Category Archives: Free markets

ALEC should stand up to liberal pressure groups

From April 2012.

Today’s Wall Street Journal explains how left-wing activists are using fear of the racism label to shut down free speech and debate. The target of their current smear campaign is American Legislative Exchange Council, or ALEC.

Liberals can’t stand ALEC because it is a strong and influential advocate for free market and limited government principals in state legislatures. Liberals accuse ALEC of supplying model legislation which may influence the writing of actual state law, or even become state law in some cases. Of course, liberal advocacy groups do this too, but they don’t let that get in the way of their criticism of ALEC.

The reality is that all sorts of people and special interest groups seek to influence the writing of laws. But for laws to take effect — no matter who proposes them — they must be passed by legislatures and signed by the chief executive (or a veto must be overturned).

The false charges of racism are particularly troubling, as no one wants to be labeled as such. That’s why scoundrels demonize their opponents with charges of racism, writes the Journal, and it’s become a powerful weapon for left-wing activists: “The ugly, race-baiting anti-ALEC campaign is typical of today’s liberal activism. It’s akin to the campaigns to smear libertarian donors Charles and David Koch and to exploit shareholder proxies to stop companies from giving to political campaigns or even the Chamber of Commerce. The left these days isn’t content merely to fight on the merits in legislatures or during elections. If they lose, they resort to demonizing opponents and trying to shut them down. The business community had better understand that ALEC won’t be the last target.”

As it turns out, the motivations of some contributors to ALEC are quite narrow. Coca-Cola wanted help from ALEC only in the opposition to soft drink taxes: “So Coke executives are happy to get ALEC’s help in their self-interest but head for the tall grass when ALEC needs a friend.”

Liberals accuse ALEC of being a front group for corporations, promoting only legislation that advances the interests of corporations or business at the expense of others. When you examine specific examples of these charges, the proposals being criticized often reduce taxes for everyone or reduce harmful and unnecessary regulations. If ALEC does promote legislation that caters to special interest groups, it should stop doing so.

Besides services to legislators, ALEC provides a valuable service to the public: The Rich States, Poor States publication that examines why some states perform better in economic growth and opportunity than others. The fifth edition was released last week.

Recently a city council member from a small town asked me if there were resources to help city council or county commission members understand and apply the principals of free markets and limited government to city and county governments. I looked and asked a few people. The answer is no, there appears to be no such resource. This seems like a growth opportunity for ALEC or a new organization. There are several well-known organizations that strive to advance the size and scope of city and county governments, and these need a counter-balance.

Shutting Down ALEC

Playing the race card to silence a free-market policy voice

Is it suddenly disreputable to advocate free-market policies? That’s the question raised by a remarkable political assault on the American Legislative Exchange Council (ALEC), which promotes reform in the 50 states. Led by former White House aide Van Jones, various left-wing activists and media are bullying big business to cut off ALEC’s funding. So much for free and open debate.

Founded in 1973, ALEC is a group of state lawmakers who meet to share and spread conservative policy ideas. ALEC’s main focus is fiscal and economic policy, notably at the moment pension and lawsuit reform, tax and spending limitation, and school choice. For years it labored in obscurity, its influence rising or falling with the public mood. But after conservatives made record gains in state legislatures in 2010, the left began to target ALEC for destruction.

Continue reading at the Wall Street Journal (no subscription required)

Coalition to Congress: End the wind production tax credit

Following is a letter from a coalition of organizations led by Americans for Prosperity advocating for the end of special treatment and subsidies for one industry.

September 24, 2013
Dear Senators and Representatives:

On behalf of the millions of members that our organizations represent, we encourage you to oppose extending the main source of federal support for wind energy, the production tax credit (PTC). The problems with bestowing government favors on wind energy are myriad — it doesn’t produce cheaper energy, it threatens electrical grid reliability, it’s inefficient, it’s unprincipled tax policy, to name a few — and it’s time to end this misguided handout.

Proposals to phase out the credit over time are a red herring. A phaseout is still an extension, and it does not address any of the problems that arise from government backing for wind energy. Besides, the PTC in its current form already has a phaseout built in: Wind farm projects may claim the tax credit for 10 years following receiving an investment letter.

In addition, we discourage you from including a PTC extension in a large tax extenders package at the end of the year. This is precisely what happened this past December; a 1-year PTC extension and expansion found its way into the Fiscal Cliff deal at the last minute. This provision expanded wind farm eligibility from those that were already in operation to those that were simply in the planning stages. If Congress is serious about comprehensive tax reform that lowers rates for everyone, then special provisions like the PTC that clutter the tax code should be first on the chopping block.

The PTC is scheduled expire on December 31, 2013. Congress should ensure that it does so as to clear the way for a simpler, less burdensome tax system across the board.

Also, Christine Harbin Hanson, a policy analyst for Americans for Prosperity, contributes the following article:

Kansas wind turbines

Expiring wind subsidies bring a sense of déjà vu to Capitol Hill. The main federal tax break for wind energy, the wind production tax credit (PTC), is on track to expire at the end of the year, and history is poised to repeat itself. This year, Congress should break from the past and end this wasteful handout for the wind industry, once and for all.

Over the next four months, Washington will engage in the same debate as always. The wind industry will claim that it needs even more time and more subsidies to get on its feet. Meanwhile, Americans for Prosperity and our coalition partners will point out the numerous economic and philosophical problems with the tax credit — it doesn’t produce cheaper energy, it’s an unreliable energy source, it’s inefficient, it’s not principled, it distorts markets, etc. Over the last twenty years, Congress has repeatedly agreed to the PTC, usually in one or two-year intervals.

This is exactly what happened with this past extension. Big Wind produced a flurry of lobbying activity while Senate Minority Leader McConnell (R-Ky.) and Vice President Biden (D) negotiated a deal to avert the Fiscal Cliff. As Tim Carney noted in the Washington Examiner at the time, this lobbying included “Obama’s closest corporate confidants as well as former congressmen from both parties.” In the end, a 1-year PTC extension and expansion found its way into the Fiscal Cliff deal at the 11th hour, alongside several additional targeted tax credits for renewable energy. Not only was the subsidy extended but it was expanded from wind farms that were already in operation to those that were simply in the planning stages.

This upcoming expiration has a plot twist: The American Wind Energy Association senses that its D.C. gravy train may be coming to an end and it will likely propose phasing down the tax credit over a period of years. Congress should avoid this trap. A phaseout is still an extension, and it does not address the problems that arise from subsidizing wind energy. Besides, the PTC in its current form already has a phaseout built in: wind farm projects may claim the tax credit for 10 years following receiving an investment letter.

Washington may be wising up to the pitfalls of using federal incentives to encourage politically-favored energy sources. Grants and loan guarantees are drying up, tarnished by repeated failures like Solyndra, Beacon Power, Ener1, A123 Systems and the list goes on-and-on. The main tax breaks for ethanol have also gone away, and momentum is building in Congress to repeal green energy mandates like the renewable fuel standard. This phase out proposal is Big Wind’s attempt to get more drink at the taxpayer trough.

Laughably, the only group calling for making the tax credit permanent is the White House. Apparently the Obama administration has still not learned from its repeated green energy failures, showing just how out of touch it is with economic realities.

Congress should end—not phase down, not extend—the wind production tax credit this year. Americans deserve energy solutions that can make it on their own in the marketplace—not ones that need to be propped up by government indefinitely. Washington’s long-time policy of giving preferential tax treatment to special interests simply isn’t working.

The real free lunch: Markets and private property

As we approach another birthday of Milton Friedman, here’s his article where he clears up the authorship of a famous aphorism, and explains how to really get a free lunch. Based on remarks at the banquet celebrating the opening of the Cato Institute’s new building, Washington, May 1993.

I am delighted to be here on the occasion of the opening of the Cato headquarters. It is a beautiful building and a real tribute to the intellectual influence of Ed Crane and his associates.

I have sometimes been associated with the aphorism “There’s no such thing as a free lunch,” which I did not invent. I wish more attention were paid to one that I did invent, and that I think is particularly appropriate in this city, “Nobody spends somebody else’s money as carefully as he spends his own.” But all aphorisms are half-truths. One of our favorite family pursuits on long drives is to try to find the opposites of aphorisms. For example, “History never repeats itself,” but “There’s nothing new under the sun.” Or “Look before you leap,” but “He who hesitates is lost.” The opposite of “There’s no such thing as a free lunch” is clearly “The best things in life are free.”

And in the real economic world, there is a free lunch, an extraordinary free lunch, and that free lunch is free markets and private property. Why is it that on one side of an arbitrary line there was East Germany and on the other side there was West Germany with such a different level of prosperity? It was because West Germany had a system of largely free, private markets — a free lunch. The same free lunch explains the difference between Hong Kong and mainland China, and the prosperity of the United States and Great Britain. These free lunches have been the product of a set of invisible institutions that, as F. A. Hayek emphasized, are a product of human action but not of human intention.

At the moment, we in the United States have available to us, if we will take it, something that is about as close to a free lunch as you can have. After the fall of communism, everybody in the world agreed that socialism was a failure. Everybody in the world, more or less, agreed that capitalism was a success. The funny thing is that every capitalist country in the world apparently concluded that therefore what the West needed was more socialism. That’s obviously absurd, so let’s look at the opportunity we now have to get a nearly free lunch. President Clinton has said that what we need is widespread sacrifice and concentrated benefits. What we really need is exactly the opposite. What we need and what we can have — what is the nearest thing to a free lunch — is widespread benefits and concentrated sacrifice. It’s not a wholly free lunch, but it’s close.

Let me give a few examples. The Rural Electrification Administration was established to bring electricity to farms in the 1930s, when about 80 percent of the farms did not have electricity. When 100 percent of the farms had electricity, the REA shifted to telephone service. Now 100 percent of the farms have telephone service, but the REA goes merrily along. Suppose we abolish the REA, which is just making low-interest loans to concentrated interests, mostly electric and telephone companies. The people of the United States would be better off; they’d save a lot of money that could be used for tax reductions. Who would be hurt? A handful of people who have been getting government subsidies at the expense of the rest of the population. I call that pretty nearly a free lunch.

Another example illustrates Parkinson’s law in agriculture. In 1945 there were 10 million people, either family or hired workers, employed on farms, and the Department of Agriculture had 80,000 employees. In 1992 there were 3 million people employed on farms, and the Department of Agriculture had 122,000 employees.

Nearly every item in the federal budget offers a similar opportunity. The Clinton people will tell you that all of those things are in the budget because people want the goodies but are just too stingy to pay for them. That’s utter nonsense. The people don’t want those goodies. Suppose you put to the American people a simple proposition about sugar: We can set things up so that the sugar you buy is produced primarily from beets and cane grown on American farms or so the sugar in addition comes without limit from El Salvador or the Philippines or somewhere else. If we restrict you to home-grown sugar, it will be two or three times as expensive as if we include sugar from abroad. Which do you really think voters would choose? The people don’t want to pay higher prices. A small group of special interests, which reaps concentrated benefits, wants them to, and that is why sugar in the United States costs several times the world price. The people were never consulted. We are not governed by the people; that’s a myth carried over from Abraham Lincoln’s day. We don’t have government of the people, by the people, for the people. We have government of the people, by the bureaucrats, for the bureaucrats.

Consider another myth. President Clinton says he’s the agent of change. That is false. He gets away with saying that because of the tendency to refer to the 12 Reagan-Bush years as if they were one period. They weren’t. We had Reaganomics, then Bushonomics, and now we have Clintonomics. Reaganomics had four simple principles: lower marginal tax rates, less regulation, restrained government spending, noninflationary monetary policy. Though Reagan did not achieve all of his goals, he made good progress. Bush’s policy was exactly the reverse of Reaganomics: higher tax rates, more regulation, more government spending. What is Clinton’s policy? Higher tax rates, more regulation, more government spending. Clintonomics is a continuation of Bushonomics, and we know what the results of reversing Reaganomics were.

On a more fundamental level, our present problems, both economic and noneconomic, arise mainly from the drastic change that has occurred during the past six decades in the relative importance of two different markets for determining who gets what, when, where, and how. Those markets are the economic market operating under the incentive of profit and the political market operating under the incentive of power. In my lifetime the relative importance of the economic market has declined in terms of the fraction of the country’s resources that it is able to use. And the importance of the political, or government, market has greatly expanded. We have been starving the market that has been working and feeding the market that has been failing. That’s essentially the story of the past 60 years.

We Americans are far wealthier today than we were 60 years ago. But we are less free. And we are less secure. When I graduated from high school in 1928, total government spending at all levels in the United States was a little over 10 percent of the national income. Two-thirds of that spending was state and local. Federal government spending was about 3 percent of the national income, or roughly what it had been since the Constitution was adopted a century and a half earlier, except for periods of major war. Half of federal spending was for the army and the navy. State and local government spending was something like 7 to 9 percent, and half of that was for schools and roads. Today, total government spending at all levels is 43 percent of the national income, and two-thirds of that is federal, one-third state and local. The federal portion is 30 percent of national income, or about 10 times what it was in 1928.

That figure understates the fraction of resources being absorbed by the political market. In addition to its own spending, the government mandates that all of us make a great many expenditures, something it never used to do. Mandated spending ranges from the requirement that you pay for antipollution devices on your automobiles, to the Clean Air Bill, to the Aid for Disability Act; you can go down the line. Essentially, the private economy has become an agent of the federal government. Everybody in this room was working for the federal government about a month ago filling out income tax returns. Why shouldn’t you have been paid for being tax collectors for the federal government? So I would estimate that at least 50 percent of the total productive resources of our nation are now being organized through the political market. In that very important sense, we are more than half socialist.

So much for input, what about output? Consider the private market first. There has been an absolutely tremendous increase in our living standards, due almost entirely to the private market. In 1928 radio was in its early stages, television was a futuristic dream, airplanes were all propeller driven, a trip to New York from where my family lived 20 miles away in New Jersey was a great event. Truly, a revolution has occurred in our material standard of living. And that revolution has occurred almost entirely through the private economic market. Government’s contribution was essential but not costly. Its contribution, which it’s not making nearly as well as it did at an earlier time, was to protect private property rights and to provide a mechanism for adjudicating disputes. But the overwhelming bulk of the revolution in our standard of living came through the private market.

Whereas the private market has produced a higher standard of living, the expanded government market has produced mainly problems. The contrast is sharp. Both Rose and I came from families with incomes that by today’s standards would be well below the so-called poverty line. We both went to government schools, and we both thought we got a good education. Today the children of families that have incomes corresponding to what we had then have a much harder time getting a decent education. As children, we were able to walk to school; in fact, we could walk in the streets without fear almost everywhere. In the depth of the Depression, when the number of truly disadvantaged people in great trouble was far larger than it is today, there was nothing like the current concern over personal safety, and there were few panhandlers littering the streets. What you had on the street were people trying to sell apples. There was a sense of self-reliance that, if it hasn’t disappeared, is much less prevalent.

In 1938 you could even find an apartment to rent in New York City. After we got married and moved to New York, we looked in the apartments-available column in the newspaper, chose half a dozen we wanted to look at, did so, and rented one. People used to give up their apartments in the spring, go away for the summer, and come back in the autumn to find new apartments. It was called the moving season. In New York today, the best way to find an apartment is probably to keep track of the obituary columns. What’s produced that difference? Why is New York housing a disaster today? Why does the South Bronx look like parts of Bosnia that have been bombed? Not because of the private market, obviously, but because of rent control.

Despite the current rhetoric, our real problems are not economic. I am inclined to say that our real problems are not economic despite the best efforts of government to make them so. I want to cite one figure. In 1946 government assumed responsibility for producing full employment with the Full Employment Act. In the years since then, unemployment has averaged 5.7 percent. In the years from 1900 to 1929 when government made no pretense of being responsible for employment, unemployment averaged 4.6 percent. So, our unemployment problem too is largely government created. Nonetheless, the economic problems are not the real ones.

Our major problems are social — deteriorating education, lawlessness and crime, homelessness, the collapse of family values, the crisis in medical care, teenage pregnancies. Every one of these problems has been either produced or exacerbated by the well-intentioned efforts of government. It’s easy to document two things: that we’ve been transferring resources from the private market to the government market and that the private market works and the government market doesn’t.

It’s far harder to understand why supposedly intelligent, well-intentioned people have produced these results. One reason, as we all know, that is certainly part of the answer is the power of special interests. But I believe that a more fundamental answer has to do with the difference between the self-interest of individuals when they are engaged in the private market and the self-interest of individuals when they are engaged in the political market. If you’re engaged in a venture in the private market and it begins to fail, the only way you can keep it going is to dig into your own pocket. So you have a strong incentive to shut it down. On the other hand, if you start exactly the same enterprise in the government sector, with exactly the same prospects for failure, and it begins to fail, you have a much better alternative. You can say that your project or program should really have been undertaken on a bigger scale; and you don’t have to dig into your own pocket, you have a much deeper pocket into which to dig, that of the taxpayer. In perfectly good conscience you can try to persuade, and typically succeed in persuading, not the taxpayer, but the congressmen, that yours is really a good project and that all it needs is a little more money. And so, to coin another aphorism, if a private venture fails, it’s closed down. If a government venture fails, it’s expanded.

We sometimes think the solution to our problems is to elect the right people to Congress. I believe that’s false, that if a random sample of the people in this room were to replace the 435 people in the House and the 100 people in the Senate, the results would be much the same. With few exceptions, the people in Congress are decent people who want to do good. They’re not deliberately engaging in activities that they know will do harm. They are simply immersed in an environment in which all the pressures are in one direction, to spend more money.

Recent studies demonstrate that most of the pressure for more spending comes from the government itself. It’s a self-generating monstrosity. In my opinion, the only way we can change it is by changing the incentives under which the people in government operate. If you want people to act differently, you have to make it in their own self-interest to do so. As Armen Alchan always says, there’s one thing you can count on everybody in the world to do, and that’s to put his self-interest above yours.

I have no magic formula for changing the self-interest of bureaucrats and members of Congress. Constitutional amendments to limit taxes and spending, to rule out monetary manipulation, and to inhibit market distortions would be fine, but we’re not going to get them. The only viable thing on the national horizon is the term-limits movement. A six-year term limit for representatives would not change their basic nature, but it would change drastically the kinds of people who would seek election to Congress and the incentives under which they would operate. I believe that those of us who are interested in trying to reverse the allocation of our resources, to shift more and more to the private market and less and less to the government market, must disabuse ourselves of the notion that all we need to do is elect the right people. At one point we thought electing the right president would do it. We did and it didn’t. We have to turn our attention to changing the incentives under which people operate. The movement for term limits is one way of doing that; it’s an excellent idea, and it’s making real progress. There have to be other movements as well.

Some changes are being made on the state level. Wherever you have initiative, that is, popular referendum, there is an opportunity to change. I don’t believe in pure democracy; nobody believes in pure democracy. Nobody believes that it’s appropriate to kill 49 percent of the population even if 51 percent of the people vote to do so. But we do believe in giving everybody the opportunity to use his own resources as effectively as he can to promote his own values as long as he doesn’t interfere with anybody else. And on the whole, experience has shown that the public at large, through the initiative process, is much more attuned to that objective than are the people they elect to the legislature. So I believe that the referendum process has to be exploited. In California we have been working very hard on an initiative to allow parental choice of schools. Effective parental choice will be on the ballot this fall. Maybe we won’t win it, but we’ve got to keep trying.

We’ve got to keeping trying to change the way Americans think about the role of government. Cato does that by, among other things, documenting in detail the harmful effects of government policies that I’ve swept over in broad generalities. The American public is being taken to the cleaners. As the people come to understand what is going on, the intellectual climate will change, and we may be able to initiate institutional changes that will establish appropriate incentives for the people who control the government purse strings and so large a part of our lives.

Wichita airfares, on the rise

Airplane

A survey by travel website CheapFlights.com shows that airfares in Wichita have both fallen and risen in recent years, even though the City of Wichita, Sedgwick County, and the State of Kansas collectively spend millions each year to keep airfares low.

The survey, according to a news release, ranks airports by “averaging the prices our users found during the month of June when searching for flights to popular domestic and international destinations like Miami, Honolulu, London and Cancun.”

The news release warns that “These rankings can shift dramatically from year to year and prices fluctuate frequently on specific routes.”

Since this is the fourth year for this survey, I thought it would be interesting to see how airfares in Wichita have fared over the timeframe of this survey. An interactive visualization is presented below.

wichita-airfares-compared-2013-07

Here is an illustration of Wichita airfares compared to the other airports included in the survey, which for 2013 included the 101 most popular airports. You can see that based on the data gathered for this study, the average airfare declined, but then rose. Wichita’s rank among airports rose, accordingly. (In the airfare rankings in this survey, a higher rank means higher airfares, relative to other airports.)

This data should inspire us to re-examine whether the taxpayer-funded effort to reduce airfares in Wichita has produced the desired result.

There have been other audits or studies which have questioned the efficacy of Wichita’s airport subsidy program. See Affordable Airfares audit embarrassing to Wichita for an example.

I’ve created an interactive visualization from this data. Use the visualization below, or click here to open the visualization in a new window, which may work better for some users. Click on an airport name to highlight its fares against other airports. Use Ctrl+click to add other airports.

Data is from CheapClights.com. Visualization created by myself using Tableau Public.

Wichita movie theater expands product line, now selling groceries

warren-theater-brewers-best-bbq-sauce-smallPossibly seeking to take advantage of impulse purchases while patrons buy movie tickets, a Warren Theater in Wichita has started carrying a limited line of grocery items.

A reader submitted this photo, commenting: “I went to the taxpayer-subsidized Warren Theater this weekend, and who was staring back at me across the counter — none other than the smiling face of the mayor. Warren has a display set up to sell Brewer BBQ sauce and my sandwich included an (unrequested) cup of the stuff.”

The sauce in the photo is produced and marketed by Brewer’s Best, a company recently founded by Wichita Mayor Carl Brewer.

It is unknown whether Mayor Brewer plans to create other grocery products for Warren Theaters to sell.

Wichita STAR bonds project not good for capitalism

Tomorrow the Wichita City Council considers approval of the project plan for a STAR bonds project in Wichita.

The formation of the district has already been approved. This action by the council will consider the development plan and the actual authorization to spend money.

If approved, the city will proceed under the State of Kansas STAR bonds program. The city will sell bonds and turn over the proceeds to the developer. As bond payments become due, sales tax revenue will make the payments.

It’s only the increment in sales tax that is eligible to be diverted to bond payments. This increment is calculated by first determining a base level of sales for the district. Then, as new development comes online — or as sales rise at existing merchants — the increased sales tax over the base is diverted to pay the STAR bonds. Estimates are that annual revenue available for the bonds will be over $5,000,000.

For this district, the time period used to determine the base level of sales tax is February 2011 through January 2012. A new Cabela’s store opened in March 2012, and it’s located in the STAR bonds district. Since Cabela’s sales during the period used to calculate the base period was $0, the store’s entire sales tax collections will be used to benefit the STAR bonds developer.

(There are a few minor exceptions, such as the special CID tax Cabela’s collects for its own benefit.)

Which begs the question: Why is the Cabela’s store included in the boundaries of the STAR bonds district?

With sales estimated at $35 million per year, the state has been receiving around $2 million per year in sales tax from this store. But after the STAR bonds are sold, that money won’t be flowing to the state. Instead, it will be used to pay off bonds that benefit the project’s developer.

Some questions

Curiously, the city doesn’t provide a cost-benefit study for this project. This is the usual mechanism the city relies on as justification for investments in economic development projects.

Often developers ask government for incentives because they claim the project is not economically feasible without assistance. Is that the case with this development? If not, why the need for subsidies?

And if taxpayer subsidy is required for this development, we need to ask what it is about Kansas that discourages this type of business investment.

STAR bonds should be opposed as they turn over tax policy to the private sector. We should look at taxation as a way for government to raise funds to pay for services that all people benefit from. An example is police and fire protection. Even people who are opposed to taxation rationalize paying taxes that way.

But STAR bonds turn tax policy over to the private sector for personal benefit. The money is collected under the pretense of government authority, but it is collected for the exclusive benefit of the owners of property in the STAR bonds district.

Citizens should be asking this: Why do we need taxation, if we can simply excuse some from participating in the system?

Another question: In the words of the Kansas Department of Commerce, the STAR bonds program offers “municipalities the opportunity to issue bonds to finance the development of major commercial, entertainment and tourism areas and use the sales tax revenue generated by the development to pay off the bonds.” This description, while generally true, is not accurate. This STAR bonds district includes much area beyond the borders of the proposed development, including a Super Target store, a new Cabela’s store, and much vacant ground that will probably be developed as retail. The increment in sales taxes from these stores — present and future — goes to the STAR bond developer. As we’ve seen, since the Cabela’s store did not exist during the time the base level of sales was determined, all of its sales count towards the increment.

STAR bonds, or capitalism?

In economic impact and effect, the STAR bonds program is a government spending program. Except: Like many spending programs implemented through the tax system, legislative appropriations are not required. No one has to vote to spend on a specific project. Can you imagine the legislature voting to grant $5 million per year to a proposed development in northeast Wichita? That doesn’t seem likely. Few members would want to withstand the scrutiny of having voted in favor of such blatant cronyism.

But under tax expenditure programs like STAR bonds, that’s exactly what happens — except for the legislative voting part, and the accountability that sometimes follow.

Government spending programs like STAR bonds are sold to legislators as jobs programs. Development, it is said, will not happen unless project developers receive incentives through these spending programs. Since no legislator wants to be seen voting against jobs, many are susceptible to the seductive promise of jobs.

But often these same legislators are in favor of tax cuts to create jobs. This is the case in the Kansas House, where many Republican members are in favor of reducing the state’s income tax as a way of creating economic growth and jobs. On this issue, these members are correct.

But many of the same members voted in favor of tax expenditure programs like the STAR bonds program. These two positions cannot be reconciled. If government taxing and spending is bad, it is especially bad when part of tax expenditure programs like STAR bonds. And there’s plenty of evidence that government spending and taxation is a drag on the economy.

It’s not just legislators that are holding these incongruous views. Secretary of Commerce Pat George promoted the STAR bonds program to legislators. Governor Sam Brownback supported the program.

When Brownback and a new, purportedly more conservative Kansas House took office, I wondered whether Kansas would pursue a business-friendly or capitalism-friendly path: “Plans for the Kansas Republican Party to make Kansas government more friendly to business run the risk of creating false, or crony capitalism instead of an environment of genuine growth opportunity for all business.” I quoted John Stossel:

The word “capitalism” is used in two contradictory ways. Sometimes it’s used to mean the free market, or laissez faire. Other times it’s used to mean today’s government-guided economy. Logically, “capitalism” can’t be both things. Either markets are free or government controls them. We can’t have it both ways.

The truth is that we don’t have a free market — government regulation and management are pervasive — so it’s misleading to say that “capitalism” caused today’s problems. The free market is innocent.

But it’s fair to say that crony capitalism created the economic mess.

But wait, you may say: Isn’t business and free-market capitalism the same thing? Not at all. Here’s what Milton Friedman had to say: “There’s a widespread belief and common conception that somehow or other business and economics are the same, that those people who are in favor of a free market are also in favor of everything that big business does. And those of us who have defended a free market have, over a long period of time, become accustomed to being called apologists for big business. But nothing could be farther from the truth. There’s a real distinction between being in favor of free markets and being in favor of whatever business does.” (emphasis added.)

Friedman also knew very well of the discipline of free markets and how business will try to avoid it: “The great virtue of free enterprise is that it forces existing businesses to meet the test of the market continuously, to produce products that meet consumer demands at lowest cost, or else be driven from the market. It is a profit-and-loss system. Naturally, existing businesses generally prefer to keep out competitors in other ways. That is why the business community, despite its rhetoric, has so often been a major enemy of truly free enterprise.”

The danger of Kansas government having a friendly relationship with Kansas business is that the state will circumvent free markets and promote crony, or false, capitalism in Kansas. It’s something that we need to be on the watch for. The existence of the STAR bonds program lets us know that a majority of Kansas legislators — including many purported fiscal conservatives — prefer crony capitalism over free enterprise and genuine capitalism.

The problem

Government bureaucrats and politicians promote programs like STAR bonds as targeted investment in our economic future. They believe that they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by the state that shapes the future direction of the Kansas economy.

Arnold King has written about the ability of government experts to decide what investments should be made with public funds. There’s a problem with knowledge and power:

As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.

When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.

Despite this knowledge problem, Kansas legislators are willing to give power to bureaucrats in the Department of Commerce who feel they have the necessary knowledge to direct the investment of public funds. One thing is for sure: the state and its bureaucrats have the power to make these investments. They just don’t have — they can’t have — the knowledge as to whether these are wise.

What to do

The STAR bonds program is an “active investor” approach to economic development. Its government spending on business leads to taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Kansas and many of its cities employ: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.'”

There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Government spending on specific companies through programs like STAR bonds is an example of precisely the wrong policy.

We need to move away from economic development based on this active investor approach. We need to advocate for policies at all levels of government that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.

Public Hearing Considering the Adoption of a STAR Bond Project Plan for the K-96 Greenwich Star Bond Projec… by

Wind tax credit promotes expensive electricity

Conservative and free-market groups are asking Congress to oppose extending the Production Tax Credit for production of electricity from wind.

The letter, presented below, is designed for representatives from states that don’t have a Renewable Portfolio Standard, which is a policy or law that requires a certain amount of electricity to be produced from renewable sources, which is primarily wind in most places. Kansas has an RPS, and Governor Sam Brownback actively supports maintaining this standard, which will require that more Kansas electricity be produced from wind. Kansas Policy Institute has found that RPS will result in higher electricity costs, fewer jobs, and less investment in Kansas. Its summary is at The Economic Impact of the Kansas Renewable Portfolio Standard, and the full report is here.

The letter points out that the PTC has the effect of transferring subsidy from states without RPS to those states, like Kansas, that do.

December 12, 2012
Dear Members of Congress:

We write to urge your opposition to extending the wind Production Tax Credit (PTC). Created in 1992 by the Energy Policy Act, the PTC has far outlived its usefulness. Moreover, as a member of Congress serving a state that does not have a renewable energy mandate, you should be aware that the PTC essentially transfers taxpayer dollars from your constituents and subsidizes the states with such mandates. Renewable energy mandates force utilities to buy politically-favored forms of energy such as wind, while your state has wisely chosen to allow the most abundant and affordable forms of energy to be purchased by consumers and industries.

The wind PTC provides a tax credit of 2.2 cents per kilowatt-hour, and lasts for ten years for anyone receiving it. With the wholesale price of electricity frequently ranging from 2.5 to 4.5 cents per kilowatt-hour, the PTC is worth a large percentage of the total price. This makes the wind industry one of the most heavily subsidized forms of energy. In 2010, federal subsidies paid $56 for every megawatt hour of wind energy compared to $0.64 for coal and natural gas electricity.

Despite having this generous subsidy for two decades, wind only produces 3 percent of America’s electricity. This corporate dependence on federal subsidies not only harms the taxpayers who finance the PTC, it also creates an improper incentive for wind companies to focus on obtaining lucrative subsidies rather than long-term sustainability and competitiveness. It is time the wind energy industry stood on its own and continued funding by the federal government will only hurt cost-effective energy sources as well as American taxpayers.

Lastly, for the twenty-one states that do not have a renewable energy mandate in place — states like your own — the stakes are much higher. Under the structure of the PTC, the bulk of the tax credits flow to those states that have the most wind generation capacity and those happen to be states with an RPS. This is because the PTC helps to disguise the true cost of the mandate. Extending the wind PTC ensures that your constituents will continue to subsidize wind power in other states that have made political decisions to force consumers to buy more expensive and less reliable forms of energy — like wind.

Reliable, affordable, and ‘always on’ electricity is critical to get our economy back on track. The wind PTC promotes unreliable and expensive energy to the detriment of dependable and cost-effective forms of electricity generation. By taking a principled stand against the PTC, you help taxpayers in your own state and ensure more cost-effective electricity generation overall. We urge you to allow this wasteful subsidy to expire, as planned, at the end of the year.

Freedom Action
Competitive Enterprise Institute
American Conservative Union
American Energy Alliance
Heritage Action
American Commitment

Nation can no longer afford wind tax credit

From The Hill:

Sen. Lamar Alexander (R-Tenn.) on Wednesday said the nation’s fiscal situation has become so dire that the government can no longer afford to maintain a wind power production credit that has been in place since in 1992.

“I think there is certainly the largest realization that we’ve ever had that it’s time for it to end,” Alexander said at a Wednesday event hosted by The Hill and sponsored by the American Energy Alliance.

In a longer story, The Hill reports on the efforts of U.S. Representative Mike Pompeo, a Republican representing the Kansas fourth district (Wichita metropolitan area and surrounding counties) to end the wind production tax credit:

Rep. Mike Pompeo (R-Kan.) said he hopes that conversation leads to the elimination of all energy subsidies.

Pompeo has led the House charge against the credit. He got 46 other House GOP members to sign a September letter urging Boehner to nix the provision.

Pompeo said the wind credit’s history is instructive when debating the benefits of tax carve-outs for specific industries.

He pointed to a steep decline in wind turbine installations when the credit last lapsed in 2004 as proof that subsidies distort markets and investment. And planned projects and investments already are down for next year as a result of the credit’s cloudy future.

“I think that’s further evidence that it’s non-economic,” Pompeo said.

Pompeo has been at the forefront of efforts to end subsidies that distort energy markets. He and Alexander recently contributed an op-ed to the Wall Street Journal, which may be read at Puff, the Magic Drag on the Economy: Time to let the pernicious production tax credit for wind power blow away. Pompeo also develops the argument in Governor Romney is right: End the wind production tax credit and Mike Pompeo: We need capitalism, not cronyism. The special interests that benefit from cronyism have struck back, but unsuccessfully: Kerr’s attacks on Pompeo’s energy policies fall short.

I, Pencil: The Movie

“The spontaneous configuration of creative human energies, of millions of people, with their various skills and talents, organizing voluntarily in response to human necessity and desire — as if led by an invisible hand to promote an end which was no part of the intention.”

This is part of the narration from a new short movie I, Pencil, produced by the Competitive Enterprise Institute.

Lawrence W. Reed, President of Foundation for Economic Education says about this movie: “For more than half a century, Leonard Read’s classic story has opened eyes and changed minds by the hundreds of thousands. It humbles even the high and mighty as it reveals the wondrous achievements of individuals whose contributions are coordinated by nothing more than incentives and market prices. This film guarantees that the insights of Read’s humble pencil will continue to work their magic for many years to come!”

A companion website I, Pencil, a film series from CEI has video of additional commentary, curriculum, educational resources, and many other items of interest in learning about how free markets work to bring us not only the things we need, but the things we want that make life better.

Koch articles draw critics, but few factual

Two large articles in the Wichita Eagle regarding Charles and David Koch of Wichita-based Koch Industries have attracted many comments, and many are not based on facts.

The two articles are The Kochs’ quest to save America and Charles Koch relentless in pursuing his goals.

A curious irony is the claim by many comment writers that Charles and David Koch want to buy America, while at the same time they are running it into the ground: “The koch bros. are funding the conversion of OUR COUNTRY into another third world country.”

Even if it was possible to buy America — whatever that means — why would someone destroy it first?

Another common thread in the comments is that Charles and David Koch didn’t complain about government spending, subsidy, regulation, etc. before President Barack Obama was elected. In fact, they have been working to promote free markets and economic freedom for many decades. Charles Koch and two others founded what became the Cato Institute in 1974, nearly four decades ago. Even earlier: A recent issue of Koch Industries Discovery newsletter contains a story titled “Don’t subsidize me.” Here’s an excerpt:

When Charles Koch was in his 20s, he attended a business function hosted by his father. At that event, Fred Koch introduced Charles to a local oilman.

When the independent oilman politely asked about the young man’s interests, Charles began talking about all he was doing to promote economic freedom.

“Wow!” said the oilman, who was so impressed he wanted to introduce the young bachelor to his eligible daughter.

But when Charles mentioned he was in favor of eliminating the government’s oil import quota, which subsidized domestic producers, the oilman exploded in rage.

“Your father ought to lock you in a cell!” he yelled, jabbing his finger into Charles’ chest. “You’re worse than a Communist!”

It seems the oilman was all for the concept of free markets — unless it meant he had to compete on equal terms.

Under oath

For more than 50 years, Charles Koch has consistently promoted economic freedom, even when it was not in the company’s immediate financial interest.

In the 1960s, Koch was willing to testify before a powerful Congressional committee that he was against the oil import quota — a very popular political measure at the time.

“I think it’s fair to say my audience was less than receptive,” recalls Koch.

Years later, Koch warned an independent energy association about the dangers of subsidies and mandates.

“We avoid the short-run temptation to impose regulatory burdens on competitors. We don’t lobby for subsidies that penalize taxpayers for our benefit.

“This is our philosophy because we believe this will produce the most favorable conditions in the long run,” Koch said.

Many comments take the company to task for accepting oil and ethanol subsidies. Koch Industries, as a refiner of oil, blends ethanol with the gasoline it produces in order to meet federal mandates that require ethanol usage. Even though Koch opposed subsidies for ethanol — as it opposes all subsidies — Koch accepted the subsidies. A company newsletter explained “Once a law is enacted, we are not going to place our company and our employees at a competitive disadvantage by not participating in programs that are available to our competitors.” (The tax credit subsidy program for ethanol has ended, but there is still the mandate for its use in gasoline.)

Regarding oil subsidies, the programs that are most commonly cited (percentage depletion and expensing of intangible drilling costs) apply to producers of oil — the companies that drill holes and pump up oil. Koch Industries doesn’t do that. The company doesn’t benefit from these programs.

Other comments charge that Koch Industries wants to end regulation so that it can pollute as much as it wants. This is another ridiculous charge not based on facts.

A statement on the KochFacts website states “recent critics have also claimed that Koch is one of the nation’s top 10 polluters. This study confuses pollution with permitted emissions, which are carefully regulated by the U.S. EPA and other agencies. The index labels as ‘polluters’ Ford Motor, General Motors, GE, Pfizer, Eastman Kodak, Sony, Honeywell, Berkshire Hathaway, Kimberly Clark, Anheuser Busch and Goodyear — corporations, like Koch companies, with significant manufacturing in the U.S. Emissions, a necessary by-product of manufacturing, are strictly monitored and legally permitted by federal, state and local governments.”

Say: Didn’t the U.S. government take over General Motors, and continues to hold a large stake in the company? And GE and Berkshire Hathaway: Aren’t those run by personal friends of Barack Obama?

The reality is that manufacturing has become much more efficient with regards to emissions, and Koch Industries companies have lead the way. One report from the company illustrates such progress: “Over the last three years, Koch Carbon has spent $10 million to enhance environmental performance, including $5 million for dust abatement at one of its petroleum coke handling facilities. These investments have paid off. In 2008, Koch Carbon’s reportable emissions were 6.5 percent less than in 2000, while throughput increased 10.4 percent.”

Even when Koch Industries does not agree with the need for specific regulations, the company, nonetheless, complies. Writing about an increase in regulation in the 2007 book The Science of Success: How Market-Based Management Built the World’s Largest Private Company, Charles Koch explained the importance of regulatory compliance: “This reality required is to make a cultural change. We needed to be uncompromising, to expect 100 percent of our employees to comply 100 percent of the time with complex and ever-changing government mandates. Striving to comply with every law does not mean agreeing with every law. But, even when faced with laws we think are counter-productive, we must first comply. Only then, from a credible position, can we enter into a dialogue with regulatory agencies to determine alternatives that are more beneficial. If these efforts fail, we can then join with others in using education and/or political efforts to change the law.”

Koch companies have taken leadership roles in environmental compliance, explains another KochFacts page: “In 2000, EPA recognized Koch Petroleum Group for being ‘the first petroleum company to step forward’ to reach a comprehensive Clean Air Act agreement involving EPA and state regulatory agencies in Minnesota and Texas. Despite fundamental policy disagreements, then-EPA Administrator Carol Browner acknowledged Koch’s cooperation. She characterized the agreement as ‘innovative and comprehensive’ and praised the ‘unprecedented cooperation’ of Koch in stepping forward ahead of its industry peers.” Browner was no friend of industry, and had a “record as a strict enforcer of environmental laws during the Clinton years,” according to the New York Times.

What may really gall liberals and Koch critics is this: They believe that a powerful and expansive government is good for the country. But what we have is a complicated machine that a company like General Electric can exploit for huge profits, all without creating things that consumers value. Charles Koch calls for an end to this, as he wrote last year in the Wall Street Journal: “Government spending on business only aggravates the problem. Too many businesses have successfully lobbied for special favors and treatment by seeking mandates for their products, subsidies (in the form of cash payments from the government), and regulations or tariffs to keep more efficient competitors at bay. Crony capitalism is much easier than competing in an open market. But it erodes our overall standard of living and stifles entrepreneurs by rewarding the politically favored rather than those who provide what consumers want.”

The political Left just can’t believe that anyone would write that and really mean it.

Pompeo: Wind production tax credit should expire

U.S. Representative Mike Pompeo, a Republican who represents the Kansas fourth district, and U.S. Senator Lamar Alexander contribute the following article on the harm of the wind power production tax credit (PTC). The NorthBridge Group report referenced in the article is available at Negative electricity prices and the production tax credit.

Puff, the Magic Drag on the Economy
Time to let the pernicious production tax credit for wind power blow away

By Lamar Alexander And Mike Pompeo

As Congress works to reduce spending and avert a debt crisis, lawmakers will have to decide which government projects are truly national priorities, and which are wasteful. A prime example of the latter is the production tax credit for wind power. It is set to expire on Dec. 31 — but may be extended yet again, for the seventh time.

This special provision in the tax code was first enacted in 1992 as a temporary subsidy to enable a struggling industry to become competitive. Today the provision provides a credit against taxes of $22 per megawatt hour of wind energy generated.

From 2009 to 2013, federal revenues lost to wind-power developers are estimated to be $14 billion — $6 billion from the production tax credit, plus $8 billion courtesy of an alternative-energy subsidy in the stimulus package — according to the Joint Committee on Taxation and the Treasury Department. If Congress were to extend the production tax credit, it would mean an additional $12 billion cost to taxpayers over the next 10 years.

There are many reasons to let this giveaway expire, including wind energy’s inherent unreliability and its inability to stand on its own two feet after 20 years. But one of the most compelling reasons is provided in a study released Sept. 14 by the NorthBridge Group, an energy consultancy. The study discusses a government-created economic distortion called “negative pricing.”

This is how it works. Coal- and nuclear-fired plants provide a reliable supply of electricity when the demand is high, as on a hot summer day. They generate at lower levels when the demand is low, such as at night.

But wind producers collect a tax credit for every kilowatt hour they generate, whether utilities need the electricity or not. If the wind is blowing, they keep cranking the windmills.

Why? The NorthBridge Group’s report (“Negative Electricity Prices and the Production Tax Credit”) finds that government largess is so great that wind producers can actually pay the electrical grid to take their power when demand is low and still turn a profit by collecting the credit — and they are increasingly doing so. The wind pretax subsidy is actually higher than the average price for electricity in many of the wholesale markets tracked by the Energy Information Administration.

This practice drives the price of electricity down in the short run. Wind-energy supporters say that’s a good thing. But it is hazardous to the economy’s health in the long run.

Temporarily lower energy prices driven by wind-power’s negative pricing will cripple clean-coal and nuclear-power companies. But running coal and nuclear out of business is not good for the U.S. economy. There is no way a country like this one — which uses 20% to 25% of all the electricity in the world — can operate with generators that turn only when the wind blows.

The Obama administration and other advocates of wind power argue that the subsidy provided by the tax credit allows the wind industry to sustain American jobs. But they are jobs that exist only because of the subsidy. Keeping a weak technology alive that can’t make it on its own won’t create nearly as many jobs as the private sector could create if it had the kind of low-cost, reliable, clean electricity that wind power simply can’t generate.

While the cost of renewable energy has declined over the years, it is still far more expensive than conventional sources. And even the administration’s secretary of energy, Steven Chu, calls wind “a mature technology,” which should mean it is sufficiently advanced to compete in a free market without government subsidies. If wind power cannot compete on its own after 20 years without costly special privileges, it never will.

Pickens changes his mind, again

Energy investor T. Boone Pickens has changed his mind about government subsidy of energy markets — again.

Until recently Pickens has been promoting federal legislation titled H.R. 1380: New Alternative Transportation to Give Americans Solutions Act of 2011, or NAT GAS act. The bill provides a variety of subsidies, implemented through tax credits, to producers and users of natural gas. The goal is to promote the use of natural gas for a transportation fuel, particularly for long-haul trucks.

Now, according to reporting in Politico, Pickens said about the transition to natural gas “It’s going to happen, and you don’t have to have Washington do it, thank God.”

Later in the article Pickens is quoted as saying “You don’t have to have a tax credit; it’s going to happen.”

Before promoting subsidies for natural gas as a transportation fuel, Pickens actively promoted wind power, another form of energy production that receives government subsidy. In 2008 Pickens ordered 667 wind turbines worth $2 billion from General Electric. Now, in the Politico article, he concedes he lost a lot of money on this venture.

His plan, at that time, was to use wind power to generate electricity, and the natural gas saved would be used to power transportation. But there’s another relationship between wind power and gas, and it stems from the unreliability and variability of wind power. It’s difficult to quickly adjust the output of most power plants. But natural gas turbine plants are an exception. Kansas recently saw one of its major electric utilities complete a new natural gas power plant. The need for the plant was at least partly created by its investment in wind: A document produced by Westar titled The Greenhouse Gas Challenge noted the “Construction of the 665 MW natural gas-fired Emporia Energy Center, providing the ability to efficiently follow the variability of wind generation.” In another document announcing a request for a rate increase it stated “Our Emporia Energy Center is excellent for following the variability of wind production.”

At the time of these investments by Pickens and Westar, the price of natural gas was high. Now it is low — so low, and the prospects for future low prices certain enough — that Pickens has abandoned his wind farm projects. Even with all the subsidy granted to wind power, it’s cheaper to generate electricity with gas.

Let’s hope this is the last time Pickens develops a plan to tap the federal taxpayer to pay for his plans.

Minimum wage increase not a solution

Those who advocate for a higher minimum wage law appear to have the best interests of workers as their concern. But as is almost always the case when government intervenes into markets, the unintended consequences create more harm than good.

In the case of the federal minimum wage, we need to remember that this law — as well-intentioned as it may be — is not the solution to unemployment or raising the standard of living of workers.

The great appeal of a higher minimum wage mandated by an act of Congress is that it seems like a simple and harmless way to increase the wellbeing of low-wage workers. Those who were earning less than the new lawful wage and keep their jobs after the increase are happy. They are grateful to the lawmakers, labor leaders, newspaper editorialists, and others who pleaded for the higher minimum wage. News stories will report their good fortune.

That’s the visible effect of raising the minimum wage. But to understand the entire issue, we must look for the unseen effects. Milton Friedman explained in Capitalism and Freedom:

Minimum wage laws are about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it. Many proponents of minimum wage laws quite properly deplore extremely low rates; they regard them as a sign of poverty; and they hope, by outlawing wage rates below some specified level, to reduce poverty. In fact, insofar as minimum wage laws have any effect at all, their effect is clearly to increase poverty. The state can legislate a minimum wage rate. It can hardly require employers to hire at that minimum all who were formerly employed at wages below the minimum. … The effect of the minimum wage is therefore to make unemployment higher than it otherwise would be.

The not-so-visible effect of the higher wage law is that demand for labor will be reduced. Those workers whose productivity — as measured by the give and take of supply and demand — lies below the new lawful wage rate are in danger of losing their jobs. The minimum wage law says if you hire someone you must pay them a certain minimum amount. The law can’t compel you to hire someone, nor can it force employers to keep workers on the payroll.

The people who lose their jobs are dispersed. A few workers here; a few there. They may not know who is to blame for their situation. Newspaper and television reporters will not seek these people, as they are largely invisible, especially so in the case of the people who are not hired because of the higher minimum wage level.

Some things employers do to compensate for higher labor costs include these:

  • Reduce non-wage benefits such as health insurance.
  • Eliminate overtime hours that many employees rely on.
  • Substitute machines for labor. We might see more self-service checkout lanes at supermarkets and more use of automated telephone response systems, for example.
  • Use illegal labor. Examples include paying employees under the table, or requiring work off-the-clock.
  • Some employers may be more willing to bear the risks of using undocumented workers who can’t complain that they aren’t being paid the minimum wage.
  • Some employers may decide that the risks and hassles of being in business aren’t worth it anymore, and will close shop.

Solution to low wages

If we are truly concerned about the plight of low-wage and low-skilled workers we can face some realities and deal with them openly. The primary reality is that some people are not able to produce output that our economy values highly. These workers are not very productive. Passing a law that requires employers to pay them more doesn’t change the fact that their productivity is low. But there are ways to increase productivity.

One way to increase workers’ productivity is through education. Unfortunately, there is ample evidence that our public education system is not producing graduates with the skills needed for well-paying jobs. But this is a problem that can be fixed.

Another way to increase wages is to encourage more capital investment. But capital is a dirty word to liberals, as it conjures up images of rich people earning income from the labors of others. But as the economist Walter E. Williams says, ask yourself this question: who earns the higher wage: a man digging a ditch with a shovel, or a man digging a ditch using a power backhoe? The difference between the two is that the man using the backhoe is more productive, although the worker using the shovel is undoubtedly working harder. But it is productivity, not work effort, that is valued. That productivity is provided by capital — the savings that someone accumulated (instead of spending on immediate consumption or taxes) and invested in a way that increased the output of workers and our economy.

These savers and investors are not necessarily wealthy people. Anyone who defers current consumption in order to save and invest — no matter how small the amount — provides capital to industry.

Education and capital accumulation are the two best ways to increase the productivity and the wages of workers. Ironically, the people who are most vocal about raising wages through legislative fiat are also usually opposed to meaningful education reform and school choice, insisting on more resources being poured into the present system. They also usually support higher taxes on both individuals and business, which makes it harder to accumulate capital. These people and organizations should examine the effects of the policies they promote, as they are not in alignment with their stated goals.

Minimum wage as competitive weapon

We also need to examine the motivations of those calling for a higher minimum wage. Sometimes they see a way gain a competitive advantage.

In 2005 Walmart came out in favor of raising the national minimum wage. Providing an example of how regulation is pitched as needed for the common good, Walmart’s CEO said that he was concerned for the plight of working families, and that he thought the current minimum wage of $5.15 per hour was too low. If Walmart — a company the political left loves to hate as much as any other — can be in favor of increased regulation of the workplace, can regulation be a good thing? Had Walmart discovered the joys of big government?

The answer is yes. Walmart discovered a way of using government regulation as a competitive weapon. This is often the motivation for business support of regulation. In the case of Walmart, it was already paying its employees well over the current minimum wage. At the time, some sources thought that the minimum wage could be raised as much as 50 percent and not cause Walmart any additional cost — its employees already made that much.

But its competitors didn’t pay wages that high. If the minimum wage rose very much, these competitors to Walmart would be forced to increase their wages. Their costs would rise. Their ability to compete with Walmart would be harmed.

In short, Walmart supported government regulation in the form of a higher minimum wage as a way to impose higher costs on its competitors. It found a way to compete outside the marketplace. And it did it while appearing noble.

Governor Romney is right: End the wind production tax credit

U.S. Representative Mike Pompeo, a Republican who represents the Kansas fourth district, contributes the following article on the harm of government involvement in energy markets, wind power specifically. Pompeo has written extensively on energy; see Pompeo on energy tax simplification, Era of energy subsidies is over, and Free market energy solutions don’t jeopardize national security. He has also introduced legislation to end all tax credits for energy, H.R. 3308: Energy Freedom and Economic Prosperity Act.

There’s been a steady drumbeat from those seeking an extension of the wind production tax credit. For many reasons, including some that former Massachusetts Gov. Mitt Romney has carefully highlighted in his opposition, this is a bad idea.

First, an extension continues this unsettling policy trend in which citizens are asked to bear all the risks and gain none of the rewards. This socialization of risks and privatization of profits guarantees disasters, for corporate boards and even their federal overseers can become careless and, in some instances, reckless. This fact was clearly demonstrated by the Solyndra debacle — when a company with close ties to the Obama administration lost more than a half billion dollars of taxpayers’ money. At the heart of that fiasco was both the company and the administration’s indifference to the taxpayers.

Solyndra also revealed something else damaging about federal involvement in markets: the potential for political corruption. It’s clear that the Obama administration became emotionally, and inappropriately, invested in the fortunes of one company and one sector. When that happens, the system is compromised, cronyism flourishes and corruption is inevitable.

President Barack Obama talks about the need to “invest” in alternative energy sources. But the reality is that he is not investing his money — he’s spending yours. I’m not sure that too many Americans would choose the president to manage their retirement accounts. His record — a jobless and exceedingly shallow recovery — is not good.

With this production tax credit extension, the wisdom of the investment is especially dubious. Wind companies and their lobbyists have, for the last year, been telling all who would listen that the expiration of the tax credit could spell doom for their industry. Obama repeats this claim regularly on the campaign trail.

But what does that say about the industry? If you need a tax credit to compete, you are probably not that competitive.

Moreover, the tax credit is not de minimis for either taxpayers or companies that are lobbying for it. It will cost the taxpayers more than 12 billion dollars inside the budget window. Worse, the credit is set at 2.2 cents per kilowatt hour. Just to compare, the national average for produced power is around 6 cents per kilowatt hour. That means that the wind industry gets an almost 40 percent subsidy for each unit it produces. How many companies would like that?

You also have to remember that wind power enjoys a mandate in more than 30 states. That is, regardless of cost — or price to ratepayers — utilities must use wind or other renewables for specific amounts of power generation. So, the wind companies enjoy not only a tax credit, but a must-use mandate as well — regardless of cost.

It would be one thing if we were running out of natural gas and confronted a real national requirement to use alternative energy. But it’s the reverse. The United States has more traditional energy resources than anywhere else on Earth, according to the Congressional Research Service. With the surge in production from the shale formations, a new Barclays report just concluded, natural gas will likely dominate wind in the marketplace for the foreseeable future.

Even now, in places like Williston, N.D., companies are hiring everyone who can get there to work on rigs or in ancillary jobs. If the president is genuinely worried about jobs, maybe he should visit the Bakken in North Dakota, or the Marcellus in Pennsylvania or the Eagle Ford in Texas.

Using wind power to generate electricity is not a new idea. The first windmills used to generate electricity went up in the 19th Century. The production tax credit is also not a new idea. It is now about 20 years old.

Romney’s opposition to continuing the wind subsidy is absolutely correct. At some point, an industry has to either succeed or fail on its own merits.

For wind companies, we are at that point now.

Energy subsidies exposed

On the campaign trail, President Barack Obama calls for an end to energy subsidies for the fossil fuel industry. It turns out, however, that this industry receives relatively little subsidy, while the president’s favored forms of energy investment — wind and solar — receive much more. Additionally, coal, oil, and gas industries paid billions in taxes to the federal government, while electricity produced by solar and wind are a cost to taxpayers.

Saturday’s Wall Street Journal piece The Energy Subsidy Tally: Wind and solar get the most taxpayer help for the least production gathers the facts: “The nearby chart shows the assistance that each form of energy for electricity production received in 2010. The natural gas and oil industry received $2.8 billion in total subsidies, not the $4 billion Mr. Obama claims on the campaign trail, and $654 million for electric power. The biggest winner was wind, with $5 billion. Between 2007 and 2010, total energy subsidies rose 108%, but solar’s subsidies increased six-fold and wind’s were up 10-fold.”

When looking at subsidy received per unit of power produced, the Journal found that oil, gas, and coal received $0.64 per megawatt hour, hydropower $0.82, nuclear $3.14, wind $56.39, and solar $775.64. Commented the Journal: “So for every tax dollar that goes to coal, oil and natural gas, wind gets $88 and solar $1,212. After all the hype and dollars, in 2010 wind and solar combined for 2.3% of electric generation — 2.3% for wind and 0% and a rounding error for solar. Renewables contributed 10.3% overall, though 6.2% is hydro. Some ‘investment.'”

In Kansas, there is disagreement among elected officials over wind power. Kansas Governor Sam Brownback and U.S. Senator Jerry Moran favor the production tax credit that makes wind feasible. Together they penned an op-ed that tortures logic to defend the tax credits. Each has spoken out on his own on the national stage. See Brownback on wind, again and Wind energy split in Kansas.

Brownback has also supported, at both federal and state levels, renewable portfolio standards. These in effect mandate the production of wind power. Recently Kansas Policy Institute produced a report that details the harmful effect of this law: “Renewable energy is more expensive than conventional energy, so government mandates are necessary to ensure that more renewable energy is purchased. However, the unseen consequences of well-intended efforts to increase energy independence are rarely considered. The authors estimate that by 2020, the average household’s electricity bill will increase by $660, approximately 12,000 fewer jobs will have been created, and business investment in the state will be $191 million less than without the mandate.” See The Economic Impact of the Kansas Renewable Portfolio Standard.

In Wichita, Mayor Carl Brewer is recruiting wind power companies to come to Wichita. If he is successful, you can be sure it will be at great cost to Kansas and Wichita taxpayers.

Contrast with the position taken by U.S. Representative Mike Pompeo, a Republican who represents the Kansas fourth district, which includes the Wichita metropolitan area. Recently he wrote: “Supporters of Big Wind, like President Obama, defend these enormous, multi-decade subsidies by saying they are fighting for jobs, but the facts tell a different story. Can you say ‘stimulus’? The PTC’s logic is almost identical to the President’s failed stimulus spending of $750 billion — redistribute wealth from hard-working taxpayers to politically favored industries and then visit the site and tell the employees that ‘without me as your elected leader funneling taxpayer dollars to your company, you’d be out of work.’ I call this ‘photo-op economics.’ We know better. If the industry is viable, those jobs would likely be there even without the handout. Moreover, what about the jobs lost because everyone else’s taxes went up to pay for the subsidy and to pay for the high utility bills from wind-powered energy? There will be no ribbon-cuttings for those out-of-work families.”

Pompeo has introduced legislation in Congress that would end tax credits for all forms of energy production. See H.R. 3308: Energy Freedom and Economic Prosperity Act.

The Energy Subsidy Tally
Wind and solar get the most taxpayer help for the least production.

President Obama traveled to Iowa Tuesday and touted wind energy subsidies as the path to economic recovery. Then he attacked Mitt Romney as a tool of the oil and gas industry. “So my attitude is let’s stop giving taxpayer subsidies to oil companies that don’t need them, and let’s invest in clean energy that will put people back to work right here in Iowa,” he said. “That’s a choice in this election.”

There certainly is a subsidy choice in the election, but the facts are a lot different than Mr. Obama portrays them. What he isn’t telling voters is how many tax dollars his Administration has already steered to wind and solar power, and how much more subsidized they are than other forms of electricity generation.

Continue reading at the Wall Street Journal (subscription required)

Kansas Economic Freedom Index, 2012 Edition

Today marks the release of the 2012 edition of the Kansas Economic Freedom Index. The Index examines votes made by members of the Kansas Legislature based on the impact the proposed legislation has on free markets and the constitutional principles of individual liberty and limited government. Based on their votes, legislators earn scores that illuminate their support of — or opposition to — these principles of economic freedom.

The Kansas Economic Freedom Index is produced by Americans for Prosperity–Kansas, Kansas Policy Institute, and Voice for Liberty in Wichita. It is intended to provide educational information to the public about broad economic issues that are important to the citizens of our State. The Index is the product of nonpartisan analysis, study, and research and is not intended to directly or indirectly endorse or oppose any candidate for public office. Each partner organization operates independently and has its own distinct voice in advocating for free markets and supporting the constitutional principles of individual liberty and limited government.

The Kansas Economic Freedom Index is hosted at two sites: KansasEconomicFreedom.com and Kansas Policy Institute.

The value of a voting index is that it shines light on what lawmakers actually do, not what they say they do. Many of the votes included in the Kansas Economic Freedom index did not generate newspaper or television coverage, but collectively these votes let us know who are the champions of economic freedom and who are its enemies.

Pickens’ NATGAS act sponsor defeated

A congressional primary election served as a barometer of public sentiment on energy policy and government interventionism into free markets.

In yesterday’s Oklahoma primary elections, Jim Bridenstine defeated 10-year incumbent John Sullivan in a Republican primary for U.S. House of Representatives, first district.

The difference between the two candidates, as reported by the Tulsa World, boiled down to supporting or opposing H.R. 1380: New Alternative Transportation to Give Americans Solutions Act of 2011, or NAT GAS act. The bill provides a variety of subsidies, implemented through tax credits, to producers and users of natural gas. The legislation’s purpose is to promote the use of natural gas as the fuel the nation uses for transportation by converting over-the-road trucks to run on natural gas. From the story Republicans vying for 1st District seat square off civilly at event:

On only one issue, energy policy, did Sullivan and Bridenstine substantially disagree. Sullivan touted his bill to promote natural gas vehicle fuels, while Bridenstine supports an alternative proposal.

“Let’s get cars, trucks and buses running on natural gas,” Sullivan said. “We have an abundance of it here in the United States. It’s cheap and abundant and … it also addresses a national security issue by lessening our dependence on foreign oil.”

Bridenstine calls Sullivan’s NatGas Act a “big-government” boondoggle because it creates a short-term subsidy to convert vehicles to natural gas.

“We ought not let Washington, D.C., control free markets with tax subsidies,” he said.

It wasn’t just that Sullivan supported the NATGAS bill — he was the lead sponsor. Now Oklahoma Republicans have rejected the sponsor of a large dose of harmful crony capitalism. Thank you, Oklahoma.

Another supporter of this bill — perhaps the leading promoter — is T. Boone Pickens. He promotes this bill as a way to convert trucks to run on natural gas at no cost to the taxpayer. Except for two things: Tax credits are equivalent to spending. But they mix spending with taxation in a way that lets politicians and handout-seekers like Pickens to wrongly claim that tax credits are not cash handouts. Fortunately, not everyone falls for this seductive trap. In an excellent article on the topic that appeared in Cato Institute’s Regulation magazine, Edward D. Kleinbard explains:

Specialists term these synthetic government spending programs “tax expenditures.” Tax expenditures are really spending programs, not tax rollbacks, because the missing tax revenues must be financed by more taxes on somebody else. Like any other form of deficit spending, a targeted tax break without a revenue offset simply means more deficits (and ultimately more taxes); a targeted tax break coupled with a specific revenue “payfor” means that one group of Americans is required to pay (in the form of higher taxes) for a subsidy to be delivered to others through the mechanism of the tax system. … Tax expenditures dissolve the boundaries between government revenues and government spending. They reduce both the coherence of the tax law and our ability to conceptualize the very size and activities of our government. (The Hidden Hand of Government Spending, Fall 2010)

The other thing is that the NATGAS bill would likely be very expensive, much more so than claimed. The Wall Street Journal has reported on its cost: “Proponents put the cost at about $5 billion over five years, but many energy experts believe it would be multiples higher. Eight million trucks are on the road today, and if each got a $15,000 average tax credit, the price tag grows to over $100 billion.”

Pickens appeared this Sunday on Fox News Sunday with Chris Wallace to promote NATGAS in this excerpt.

WALLACE: All right. Let’s focus on the natural gas, though, which you’re saying cheaper. It’s cleaner. And we don’t have to ship trillions of dollars over to OPEC, to our enemies.

Your idea is to convert this nation’s 8 million heavy duty trucks, the 18-wheelers, to natural gas.

What does that mean for pollution? And what does that mean in terms of our dependence on foreign oil?

PICKENS: The independence on foreign oil first. There are 250 million vehicles in America. I just want 8 million. Give me the 8 million.

What can I do for us? If I had 8 million, that would be 3 million barrels of oil a day. We import 4.4 million barrels a day from OPEC. So, we would cut OPEC by 20 — by, we could cut them about —

WALLACE: Sixty percent.

PICKENS: More than 60 percent, close to 70 percent we could cut. With just 8 million, that’s it. I mean, it’s like a freebie. And it truly is.

Pickens promotes the program as a “freebie,” despite the Journal’s reporting that it could cost over $100 billion and the fact that tax credits are real government spending.

Troubling also is Pickens’ focus on himself: “I just want 8 million. Give me the 8 million.”

In March an amendment to a Senate highway bill that would have implemented a version of the NATGAS act was defeated. That, coupled with the message Oklahoma voters sent, ought to put an end to NATGAS and let energy markets and consumers decide energy policy.

Are you in the top 1%?

Most Americans would be surprised to learn that they are, in fact, in the top one percent of income — when the entire world is considered. It is economic freedom in America that has been responsible for this high standard of living. But America’s ranking among the countries in economic freedom has declined, and may fall further.

View the 60-second video at Economic Freedom in 60 Seconds, or click below.

Myth: Markets can solve all problems without government at all

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer, who is Vice President for International Programs at the Atlas Economic Research Foundation, General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, a Senior Fellow at the Cato Institute, and Director of Cato University, has written an important paper that confronts these myths about markets. The twentieth myth — Markets Can Solve All Problems without Government at All — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Markets Can Solve All Problems without Government at All

Myth: Government is so incompetent that it can’t do anything right. The main lesson of the market is that we should always weaken government, because government is simply the opposite of the market. The less government you have, the more market you have.

Tom G. Palmer: Those who recognize the benefits of markets should recognize that in much of the world, perhaps all of it, the basic problem is not only that governments do too much, but also that they do too little. The former category — things that governments should not do, includes A) activities that should not be done by anyone at all, such as “ethnic cleansing,” theft of land, and creating special legal privileges for elites, and B) things that could and should be done through the voluntary interaction of firms and entrepreneurs in markets, such as manufacturing automobiles, publishing newspapers, and running restaurants. Governments should stop doing all of those things. But as they cease doing what they ought not to do, governments should start doing some of the things that would in fact increase justice and create the foundation for voluntary interaction to solve problems. In fact, there is a relation between the two: governments that spend their resources running car factories or publishing newspapers, or worse — confiscating property and creating legal privileges for the few — both undercut and diminish their abilities to provide truly valuable services that governments are able to provide. For example, governments in poorer nations rarely do a good job of providing clear legal title, not to mention securing property from takings. Legal systems are frequently inefficient, cumbersome, and lack the independence and impartiality that are necessary to facilitate voluntary transactions.

For markets to be able to provide the framework for social coordination, property and contract must be well established in law. Governments that fail to provide those public benefits keep markets from emerging. Government can serve the public interest by exercising authority to create law and justice, not by being weak, but by being legally authoritative and at the same time limited in its powers. A weak government is not the same as a limited government. Weak unlimited governments can be tremendously dangerous because they do things that ought not to be done but do not have the authority to enforce the rules of just conduct and provide the security of life, liberty, and estate that are necessary for freedom and free market exchanges. Free markets are not the same as the sheer absence of government. Not all anarchies are attractive, after all. Free markets are made possible by efficiently administered limited governments that clearly define and impartially enforce rules of just conduct.

It is also important to remember that there are plenty of problems that have to be solved through conscious action; it’s not enough to insist that impersonal market processes will solve all problems. In fact, as Nobel Prize winning economist Ronald Coase explained in his important work on the market and the firm, firms typically rely on conscious planning and coordination to achieve common aims, rather than on constant recourse to market exchanges, because going to the market is costly. Each contract arranged is costly to negotiate, for example, so long-term contracts are used instead to reduce contracting costs. In firms, long-term contracts substitute for spot-exchanges and include labor relations involving teamwork and conscious direction, rather than constant bidding for particular services. Firms — little islands of teamwork and planning — are able to succeed because they navigate within a wider ocean of spontaneous order through market exchanges. (The great error of the socialists was to try to manage the entire economy like one great firm; it would be a similar error not to recognize the limited role of conscious direction and teamwork within the wider spontaneous order of the market.) To the extent that markets can provide the framework of creation and enforcement of rules of just conduct, advocates of free markets should promote just that. Private security firms are often better than state police (and less violent, if for no other reason than that the cost of violence are not easily shifted to third parties, except by the state); voluntary arbitration often works far better than state courts. But recognizing that entails recognizing the central role of rules in creating markets and, thus, favoring efficient and just rules, whether provided by government or by the market, rather than merely being “anti-government.”

Finally, it should be remembered that property and market exchange may not, by themselves, solve all problems. For example, if global warming is in fact a threat to the entire planet’s ability to sustain life, or if the ozone layer is being degraded in ways that will be harmful to life, coordinated government solutions may be the best, or perhaps the only, way to avoid disaster. Naturally, that does not mean that markets would play no role at all; markets for rights to carbon dioxide emissions might, for example, help to smooth adjustments, but those markets would first have to be established by coordination among governments. What is important to remember, however, is that deciding that a tool is not adequate and appropriate for all conceivable problems does not entail that it is not adequate and appropriate for any problems. The tool many work very well for some or even most problems. Property and markets solve many problems and should be relied on to do so; if they do not solve all, that is no reason to reject them for problems for which they do offer efficient and just solutions.

Free markets may not solve every conceivable problem humanity might face, but they can and do produce freedom and prosperity, and there is something to be said for that.

Myth: All relations among humans can be reduced to market relations

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer, who is Vice President for International Programs at the Atlas Economic Research Foundation, General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, a Senior Fellow at the Cato Institute, and Director of Cato University, has written an important paper that confronts these myths about markets. The nineteenth myth — All Relations Among Humans Can Be Reduced to Market Relations — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: All Relations Among Humans Can Be Reduced to Market Relations

Myth: All actions are taken because the actors are maximizing their own utility. Even helping other people is getting a benefit for yourself, or you wouldn’t do it. Friendship and love represent exchanges of services for mutual benefit, no less than exchanges involving sacks of potatoes. Moreover, all forms of human interaction can be understood in terms of markets, including politics, in which votes are exchanged for promises of benefits, and even crime, in which criminals and victims exchange, in the well known example, “your money or your life.”

Tom G. Palmer: Attempting to reduce all actions to a single motivation falsifies human experience. Parents don’t think about the benefits to themselves when they sacrifice for their children or rush to their rescue when they’re in danger. When people pray for salvation or spiritual enlightenment, their motivations are not quite the same as when they are shopping for clothes. What they do have in common is that their actions are purposeful, that they are undertaken to achieve their purposes. But it does not follow logically from that that the purposes they are striving to achieve are all reducible to commensurable units of the same substance. Our purposes and motivations may be varied; when we go to the market to buy a hammer, when we enter an art museum, and when we cradle a newborn baby, we are realizing very different purposes, not all of which are well expressed in terms of buying and selling in markets.

It is true that intellectual constructs and tools can be used to understand and illuminate a variety of different kinds of interaction. The concepts of economics, for example, which are used to understand exchanges on markets, can also be used to understand political science and even religion. Political choices may have calculable costs and benefits, just like business choices; political parties or mafia cartels may be compared to firms in the market. But it does not follow from such applications of concepts that the two choice situations are morally or legally equivalent. A criminal who offers you a choice between keeping your money and keeping your life is not relevantly like an entrepreneur who offers you a choice between keeping your money and using it to buy a commodity, for the simple reason that the criminal forces you to choose between two things to both of which you have a moral and legal entitlement, whereas the entrepreneur offers you a choice between two things, to one of which he has an entitlement and to one of which you have an entitlement. In both cases you make a choice and act purposively, but in the former case the criminal has forced you to choose, whereas in the latter case the entrepreneur has offered you a choice; the former lessens your entitlements and the latter offers to increase them, by offering you something you don’t have but may value more for something you do have but may value less. Not all human relationships are reducible to the same terms as markets; at the very least, those that involve involuntary “exchanges” are radically different, because they represent losses of opportunity and value, rather than opportunities to gain value.

Myth: Privatizaton and marketization in post-communist societies were corrupt, which shows that markets are corrupting

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer, who is Vice President for International Programs at the Atlas Economic Research Foundation, General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, a Senior Fellow at the Cato Institute, and Director of Cato University, has written an important paper that confronts these myths about markets. The eighteenth myth — Privatizaton and Marketization in Post-Communist Societies Were Corrupt, Which Shows that Markets Are Corrupting — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Privatizaton and Marketization in Post-Communist Societies Were Corrupt, Which Shows that Markets Are Corrupting

Myth: Privatization campaigns are almost always rigged. It’s a game that just awards the best state assets to the most ruthless and corrupt opportunists. The whole game of privatization and marketization is dirty and represents nothing more than theft from the people.

Tom G. Palmer: A variety of formerly socialist states that have created privatization campaigns have had quite varied outcomes. Some have generated very successful market orders. Others have slipped back toward authoritarianism and have seen the “privatization” processes result in new elites gaining control of both the state and private businesses, as in the emerging “Siloviki” system of Russia. The dirtiness of the dirty hands that profited from rigged privatization schemes was a result of the preexisting lack of market institutions, notably the rule of law that is the foundation for the market. Creating those institutions is no easy task and there is no well known generally applicable technique that works in all cases. But the failure in some cases to fully realize the institutions of the rule of law is no reason not to try; even in the case of Russia, the deeply flawed privatization schemes that were instituted were an improvement over the one-party tyranny that preceded them and that collapsed from its own injustice and inefficiency.

Mere “privatization” in the absence of a functioning legal system is not the same as creating a market. Markets rest on a foundation of law; failed privatizations are not failures of the market, but failures of the state to create the legal foundations for markets.

Myth: When prices are liberalized and subject to market forces, they just go up

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer, who is Vice President for International Programs at the Atlas Economic Research Foundation, General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, a Senior Fellow at the Cato Institute, and Director of Cato University, has written an important paper that confronts these myths about markets. The seventeenth myth — When Prices are Liberalized and Subject to Market Forces, They Just Go Up — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: When Prices are Liberalized and Subject to Market Forces, They Just Go Up

Myth: The fact is that when prices are left to market forces, without government controls, they just go up, meaning that people can afford less and less. Free-market pricing is just another name for high prices.

Tom G. Palmer: Prices that are controlled at below market levels do tend to rise, at least over the short time, when they are freed. But there is much more to the story than that. For one thing, some controlled prices are kept above the market level, so that when they are freed, they tend to fall. Moreover, when looking at money prices that are controlled by state power, it’s important to remember that the money that changes hands over the table is not usually the only price paid by those who successfully purchase the goods. If the goods are rationed by queuing, then the time spent waiting in line is a part of what people have to spend to get the goods. (Notably, however, that waiting time represents pure waste, since it’s not time that is somehow transferred to producers to induce them to make more of the goods to satisfy the unmet demand.) If corrupt officials have their hands open, there are also the payments under the table that have to be added to the payment that is made over the table. The sum of the legal payment, the illegal bribes, and the time spent waiting in lines when maximum prices are imposed by the state on goods and services is quite often higher than the price that people would agree on through the market. Moreover, the money spent on bribes and the time spent on waiting are wasted — they are spent by consumers but not received by producers, so they provide no incentive for producers to produce more and thereby alleviate the shortage caused by price controls.

While money prices may go up in the short time when prices are freed, the result is to increase production and diminish wasteful rationing and corruption, with the result that total real prices — expressed in terms of a basic commodity, human labor time — goes down. The amount of time that a person had to spend laboring to earn a loaf of bread in 1800 was a serious fraction of his or her laboring day; as wages have gone up and up and up and up, the amount of working time necessary to buy a loaf of bread has fallen to just a few minutes in wealthy countries. Measured in terms of labor, the prices of all other goods have fallen dramatically, with one exception: labor itself. As labor productivity and wages rise, hiring human labor becomes more expensive, which is why modestly well off people in poor countries commonly have servants, whereas even very wealthy people in rich countries find it much cheaper to buy machines to wash their clothes and dishes. The result of free markets is a fall in the price of everything else in terms of labor, and a rise in the price of labor in terms of everything else.

Myth: Markets only benefit the rich and talented

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer, who is Vice President for International Programs at the Atlas Economic Research Foundation, General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, a Senior Fellow at the Cato Institute, and Director of Cato University, has written an important paper that confronts these myths about markets. The sixteenth myth — Markets Only Benefit the Rich and Talented — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Markets Only Benefit the Rich and Talented

Myth: The rich get richer and the poor get poorer. If you want to make a lot of money, you have to start out with a lot. In the race of the market for profits, those who start out ahead reach the finish line first.

Tom G. Palmer: Market processes aren’t races, which have winners and losers. When two parties voluntarily agree to exchange, they do so because they both expect to benefit, not because they hope they will win and the other will lose. Unlike in a race, in an exchange, if one person wins, it doesn’t mean that the other has to lose. Both parties gain. The point is not to “beat” the other, but to gain through voluntary cooperative exchange; in order to induce the other person to exchange, you have to offer a benefit to him or her, as well.

Being born to wealth may certainly be a good thing, something the citizens of wealthy countries probably do not appreciate as much as do those who seek to emigrate from poor countries to rich countries; the latter usually understand the benefits of living in a wealthy society better than those who are born to it. But within a free market, with freedom of entry and equal rights for all buyers and sellers, those who were good at meeting market demands yesterday may not be the same as those who will be good at meeting market demand tomorrow. Sociologists refer to the “circulation of elites” that characterizes free societies; rather than static elites that rest on military power, caste membership, or tribal or family connection, the elites of free societies — including artistic elites, cultural elites, scientific elites, and economic elites — are open to new members and rarely pass on membership to the children of members, many of whom move from the upper classes to the middle classes.

Wealthy societies are full of successful people who left behind countries where markets are severely restricted or hampered by special favors for the powerful, by protectionism, and by mercantilistic monopolies and controls, where opportunities for advancement in the market are limited. They left those societies with little or nothing and found success in more open and market-oriented societies, such as the USA, the United Kingdom, and Canada. What was the difference between the societies they left and those they joined?: freedom to compete in the market. How sad for poor countries it is that the mercantilism and restrictions in their home countries drive them abroad, so they can not stay at home and enrich their neighbors and friends by putting their entrepreneurial drive to work.

Generally, in countries with freer markets, the greatest fortunes are made, not by satisfying the desires of the rich, but by satisfying the desires of the more modest classes. From Ford Motors to Sony to Wal-mart, great companies that generate great fortunes tend to be those that cater, not to the tastes of the richest, but to the lower and middle classes.

Free markets tend to be characterized by a “circulation of elites,” with no one guaranteed a place or kept from entering by accident of birth. The phrase “the rich get richer and the poor gets poorer” applies, not to free markets, but to mercantilism and political cronyism, that is, to systems in which proximity to power determines wealth. Under markets, the more common experience is that the rich do well (but may not stay “rich” by the standards of their society) and the poor get a lot richer, with many moving into the middle and upper classes. At any given moment, by definition 20% of the population will be in the lowest quintile of income and 20% will be in the highest quintile. But it does not follow either that those quintiles will measure the same amount of income (as incomes of all income groups rise in expanding economies) or that the income categories will be filled by the same people. The categories are rather like rooms in a hotel or seats on a bus; they are filled by someone, but not always by the same people. When income distributions in market-oriented societies are studied over time, a great deal of income mobility is revealed, with remarkable numbers of people moving up and down in the income distributions. What is most important, however, is that prosperous market economies see all incomes rise, from the lowest to the highest.

Myth: Markets debase culture and art

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer, who is Vice President for International Programs at the Atlas Economic Research Foundation, General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, a Senior Fellow at the Cato Institute, and Director of Cato University, has written an important paper that confronts these myths about markets. The fifteenth myth — Markets Debase Culture and Art — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Markets Debase Culture and Art

Myth: Art and culture are responses to the higher elements of the human soul and, as such, cannot be bought and sold like tomatoes or shirt buttons. Leaving art to the market is like leaving religion to the market, a betrayal of the inherent dignity of art, as of religion. Moreover, as art and culture are opened more and more to competition on international markets, the result is their debasement, as traditional forms are abandoned in the pursuit of the almighty dollar or euro.

Tom G. Palmer: Most art has been and is produced for the market. Indeed, the history of art is largely the history of innovation through the market in response to new technologies, new philosophies, new tastes, and new forms of spirituality. Art, culture, and the market have been intimately connected for many centuries. Musicians charge fees for people to attend their concerts, just as vegetable mongers charge for tomatoes or tailors charge to replace buttons on suits. In fact, the creation of wider markets for music, film, and other forms of art by the creation of records, cassettes, CDs, DVDs, and now iTunes and mp3 files allows more and more people to be exposed to more and more varied art, and for artists to create more artistic experiences, to create more hybrid forms of art, and to earn more income. Unsurprisingly, most of the art produced in any given year won’t stand the test of time; that creates a false perspective on the part of those who condemn contemporary art as “trashy,” in comparison to the great works of the past; what they are comparing are the best works winnowed out from hundreds of years of production to the mass of works produced in the past year. Had they included all of the works that did not stand the test of time and were not remembered, the comparison would probably look quite different.

What accounts for the survival of the best is precisely the competitive process of markets for art. Comparing the entirety of contemporary artistic production with the very best of the best from past centuries is not the only error people make when evaluating markets for art. Another error common to observers from wealthy societies who visit poor societies is the confusion of the poverty of poor societies with their cultures. When wealthy visitors see people in countries that are poor-but-growing-economically using cell phones and flipping open laptops, they complain that their visit is not as “authentic” as the last one. As people become richer through market interactions made possible by increasing liberalization or globalization, such as the introduction of cell telephony, antiglobalization activists from rich countries complain that the poor are being “robbed” of their culture. But why equate culture with poverty? The Japanese went from poverty to wealth and it would be hard to argue that they are any less Japanese as a result. In fact, their greater wealth has made possible the spread of awareness of Japanese culture around the world. In India, as incomes are rising, the fashion industry is responding by turning to traditional forms of attire, such as the sari, and adapting, updating, and applying to it aesthetic criteria of beauty and form. The very small country of Iceland has managed to maintain a high literary culture and their own theater and movie industry because per capita incomes are quite high, allowing them to dedicate their wealth to perpetuating and developing their culture.

Finally, although religious belief is not “for sale,” free societies do leave religion to the same principles — equal rights and freedom of choice — as those at the foundation of the free market. Churches, mosques, synagogues, and temples compete with each other for adherents and for support. Unsurprisingly, those European countries that provide official state support of churches tend to have very low church participation, whereas countries without state support of religion tend to have higher levels of church participation. The reason is not so hard to understand: churches that have to compete for membership and support have to provide services — sacramental, spiritual, and communal — to members, and that greater attention to the needs of the membership tends to create more religiosity and participation. Indeed, that’s why the official established state church of Sweden lobbied to be disestablished in the year 2000; as an unresponsive part of the state bureaucracy, the church was losing connection with its members and potential members and was, in effect, dying.

There is no contradiction between the market and art and culture. Market exchange is not the same as artistic experience or cultural enrichment, but it is a helpful vehicle for advancing both.

Myth: Markets rest on the principle of the survival of the fittest

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer, who is Vice President for International Programs at the Atlas Economic Research Foundation, General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, a Senior Fellow at the Cato Institute, and Director of Cato University, has written an important paper that confronts these myths about markets. The fourteenth myth — Markets Rest on the Principle of the Survival of the Fittest — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Markets Rest on the Principle of the Survival of the Fittest

Myth: Just like the law of the jungle, red in tooth and claw, the law of the market means survival of the fittest. Those who cannot produce to market standards fall by the wayside and are trampled underfoot.

Tom G. Palmer: Invocations of evolutionary principles such as “survival of the fittest” in the study of living systems and in the study of human social interaction lead to confusion unless they identify what it is in each case that survives. In the case of biology, it is the individual animal and its ability to reproduce itself. A rabbit that is eaten by a cat because it’s too slow to escape isn’t going to have any more offspring. The fastest rabbits will be the ones to reproduce. When applied to social evolution, however, the unit of survival is quite different; it’s not the individual human being, but the form of social interaction, such as a custom, an institution, or a firm, that is “selected” in the evolutionary struggle. When a business firm goes out of business, it “dies,” that is to say, that particular form of social cooperation “dies,” but that certainly doesn’t mean that the human beings who made up the firm — as investors, owners, managers, employees, and so on — die, as well. A less efficient form of cooperation is replaced by a more efficient form. Market competition is decidedly unlike the competition of the jungle. In the jungle animals compete to eat each other, or to displace each other. In the market, entrepreneurs and firms compete with each other for the right to cooperate with consumers and with other entrepreneurs and firms. Market competition is not competition for the opportunity to live; it is competition for the opportunity to cooperate.

Myth: Markets can not meet human needs, such as health, housing, education, and food

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The thirteenth myth — Markets Can Not Meet Human Needs, Such as Health, Housing, Education, and Food — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Markets Can Not Meet Human Needs, Such as Health, Housing, Education, and
Food

Myth: Goods should be distributed according to principles appropriate to their nature. Markets distribute goods according to ability to pay, but health, housing, education, food, and other basic human needs, precisely because they are needs, should be distributed according to need, not ability to pay.

Tom G. Palmer: If markets do a better job of meeting human needs than other principles, that is, if more people enjoy higher standards of living under markets than under socialism, it seems that the allocation mechanism under markets does a better job of meeting the criterion of need, as well. As noted above, the incomes of the poorest tend to rise rapidly with the degree of market freedom, meaning that the poor have more resources with which to satisfy their needs. (Naturally, not all needs are directly related to income; true friendship and love certainly are not. But there is no reason to think that those are more “equitably” distributed by coercive mechanisms, either, or even that they can be distributed by such mechanisms.)

Moreover, while assertions of “need” tend to be rather rubbery claims, as are assertions of “ability,” willingness to pay is easier to measure. When people bid with their own money for goods and services, they are telling us how much they value those goods and services relative to other goods and services. Food, certainly a more basic need than education or health care, is provided quite effectively through markets. In fact, in those countries where private property was abolished and state allocation substituted for market allocation, the results were famine and even cannibalism. Markets meet human needs for most goods, including those that respond to basic human needs, better than do other mechanisms.

Satisfaction of needs requires the use of scarce resources, meaning that choices have to be made about their allocation. Where markets are not allowed to operate, other systems and criteria for rationing scarce resources are used, such as bureaucratic allocation, political pull, membership in a ruling party, relationship to the president or the main holders of power, or bribery and other forms of corruption. It is hardly obvious that such criteria are better than the criteria evolved by markets, nor that they generate more equality; the experience is rather the opposite.

Myth: Markets lead to more inequality than non-market processes

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The twelfth myth — Markets Lead to More Inequality than Non-Market Processes — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Markets Lead to More Inequality than Non-Market Processes

Myth: By definition, markets reward ability to satisfy consumer preferences and as abilities differ, so incomes will differ. Moreover, by definition, socialism is a state of equality, so every step toward socialism is a step toward equality.

Tom G. Palmer: If we want to understand the relationships between policies and outcomes, it should be kept in mind that property is a legal concept; wealth is an economic concept. The two are often confused, but they should be kept distinct. Market processes regularly redistribute wealth on a massive scale. In contrast, unwilling redistribution of property (when undertaken by individual citizens, it’s known as “theft”) is prohibited under the rules that govern free markets, which require that property be well defined and legally secure. Markets can redistribute wealth, even when property titles remain in the same hands. Every time the value of an asset (in which an owner has a property right) changes, the wealth of the asset owner changes. An asset that was worth 600 Euros yesterday may today be worth only 400 Euros. That’s a redistribution of 200 Euros of wealth through the market, although there has been no redistribution of property. So markets regularly redistribute wealth and in the process give owners of assets incentives to maximize their value or to shift their assets to those who will. That regular redistribution, based on incentives to maximize total value, represents transfers of wealth on a scale unthinkable for most politicians. In contrast, while market processes redistribute wealth, political processes redistribute property, by taking it from some and giving it to others; in the process, by making property less secure, such redistribution tends to make property in general less valuable, that is, to destroy wealth. The more unpredictable the redistribution, the greater the loss of wealth caused by the threat of redistribution of property.

Equality is a characteristic that can be realized along a number of different dimensions, but generally not across all. For example, people can all be equal before the law, but if that is the case, it is unlikely that they will have exactly equal influence over politics, for some who exercise their equal rights to freedom of speech will be more eloquent or energetic than others, and thus more influential. Similarly, equal rights to offer goods and services on free markets may not lead to exactly equal incomes, for some may work harder or longer (because they prefer income to leisure) than others, or have special skills for which others will pay extra. On the flip side, the attempt to achieve through coercion equality of influence or equality of incomes will entail that some exercise more authority or political power than others, that is, the power necessary to bring about such outcomes. In order to bring about a particular pattern of outcomes, someone or some group must have the “God’s Eye” view of outcomes necessary to redistribute, to see a lack here and a surplus there and thus to take from here and move to there. As powers to create equal outcomes are concentrated in the hands of those entrusted with them, as was the case in the officially egalitarian Soviet Union, those with unequal political and legal powers find themselves tempted to use those powers to attain unequal incomes or access to resources. Both logic and experience show that conscious attempts to attain equal or “fair” incomes, or some other pattern other than what the spontaneous order of the market generates, are generally self-defeating, for the simple reason that those who hold the power to redistribute property use it to benefit themselves, thus converting inequality of political power into other sorts of inequality, whether honors, wealth, or something else. Such was certainly the experience of the officially communist nations and such is the path currently being taken by other nations, such as Venezuela, in which total power is being accumulated in the hands of one man, Hugo Chavez, who demands such massively unequal power, ostensibly in order to create equality of wealth among citizens.

According to the data in the 2006 Economic Freedom of the World Report, reliance on free markets is weakly correlated to income inequality (from the least free to the most free economies the world over, divided into quartiles, the percentage of income received by the poorest ten percent varies from an average of 2.2% to an average of 2.5%), but it is very strongly correlated to the levels of income of the poorest ten percent (from the least free to the most free economies the world over, divided into quartiles, the average levels of income received by the poorest ten percent are $826, $1,186, $2,322, and $6,519). Greater reliance on markets seems to have little impact on income distributions, but it does substantially raise the incomes of the poor and it is likely that many of the poor would certainly consider that a good thing.

Myth: Too much reliance on markets is as silly as too much reliance on socialism: the best is the mixed economy

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The eleventh myth — Too Much Reliance on Markets Is As Silly as Too Much Reliance on Socialism: the Best is the Mixed Economy — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Too Much Reliance on Markets Is As Silly as Too Much Reliance on Socialism: the
Best is the Mixed Economy

Myth: Most people understand that it’s unwise to put all your eggs in one basket. Prudent investors diversify their portfolios and it’s just as reasonable to have a diversified “policy portfolio,” as well, meaning a mix of socialism and markets.

Tom G. Palmer: Prudent investors who don’t have inside information do indeed diversify their portfolios against risk. If one stock goes down, another may go up, thus evening out the loss with a gain. Over the long run, a properly diversified portfolio will grow. But policies aren’t like that. Some have been demonstrated time and time gain to fail, while others have been demonstrated to succeed. It would make no sense to have a “diversified investment portfolio” made up of stocks in firms that are known to be failing and stocks in firms that are known to be succeeding; the reason for diversification is that one doesn’t have any special knowledge of which firms are more likely to be profitable or unprofitable.

Studies of decades of economic data carried out annually by the Fraser Institute of Canada and a world wide network of research institutes have shown consistently that greater reliance on market forces leads to higher per capita incomes, faster economic growth, lower unemployment, longer life spans, lower infant mortality, falling rates of child labor, greater access to clean water, health care, and other amenities of modern life, including cleaner environments, and improved governance, such as lower rates of official corruption and more democratic accountability. Free markets generate good results.

Moreover, there is no “well balanced” middle of the road. State interventions into the market typically lead to distortions and even crises, which then are used as excuses for yet more interventions, thus driving policy one direction or another. For example, a “policy portfolio” that included imprudent monetary policy, which increases the supply of money faster than the economy is growing, will lead to rising prices. History has shown repeatedly that politicians tend to respond, not by blaming their own imprudent policies, but by blaming an “overheated economy” or “unpatriotic speculators” and imposing controls on prices. When prices are not allowed to be corrected by supply and demand (in this case, the increased supply of money, which tends to cause the price of money, as expressed in terms of commodities, to fall), the result is shortages of goods and services, as more people seek to buy limited supplies of goods at the below-market price than producers are willing to supply at that price. In addition, the lack of free markets leads people to shift to black markets, under-the-table-bribes of officials, and other departures from the rule of law. The resulting mixture of shortage and corruption then typically induces yet greater tendencies toward authoritarian assertions of power. The effect of creating a “policy portfolio” that includes such proven bad policies is to undermine the economy, to create corruption, and even to undermine constitutional democracy.

Myth: Markets lead to disastrous economic cycles, such as the Great Depression

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The tenth myth — Markets Lead to Disastrous Economic Cycles, Such as the Great Depression — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Markets Lead to Disastrous Economic Cycles, Such as the Great Depression

Myth: Reliance on market forces leads to cycles of “boom and bust,” as investor overconfidence feeds on itself, leading to massive booms in investment that are inevitably followed by contractions of production, unemployment, and a generally worsening economic condition.

Tom G. Palmer: Economic cycles of “boom and bust” are sometimes blamed on reliance on markets. The evidence, however, is that generalized overproduction is not a feature of markets; when more goods and services are produced, prices adjust and the result is general affluence, not a “bust.” When this or that industry expands beyond the ability of the market to sustain profitability, a process of self-correction sets in and profit signals lead resources to be redirected to other fields of activity. There is no reason inherent in markets for such correction to apply to all industries; indeed, it is self-contradictory (for if investment is being taken away from all and redirected to all, then it’s not being taken away from all in the first place).

Nonetheless, prolonged periods of general unemployment are possible when governments distort price systems through foolish manipulation of monetary systems, a policy error that is often combined with subsidies to industries that should be contracting and wage and price controls that keep the market from adjusting, thus prolonging the unemployment. Such was the case of the Great Depression that lasted from 1929 to the end of World War II, which economists (such as Nobel Prize winner Milton Friedman) showed was caused by a massive and sudden contraction in the money supply by the U.S. Federal Reserve system, which was pursuing politically set goals. The general contraction was then deepened by the rise in protectionism, which extended the suffering worldwide, and prolonged greatly by such programs as the National Recovery Act, programs to keep farm prices high (by destroying huge quantities of agricultural products and restricting supply), and other “New Deal” programs that were aimed at keeping market forces from correcting the disastrous effects of the government’s policy errors.

More recent crashes, such as the Asian financial crisis of 1997, have been caused by imprudent monetary and exchange rate policies that distorted the signals to investors. Market forces corrected the policy failures of governments, but the process was not without hardship; the cause of the hardship was not the medicine that cured the disease, but the bad monetary and exchange rate policies of governments that caused it in the first place.

With the adoption of more prudent monetary policies by governmental monetary authorities, such cycles have tended to even out. When combined with greater reliance on market adjustment processes, the result has been a reduction in the frequency and severity of economic cycles and long-term and sustained improvement in those countries that have followed policies of freedom of trade, budgetary restraint, and the rule of law.

Myth: Markets don’t work in developing countries

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The ninth myth — Markets Don’t Work in Developing Countries — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: Markets Don’t Work in Developing Countries

Myth:Markets work well in countries with well developed infrastructures and legal systems, but in their absence developing countries simply cannot afford recourse to markets. In such cases, state direction is necessary, at least until a highly developed infrastructure and legal system is developed that could allow room for markets to function.

Tom G. Palmer: In general, infrastructure development is a feature of the wealth accumulated through markets, not a condition for markets to exist, and the failure of a legal system is a reason why markets are underdeveloped, but that failure is a powerful reason to reform the legal system so it could provide the foundation for the development of markets, not to postpone legal reform and market development. The only way to achieve the wealth of developed countries is to create the legal and institutional foundations for markets so that entrepreneurs, consumers, investors, and workers can freely cooperate to create wealth.

All currently wealthy countries were once very poor, some within living memory. What needs explanation is not poverty, which is the natural state of mankind, but wealth. Wealth has to be created and the best way to ensure that wealth is created is to generate the incentives for people to do so. No system better than the free market, based on well defined and legally secure property rights and legal institutions to facilitate exchange, has ever been discovered for generating incentives for wealth creation. There is one path out of poverty, and that is the path of wealth creation through the free market. The term “developing nation” is frequently misapplied when it is applied to nations whose governments have rejected markets in favor of central planning, state ownership, mercantilism, protectionism, and special privileges. Such nations are not, in fact, developing at all. The nations that are developing, whether starting from relatively wealthy or relatively impoverished positions, are those that have created legal institutions of property and contract, freed markets, and limited the powers, the budget, and the reach of the state power.

Walter Williams on government in a free society

Walter E.
Williams

Last September in Wichita economist Walter E. Williams spoke on the legitimate role of government in a free society, touching on the role of government as defined in the Constitution, the benefits of capitalism and private property, and the recent attacks on individual freedom and limited government.

Williams’ evening lecture was held in the Mary Jane Teall Theater at Century II, and all but a handful of its 652 seats were occupied. It was presented by the Bill of Rights Institute and underwritten by the Fred and Mary Koch Foundation.

Williams said that one of the justifications for the growth of government — far beyond the visions of the founders of America — is to promote fairness and justice. While these are worthy goals, Williams said we must ask what is the meaning of fairness and justice, referring to the legitimate role of government in a free society.

In the Constitution, Williams said the founders specified the role of the federal government in Article 1 Section 8. This section holds a list that enumerates what Congress is authorized to do. If something is not on the list, Williams said Congress is not authorized to do it.

The Article 8 powers that Williams mentioned are to lay and collect taxes, duties, imposts, and excises; to pay the debts and provide for the common defense and general welfare of the United States; to borrow money on the credit of the United States; to coin money; to establish post-offices and post-roads; and to raise and support armies. It is regarding these powers, plus a few others, that Congress has taxing and spending authority. “Nowhere in the United States Constitution to we find authority for Congress to tax and spend for up to two-thirds to three-quarters of what Congress taxes and spends for today.”

Farm subsidies, handouts to banks, and food stamps are examples Williams gave of programs that are not authorized by the Constitution. “I think that we can safely say that we’ve made a significant departure from the constitutional principles of individual freedom and limited government that made us a rich nation in the first place.”

The institutions of private property and free enterprise are the embodiment of these principles, Williams said. But there have been many successful attacks on private property and free enterprise. Thomas Jefferson, Williams said, anticipated this when he wrote “The natural progress of things is for government to gain ground, and for liberty to yield.”

Taxation and spending are the ways government has gained ground. Taxes represent government claims on private property.

But an even better measure of what government has done is to look at spending. From 1787 to 1920, federal spending was only three percent of gross domestic product, except during wartime. Today, that figure is approaching 30 percent, Williams said: “The significance is that as time goes by, you and I own less and less of our most valuable property, namely ourselves and the fruits of our labor.”

In the realm of economics, Williams said that the founders thought that free markets and capitalism was the most effective social organization for promoting freedom, with capitalism defined as a system where people are free to pursue their own objectives as long as they do not violate the property rights of others. An often-trivialized benefit of capitalism and voluntary exchange is that it minimizes the capacity of one person to coerce another, he told the audience. This applies to the government, too.

But for the last half-century, Williams said that free enterprise has been under unrelenting attack by the American people. Whether they realize it or not, people have demonstrated a “deep and abiding contempt” for private property rights and individual liberty.

Williams said that ironically, capitalism is threatened not because of its failure, but because of its success. Capitalism has eliminated things that plagued mankind since the beginning of time — he mentioned disease, gross hunger, and poverty — and been so successful that “all other human wants appear to us to be at once inexcusable and unbearable.”

So now, in the name of ideals other than freedom and liberty, we pursue things like equality of income, race and sex balance, affordable housing, and medical care. “As a result of widespread control by our government in order to achieve these higher objectives, we are increasingly being subordinated to the point where personal liberty in our country is treated like dirt.”

This ultimately leads to tyranny and totalitarianism, he said. To those who might object to this strong and blunt conclusion, Williams asked this question: “Which way are we headed, tiny steps at a time: towards more liberty, or towards more government control of our lives?” He said that the answer, unambiguously, is the latter.

It is the tiny steps that concern Williams, as they ultimately lead to their destination. Quoting Hume, he said “It is seldom that liberty of any kind is lost all at once.” Instead, Williams said it is always lost bit by bit. If anyone wanted to take away all our liberties all at once, we would rebel. But not so when liberties are taken bit by bit, which is what is currently happening.

It is people’s desire for government to do good — helping the disadvantaged, elderly, failing businesses, college students — that leads to the attack on private property and economic freedom. But Williams explained that government has no resources of its own, meaning that for government to give one person money it must first — “through intimidation, threats, and coercion” — confiscate it from someone else.

Williams told the audience that if a private person used coercion to take money from someone and give it to another person, that act would universally be considered theft and a crime. It doesn’t matter how needy or deserving the recipient, it would still be theft. But Williams asked if there is any conceptual difference between that act and when agents of the government do the same. Williams says no, except that in the second act, where Congress takes the money, the theft is legal.

But mere legality doesn’t not make something moral. Slavery was legal in America for many years, but not moral. The purges of Stalin and Mao were legal under the laws of those countries. So legality does not equate to morality, Williams explained, and he said he cannot find a moral case for taking what belongs to one person and giving it to another to whom it does not belong.

Charity is “praiseworthy and laudable” when it is voluntary, but it is worthy of condemnation when government reaches into others’ pockets for charity. Those who accept the forced takings are guilty, too, he explained.

“The essence of our relationship with government is coercion,” Williams told the audience. This, he said, represents our major problem as a nation today: We’ve come to accept the idea of government taking from one to give to another. But the blame, Williams said, does not belong with politicians — “at least not very much.” Instead, he said that the blame lies with us, the people who elect them to office in order to get things for us. A candidate who said he would do only the things that the Constitution authorizes would not have much of a chance at being elected.

The further problem is that if Kansans don’t elect officials who will bring federal dollars to Kansas, it doesn’t mean that Kansans will pay lower federal taxes. The money, taken from Kansans, will go to other states, leading to this conundrum: “That is, once legalized theft begins, it pays for everybody to participate.”

We face a moral dilemma, then. Williams listed several great empires that declined for doing precisely what we’re doing: “Bread and circuses,” or big government spending.

But there is a note — only one — of optimism, Williams believes. The first two years of the Obama administration, along with the Democratic Senate and House of Representatives, has been so brazen in their activities in “running roughshod over our liberties” that people are starting to argue and debate the Constitution. State attorneys general are bringing suits against the federal government over Obama’s health care plan. State legislatures are passing tenth amendment resolutions. The tea party and other grassroots movements give him optimism, too.

We must also ask ourselves if we are willing to give up the benefits we get from government, he said. But most people want cuts in spending on other people, not ourselves, as “ours is critical and vital to the national interest.” With all of us feeling this way, Williams said the country is in danger.

Young people have the greatest stake in the struggle for limited government and economic freedom, as the older generations have benefited from a relatively free country and the economic mobility that accompanied it. He said he’s afraid we’re losing that: “I’m hoping that future generations will not curse us for bequeathing to them a nation far less robust, far less free, than the nation that our parents and our ancestors bequeathed us.”

In answering a question from the audience, Williams said he would be afraid of a constitutional convention to be held today, as some are advocating. We wouldn’t be sending people like John Adams. Instead, he said we’d be sending people like Barney Frank and others who have “deep contempt” for personal freedom.

In response to a question on regulation, Williams said that regulations like health care and uncertainty over taxation cause businesses to be afraid to commit money to long term investments. Uncertainty “collapses the time horizon” causing firms to look for investments that pay off in the short term rather than the long term. This contributes to unemployment, he said.

Williams also talked about the economic history of America. From its beginning to 1930, there were recessions and depressions, but there were not calls for the federal government to intervene and stimulate the economy. It wasn’t until the Hoover administration and the New Deal that the federal government intervened in the economy in order to “fix” the economy. Williams said that what should have been a “sharp two or three-year downtown” was turned in to the Great Depression — which was not over until after World War II — by government intervention. The measures being taken today are similarly postponing the recovery, he said. He added that most serious economic downturns are caused by government. It’s also futile for the government to spend the country out of a recession, which he likened to taking water from the deep end of a pool to the shallow end in order to raise the level of the shallow end. Government taking money from one person, giving it to another, and expecting the economy to rise is similarly futile.

A question about mainstream media and their representation of the issues of today brought this response: “You have to make the assumption, I believe implied in your question, that those people are ignorant, and if only they knew better, they would change their behavior. Human ignorance is somewhat optimistic, because ignorance is curable through education. I’m very sure that many of these people want government control. The elite have always wanted government control, and the media was very responsible in getting President Obama elected.”

In an interview, I asked what President Obama should say in his jobs speech. Williams recommended the president should reduce regulation and lower taxes, especially capital gains and corporate income taxes. The spending programs of the past will not help. But Obama’s constituency will not favor this approach. The spending on roads and bridges benefits labor unions, for example.

On those who accept who accept and benefit from government spending, Williams said that “one of the tragedies of our nation” is that the growth of government has turned otherwise decent people into thieves, because they participate in the taking of what belongs to someone else. But because of the pervasiveness of government, sometimes this is unavoidable.

I asked do we need better politicians — ones who will work to limit government — or do we need different rules such as a balanced budget amendment or spending constraints? Williams said that the bulk of the blame lies with the people, as politicians are simply doing what voters ask them to do. “The struggle is to try to convince our fellow Americans on the moral superiority of liberty and its main ingredient, limited government.” Politicians will then follow, he added.

I asked if we’ve passed some sort of tipping point, where people look first to government rather than voluntary exchange through markets. He said perhaps so, and mentioned another problem: Close to 50 percent of Americans pay no federal income tax. These people become natural constituents for big-spending politicians. As they pay no taxes — “no stake in the game” — they don’t care if taxes are raised or lowered.

On the issue of the subsidy being poured into downtown Wichita, Williams said the issue is an example of the “seen and unseen” problem identified by Frederic Bastiat. We easily see the things that government taxation and intervention builds, such as a convention center. But what is not easily seen is what people would have done with the money that was taken from them through taxation. While the money taken from each person may be small, it adds up.

On government funding for arts, an issue in Kansas at this time, Williams said that it ought to be an insult to artists that their work has to be funded through government forcing people to pay, as opposed to voluntary payments.

Born in Philadelphia, Pennsylvania, Dr. Walter E. Williams holds a B.A. in economics from California State University, Los Angeles, and M.A. and Ph.D. degrees in economics from UCLA. He has served on the faculty of George Mason University in Fairfax, Virginia, as John M. Olin Distinguished Professor of Economics, since 1980. His website is Walter Williams Home Page.

Myth: The more complex a social order is, the less it can rely on markets and the more it needs government direction

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The eighth myth — The More Complex a Social Order Is, the Less It Can Rely on Markets and the More It Needs Government Direction — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism. An eleven minute podcast of Palmer speaking on this topic is at The Morality of Capitalism.

Myth: The More Complex a Social Order Is, the Less It Can Rely on Markets and the More
It Needs Government Direction

Myth: Reliance on markets worked fine when society was less complicated, but with the tremendous growth of economic and social connections, government is necessary to direct and coordinate the actions of so many people.

If anything, the opposite is true. A simple social order, such as a band of hunters or gatherers, might be coordinated effectively by a leader with the power to compel obedience. But as social relations become more complex, reliance on voluntary market exchange becomes more — not less — important. A complex social order requires the coordination of more information than any mind or group of minds could master. Markets have evolved mechanisms to transmit information in a relatively low cost manner; prices encapsulate information about supply and demand in the form of units that are comparable among different goods and services, in ways that voluminous reports by government bureaucracies cannot. Moreover, prices translate across languages, social mores, and ethnic and religious divides and allow people to take advantage of the knowledge possessed by unknown persons thousands of miles away, with whom they will never have any other kind of relationship. The more complex an economy and society, the more important reliance on market mechanisms becomes.

Myth: Markets don’t work (or are inefficient) when there are negative or positive externalities

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The seventh myth — Markets Don’t Work (or Are Inefficient) When There Are Negative or Positive Externalities — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism.

Myth: Markets Don’t Work (or Are Inefficient) When There Are Negative or Positive Externalities

Myth: Markets only work when all of the effects of action are born by those who make the decisions. If people receive benefits without contributing to their production, markets will fail to produce the right amount. Similarly, if people receive “negative benefits,” that is, if they are harmed and those costs are not taken into account in the decision to produce the goods, markets will benefit some at the expense of others, as the benefits of the action go to one set of parties and the costs are borne by another.

Tom G. Palmer: The mere existence of an externality is no argument for having the state take over some activity or displace private choices. Fashionable clothes and good grooming generate plenty of positive externalities, as others admire those who are well clothed or groomed, but that’s no reason to turn choice of or provision of clothing and grooming over to the state. Gardening, architecture, and many other activities generate positive externalities on others, but people undertake to beautify their gardens and their buildings just the same. In all those cases, the benefits to the producers alone — including the approbation of those on whom the positive externalities are showered — are sufficient to induce them to produce the goods. In other cases, such as the provision of television and radio broadcasts, the public good is “tied” to the provision of other goods, such as advertising for firms; the variety of mechanisms to produce public goods is as great as the ingenuity of the entrepreneurs who produce them.

More commonly, however, it’s the existence of negative externalities that leads people to question the efficacy or justice of market mechanisms. Pollution is the most commonly cited example. If a producer can produce products profitably because he imposes the costs of production on others who have not consented to be a part of the production process, say, by throwing huge amounts of smoke into the air or chemicals into a river, he will probably do so. Those who breathe the polluted air or drink the toxic water will bear the costs of producing the product, while the producer will get the benefits from the sale of the product. The problem in such cases, however, is not that markets have failed, but that they are absent. Markets rest on property and cannot function when property rights are not defined or enforced. Cases of pollution are precisely cases, not of market failure, but of government failure to define and defend the property rights of others, such as those who breathe polluted air or drink polluted water. When people downwind or downstream have the right to defend their rights, they can assert their rights and stop the polluters from polluting. The producer can install at his own expense equipment or technology to eliminate the pollution (or reduce it to tolerable and non-harmful levels), or offer to pay the people downwind or downstream for the rights to use their resources (perhaps offering them a better place to live), or he must stop producing the product, because he is harming the rights of others who will not accept his offers, showing that the total costs exceed the benefits. It’s property rights that make such calculations possible and that induce people to take into account the effects of their actions on others. And it’s markets, that is, the opportunity to engage in free exchange of rights, that allow all of the various parties to calculate the costs of actions.

Negative externalities such as air and water pollution are not a sign of market failure, but of government’s failure to define and defend the property rights on which markets rest.

Myth: Markets cannot possibly produce public (collective) goods

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The sixth myth — Markets Cannot Possibly Produce Public (Collective) Goods — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism.

Myth: Markets Cannot Possibly Produce Public (Collective) Goods

Myth: If I eat an apple, you can’t; consumption of an apple is purely rivalrous. If I show a movie and don’t want other people to see it, I have to spend money to build walls to keep out non-payers. Some goods, those for which consumption is non-rival and exclusion is costly, cannot be produced on markets, as everyone has an incentive to wait for others to produce them. If you produce a unit, I can just consume it, so I have no incentive to produce it. The same goes for you. The publicness of such goods requires state provision, as the only means to provide them. Such goods include not only defense and provision of a legal system, but also education, transportation, health care, and many other such goods. Markets can never be relied on to produce such goods, because non-payers would free-ride off of those who pay, and since everyone would want to be a free-rider, nobody would pay. Thus, only government can produce such goods.

Tom G. Palmer: The public goods justification for the state is one of the most commonly misapplied of economic arguments. Whether goods are rivalrous in consumption or not is often not an inherent feature of the good, but a feature of the size of the consuming group: a swimming pool may be non-rivalrous for two people, but quite rivalrous for two hundred people. And costs of exclusion are applicable to all goods, public or private: if I want to keep you from eating my apples, I may have to take some action to protect them, such as building a fence. Many goods that are non-rivalrous in consumption, such as a professional football game (if you see it, it doesn’t mean that I can’t see it, too), are produced only because entrepreneurs invest in means to exclude non-payers.

Besides not being an inherent feature of the goods per se, the alleged publicness of many goods is a feature of the political decision to make the goods available on a nonexclusive and even non-priced basis. If the state produces “freeways,” it’s hard to see how private enterprise could produce “freeways,” that is, zero-priced transportation, that could compete. But notice that the “freeway” isn’t really free, since it’s financed through taxes (which have a particularly harsh form of exclusion from enjoyment, known as jail), and also that the lack of pricing is the primary reason for inefficient use patterns, such as traffic jams, which reflect a lack of any mechanism to allocate scarce resources (space in traffic) to their most highly valued uses. Indeed, the trend around the world has been toward pricing of roads, which deeply undercuts the public goods argument for state provision of roads.

Many goods that are allegedly impossible to provide on markets have been, or are at present, provided through market mechanisms — from lighthouses to education to policing to transportation, which suggests that the common invocation of alleged publicness is unjustified, or at least overstated.

A common form of the argument that certain goods are allegedly only producible through state action is that there are “externalities” that are not contracted for through the price mechanism. Thus, widespread education generates public benefits beyond the benefits to the persons who are educated, allegedly justifying state provision and financing through general tax revenues. But despite the benefits to others, which may be great or small, the benefits to the persons educated are so great for them that they induce sufficient investment in education. Public benefits don’t always generate the defection of free-riders. In fact, as a wealth of research is demonstrating today, when states monopolize education they often fail to produce it for the poorest of the poor, who nonetheless perceive the benefits to them of education and invest substantial percentages of their meager incomes to educate their children. Whatever externalities may be generated by their children’s education does not stop them from paying their own money to procure education for their children.

Finally, it should be remembered that virtually every argument alleging the impossibility of efficient production of public goods through the market applies at least equally strongly– and in many cases much more strongly –to the likelihood that the state will produce public goods. The existence and operation of a just and law-governed state is itself a public good, that is, the consumption of its benefits is non-rivalrous (at least among the citizenry) and it would be costly to exclude non-contributors to its maintenance (such as informed voters) from the enjoyment of its benefits. The incentives for politicians and voters to produce just and efficient government are not very impressive, certainly when placed next to the incentives that entrepreneurs and consumers have to procure public goods through cooperation in the marketplace. That does not mean that the state should never have any role in producing public goods, but it should make citizens less willing to cede to the state additional responsibilities forproviding goods and services. In fact, the more responsibilities are given to the state, the less likely it is to be able to produce those public goods, such as defense of the rights of its citizens from aggression, at which it might enjoy special advantages.

Myth: Markets only work when an infinite number of people with perfect information trade undifferentiated commodities

When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The fifth myth — Markets Only Work When an Infinite Number of People With Perfect Information Trade Undifferentiated Commodities — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism.

Myth: Markets Only Work When an Infinite Number of People With Perfect Information Trade Undifferentiated Commodities

Myth: Market efficiency, in which output is maximized and profits are minimized, requires that no one is a price setter, that is, that no buyer or seller, by entering or exiting the market, will affect the price. In a perfectly competitive market, no individual buyer or seller can have any impact on prices. Products are all homogenous and information about products and prices is costless. But real markets are not perfectly competitive, which is why government is required to step in and correct things.

Tom G. Palmer: Abstract models of economic interaction can be useful, but when normatively loaded terms such as “perfect” are added to theoretical abstractions, a great deal of harm can be done. If a certain condition of the market is define as “perfect” competition, then anything else is “imperfect” and needs to be improved, presumably by some agency outside of the market. In fact, “perfect” competition is simply a mental model, from which we can deduce certain interesting facts, such as the role of profits in directing resources (when they’re higher than average, competitors will shift resources to increase supply, undercut prices, and reduce profits) and the role of uncertainty in determining the demand to hold cash (since if information were costless, everyone would invest all their money and arrange it to be cashed out just at the moment that they needed to make investments, from which we can conclude that the existence of cash is a feature of a lack of information). “Perfect” competition is no guide to how to improve markets; it’s a poorly chosen term for a mental model of market processes that abstracts from real world conditions of competition.

For the state to be the agency that would move markets to such “perfection,” we would expect that it, too, would be the product of “perfect” democratic policies, in which infinite numbers of voters and candidates have no individual impact on policies, all policies are homogenous, and information about the costs and benefits of policies is costless. That is manifestly never the case.

The scientific method of choosing among policy options requires that choices be made from among actually available options. Both political choice and market choice are “imperfect” in all the ways specified above, so choice should be made on the basis of a comparison of real — not “perfect”– market processes and political processes. Real markets generate a plethora of ways of providing information and generating mutually beneficial cooperation among market participants. Markets provide the framework for people to discover information, including forms of cooperation.

Advertising, credit bureaus, reputation, commodity exchanges, stock exchanges, certification boards, and many other institutions arise within markets to serve the goal of facilitating mutually beneficial cooperation. Rather than discarding markets because they aren’t perfect, we should look for more ways to use the market to improve the imperfect state of human welfare.

Finally, competition is better understood, not as a state of the market, but as a process of rivalrous behavior. When entrepreneurs are free to enter the market to compete with others and customers are free to choose from among producers, the rivalry among producers for the custom of customers leads to behavior favorable to those customers.

Myth: Markets depend on perfect information, requiring government regulation to make information available

When thinking about the difference between government action and action taken by free people trading freely in markets, we find that many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The fourth myth — Markets Depend on Perfect Information, Requiring Government Regulation to Make Information Available — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism.

Myth: Markets Depend on Perfect Information, Requiring Government Regulation to Make Information Available

Myth: For markets to be efficient, all market participants have to be fully informed of the costs of their actions. If some have more information than others, such asymmetries will lead to inefficient and unjust outcomes. Government has to intervene to provide the information that markets lack and to create outcomes that are both efficient and just.

Tom G. Palmer: Information, like every other thing we want, is always costly, that is, we have to give something up to get more of it. Information is itself a product that is exchanged on markets; for examples, we buy books that contain information because we value the information in the book more than we value what we give up for it. Markets do not require for their operation perfect information, any more than democracies do. The assumption that information is costly to market participants but costless to political participants is unrealistic in extremely destructive ways. Neither politicians nor voters have perfect information. Significantly, politicians and voters have less incentive to acquire the right amount of information than do market participants, because they aren’t spending their own money. For example, when spending money from the public purse, politicians don’t have the incentive to be as careful or to acquire as much information aspeople do when they are spending their own money.

A common argument for state intervention rests on the informational asymmetries between consumers and providers of specialized services. Doctors are almost always more knowledgeable about medical matters than are patients, for example; that’s why we go to doctors, rather than just curing ourselves. Because of that, it is alleged that consumers have no way of knowing which doctors are more competent, or whether they are getting the right treatment, or whether they are paying too much. Licensing by the state may then be proposed as the answer; by issuing a license, it is sometimes said, people are assured that the doctor will be qualified, competent, and upright. The evidence from studies of licensure, of medicine and of other professions, however, shows quite the opposite. Whereas markets tend to generate gradations of certification, licensing is binary; you are licensed, or you are not. Moreover, it’s common in licensed professions that the license is revoked if the licensed professional engages in “unprofessional conduct,” which is usually defined as including advertising! But advertising is one of the means that markets have evolved to provide information– about the availability of products and services, about relative qualities, and about prices. Licensure is not the solution to cases of informational asymmetry; it is the cause.

Myth: Reliance on markets leads to monopoly

When thinking about the difference between government action and action taken by free people trading freely in markets, many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The third myth — Reliance on Markets Leads to Monopoly — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism.

Myth: Reliance on markets leads to monopoly

Myth: Without government intervention, reliance on free markets would lead to a few big firms selling everything. Markets naturally create monopolies, as marginal producers are squeezed out by firms that seek nothing but their own profits, whereas governments are motivated to seek the public interest and will act to restrain monopolies.

Tom G. Palmer: Governments can — and all too often do — give monopolies to favored individuals or groups; that is, they prohibit others from entering the market and competing for the custom of customers. That’s what a monopoly means. The monopoly may be granted to a government agency itself (as in the monopolized postal services in many countries) or it may be granted to a favored firm, family, or person.

Do free markets promote monopolization? There’s little or no good reason to think so and many reasons to think not. Free markets rest on the freedom of persons to enter the market, to exit the market, and to buy from or sell to whomever they please. If firms in markets with freedom of entry make above average profits, those profits attract rivals to compete those profits away. Some of the literature of economics offers descriptions of hypothetical situations in which certain market conditions could lead to persistent “rents,” that is, income in excess of opportunity cost, defined as what the resources could earn in other uses. But concrete examples are extremely hard to find, other than relatively uninteresting cases such as ownership of unique resources (for example, a painting by Rembrandt). In contrast, the historical record is simply full of examples of governments granting special privileges to their supporters.

Freedom to enter the market and freedom to choose from whom to buy promote consumer interests by eroding those temporary rents that the first to offer a good or service may enjoy. In contrast, endowing governments with power to determine who may or may not provide goods and services creates the monopolies — the actual, historically observed monopolies — that are harmful to consumers and that restrain the productive forces of mankind on which human betterment rests. If markets routinely led to monopolies, we would not expect to see so many people going to government to grant them monopolies at the expense of their less powerful competitors and customers. They could get their monopolies through the market, instead.

It’s always worth remembering that government itself seeks to exercise a monopoly; it’s a classic defining characteristic of a government that it exercises a monopoly on the exercise of force in a given geographic area. Why should we expect such a monopoly to be more friendly to competition than the market itself, which is defined by the freedom to compete?

Myth: Markets promote greed and selfishness

When thinking about the difference between government action and action taken by free people trading freely in markets, many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The second myth — Markets Promote Greed and Selfishness — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism.

Myth: Markets promote greed and selfishness

Myth: People in markets are just trying to find the lowest prices or make the highest profits. As such, they’re motivated only by greed and selfishness, not by concern for others.

Tom G. Palmer: Markets neither promote nor dampen selfishness or greed. They make it possible for the most altruistic, as well as the most selfish, to advance their purposes in peace. Those who dedicate their lives to helping others use markets to advance their purposes, no less than those whose goal is to increase their store of wealth. Some of the latter even accumulate wealth for the purpose of increasing their ability to help others. George Soros and Bill Gates are examples of the latter; they earn huge amounts of money, at least partly in order to increase their ability to help others through their vast charitable activities.

A Mother Teresa wants to use the wealth available to her to feed, clothe, and comfort the greatest number of people. Markets allow her to find the lowest prices for blankets, for food, and for medicines to care for those who need her assistance. Markets allow the creation of wealth that can be used to help the unfortunate and facilitate the charitable to maximize their ability to help others. Markets make possible the charity of the charitable.

A common mistake is to identify the purposes of people with their “self-interest,” which is then in turn confused with “selfishness.” The purposes of people in the market are indeed purposes of selves, but as selves with purposes we are also concerned about the interests and well being of others — our family members, our friends, our neighbors, and even total strangers whom we will never meet. And as noted above, markets help to condition people to consider the needs of others, including total strangers.

As has often been pointed out, the deepest foundation of human society is not love or even friendship. Love and friendship are the fruits of mutual benefit through cooperation, whether in small or in large groups. Without such mutual benefit, society would simply be impossible. Without the possibility of mutual benefit, Tom’s good would be June’s bad, and vice versa, and they could never be cooperators, never be colleagues, never be friends. Cooperation is tremendously enhanced by markets, which allow cooperation even among those who are not personally known to each other, who don’t share the same religion or language, and who may never meet. The existence of potential gains from trade and the facilitation of trade by well-defined and legally secure property rights make possible charity among strangers, and love and friendship across borders.

Intentions and results

From a video produced by LearnLiberty.org, a project of Institute for Humane Studies: “Prof. Don Boudreaux explains what economists mean when they talk about unintended consequences. Essentially, unintended consequences are the large outcomes that emerge from the actions made by many individuals. These outcomes can be good or bad. Therefore, when analyzing various polices, we must be extremely careful to distinguish between intentions and results.”

Boudreaux concludes the video with this: “We live in this incredibly complex world. When we take any action, we know that the consequences of those actions are going to extend out very far. We can see those consequences only a little bit in front of us. We can’t trace them out fully. And it applies whether or not you believe in big government, tiny government, and medium-sized government. Yes, it’s difficult in many cases to trace out how the incentives will have real-world effects. But that difficulty does not excuse us from the task of pursuing it. We can’t just simply say, oh the intentions of the policymakers are good, therefore we can be assured that the results will be good. That’s cheating. We just can’t do that. That’s very bad public policy.”

Understanding this is especially important as we in Wichita and the surrounding area prepare to undertake a comprehensive government plan for sustainable communities.

The video’s page is Unintended Consequences, or click below to view at YouTube.