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Critical Thinking Doesn’t Mean What Most People Think – Article by Sanford Ikeda

Critical Thinking Doesn’t Mean What Most People Think – Article by Sanford Ikeda

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The New Renaissance Hat
Sanford Ikeda
July 4, 2017
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Academics like to say that we teach “critical thinking” without thinking too critically about what it means to think critically.

Being Critical, Not Thinking Critically 

Too often in practice, people equate critical thinking with merely being skeptical of whatever they hear. Or they will interpret it to mean that, when confronted with someone who says something that they disagree with, they either:

a) stop listening (and perhaps then start shouting),

b) find a way to squeeze the statement into our pre-existing belief system (if we can’t we stop thinking about it), or

c) attempt to “educate” the speaker about why their statement or belief system is flawed. When this inevitably fails we stop speaking to them, at least about the subject in question.

Ultimately, each of these responses leaves us exactly where we started, and indeed stunts our intellectual growth. I confess that I do a, b, and c far too often (except I don’t really shout that much).

To me, critical thinking means, at a minimum, questioning a belief system (especially my own) by locating the premises underlying a statement or conclusion, whether we agree with it or not, and asking:

1) whether or not the thinker’s conclusions follow from those premises,

2) whether or not those premises are “reasonable,” or

3) whether or not what I consider reasonable is “reasonable” and so on.

This exercise ranges from hard to excruciatingly uncomfortable – at least when it comes to examining my own beliefs. (I’ve found that if I dislike a particular conclusion it’s hard to get myself to rigorously follow this procedure; but if I like a conclusion it’s often even harder.)

Teaching Critical Thinking

Fortunately, people have written articles and books that offer good criticisms of most of my current beliefs. Of course, it’s then up to me to read them, which I don’t do often enough. And so, unfortunately, I don’t think critically as much as I should…except when I teach economics.

It’s very important, for example, for a student to critically question her teacher, but that’s radically different from arguing merely to win. Critical thinking is argument for the sake of better understanding, and if you do it right, there are no losers, only winners.

Once in a while, a student speaks up in class and catches me in a contradiction – perhaps I’ve confused absolute advantage with comparative advantage – and that’s an excellent application of genuine critical thinking. As a result we’re both now thinking more clearly. But when a student or colleague begins a statement with something like “Well, you’re entitled to your opinion, but I believe…” that person may be trying to be critical (of me) but not in (or of) their thinking.

It may not be the best discipline for this, but I believe economics does a pretty good job of teaching critical thinking in the sense of #1 (logical thinking). Good teachers of economics will also strategically address #2 (evaluating assumptions), especially if they know something about the history of economic ideas.

Economics teachers with a philosophical bent will sometimes address #3 but only rarely (otherwise they’d be trading off too much economic content for epistemology). In any case, I don’t think it’s possible to “get to the bottom” of what is “reasonable reasonableness” and so on because what ultimately is reasonable may, for logical or practical reasons, always lie beyond our grasp.

I could be wrong about that or indeed any of this. But I do know that critical thinking is a pain in the neck. And that I hope is a step in the right direction.

Sanford (Sandy) Ikeda is a professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism. He is a member of the FEE Faculty Network.

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

What Are the Chances That a Muslim Is a Terrorist? – Article by Sanford Ikeda

What Are the Chances That a Muslim Is a Terrorist? – Article by Sanford Ikeda

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The New Renaissance HatSanford Ikeda
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It’s flu season and for the past two days you’ve had a headache and sore throat. You learn that 90% of people who actually have the flu also have those symptoms, which makes you worry.  Does that mean the chances of your having the flu is 90%?  In other words, if there’s a 90% chance of having a headache and sore throat given that you have the flu, does that mean there’s a 90% chance having the flu given that you have a headache and sore throat?We can use symbols to express this question as follows: Pr(Flu | Symptoms) = Pr(Symptoms | Flu) = 90%?

The answer is no. Why?

If you think about it you’ll realize that there are other things besides the flu that can give you a combination of a headache and sore throat, such as a cold or an allergy, so that having those symptoms is certainly not the same thing as having the flu.  Similarly, while fire produces smoke, the old saying that “where there’s smoke there’s fire” is wrong because it’s quite possible to produce smoke without fire.

Fortunately, there’s a nice way to account for this.

How Bayes’ Theorem Works

Suppose you learn that, in addition to Pr(Symptoms | Flu) = 90%, that the probability of a randomly chosen person having a headache and sore throat this season, regardless of the cause, is 10% – i.e. Pr(Symptoms) = 10% – and that only one person in 100 will get the flu this season – i.e. Pr(Flu) = 1%.  How does this information help?

Again, what we want to know are the chances of having the flu, given these symptoms Pr(Flu | Symptom).  To find that we’ll need to know first the probability of having those symptoms if we have the flu (90%) times the probability of having the flu (1%).  In other words, there’s a 90% chance of having those symptoms if in fact we do have the flu, and the chances of having the flu is only 1%. That means Pr(Symptoms | Flu) x Pr(Flu) = 0.90 x 0.01 = 0.009 or 0.9% or a bit less than one chance in 100.

Finally, we need to divide that result by the probability of having a headache and sore throat regardless of the cause Pr(Symptoms), which is 10% or 0.10, because we need to know if your headache and sore throat are flu Symptoms out of all headache-and-sore symptoms that have occurred.

So, putting it all together, the answer to the question, “What is the probability that your Symptoms are caused by the Flu?” is as follows:

Pr(Flu | Symptoms) = [Pr(Symptoms | Flu) x Pr(Flu)] ÷ Pr(Symptoms) = 0.90 x 0.01 ÷ 0.10 = 0.09 or 9%.

So if you have a headache and sore throat there’s only a 9% chance, not 90%, that you have the flu, which I’m sure will come as a relief!

This particular approach to calculating “conditional probabilities” is called Bayes’ Theorem, after Thomas Bayes, the 18th century Presbyterian minister who came up with it. The example above is one that I got out this wonderful little book.

Muslims and Terrorism

Now, according to some sources (here and here), 10% of Terrorists are Muslim. Does this mean that there’s a 10% chance that a Muslim person you meet at random is a terrorist?  Again, the answer is emphatically no.

To see why, let’s apply Bayes’ theorem to the question, “What is the probability that a Muslim person is a Terrorist?” Or, stated more formally, “What is the probability that a person is a Terrorist, given that she is a Muslim?” or Pr(Terrorist | Muslim)?

Let’s calculate this the same way we did for the flu using some sources that I Googled and that appeared to be reliable.  I haven’t done a thorough search, however, so I won’t claim my result here to be anything but a ballpark figure.

So I want to find Pr(Terrorist | Muslim), which according to Bayes’ Theorem is equal to…

1) Pr(Muslim | Terrorist):  The probability that a person is a Muslim given that she’s a Terrorist is about 10% according to the sources I cited above, which report that around 90% of Terrorists are Non-Muslims.

Multiplied by…

2) Pr(Terrorist):  The probability that someone in the United States is a Terrorist of any kind, which I calculated first by taking the total number of known terrorist incidents in the U.S. back through 2000 which I tallied as 121 from this source  and as 49 from this source. At the risk of over-stating the incidence of terrorism, I took the higher figure and rounded it to 120.  Next, I multiplied this times 10 under the assumption that on average 10 persons lent material support for each terrorist act (which may be high), and then multiplied that result by 5 under the assumption that only one-in-five planned attacks are actually carried out (which may be low).  (I just made up these multipliers because the data are hard to find and these numbers seem to be at the higher and lower ends of what is likely the case and I’m trying to make the connection as strong as I can; but I’m certainly willing to entertain evidence showing different numbers.)  This equals 6,000 Terrorists in America between 2000 and 2016, which assumes that no person participated in more than one terrorist attempt (not likely) and that all these persons were active terrorists in the U.S. during those 17 years (not likely), all of which means 6,000 is probably an over-estimate of the number of Terrorists.

If we then divide 6,000 by 300 million people in the U.S. during this period (again, I’ll over-state the probability by not counting tourists and visitors) that gives us a Pr(Terrorist) = 0.00002 or 0.002% or 2 chances out of a hundred-thousand.

Now, divide this by…

3) The probability that someone in the U.S. is a Muslim, which is about 1%.

Putting it all together gives the following:

Pr(Terrorist | Muslim) = [Pr(Muslim | Terrorist) x Pr(Terrorist)] ÷ Pr(Muslim) = 10% x 0.002% ÷ 1% = 0.0002 or 0.02%.

One interpretation of this result is that the probability that a Muslim person, whom you encounter at random in the U.S., is a terrorist is about 1/50th of one-percent. In other words, around one in 5,000 Muslim persons you meet at random is a terrorist.  And keep in mind that the values I chose to make this calculation deliberately over-state, probably by a lot, that probability, so that the probability that a Muslim person is a Terrorist is likely much lower than 0.02%.

Moreover, the probability that a Muslim person is a Terrorist (0.002%) is 500 times lower than the probability that a Terrorist is a Muslim (10%).

(William Easterly of New York University applies Bayes’ theorem to the same question, using estimates that don’t over-state as much as mine do, and calculates the difference not at 500 times but 13,000 times lower!)

Other Considerations

As low as the probability of a Muslim person being a Terrorist is, the same data do indicate that a Non-Muslim person is much less likely to be a Terrorist.  By substituting values where appropriate – Pr(Non-Muslim | Terrorist) = 90% and Pr(Non-Muslim) = 99% – Bayes’ theorem gives us the following:

Pr(Terrorist | Non-Muslim) = [Pr(Non-Muslim | Terrorist) x Pr(Terrorist) ÷ Pr(Non-Muslim) = 90% x 0.002% ÷ 99% = 0.00002 or 0.002%.

So one interpretation of this is that a randomly chosen Non-Muslim person is around one-tenth as likely to be a Terrorist than a Muslim person (i.e. 0.2%/0.002%).  Naturally, the probabilities will be higher or lower if you’re at a terrorist convention or at an anti-terrorist peace rally; or if you have additional data that further differentiates among various groups – such as Wahhabi Sunni Muslims versus Salafist Muslim or Tamil Buddhists versus Tibetan Buddhists – the results again will be more accurate.

But whether you’re trying to educate yourself about the flu or terrorism, common sense suggests using relevant information as best you can. Bayes’ theorem is a good way to do that.

(I wish to thank Roger Koppl for helping me with an earlier version of this essay. Any remaining errors, however, are mine, alone.)

Sanford (Sandy) Ikeda is a professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism. He is a member of the FEE Faculty Network.

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

A Date That Should Live in Infamy – Article by Sanford Ikeda

A Date That Should Live in Infamy – Article by Sanford Ikeda

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The New Renaissance HatSanford Ikeda
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Never forget Executive Order 9066

On February 19, 1942 — seventy-four years ago — Franklin Delano Roosevelt signed Executive Order 9066. With the stroke of his pen, the man who had earlier snubbed Jesse Owens after the Berlin Olympics used his executive powers to order the imprisonment of over 100,000 persons of Japanese ancestry (as well as thousands of German and Italian ancestry) for the duration of World War II.

internment-2Most of the internees were natural-born American citizens, whose “crime” was having a parent or merely a grandparent with Japanese blood. It was an act of naked, aggressive racism that damaged people and families, including my own, for generations.

internmentIt happened here. With the NDAA as the law of the land, and with war-mongering and xenophobia, it could happen here again. We must oppose such collectivism and stand for freedom for all.

On a related note, if you think Apple’s current battle with the FBI over iPhone security is based on empty fears of civil-liberties violations, think again. After decades of denials, the US Census Bureau recently admitted that it provided the Treasury Department with the names and addresses of Japanese-Americans who were later tracked down and herded into concentration camps.

Sanford (Sandy) Ikeda is a professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism. He is a member of the FEE Faculty Network.

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

The Other Half of the Inflation Story: Credit Expansion Adds Noise to Price Signals – Article by Sanford Ikeda

The Other Half of the Inflation Story: Credit Expansion Adds Noise to Price Signals – Article by Sanford Ikeda

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The New Renaissance Hat
Sanford Ikeda
May 7, 2015
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More money means higher prices. It’s too bad not everyone understands that connection. Even some economists don’t get it. Readers of the Freeman do, I’m sure. And they also understand why that’s a bad thing.

Increasing the supply of money and credit, other things equal, will cause a general rise in wages and prices across an economy. When the Federal Reserve, the central bank of the United States, excessively “prints money,” the result is “inflation” as it’s now commonly called. For those who get the new money after everyone else has spent theirs, inflation means incomes will now buy fewer goods, and every dollar lent before prices rose will be worth less when it’s returned.

If inflation continues, people will eventually learn to demand more for what they sell and lend in order to compensate for the purchasing power that inflation keeps eating away. That, in turn, will cause prices to rise faster, which makes planning for households and businesses even more difficult. In the past, that difficulty has led to hyperinflation and a breakdown of the entire economic system.

But as awful as all this may be, it’s really only half the story, and perhaps not even the worse half. What follows is a highly simplified story of what happens.

The structure of production

If you’d like to build a sturdy house, you’ll need to have some kind of blueprint or plan that will tell you two things:

  1. how the frame, floor, walls, roof, plumbing, and electrical system will all fit together; and
  2. the order in which to put these components together.

Even if the house was made entirely of identical stones, you would need to know how to fit them together to form the floor, walls, chimney, and other structural components. No two stones would serve exactly the same function in the overall plan.

The economy is like a house in the sense that each of its parts, which we might call “capital,” needs to mesh in a certain way if the eventual result will be order and not chaos. But there are two big differences between a house and an economy. The first is that the economy is not only much bigger, but it consists of a multitude of “houses” or private enterprises that have to fit together or coordinate, and so it’s an unimaginably more complex phenomenon than even the most elaborate house.

The second major difference is that a house is consciously constructed for a purpose, typically for someone to live in it. But an economic system is neither consciously designed by anyone nor intended to fulfill any particular purpose, other than perhaps to enable countless people with plans to do the best they can to achieve success. It’s a spontaneous order.

The way all the pieces of capital, from all the diverse people in the economy who own them, fit together is called the capital structure of production.

Credit expansion distorts the structure of production

When people decide to spend a certain portion of their incomes on consumption today, they are at the same time deciding to save some portion for consumption for the future. The amount that they save then gets lent out to borrowers and investors in the market for loanable funds. The rate of interest is the price of making those transactions across time. That is, when you decide to increase your saving, other things equal, the rate of interest (what some economists call the “natural rate of interest”) will fall. The falling interest rate makes borrowing more attractive to producers who invest today to produce more goods in the future.

That’s great, because when the market for loanable funds is operating freely without distortions, that means when people who saved today try to consume more in the future, there actually is more in the future for them to consume . Businesses today invested more at the lower rates precisely in order to have more to sell in the future when consumers want to buy more.

Now, if the Federal Reserve prints more money and that money goes into the loanable funds market, that will also increase the supply of loans and lower the interest rate and induce more borrowing and investment for future output. The difference here is that the supply of loans increases not because people are saving more now in order to consume more in the future, but only because of the credit expansion. That means that in the future, when businesses have more goods to sell, consumers won’t be able to buy them (because they didn’t save enough to do so) at prices that will cover all of the businesses’ costs. Prices will have to drop in order for markets to clear. Sellers suffer losses and workers lose their jobs.

And, oh yes, all that credit expansion also causes inflation.

While this process sounds rather involved, it’s still a highly simplified version of what has come to be known as the Austrian business cycle theory. (For a more advanced version, see here.) Of course, each instance in reality is significantly different from any other, but the narrative is essentially the same: credit expansion distorts the structure of production, and resources eventually become unemployed.

The explanation is more involved than the typical inflation-is-bad story that we’re more familiar with. Indeed, that probably explains why it’s the less-well-known half of the story. Even Milton Friedman and the monetarists pay little attention to the capital structure, choosing instead to focus on the problems of inflationary expectations.

Again, for Austrians, the problem arises when credit expansion artificially lowers interest rates and sets off an unsustainable “boom”; the solution is when the structure of production comes back into alignment with people’s actual preferences for consumption and saving, which is the “bust.” Most modern macroeconomists see it exactly the opposite way: the bust is the problem, and the boom is the solution.

An intricate, dynamic jigsaw puzzle

To close, I’d like to use an analogy I learned from Steve Horwitz (whom I heartily welcome back as a fellow columnist here at the Freeman).

The market economy is like a giant jigsaw puzzle in which each piece represents a unique unit of capital. When the system is allowed to operate without government intervention, the profit-and-loss motive tends to bring the pieces together in a complementary way to form a harmonious mosaic (although in a dynamic world, it couldn’t achieve perfection).

Credit expansion, then, is like someone coming along and making too many of some pieces and too few of others — and then, during the boom, trying to force them together, severely distorting the overall picture. During the bust, people realize they have to get rid of some pieces and try to discover where the others actually fit. That requires challenging adjustments and may take some time to accomplish. But if the government tries to “help” by stimulating the creation of more superfluous pieces, it will only confuse matters and make the process of adjustment take that much longer.

Inflation is bad enough. Unfortunately, it’s only half the story.

Sanford Ikeda is a 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.

Shut Out: How Land-Use Regulations Hurt the Poor – Article by Sanford Ikeda

Shut Out: How Land-Use Regulations Hurt the Poor – Article by Sanford Ikeda

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The New Renaissance Hat
Sanford Ikeda
February 28, 2015
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People sometimes support regulations, often with the best of intentions, but these wind up creating outcomes they don’t like. Land-use regulations are a prime example.

My colleague Emily Washington and I are reviewing the literature on how land-use regulations disproportionately raise the cost of real estate for the poor. I’d like to share a few of our findings with you.

Zoning

One kind of regulation that was actually intended to harm the poor, and especially poor minorities, was zoning. The ostensible reason for zoning was to address unhealthy conditions in cities by functionally separating land uses, which is called “exclusionary zoning.” But prior to passage of the Civil Rights Act of 1968, some municipalities had race-based exclusionary land-use regulations. Early in the 20th century, several California cities masked their racist intent by specifically excluding laundry businesses, predominantly Chinese owned, from certain areas of the cities.

Today, of course, explicitly race-based, exclusionary zoning policies are illegal. But some zoning regulations nevertheless price certain demographics out of particular neighborhoods by forbidding multifamily dwellings, which are more affordable to low- or middle-income individuals. When the government artificially separates land uses and forbids building certain kinds of residences in entire districts, it restricts the supply of housing and increases the cost of the land, and the price of housing reflects those restrictions.

Moreover, when cities implement zoning rules that make it difficult to secure permits to build new housing, land that is already developed becomes more valuable because you no longer need a permit. The demand for such developed land is therefore artificially higher, and that again raises its price.

Minimum lot sizes

Other things equal, the larger the lot, the more you’ll pay for it. Regulations that specify minimum lot sizes — that say you can’t build on land smaller than that minimum — increase prices. Regulations that forbid building more units on a given-size lot have the same effect: they restrict supply and make housing more expensive.

People who already live there may only want to preserve their lifestyle. But whether they intend to or not (and many certainly do so intend) the effect of these regulations is to exclude lower-income families. Where do they go? Where they aren’t excluded — usually poorer neighborhoods. But that increases the demand for housing in poorer neighborhoods, where prices will tend to be higher than they would have been.

And it’s not just middle-class families that do this. Very wealthy residents of exclusive neighborhoods and districts also have an incentive to support limits on construction in order to maintain their preferred lifestyle and to keep out the upper-middle-class hoi polloi. Again, the latter then go elsewhere, very often to lower-income neighborhoods — Williamsburg in Brooklyn is a recent example — where they buy more-affordable housing and drive up prices. Those who complain about well-off people moving into poor neighborhoods — a phenomenon known as “gentrification” — may very well have minimum-lot-size and maximum-density regulations to thank.

When government has the authority to restrict building and development, established residents of all income levels will use that power to protect their wealth.

Parking requirements

Another land-use regulation that makes space more expensive is municipal requirements that establish a minimum number of parking spaces per housing unit.

According Donald Shoup’s analysis, parking requirements add significantly to the cost of housing, particularly in areas with high land values. For example, in Los Angeles, parking requirements can add $104,000 to the cost of each apartment. Parking requirements limit consumers’ choices and increase the cost of housing even for those who prefer not to pay for parking.

Developers typically build only the minimum amount of parking required by law, which indicates that those requirements are binding. That is, in a less-regulated environment, developers would devote less land to parking and more land to living space. A greater supply of living space will, other things equal, lower the cost of housing.

Smart-growth regulations

In the 1970s, municipalities enacted new rules that were designed to protect farmland and to preserve green space surrounding rapidly growing cities by forbidding private development in those areas. By the late 1990s, this practice evolved into a land-use strategy called “smart growth.” (Here’s a video I did about smart growth.)  While some of these initiatives may have preserved green space that can be seen, what is harder to see is the resulting supply restriction and higher cost of housing.

Again, the lower the supply of housing, other things equal, the higher real-estate prices will be. Those who now can’t afford to buy will often rent smaller apartments in less-desirable areas, which typically have less influence on the political process. Locally elected officials tend to be more responsive to the interests of current residents who own property, vote, and pay taxes, and less responsive to renters, who are more likely to be transients and nonvoters. That, in turn, makes it easier to implement policies that use regulation to discriminate against people living on low incomes.

Conclusion

Zoning, minimum lot sizes, minimum parking requirements, and smart-growth regulations demonstrably and significantly increase the cost of housing for everyone by raising construction costs and restricting the supply of housing.

The average household in the United States today, rich or poor, spends about a third of its income on housing. But higher home prices hit lower-income households disproportionately hard because a dollar increase in housing expenditure represents a larger percentage of a poorer household’s budget. Indeed, the bottom 20 percent of households spends around 40 percent of income on housing.

In other words, these land-use regulations are unfairly regressive. Relaxing or even removing them would be a step toward achieving greater equity.

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.
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This article was originally published by The Foundation for Economic Education.
Dissent Under Socialism – Article by Sanford Ikeda

Dissent Under Socialism – Article by Sanford Ikeda

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The New Renaissance Hat
Sanford Ikeda
August 26, 2014
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The Daily Mail reports that “France’s Socialist government provoked outrage … by becoming the first in the world to ban protests against Israeli action in Palestine.” The socialist interior minister justified the ban by citing the potential for violent clashes in Paris between opposing groups, which he deemed a “threat to public order.”

My object here is not to comment on any aspect of the conflict in the Middle East or on this ban, which may or may not be justified. What caught my eye in the story is the following quote:

Sylvie Perrot, another pro-Palestine activist from Paris, said: “Fascist states stop people demonstrating against wars—it is beyond belief that French Socialists are following their example.”

Au contraire! 

If you understand the nature of socialism, it’s quite believable.

Collectivism and dissent

Let me begin by defining “collectivism” as any economic system in which the State controls the principal means of production. Collectivism requires central planning of some kind over the resources the State controls. The particular brand of collectivism we’re talking about depends on the aims of the controllers. 

In theory, “socialism” aims to unite people around the world regardless of nationality toward a common internationalist goal, while in theory “fascism” aims to unite people of a particular nation toward a common nationalist goal. The ends differ but all forms of collectivism use the same means: State control (de facto or de jure) over the means of production. Given their common collectivist roots, then, it shouldn’t be surprising that fascism and socialism employ similar policies.

Even more than that, however, F. A. Hayek points out, in The Road to Serfdom:  

That socialism so long as it remains theoretical is internationalist, while as soon as it is put into practice … it becomes violently nationalist, is one of the reasons why “liberal socialism” as most people in the Western world imagine it is purely theoretical, while the practice of socialism is everywhere totalitarian.

I would recommend the chapters in The Road to Serfdom where Hayek explains why this is the case (especially “Individualism and Collectivism,” “Planning and Democracy,” “Planning and the Rule of Law,” and “The Socialist Roots of Naziism”), but here are two important points in that explanation.

First, to the degree that the State undertakes central planning of the resources it controls, it can’t allow any person to interfere with or oppose the plan. Or, as Hayek puts it, “If the state is precisely to foresee the incidence of its actions, it means that it can leave those affected no choice.”

Second, the more resources the State controls, the wider the scope and more detailed its planning necessarily becomes so that delay in any part of the system becomes intolerable. There is little room for unresponsiveness, let alone dissent. Hayek again:

If people are to support the common effort without hesitation, they must be convinced that not only the end aimed at but also the means chosen are the right ones. The official creed, to which adherence must be enforced, will therefore comprise all the views about facts on which the plan is based. Public criticism or even expressions of doubt must be suppressed because they tend to weaken public support. [emphasis added]

My point is that even if genuine socialism of some kind did exist in France (or anywhere else), the government there could not allow spontaneous political demonstrations, for the reasons Hayek outlines in The Road to Serfdom. Collective political ends must trump individual expression. 

That a socialist government would ban political demonstrations should then come as no surprise.

The problem is central planning 

Friends of mine have objected that these arguments are misplaced because genuine socialism doesn’t exist in France, and that political parties who brand themselves “socialist” aren’t really socialist at all, at least in the sense defined here. 

But Hayek’s point is that intolerance for dissent grows with the scope of central planning. Thus, the principle also applies in the case of a mixed economy, such as the United States, with more limited central planning. To the extent that the U.S. government tries to pursue collectivist ends—say, during times of war—the greater the pressure on public officials to quell open displays of protest.

Moreover, the more things the central government plans for, the less freedom—of expression, assembly, association—there can be. If the State controls all means of production and all resources are placed in the hands of the authorities, then in effect all forms of expression—in politics, science, religion, art—are political and any form of dissent from the official creed is intolerable and must be forbidden. That would lead, and has led, to the death of free inquiry, because dissent, rebellion, and radical criticism are essential to the growth of knowledge.

One of the political virtues of private property is that it establishes a sphere of autonomy in which we are safe from the threat of physical violence. In that sphere of autonomy, we can say or not say, or do or not do, anything we like, so long as we don’t initiate physical violence against others. Private property is the garage where we can form a band or invent the personal computer or paint protest signs. As private property disappears, not only do our economic liberties disappear, but so too do our political liberties.

What is not forbidden …

Indeed, taken to its logical conclusion, under pure collectivism no freedom at all would remain, and not only the freedom to peacefully assemble in protest against government activities. In a completely collectivist system, it’s not a stretch to say that what isn’t forbidden would in fact be mandatory.

From California, which at least for now is a ways off from pure collectivism, comes an even-nuttier though still-scary scenario:

A Southern California couple received a letter from Glendora city officials threatening to fine them $500 if they don’t get their sun-scorched brown lawn green again, reports AP. Which Laura Whitney and Michael Korte would gladly do, except for one thing: They could also be fined $500 if they water their lawn too much; they’re currently only watering twice a week.

Thus, what is mandatory may also be forbidden. Don’t forget, 1984 was 30 years ago.

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.
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This article was originally published by The Foundation for Economic Education.
Plot Holes in Fiction and in Life – Article by Sanford Ikeda

Plot Holes in Fiction and in Life – Article by Sanford Ikeda

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Sanford Ikeda
August 23, 2014
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Fans of J.R.R. Tolkien’s trilogy The Lord of the Rings (LOTR) have long been aware of a possible plot hole. The central narrative concerns the hero, Frodo Baggins, who must destroy a powerful ring by walking through forbidding terrain and defeating or eluding monstrous foes and throwing the ring into a live volcano. The journey takes many months and costs Frodo and his companions dearly.

Over the years, many readers have noticed a much easier and less dangerous solution. Why, they ask, didn’t Frodo just have Gandalf ask his friends the mighty eagles to fly him swiftly over enemy territory so he could then simply toss the ring into the volcano? I’ve run across this post on Facebook a few times, which cleverly patches that hole with only a slight change in the narrative. (Others argue that there’s really no hole to patch because the “eagle solution” itself has flaws. And so the debate continues.)

Anyway, it occurred to me that the kind of social theory that I and many Austrian economists engage in could usefully be framed in terms of plot holes.

What’s a plot hole?

I’ll define a plot hole as a failure of logic, a factual mistake, or an obvious solution to a critical problem central to a story. (Here’s a slightly different definition from Wikipedia.) Of course, any particular plot hole may involve more than one of these errors of fact, logic, or perception, and there may be more kinds of plot holes than these. But here are examples of each of the ones I’ve mentioned. They come from movies, but some of them, such as the plot hole in Lord of the Rings, have literary counterparts.

Factual hole: In the movie Independence Day, key characters survive a massive fireball by ducking into the open side-door of a tunnel just as the inferno blasts by. Anyone who knows about firestorms would tell you that the super-heated air alone would instantly kill anyone in that situation.

Logical hole: In Citizen Kane, miserable Charles Foster Kane dies alone. How then does anyone know that his last word was “Rosebud”? Keep in mind that it’s a reporter’s search for the meaning of that word that drives the story forward.

Perceptual hole: The LOTR problem mentioned above is an example of this. No one seems to realize that there may be a much safer and effective way to defeat the enemy.

I would think that one of the things that makes writing fiction difficult is that events and characters have to hang together. The writer needs always to keep in mind the rules of the universe she’s creating, to recall what her characters know and when they know it, and to make sure that these details all constrain every action and event.

Life is full of “plot holes”

In real life, we make mistakes all the time. I think it’s interesting that those mistakes appear to fit neatly into the three categories of plot holes I’ve identified.

Factual hole/error: A person who doesn’t know the difference between liters and gallons buys a 100-liter barrel to hold 100 gallons of rainwater. No explanation necessary.

Logical hole/error: Thinking that since you’ve made a string of bad investment decisions, your next decision is therefore more likely to be a good one. But it’s quite the contrary: If you’ve been consistently making bad decisions, it follows that if nothing else changes, your next decision will also be bad one. (See “gambler’s fallacy.”)

Perceptual hole/error: Selling your car for $15,000 when, unbeknownst to you, you could have sold it for $20,000. The better deal simply escapes your notice and, if you were ever to learn about it, you would feel regret.

Here’s the difference though: In fiction, a writer can get away with any of these three plot holes as long as no reader sees it. Even if you do notice one, but you otherwise enjoy the story, you might be willing to overlook it. But in real life, you can’t ignore factual or logical plot holes. If you try to, they will come back and bite you. It will be painfully obvious that you can’t put 100 gallons of water into a 100-liter barrel. And if you bet on your next investment being a winner because you’ve just had a bunch of losers, it’s very likely that you’ll be disappointed. These kinds of holes you’re bound to discover.

I wrote about errors in an earlier column, but the distinction comes from my great teacher Israel Kirzner. He identifies a class of errors that derive from “overoptimism.” The more optimistic you are, the more likely it is that you’ll deliberately pass up solid opportunities for gain and thus the more likely it is that you’ll be disappointed. That’s not to say that optimism is a bad thing. If you weren’t optimistic and so never acted on that optimism, you’d never know if that optimism were warranted or not. You would never learn.

The other kind of error, what Kirzner calls “overpessimism,” happens when you’re so pessimistic that you unwittingly pass up a realizable opportunity. And because you don’t take chances, you don’t learn. This type of error is akin to a perceptual hole. Thinking you can only get $15,000 for your car means not selling to someone who would in fact pay more. Here, it’s not inevitable that you will discover your error because, after all, someone does buy your car (for $15,000). But you could have done better if you’d been more alert.

So errors of overpessimism, what I’m calling perceptual holes, are very different from factual and logical holes in that they are much harder to detect.

Plot holes and social theory

For many Austrian economists like me, economics, as a branch of a social theory, accepts as a datum that people are prone to make mistakes. But given the right rules of the game—private property, free association—they can discover those mistakes and correct them via an entrepreneurial-competitive process. Unlike plot holes in fiction writing, then, plot holes in living social systems are a feature, not a bug.

So our challenge as flesh-and-blood people, and what makes our lives interesting, is to discover plot holes, especially perceptual ones, and to fill them in. The challenge of social theorists is to understand as much we can about how that happens. In novels it’s the people outside the story who discover holes; in society it’s the people living the story who do.

Plot holes in novels spell failure. Plot holes in real life mean opportunity.

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.
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This article was originally published by The Foundation for Economic Education.
Heterogeneity: A Capital Idea! – Article by Sanford Ikeda

Heterogeneity: A Capital Idea! – Article by Sanford Ikeda

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The New Renaissance Hat
Sanford Ikeda
June 26, 2014
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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.
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This article was originally published by The Foundation for Economic Education.
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.
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This article was originally published by The Foundation for Economic Education.
Meaningful and Vacuous “Privilege” – Article by G. Stolyarov II

Meaningful and Vacuous “Privilege” – Article by G. Stolyarov II

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The New Renaissance Hat
G. Stolyarov II
December 3, 2013
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Sanford Ikeda’s concise and insightful lists of 14 common fallacies about the free market (available in two installments from The Freeman here and here) motivate careful thought about the commonly used and misused term “privilege” and the conflations in which it can result. In discussing the second fallacy regarding the free market, that it is identical to a system where the government grants special privileges to businesses, Dr. Ikeda writes that “People sometimes define ‘privilege’ as any advantage a person or group may have over others. Certainly such advantages exist today and would exist in a free market—you may be born into a wealthy family or have superior drive and resourcefulness—but these advantages are consistent with the absence of privilege in the libertarian sense, as long as you acquired such advantages without fraud or the initiation of physical violence against the person or property of others.”

Indeed, the increasingly common usage of the term “privilege” to mean any advantage whatsoever eviscerates it of any genuine meaning it once had. This problem in today’s discourse spreads far beyond discussions of connections between businesses and governments.

Certainly, the very fact that one individual is different from another – with a different set of experiences, different physique, different knowledge, and even different standing room at any particular time – provides that individual with opportunities that the other lacks, while rendering him or her limited in ways that the other is not. Unfortunately, this trivial fact is increasingly being misconstrued in some circles to suggest vile inequities arising out of innocuous human differences. People who have not aggressed against, or even demeaned or ridiculed, anyone are increasingly being identified as “privileged” simply for belonging to broadly and crudely defined groups – be it all people of European descent, all males, or even all non-overweight people (witness the pseudo-concept of “thin privilege”) or people who are not disabled. (“Ableism” is apparently an emerging sin in the vocabulary of the increasingly militant and vitriolic collectivistic “social justice” movement – which is about neither true individual-oriented justice nor the preservation of a civilized and tolerant society.)  Such a vacuously expansive view of privilege is a tremendous insult to the true victims of coercive privilege throughout history – from slaves in all eras, to women who in prior eras were denied suffrage and property rights, to the freethinkers and forbears of liberty and reason, whose voices were too often snuffed out by the arbitrary power of absolute monarchs and theocrats in the pre-Enlightenment world.

Thomas Jefferson, an opponent of privilege in its meaningful sense, put it best when he expressed in his 1826 letter to Roger C. Weightman “the palpable truth, that the mass of mankind has not been born with saddles on their backs, nor a favored few booted and spurred, ready to ride legitimately, by the grace of god.” Jefferson was a staunch opponent of the coercive privilege that enabled some to gain artificial advantages by restricting others from pursuing life-improving courses of action. Accidents of birth, or special lobbying skills, should not, in a just system, enable a person to acquire prerogatives which could not be earned through the free, peaceful exercise of that person’s abilities. Jefferson saw the future and strength of the American republic in the hoped-for emergence of a “natural aristocracy of talent and virtue” – people who, when allowed the liberty to flourish through honest work and competition, would become role models for others solely through their examples. This natural aristocracy would not need force to maintain its prominence, because the traits of the most knowledgeable, most industrious, and most virtuous people will be emulated by any who earnestly seek to improve their own lives and who have the freedom to acquire knowledge and make their own decisions.

Yet Jefferson’s natural aristocracy would be denounced as an example of horrid “privilege” by the “social justice” types – simply due to the necessarily unequal distribution of outcomes on a free market of open and honest production, competition, and cooperation. After all, not everyone can originate the same ideas at the same time. Not everyone can take advantage of the same opportunity for entrepreneurial profit, whose attainment, as economist Israel Kirzner demonstrated in Competition and Entrepreneurship, arises out of alertness to opportunities that others have missed. Kirzner writes that “Because the participants in [a] market are less than omniscient, there are likely to exist, at any given time, a multitude of opportunities that have not yet been taken advantage of. Sellers may have sold for prices lower than the prices which were in fact obtainable… Buyers may have bought for prices higher than the lowest prices needed to secure what they are buying…” (43). Would it be an example of unacceptable “privilege” for an alert entrepreneur to remedy such an arbitrage opportunity and thereby bring otherwise-unrealized value to consumers?

Yes, the free exercise of human abilities will produce outcomes where some people will have some advantages over some others (while, of course, leaving fully open the possibility that those very others will have their own distinct advantages, obtained through hard work, knowledge, or sheer luck). But, as long as coercion is not involved in securing and maintaining those advantages, the people endowed with them are not “booted and spurred” to ride the rest of us. As Dr. Ikeda points out, the differences among people are a source of strength harnessed by the free market: “The free market gives you an incentive to profit from associating with and learning from others who might be very different from you, who operate outside your normal social networks.” By incentivizing and facilitating these interactions, the free market encourages greater tolerance, understanding, and visible societal heterogeneity of the sort that constitutes the best safeguard against truly heinous oppressions based on collectivistic stereotypes. Instead of condemning others as being too “privileged” simply on account of innocuous differences, it is far more productive to think about how those differences can help one achieve one’s own values through honest, peaceful, and productive interaction, cooperation, and exchange.