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What Marx Could Teach Obama and Trump about Trade – Article by Jairaj Devadiga

What Marx Could Teach Obama and Trump about Trade – Article by Jairaj Devadiga

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The New Renaissance HatJairaj Devadiga
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Karl Marx was hardly known for championing economic freedom. Yet, even he understood the evils of protectionism. Marx, as quoted by his sidekick Frederick Engels, gave probably my favorite definition of protectionism:

“The system of protection was an artificial means of manufacturing manufacturers, of expropriating independent laborers, of capitalizing the national means of production and subsistence, and of forcibly abbreviating the transition from the medieval to the modern mode of production.”

Wow. So much wisdom packed into one sentence, and from Marx of all people. Let’s go through the sentence piece by piece to understand its meaning.

“Artificially manufacturing manufacturers”

This is an obvious one. We need only look at Donald Trump and the way he seeks to create jobs in the United States. By imposing tariffs on imported goods, Trump wants to encourage their production in America by making it relatively cheaper. This is what Marx meant by “manufacturing manufacturers”.

“Expropriating independent laborers”

Protectionism, as Marx observed, hurts the working class. Apart from the corporations who are protected against foreign competition, and their employees, everybody loses. For example, when Obama increased tariffs on tire imports, it increased the incomes of workers in that industry by less than $48 million. But it forced everyone else to spend $1.1 billion more on tires.

Just imagine the impact of Trump imposing across the board tariffs on all products. The cost of living for the average working class American would shoot up by an order of magnitude. And that is not even considering the impact of retaliatory tariffs.

“Capitalizing the… means of production” and  “forcibly abbreviating the transition… to the modern mode of production.”

Marx knew that when you make it expensive to employ people by way of minimum wage and other labor regulations, you make it relatively more profitable to use machines. Economist Narendra Jadhav tracks how manufacturing in India has become more capital-intensive over the years. Tariffs on imported goods did not help create jobs in the manufacturing sector. Even though India has armies of young, unemployed people it is cheaper to use machines rather than comply with the nearly 250 different labor laws (central and state combined).

Just because Trump imposes a tariff on Chinese goods does not mean that jobs will “come back” to the US. Even if there were no minimum wage, wages in the US are naturally higher than wages in less-developed countries, meaning it would still be cheaper to use robots.

“Emancipation of the Proletarians”

Apart from more and better quality goods that would be available more cheaply, as economist Donald Boudreaux points out ever so often, there is another thing to be gained from free trade. Marx said it would lead to the “emancipation of the proletarians.” I turn once again to India as an example. Where earlier the rigid caste system forced so-called “untouchables” into demeaning jobs (such as cleaning sewers), in the past 25 years some of them have become millionaires as a result of India being opened up to trade.

It is a shame, that even when virtually all intellectuals, from F.A. Hayek and Milton Friedman to Karl Marx and Keynes, have agreed that free trade is the best, there are those who would still defend protectionism.

Jairaj Devadiga is an economist who illustrates the importance of property rights and freedom through some interesting real-world cases.

This article was originally published on FEE.org. Read the original article.

Our Economic Malaise Is Impacting Young Workers the Most – Article by Ryan McMaken

Our Economic Malaise Is Impacting Young Workers the Most – Article by Ryan McMaken

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The New Renaissance Hat
Ryan McMaken
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In the wake of the 2007-2009 recession, 78 months passed before employment returned to where it had been before the crisis. This was, by far, the longest period needed to recover from job losses in decades. The second-longest period needed to recover jobs occurred after the 2002 recession when about 50 months were needed to recover lost jobs:

economic_malaise_young_people_1

Moreover, we see that in recent cycles, job growth during each recovery has been getting weaker and weaker over time:

economic_malaise_young_people_2

Some observers of the rose-colored-glasses-wearing variety have attempted to explain away the most recent malaise in job gains by claiming that fewer jobs are needed because so many Baby Boomers are aging out of the work force, and because people are so much wealthier, they argue, workers are leaving the labor force for non-economic reasons. That is, people are leaving the labor force for reasons other than being discouraged workers.

These claims are plausible, but the empirical data we have does not support them.

Keep in mind that ever since the 2007-2009 recession, the U-6 unemployment rate, which includes underemployed workers (i.e., involuntary part timers) and discourage workers, has reached multi-decade highs in recent years, and even now, is only at levels seen during the worst of the last recession:

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This is not simply a matter of fewer jobs being created because workers are going away.

To get a sense of the situation, we have to first look at the demographics of the working age population and the labor force.

(This demographic data on the working-age population is only currently available through the first quarter of 2015, so the time series ends in early 2015.)

economic_malaise_young_people_4

The top line is the total working age population (ages 15-65) published by the OECD and the World Bank. According to this measure, there is no decline in the working age population.

If people were aging out of the work force in droves to the point of driving a net exodus, we would see a downturn in the blue line. We don’t see that. In fact, from the beginning of the last recession at the end of 2007 to the first quarter of 2015, the working age population increased by 7.5 million people.

During that same period, the US economy added 801,000 jobs. That is, after the initial loss of 10 million jobs, the US economy began to add jobs again, but after more than seven full years, had only added a net of 801,000 jobs.

But maybe only 801,000 jobs were added because very few of those 7.5 million people wanted to be in the work force.

Well, it’s a safe bet that not all of them wanted to be in the work force, but we do know that using the standard BLS measure for the work force that 2.4 million people entered the work force during the period when only 801,000 jobs were added. (See the green line above.) That means over that time period, you had 1.6 million new people in the labor force while half that many jobs were added.

And this labor force measure only takes into account active job seekers and employed people. It ignores discouraged workers and involuntary part timers.

So we find that both the official labor force and the working age population were increasing at levels substantially above the employment levels.

Indeed, the only way we can find a number that suggests more jobs were added than workers is to look at the working-age population for ages between 25 and 54. That is, if we exclude all potential workers under 25 and all above 54, then yes, the working age population did decline by 1 million jobs. (See the red line above.)

In real life, though, the work force includes quite a few people who are, say, 22 years old, and quite a few who are 60 years old. If those people are included, the working age population is growing considerably.

Meanwhile, workforce participation has been falling for a number of years, and is now at some of the lowest levels that have been seen in more than 30 years. From 2014 to 2016, work force participation ranged from about 62 percent to 64 percent. That’s the lowest participation rate seen since the the early 1980s.

economic_malaise_young_people_5

Many have assumed this means that many older workers are leaving the work force. Unfortunately, it seems that it is young workers who are most likely to leave the labor force, which is problematic for future productivity. For young workers in the 20-24 age range, work force participation has been falling for more than a decade, and fell off significantly during the last recession:

economic_malaise_young_people_6

Meanwhile, labor force participation for 55-and-older individuals has held steady:

economic_malaise_young_people_7

It appears unlikely that it is now unnecessary to add jobs at a rate comparable to past recoveries because so many older workers are leaving the work force. Nor is it likely that young people are leaving the work force because they are so prosperous. It’s more likely that young people are leaving the work force as discouraged workers.

This supposition is further strengthened by the fact that the unemployment rate in the 16-24 age range has been above 10 percent for the past nine years. It was especially high even before the last recession.

But, unemployment among over-55 workers is among the lowest of all demographic groups, with a rate between 3 percent and 4 percent in recent years.

In other words, older workers are sticking around and doing relatively well. It appears that younger workers, meanwhile, are more likely to be unemployed, underemployed, or even totally out of the workforce as discouraged workers.

One phenomenon that gives us a reason to think this is the fact that the number of young people living with their parents has reached historic highs in the United States. As Pew recently reported:

In 2014, for the first time in more than 130 years, adults ages 18 to 34 were slightly more likely to be living in their parents’ home than they were to be living with a spouse or partner in their own household.

Living at home is more likely for men than for women, but in both cases, more young people are living with their parents than during any other period since World War II:

economic_malaise_young_people_8

Those who attempt to spin the current job numbers as simply the effects of people happily leaving the work force appear to be mistaken in assuming that older workers are leaving, and that younger workers need not work because they’re so unusually productive.

If young workers were so productive, is it too much to believe that they would choose to rent an apartment rather than live with their parents?

Once we look a the demographics behind the current job numbers, we actually find the situation is more alarming that we might have thought otherwise. We seem to be in a situation where younger workers are participating in the work force less, and putting off acquiring essential job skills that will lead to more productivity later.

Older workers are still sticking around in numbers large enough to keep the overall labor force number growing.

However, while both the working age population and the labor force are growing, overall job creation simply is not keeping up.

At some point, those 30-year olds living with their parents are doing to need full-time work, but will they have the job experience necessary (and thus the productivity) necessary to support the lifestyle to which they have become accustomed?

Or, will they simply enter the workforce with few job skills following a decade of part-time work or no work forced on them by our weak economy? When that happens, we’re likely to see a continued decline in the household and personal incomes.

Ryan W. McMaken is the editor of Mises Daily and The Free Market. He has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre. 

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.

Yes, We Still Make Stuff, and It Wouldn’t Matter if We Didn’t – Article by Steven Horwitz

Yes, We Still Make Stuff, and It Wouldn’t Matter if We Didn’t – Article by Steven Horwitz

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The New Renaissance HatSteven Horwitz
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One of the perennial complaints about the US economy is that we don’t “make stuff” anymore. You hear this from candidates from both major parties, but especially from Donald Trump and Bernie Sanders. The argument seems to be that our manufacturing sector has collapsed and that all US workers do is to provide services, rather than manufacturing tangible goods.

It turns out that this perception is wrong, as the US manufacturing sector continues to grow and in 2014 manufacturing output was higher than at any point in US history. But even if the perception were correct, it does not matter. The measure of an economy’s health isn’t the quantity of physical stuff it produces, but rather the value that it produces. And value comes in a variety of forms.

Manufacturing is Up

The path to economic growth is not to freeze into place the US economy of the 1950s. Let’s deal with the myth of manufacturing decline first. The one piece of evidence in favor of that perception is that there are fewer manufacturing jobs today than in the past. Total manufacturing employment peaked at around 19 million jobs in the late 1970s. Today, there are about 12.5 million manufacturing jobs in the US.

However, manufacturing output has never been higher. The real value of US manufacturing output in 2014 was over $2 trillion. The real story of the US manufacturing sector is that we have become so much more efficient, that we can produce more and more manufactured goods with less and less labor. These efficiency gains are largely the result of computer technology and automation, especially in the last fifteen years.

The labor that we no longer need in order to produce an ever-increasing amount of stuff is now available to produce a whole variety of other things we value, from phone apps to entertainment to the expanded number and variety of grocery stores and restaurants, to the data analyses that makes all of this growth possible.

Just as the workers in those factories we are so nostalgic for were labor freed from growing food thanks to the growth in agricultural productivity, so are today’s web designers, chefs at the newest hipster café, and digital editors in Hollywood the labor that has been freed from producing “stuff” thanks to greater technological productivity.

Or, put differently: those agricultural, industrial, and computer revolutions collectively have enabled us to have more food, more stuff, and more entertainment, apps, services, and cage-free chicken salads served with kale. The list of human wants is endless, and the less labor we use to satisfy some of them, the more we have to start working on other ones.

But notice something: all of the things that we produce have something in common. Whether it’s food or footwear, or automobiles or apps, or manicures or massages, the point of production is to rearrange capital and labor in ways that better satisfy wants. In the language of economics, the point of production (and exchange) is to increase utility.

When we produce more cars that people wish to buy, it increases utility. When we open a new Asian fusion street food taco stand, it increases utility. When Uber more effectively uses the existing stock of cars, it increases utility. When we exchange dollars for manicures, it increases utility.

Adam Smith helped us to understand that the wealth of nations is not measured by how much gold a country possesses. Modern economics helps us understand that such wealth is not measured by how much physical stuff we manufacture. Increases in wealth happen because we arrange the physical world in ways that people value more.

Neither producing cars nor providing manicures changes the number of atoms in the universe. Both activities just rearrange existing matter in ways that people value more. That is what economic growth is about.

Misplaced Nostalgia

We’re richer because we have allowed markets to produce with fewer workers. When we are fooled into believing that “growth” is synonymous with “stuff,” we are likely to make two serious errors. First, we ignore the fact that the production of services is value-creating and therefore adds to wealth.

Second, we can easily believe that we need to “protect” manufacturing jobs. We don’t. And if we try to do so, we will not only stifle economic growth and thereby impoverish the citizenry, we will be engaging in precisely the sort of special-interest politics that those who buy the myth of manufacturing often rightly complain about in other sectors.

The path to economic growth is not to freeze into place the US economy of the 1950s. We are far richer today than we were back then, and that’s due to the remaining dynamism of an economy that can still shed jobs it no longer needs and create new ones to meet the ever-changing wants of the consumer.

The US still makes plenty of stuff, but we’re richer precisely because we have allowed markets to do so with fewer workers, freeing those people to provide us a whole cornucopia of new things to improve our lives in endless ways. We can only hope that the forces of misplaced nostalgia do not win out over the forces of progress.

Steven_Horwitz

Steven Horwitz

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 originally published on FEE.org. Read the original article.

Mises on Protectionism and Immigration – Article by Matt McCaffrey

Mises on Protectionism and Immigration – Article by Matt McCaffrey

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The New Renaissance HatMatt McCaffrey
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The economic causes and consequences of immigration are among the most important issues facing the world today. Both pro- and anti-immigration advocates are digging in their heels, and both sides look increasingly unlikely to relent. Despite the bleak outlook, however, there is still hope for a peaceful and charitable discussion of the economics of immigration.

With that in mind, I want to consider Mises’s thoughts on the topic. For Mises, emigration and immigration are motivated by a simple economic fact: the conditions of production are not the same in all places. Natural and human conditions change constantly, and as a result, the productivity of land, labor, and capital do so as well. Therefore in order to take advantage of changing conditions and produce in the most productive ways possible, people must constantly migrate to those places where their contributions are most valuable (1919, pp. 84–85).

The desire to move from low-productivity to high-productivity regions is for Mises the fundamental explanation for the migration of peoples, and limits overpopulation (1919, p. 85). We can say a country is relatively overpopulated when the same amount of capital and labor is less productive there than in another nation. Reducing overpopulation means reducing this “disproportion” by allowing for the mobility of persons and goods (1919, p. 86). In Mises’s view, mobility was an achievement of liberalism:

The principles of freedom, which have gradually been gaining ground everywhere since the eighteenth century, gave people freedom of movement. … Now, however — as a result of a historical process of the past — the earth is divided up among nations. Each nation possesses definite territories that are inhabited exclusively or predominantly by its own members. Only a part of these territories has just that population which … it would also have under complete freedom of movement, so that neither an inflow or an outflow of people would take place. The remaining territories are settled in such a way that under complete freedom of movement they would have either to give up or to gain population. Migrations thus bring members of some nations into the territories of other nations. That gives rise to particularly characteristic conflicts between peoples. (1919, pp. 86–87)

Mises has two types of conflict in mind: economic and social. Economic conflict occurs because domestic workers resent that fact that immigration bids down their wages:

[I]n territories of immigration, immigration depresses the wage rate. That is a necessary side effect of migration of workers and not, say, as Social Democratic doctrine wants to have believed, an accidental consequence of the fact that the emigrants stem from territories of low culture and low wages. (1919, p. 87)

Social conflict can also arise. Mises emphasized, however, that in most cases immigrants are obliged to give up their national identity and adapt themselves to the culture of their new home. Only in relatively extreme cases, such as European imperialism, was it historically possible for immigrants to replace original inhabitants and their cultures (1919, p. 89). In fact, according to Mises, strong cultures need not resort to government in order to protect themselves:

A nation that believes in itself and its future, a nation that means to stress the sure feeling that its members are bound to one another not merely by accident of birth but also by the common possession of a culture that is valuable above all to each of them, would necessarily be able to remain unperturbed when it saw individual persons shift to other nations. A people conscious of its own worth would refrain from forcibly detaining those who wanted to move away and from forcibly incorporating into the national community those who were not joining it of their own free will. To let the attractive force of its own culture prove itself in free competition with other peoples — that alone is worthy of a proud nation, that alone would be true national and cultural policy. The means of power and of political rule were in no way necessary for that. (1919, pp. 103–04)

However, for Mises, cultural considerations are mainly an aside. In general, he saw conflicts over immigration as being driven mostly by protectionism rather than insurmountable differences in human beings or cultures (1935). In particular, domestic unions support government policies to restrict immigration and thus keep low-wage competition out of the labor market:

Public opinion has been led astray by the smoke-screen laid down by Marxist ideology which would have people believe that the union-organized “proletariat of all lands” have the same interests and that only entrepreneurs and capitalists are nationalistic. The hard fact of the matter — namely that the unions in all those countries which have more favorable conditions of production, relatively fewer workers and thus higher wages, seek to prevent an influx of workers from less favored lands—has been passed over in silence. (1935)

As Per Bylund notes, this is precisely what is happening in Sweden, where unions prevent the integration of immigrants so as to keep wages high. Protectionism at home also breeds protectionism abroad, as foreign nations try to cope with lower productivity through their own regulations designed to counter “unfair” competition on the world market. As economic conditions worsen in those countries where migration is prevented by the state, conflict becomes inevitable:

[People in these countries] will certainly still have just as much cause to complain as before — not over the unequal distribution of raw materials, but over the erection of migration barriers around the lands with more favorable conditions of production. And it may be that one day they will reach the conclusion that only weapons can change this unsatisfactory situation. Thus, we may face a great coalition of the lands of would-be emigrants standing in opposition to the lands that erect barricades to shut out would-be immigrants. … Without the reestablishment of freedom of migration throughout the world, there can be no lasting peace. (1935)

In this way, protectionist policies inevitably lead to conflict and the destruction of human life and welfare. In fact, Mises even hints that government policies aiming to control the movement and employment of individuals suffer from the same problems socialist central planning does (1919, p. 85). At the same time, entrepreneurship and the division of labor are the foundations of a rational social order, and neither is possible without free labor markets.

The main threat facing society then is illiberal ideology, and the only solution to this “principle of violence” is to develop a consistent liberal philosophy to serve as the basis for a peaceful society (1951, p. 49).

Mises believed that any society that rejected the values of liberalism was doomed. In an age of nationalism, protectionism, and war, it’s easy to see what he meant.

Matt McCaffrey is assistant professor of enterprise at the University of Manchester.

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.

Maybe the Hardest Nut for a New Scientist to Crack: Finding a Job – Article by Bryan Gaensler

Maybe the Hardest Nut for a New Scientist to Crack: Finding a Job – Article by Bryan Gaensler

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The New Renaissance Hat
Bryan Gaensler
March 29, 2015
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The typical biography of a scientist might look something like this.

At a young age, a boy or girl discovers a love for science. Their dream is to become perhaps a geologist, a chemist, or a marine biologist.

At school they work hard at math and science, and they supplement this with everything else they can get their hands on: books, documentaries, public talks and visits to museums. They take all the right courses at college and then embark on a PhD in their chosen field.

After many years of hard effort (including chunks of time racked with doubt and frustration), they complete a solid body of work that contains some genuinely new discoveries. They’ve had the chance to meet some of the big names they read about as a kid, and now actually know some of them on a first-name basis.

The day a young graduate receives his or her science diploma is the most thrilling and satisfying day of their life. They are finally, officially, a scientist.

But there’s one thing that all those years of study and research has not prepared them for: the job market.

Scientist_Telescope
There must be a job out there somewhere…. Michael Salerno, CC BY-NC-SA

Pounding the pavement as a scientist

No matter what your profession, job hunting is not fun. But for scientists and other researchers, it’s a weird world of intense competition, painfully long time scales, and uncertain outcomes.

The strangest thing about a scientific career is that the application deadlines are often ridiculously early. Hoping to find a university position starting in September? If you wait until February or March to begin your job search, you’ve likely left it way too late. The application deadlines for some of the juiciest positions were way back in November and December.

Because of this advanced schedule, only the things that someone accomplishes a year or more before actually needing a new job will matter for their career prospects. Any amazing discoveries made after the application deadline are largely irrelevant.

The problem is that this is not always how science works.

For many important research topics, all the headline results emerge only at the very end. Students whose research is part of a massive longitudinal study or who are members of a big project team suddenly find themselves at a huge disadvantage, because they often can’t provide instant evidence of the quality of their work a whole year before needing a job.

The other daunting thing is the intensity of the competition. For most specialized scientific topics, there are far more PhD degrees than job postings: across all of science, doctoral degrees outnumber faculty positions by a ratio of 12 to one. An advertisement for a fellowship or junior faculty position will routinely draw hundreds of applications, and only 1%-2% of graduates will eventually land a coveted professorship.

How to proceed, when the odds are so stacked against you? Inevitably, the only way to counter the competition is to apply for lots of positions. A budding scientist is expected to apply for a dozen or more jobs, spread all over the world.

This situation immediately creates some challenges and problems.

By increasing the quantity of applications, the quality suffers. In an ideal world, an applicant will provide a carefully wrought narrative, weaving a story as to how their skills and background perfectly dovetail with the interest of the department they hope will hire them. But there’s no time for that. Instead one typically sends out a generic CV and research plan, and then essentially just hopes for the best.

The process is also incredibly inefficient. Professors all over write endless careful letters of recommendation, most of which have little bearing on the outcome. Selection panels spend hundreds of hours reading huge piles of applications, but can only afford a scant 10-15 minutes considering the merits of each candidate.

What’s more, not everyone can freely pursue jobs anywhere the market will take them. Young children, aging parents and other personal circumstances result in a large pool of outstanding scientists with strong geographic constraints, and hence limited options.

Overall, the harsh reality is that many applicants will simply not get any offers. A lifelong dream of being a scientist, combined with an advanced postgraduate degree, is tragically not a guarantee of a scientific career.

Good scientists should be able to find jobs

The frustration, disappointment and disillusionment grow every year. Things need to change.

First, employers need to make much more of an effort to tell applicants what sort of scientist they are looking for. Instead of reducing the job searching process to the scientific equivalent of speed dating, advertisements need to set out a clear and detailed set of selection criteria, with lots of context and background on the role and working environment. By properly telling the community what they’re looking for, labs and research institutes can focus their time on candidates with useful qualifications, and applicants can focus their energy on only those jobs for which they have a realistic chance.

Second, we need to create flexible career paths. Part-time positions, “two body” hires for couples with both members in academia, and accommodation of career interruptions need to become de rigueur, rather than whispered legends we’ve all only ever heard about second- or third-hand.

And finally, a specialist science degree needs to move beyond the expectation that it offers training only in one particular type of science.

A good scientist graduates with passion, vision and brilliance, and also with persistence, organization, rigor, eloquence and clarity. A scientist can incisively separate out truth from falsehoods, and can solve complicated problems with precious little starting information. These are highly desired attributes. The scientific community needs not just accept but celebrate that the skills and values we cherish are the paths to a wide range of stimulating and satisfying careers – both in and out of academia.

Bryan Gaensler is an award-winning astronomer and passionate science communicator, who is internationally recognised for his groundbreaking work on dying stars, interstellar magnets and cosmic explosions. A former Young Australian of the Year, NASA Hubble Fellow, Harvard professor and Australian Laureate Fellow, Gaensler is currently the Director of the Dunlap Institute for Astronomy and Astrophysics at the University of Toronto. He gave the 2001 Australia Day Address to the nation, was awarded the 2011 Pawsey Medal for outstanding research by a physicist aged under 40, and in 2013 was elected as a Fellow of the Australian Academy of Science. His best-selling popular science book Extreme Cosmos was published worldwide in 2012, and has subsequently been translated into four other languages.

This article is republished pursuant to a Creative Commons Attribution No-Derivatives license. It was originally published by The Conversation.

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

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The New Renaissance Hat
Wendy McElroy
September 18, 2014
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“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.

Why Unskilled Workers Do Not Need the Minimum Wage (2009) – Article by G. Stolyarov II

Why Unskilled Workers Do Not Need the Minimum Wage (2009) – Article by G. Stolyarov II

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The New Renaissance Hat
G. Stolyarov II
Originally Published August 16, 2009
as Part of Issue CCIII of The Rational Argumentator
Republished July 24, 2014
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Note from the Author: This essay was originally published as part of Issue CCIII of The Rational Argumentator on August 16, 2009, using the Yahoo! Voices publishing platform. Because of the imminent closure of Yahoo! Voices, the essay is now being made directly available on The Rational Argumentator.
~ G. Stolyarov II, July 24, 2014
***

I was recently asked whether one justification for the minimum wage might be a lack of genuine bargaining power among unskilled workers, as compared to high-skilled workers. The argument implicit in the question was that a specific unskilled worker can give his employer no reason to retain him in particular, and so the employer can afford to push down the unskilled worker’s wage to a ridiculously low amount. At the same time, the unskilled worker cannot find any opportunities to work elsewhere. I do not think that such suppositions are realistic, however.

Let us compare unskilled workers with workers who have specialized skill sets. High-skilled workers do indeed have more bargaining power within their specific places of employment, as they are more difficult to replace and more valuable to their employers. However, they also have fewer competitors to whom they could go if their current employment situation does not turn out to their liking. This is because a narrower range of employers would demand a worker with a certain specific skill set than would demand a generic unskilled worker. An unskilled worker can earn his maximum current possible income working in, say, a factory, a fast-food restaurant, or a custodial job for a variety of employers. A skilled accountant, on the other hand, can only earn his maximum current possible income working as an accountant, if that is his most valuable skill according to the market.

Both the skilled and the unskilled worker will tend to earn the marginal product of their labor – i.e., the amount of value that their labor contributes to the product they create – in a truly free market. The skilled worker will earn this because of his high bargaining power. The unskilled worker will earn this because he has so many alternatives with regard to employers. If the current employer does not pay the unskilled worker his marginal product of labor, numerous other employers will try to bid away the work of that person by offering slightly higher wages. Say, for instance, unskilled worker X has a marginal product of labor of $5 per hour, but he is only paid $1 at his present job with Employer A. Employer B sees a lucrative opportunity if he could hire X at $2 per hour and keep $3 of X’s hourly product for himself. So X is hired by B at $2 per hour. Now Employer C sees a lucrative opportunity if he could hire X at $3 per hour and keep $2 of X’s hourly product for himself. So X is hired by C at $3 per hour. This will tend to keep happening until X is hired by an employer who pays him his marginal product and therefore creates a situation where X cannot be bid away by a competitor offering higher wages.

This is a dynamic process, and it takes time to attain. In the meantime X’s skills might be improving as a result of on-the-job training and experience – so his marginal product might increase still further, and “equilibrium” might never be fully attained. Nonetheless, the market process functions to relentlessly approach equilibrium by means of the perceptiveness of entrepreneurs, motivated by profit and desiring to out-compete their rivals by means of greater perceptiveness and by offering better terms to employees and customers.

I do not think there is ever truly a situation where a worker has “no choice” about where to work. Moreover, I do not think there is ever a situation where a healthy human being is forever condemned to earn a low wage. A low initial wage is an excellent opportunity for many workers to gain the knowledge and experience necessary to earn higher wages in the future. There is no better job training than training on the job – as every job I have ever had demonstrated to me. By prohibiting people from working for pay below a certain level, the minimum wage laws deprive many workers of the opportunity to gain such invaluable experience.

Click here to read more articles in Issue CCIII of The Rational Argumentator.

Slogans or Science? – Article by Sanford Ikeda

Slogans or Science? – Article by Sanford Ikeda

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The New Renaissance Hat
Sanford Ikeda
May 20, 2014
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The debate over raising the legal minimum wage (LMW) to $10 an hour has people on both sides saying things they should know better than to say. For example, a friend recently posted the following meme (which isn’t the worst I’ve seen) on Facebook:

One year ago this week, San Jose decided to raise its minimum wage to $10/hour.

Any jobs disappear?

The number of minimum wage jobs has grown.

Any businesses collapse?

The number of businesses has grown.

Any questions?

Yes, several, but I’ll get to those in a bit.

Memes like these are just as silly and misleading as the simplistic arguments they’re probably attacking. In fact, the economic analysis of significantly raising the minimum wage says that, other things equal, it will reduce employment below the level where it would otherwise have been. It doesn’t say that that employment will fall absolutely or businesses will collapse.

A little thinking can go a long way

Have a look at this chart published in the Wall Street Journal. At first, it seems to support the simplistic slogans. But it’s important to compare similar periods, such as March–November 2012 (before the increase was passed) versus March–November 2013, (just after it went into effect). The LMW increase wasn’t a surprise, so in the months before it was passed, businesses would have been preparing for it, shaking things up. Comparing those two periods, which makes the strongest case for the meme’s assertions, the total percentage increase in employment (the area under the red line) looks pretty close, going just by my eyeballs and a calculator. In fact, the post-hike increase might actually be smaller, but you’d need more data to be sure. So if you compare similar periods, the rate of employment growth seems not to have been affected very much by the hike. So is the meme right?

According to that same chart and other sources, hiring in the rest of California and the country, where for the most part there was no dramatic increase in the LMW, was also on the rise at pretty much the same time. Why? Apparently, the growth rate of the U.S. economy jumped in 2012, especially in California. So the demand for inputs, including labor, probably also increased. I’m certainly not saying this correlation is conclusive, but you could infer that while hiring in San Jose was rising, it wasn’t rising as fast as it might have otherwise, given the generally improving economy.

That’s a more ambiguous result, and of course harder to flit into a meme.

You are stupid and evil and a liar!

Those strongly in favor of raising the LMW cast opponents as Republican apologists for big business. Take this post from DailyKos, which apparently is the source of the above meme. The author writes, “Empirically, there’s no clear negative effect that can be discerned. The concerns of Teahadists like Paul Ryan and Marco Rubio is [sic] rather unfounded in academic literature and in international assessments of natural experiments.”

Now, the overwhelming conclusion of years of economic research on the effects of a minimum wage on employment is that it tends to increase, not lower, unemployment. As this article from Forbes summarizes, “In a comprehensive, 182-page summary of the research on this subject from the last two decades, economists David Neumark (UC-Irvine) and William Wascher (Federal Reserve Board) determined that 85 percent of the best research points to a loss of jobs following a minimum wage increase.”

So, saying there is “no clear negative effect” is an outrageously ignorant claim. And there’s not one mention of the economic evidence that significantly raising the LMW will hurt the very people you wish to help: the relatively poor. But why address solid scientific research when there’s sloppy sloganeering by politicos to shoot down?

Attacking easy targets is understandable if you want to vilify your opponents or win an easy one for the cause. In that case, you take the dumbest statement by your rival as the basis of your attack. Such is the way of politics. In intellectual discourse, however, you may win the battle but you’ll lose the war. That is, if your goal is to learn from fruitful intellectual discussion, you must engage your opponent’s best arguments, not her weakest ones.

Let me use a counterexample. The sloganeering approach to attacking those who oppose raising the LMW is the equivalent of someone saying: “Well, this past winter was one of the coldest on record in the Midwest. So much then for global warming!” That may be “evidence” in a mud-slinging contest, but it’s not science.

What’s the theory?

While weather is complex and unpredictable, economic systems are even more so. Does that mean there are no principles of economics? Of course not. In fact, it’s because of such complexity that we need whatever help economic theory can offer to organize our thinking. And it doesn’t get any more basic than this: The demand curve for goods slopes downward.

That is, other things equal, the costlier something is, the less of it you’ll want to buy.

Note that the caveat—other things equal—is as important as the inverse relation between price and quantity demanded. That’s why my earlier back-of-the-envelope analysis had to be conditional on more data. Unfortunately, those data are often very hard to get. Does that mean we abandon the theory? Well, that would be like letting go of the rope you’re hanging on to for dear life because you’re afraid it might break.

So what exactly is the theory behind the idea that raising the LMW will increase hiring low-wage workers and boost business? If raising wages will actually increase employment and output, then why not also mandate a rise in interest rates, rents, electricity rates, oil prices, or the price of any of the other myriad factors of production that businesses ordinarily have to pay for? I would hope that this idea would give even the meme promoters pause.

As far as I know, the only situation in which forcing people to pay a higher wage rate will increase employment is when there is a dominant employer and there are barriers to competition. Economists term this “monopsony,” a situation that might occur in a so-called “factory town.” There, the dominant employer (of labor, capital, land, or whatever) can lower what she pays for inputs below the revenue that an additional unit of input earns the company. I would love to hear that argument and challenge it, because it’s the strongest one that standard economics can offer in favor of coercing businesses to raise wages. But so far I’ve not come across it, let alone any discussion of the economic literature on monopsony in the labor market, most of which questions its relevance. Some almost random examples are here and here.

Margins of analysis

Finally, economics teaches us that we can adjust to a particular change in different ways. In a thoughtful article on the effect of the LMW increase in San Jose that all sides of the debate should read, we get the following anecdote:

For his San Jose stores to make the same profit as before the wage increase, the same combo meal would be $6.75. “That would chase off a large percentage of my customers,” Mr. DeMayo said. He hasn’t laid off San Jose workers but has reduced their hours, along with some maintenance such as the drive-through lane’s daily hosing, and may close two unprofitable stores.

Employers can adjust to higher costs in one area by cutting back on spending in others. That might mean less unemployment than otherwise, but it doesn’t mean that raising the LMW has no negative employment effect at all. It means that the effects are harder to see. There’s that darn “other things being equal” again!

Slogans and memes are no substitute for science, or even clear thinking.

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.
Revolutionary France’s Road to Hyperinflation – Article by Frank Hollenbeck

Revolutionary France’s Road to Hyperinflation – Article by Frank Hollenbeck

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The New Renaissance Hat
Frank Hollenbeck
December 15, 2013
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Today, anyone who talks about hyperinflation is treated like the shepherd boy who cried wolf. When the wolf actually does show up, though, belated warnings will do little to keep the flock safe.

The current Federal Reserve strategy is apparently to wait for significant price inflation to show up in the consumer price index before tapering. Yet history tells us that you treat inflation like a sunburn. You don’t wait for your skin to turn red to take action. You protect yourself before leaving home. Once inflation really picks up steam, it becomes almost impossible to control as the politics and economics of the situation combine to make the urge to print irresistible.

The hyperinflation of 1790s France illustrates one way in which inflationary monetary policy becomes unmanageable in an environment of economic stagnation and debt, and in the face of special interests who benefit from, and demand, easy money.

In 1789, France found itself in a situation of heavy debt and serious deficits. At the time, France had the strongest and shrewdest financial minds of the time. They were keenly aware of the risks of printing fiat currency since they had experienced just decades earlier the disastrous Mississippi Bubble under the guidance of John Law.

France had learned how easy it is to issue paper money and nearly impossible to keep it in check. Thus, the debate over the first issuance of the paper money, known as assignats, in April 1790 was heated, and only passed because the new currency (paying 3 percent interest to the holder) was collateralized by the land stolen from the church and fugitive aristocracy. This land constituted almost a third of France and was located in the best places.

Once the assignats were issued, business activity picked up, but within five months the French government was again in financial trouble. The first issuance was considered a rousing success, just like the first issuance of paper money under John Law. However, the debate over the second issuance during the month of September 1790 was even more chaotic since many remembered the slippery slope to hyperinflation. Additional constraints were added to satisfy the naysayers. For example, once land was purchased by French citizens, the payment in currency was to be destroyed to take the new paper currency out of circulation.

The second issuance caused an even greater depreciation of the currency but new complaints arose that not enough money was circulating to conduct transactions. Also, the overflowing government coffers resulting from all this new paper money led to demands for a slew of new government programs, wise or foolish, for the “good of the people.” The promise to take paper money out of circulation was quickly abandoned, and different districts in France independently started to issue their own assignats.

Prices started to rise and cries for more circulating medium became deafening. Although the first two issuances almost failed, additional issuances became easier and easier.

Many Frenchmen soon became eternal optimists claiming that inflation was prosperity, like the drunk forgetting the inevitable hangover. Although every new issuance initially boosted economic activity, the improved business conditions became shorter and shorter after each new issuance. Commercial activity soon became spasmodic: one manufacturer after another closed shop. Money was losing its store-of-value function, making business decisions extremely difficult in an environment of uncertainty. Foreigners were blamed and heavy taxes were levied against foreign goods. The great manufacturing centers of Normandy closed down and the rest of France speedily followed, throwing vast numbers of workers into bread lines. The collapse of manufacturing and commerce was quick, and occurred only a few months after the second issuance of assignats and followed the same path as Austria, Russia, America, and all other countries that had previously tried to gain prosperity on a mountain of paper.

Social norms also changed dramatically with the French turning to speculation and gambling. Vast fortunes were built speculating and gambling on borrowed money. A vast debtor class emerged located mostly in the largest cities.

To purchase government land, only a small down payment was necessary with the rest to be paid in fixed installments. These debtors quickly saw the benefit of a depreciating currency. Inflation erodes the real value of any fixed payment. Why work for a living and take the risk of building a business when speculating on stocks or land can bring wealth instantaneously and with almost no effort? This growing segment of nouveau riche quickly used its newfound wealth to gain political power to ensure that the printing presses never stopped. They soon took control and corruption became rampant.

Of course, blame for the ensuing inflation was assigned to everything but the real cause. Shopkeepers and merchants were blamed for higher prices. In 1793, 200 stores in Paris were looted and one French politician proclaimed “shopkeepers were only giving back to the people what they had hitherto robbed them of.” Price controls (the “law of the maximum”) were ultimately imposed, and shortages soon abounded everywhere. Ration tickets were issued on necessities such as bread, sugar, soap, wood, or coal. Shopkeepers risked their heads if they hinted at a price higher than the official price. The daily ledger of those executed with the guillotine included many small business owners who violated the law of the maximum. To detect goods concealed by farmers and shopkeepers, a spy system was established with the informant receiving 1/3 of the goods recovered. A farmer could see his crop seized if he did not bring it to market, and was lucky to escape with his life.

Everything was enormously inflated in price except the wages for labor. As manufacturers closed, wages collapsed. Those who did not have the means, foresight, or skill to transfer their worthless paper into real assets were driven into poverty. By 1797, most of the currency was in the hands of the working class and the poor. The entire episode was a massive transfer of real wealth from the poor to the rich, similar to what we are experiencing in Western societies today.

The French government tried to issue a new currency called the mandat, but by May 1797 both currencies were virtually worthless. Once the dike was broken, the money poured through and the currency was swollen beyond control. As Voltaire once said, “Paper money eventually returns to its intrinsic value — zero.” In France, it took nearly 40 years to bring capital, industry, commerce, and credit back up to the level attained in 1789.

Frank Hollenbeck, PhD, teaches at the International University of Geneva. See Frank Hollenbeck’s article archives.

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.

On Brakes and Mistakes – Article by Sanford Ikeda

On Brakes and Mistakes – Article by Sanford Ikeda

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The New Renaissance Hat
Sanford Ikeda
March 30, 2013
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Here’s an observation from a recent column in The Economist magazine on “The Transience of Power”:

“In 1980 a corporation in the top fifth of its industry had only a 10% chance of falling out of that tier in five years. Eighteen years later that chance had risen to 25%.”

Competition makes it hard to stay at the top even as it offers a way off the bottom. Data on income mobility also support the idea. And despite occasional downturns (some quite large, as we well know), per-capita gross domestic product in the United States keeps rising steadily over time. These two phenomena, economic growth and competitive shaking out, are of course connected.

Different Ways of Thinking About Economic Growth

Economists in the mainstream (neoclassical) tradition are trained to think of growth mainly as raising the rate of producing existing products. For example, a higher rate of saving allows firms to employ more and more capital and labor, generating ever-higher rates of output. It reminds me of the Steve Martin movie, The Jerk, in which a man who is born in a run-down shack eventually strikes it rich and builds himself a much bigger house that is just a scaled-up version of the old shack.

But economist Paul Romer, for one, has said,

“If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking.”

So growth through innovation, technical advance, and making new products is more important than just using more inputs to do more of the same thing. The late Harvard economist Joseph Schumpeter came even closer to the truth when he famously described competitive innovation as a “gale of creative destruction”—building up and tearing down—with creation staying just ahead of destruction.

But standard economic theory has had trouble incorporating the kind of economic growth driven by game-changing innovators such as Apple, Facebook, and McDonalds. Mathematically modeling ignorance and error, ambition and resourcefulness, and creativity and commitment has so far been too challenging for the mainstream.

What’s the Source of Economic Growth?

Achieving economic growth through innovation means someone is taking chances, sometimes big chances, to break new ground. As Schumpeter put it, what it takes is finding “the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization.” Although talented people are behind this process, we sometimes put too much stress on bold “captains of industry” such as Steve Jobs, Mark Zuckerberg, and Ray Kroc. The personalities of the players are important—but so are the rules of the game.

Imagine if cars had no brakes. How slowly and cautiously we would have to drive!  Clearly, brakes on cars enable us to drive faster and safer. How? Well, brakes give us the freedom to make a lot of mistakes—entering a turn too fast or taking our eyes off the road for too long—without causing disaster. We can take more chances with brakes than without them. (Of course, good brakes can also seduce us into driving recklessly, but that’s a story for another day.) Similarly, economic development of the Schumpeterian variety presupposes lots of experimentation, and that in turn means making plenty of mistakes.

Markets Mean Mistakes

Now imagine a world in which people looked down on innovators. That’s hard to do in our time, but as Deirdre McClosky argues in her 2010 book, Bourgeois Dignity: Why Economists Can’t Explain the Modern World,  it wasn’t that long ago when most people disdained innovators who challenged established ways of thinking and doing. The result was cultural and economic stagnation. Making an innovator a figure of dignity worthy of respect, which she says began to take hold about 400 years ago, has sparked unprecedented economic development and prosperity.

But a smart, creative, ambitious, and committed person is likely to make mistakes. And so a culture that lauds spectacular success also needs to at least tolerate spectacular failure. You can’t have trial without error or profit without loss.

Let me be clear. I’m not saying that people in an innovative society should champion failure. I’m saying they must expect potential innovators to make a lot of mistakes and so have not only the right institutions in place (private property, contract, and so on) but also the right psychological mindset—which is something static societies can’t do.

Change, Uncertainty, and Tolerance

If you think you already know everything, anyone who thinks differently must be wrong. So why tolerate them?

One of the great differences between the modern world and the various dark ages mankind has gone through is how rapidly today our lives change. There’s immeasurably more uncertainty in the era of creative destruction than in times dominated by the “tried and true.”  But the more we realize how much uncertainty there is about what we think we know, the more we ought to be willing to admit that we may be wrong and the other guy may, at least sometimes, be right. And so if we see someone succeed or fail, we think, “That could have been me!” In a sense, an advancing society welcomes mistakes as much as it embraces triumphs, just as a fast car needs brakes as much as it needs an engine.

That’s not just fancy talk. The evidence—prosperity—is all around us.

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 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