Category Archives: Economics

by | July 10, 2007 · 7:47 pm

The One Minute Case For Advertising

Why defend advertising?

While the abundance of advertising is usually viewed as a sign of the vitality of capitalism, it is nevertheless under a near-universal assault by intellectuals. Because advertising “blatantly and unapologetically appeals to the self-interest of consumers for the blatant and selfish gain of capitalists”1, attacks on advertising are an assault on capitalism and ethical egoism. Arguments against advertising usually take two forms: the argument is that advertising is economically inefficient and the argument that advertising is somehow coercive. 2

The myth of “perfect competition”

Most economic arguments against advertising derive from the theory of “perfect competition, ” which is an ideal state against which markets are to be judged. This state is characterized by homogeneous products, relatively small sellers without monopoly power, prices which approach the cost of goods, consumers who have perfect information about all products and prices, and no entry costs to markets.

Advertising violates all these conditions, mainstream economists argue. Advertising seeks to establish product loyalty, and therefore to make certain brands more valuable than others. This creates barriers to entry by giving companies monopoly privileges, and allows them to price goods above cost. Furthermore, advertising is an imperfect and biased way of communicating product information to consumers. Finally, advertising retards progress by making it more expensive for new producers to enter the market.

In the real world, markets work quite differently: the essential characteristic of capitalism is the entrepreneurs who invest capital in new services, products, technologies, and businesses models. When their predictions are right, they gain a temporary advantage over their competition and turn a profit; when they are wrong, they take a loss. Success in business requires continual insight into which investments will prove profitable.

Rather than being a barrier to entry, advertising makes competition possible. New businesses and products stimulate demand by announcing their benefits to consumers. Expanding demand makes goods cheaper by creating economies of scale. While advertising is often attacked for creating demand for shoddy goods, it is not sufficient to advertise to gain consumer loyalty – only positive customer experience and continued positive goodwill can do that. Advertising is what allows new market entrants to capitalize on consumer dissatisfaction and dislodge established firms, as Japanese auto makers did when they demonstrated the superior value and quality of their cars over American ones.

The perfect competition model assumes that competing companies automatically lower prices to match their competitors. In reality, no business wants to lower prices unless consumers expect them – and it is advertising which performs that role by educating consumers about the competition. Advertising itself is a check on high marketing budgets: as consumers become better educated, competitive pressure creates price wars which force businesses to minimize expenses. 3

Yet another criticism is that advertising is a biased method of consumer education. Yet the continued importance of advertising as an influence on buyers proves that the creator of a good is the party most qualified to communicate the value proposition it offers, whether directly or through an intermediary. While word-of-mouth reports and independent product testing organizations are essential sources of consumer education, competitive pressure through advertising provides the claims whose veracity they evaluate.

Advertising is non-coercive

Opponents of “consumerism” often claim that advertising creates its own demand. But a commercial cannot simply implant a desire in the viewer. Rather, advertising tells consumers how their existing values can be satisfied in a particular concrete form. Some advertisements seek to meet well-defined values: toothpaste for clean teeth. Others educate consumers about products which fill a specific need: sports drinks for athletes, or diet colas for the health-conscious. Some advertising functions much like art, and present a concretization of highly abstract or subconscious values. For example, a sports car commercial may appeals to consumers who seek independence and efficiency, while a luxury sedan commercial might appeal to those who value comfort and elegance. Attacking advertising solely for appealing to emotions is as silly as criticizing a painting or a movie for appealing to the viewers’ emotion rather than presenting a dry, factual account.

Ultimately, advertising is a public appeal to the mutual self-interest of the seller and buyer. Movements to silence or limit advertising seek to regulate the freedom of the individual to voluntarily interact with others, and therefore are an assault on both freedom of speech and the right of association.

References:

  1. Google Books: Jerry Kirkpatrick: In Defense of Advertising: Arguments from Reason, Ethical Egoism, and Laissez-Faire Capitalism.
  2. The Five (Wrongheaded) Complaints against Advertising by Jerry Kirkpatrick
  3. Persistently high advertising budgets are indications of high barriers to entry, usually due to government interference. For example, in the case of drug companies, the FDA forces drug makers to spend up to a billion dollars to deliver a single drug to market. This limits the drug market to all but the largest companies and most profitable medicines. Prescription drugs have large advertising budgets because the legal barriers to entry make it prohibitively expensive to compete on price or quality, or to appeal to smaller markets such as rare diseases.

Further reading:

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by | June 26, 2007 · 4:15 pm

The One Minute Case Against Socialized Healthcare

There is no right to healthcare

The United States was founded with the declaration that all men have the right to “life, liberty, and the pursuit of happiness.” The Founders recognized that all men have a moral right to be free from the coercion of others, as long as they allow others the same freedom. They believed that rights do not impose a positive obligation on others, but only the negative obligation to restrain from the initiation of force.

The claim that there is a “right to healthcare” violates the principle of individual rights because it requires that the liberty of doctors and the property of taxpayers be violated to provide for others.

The myth of “free” healthcare

It is a common belief that when government provides something, it is free or cheap. But politicians cannot create wealth – they can only redistribute it. Money for all government spending comes from business – whether by entrepreneurial investment, the wages of patients, or taxes.

Whether by price controls of outright nationalization, when governments make prices artificially low, demand skyrockets, and shortages result. Politicians respond by passing ever more regulations to control costs. These regulations stifle innovation, drive up costs, and force healthcare providers out of business. The end result is to replace capitalism, the greatest wealth-generating system known to man, with an onerous system of central planning.

Capitalism cannot guarantee that all our medical needs will be provided for – no system can do that. But it does give entrepreneurs the incentive to compete to provide the best possible service they can. Centralized socialized systems have no incentive to improve service or to try bold new techniques. Politicians can force prices to be artificially low, but they cannot lower costs – they can only drive doctors, hospitals, and drug companies out of business.

The victims of “universal” healthcare

The waiting time for treatment in Canada varies from 14 to 30 weeks. Waiting lists for diagnostic procedures range from two to 24 weeks. Some patients die while waiting for treatment. To stop sick people from circumventing the “free” system, the government of British Columbia enacted Bill 82 in 2003, which makes it illegal to pay for private surgery. Patients waiting for critical procedures are now forced to seek procedures in the U.S. and doctors are abandoning Canada in droves. Cleveland, Ohio is now Canada’s hip-replacement center. Ontario is turning nurses into doctors to replace some of the 10,000 doctors who left Canada in the 1990’s. 1 2

What will patients do when it is illegal to seek private medical treatment in the U.S.? Politicians are already working towards that goal. State and federal regulation impose onerous regulations which forbid insurance companies from offering services such as basic coverage for emergencies by requiring coverage of many types of procedures. Medicare forces doctors to follow 130,000 pages of regulations. Critics often attack the “capitalist” nature of American health care system. The reality is that the government now pays for 50% of health care, and closely regulates the rest.

Healthcare is only affordable under capitalism

If a society is not wealthy enough to afford healthcare, health socialism will not make it richer. Cuba, a poster child of socialist healthcare schemes, spends $229 on healthcare per person each year, while the U.S. spends $ 6,096.3 Premium services are available only to paying foreigners, while natives must bribe doctors for timely treatment and bring their own towels, bed sheets, soap, food, and even sutures.4

A government can decide to replace individual choice with state-mandated decisions of what goods and services are more important for the “common good.” But it can only spend on one area at the expense of another. If Cubans are not totally deprived of medical treatment, it can only be at the expense of all other goods. A doctor’s salary in Cuba is 1.5 times the median at $15-20 per month. 5 A telling sign of their deprivation is the Cuban suicide rate, which is the highest in Latin America and among the highest in world. Cubans in Miami on the other hand, kill themselves less often than other Miamians.6 When they risk their lives in leaky boats to escape to the U.S., the right to make their own decisions regarding their health is among the freedoms they hope to gain.

References:

  1. “Free Health Care in Canada” by Walter Williams
  2. “Do We Want Socialized Medicine?” by Walter Williams
  3. Reuters: Health care in Cuba more complicated than on SiCKO
  4. BBC: Keeping Cuba Healthy by John Harris
  5. “An Evaluation of Four Decades of Cuban Healthcare” by Felipe Eduardo Sixto (PDF)
  6. Miami Herald: “Study: Suicide epidemic exists under Castro” by Juan O. Tamayo

Further reading:

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by | June 11, 2007 · 11:44 pm

The One Minute Case Against Software Patents

The cost of software patents

One prominent form of patent abuse is “submarine patents” – patents which lie dormant until someone discovers their similarity to a popular technology. The patent on the GIF image format surfaced a decade after its widespread adoption on the web. The Eolas patent on web browser plug-ins cost Microsoft $521 million and forced tens of millions of web pages to be crippled or redesigned. The RIM patent cost Blackberry $612.5 million and nearly shut down service to millions of people despite the patent itself being invalidated.

Software patents are becoming a major threat to the software industry. The risk of software patent lawsuits forces software companies to obtain defensive patents in order to obtain cross-licensing agreements and discourage patent lawsuits through the threat of counter- suits. An entire industry of patent trolls extorts businesses with bogus patents by taking advantage of the fact that many businesses prefer to pay licensing fees than go to court.

The problem of software patent enforcement

A software algorithm is an abstract description of a general way to solve a problem, such as a mathematical formula. Many algorithms are popular because programmers have found them to be useful in different fields. Algorithms, such as sorting lists and organizing shopping carts are widely recognized as non-patentable. But how can one distinguish obvious ideas from patentable ones? Does the application of an existing algorithm to a new field deserve a patent?

Software patents cripple software development

Software patents make software development risky because it is so difficult to know whether an idea has been implemented before. Over the years, millions of software programs have been written using billions of algorithms. Is it not feasible to have to study thousands of patents to make sure one does not violate the rights of others, while at the same time designing an integrated product. As a consequence, innovative companies are faced with the constant threat of discontinuing products or paying enormous amounts.

The success of companies such as Microsoft, Oracle, SAP, and Apple was not due to monopolizing certain features, but on continually improving on each other’s innovations. In a 1991 memo, Bill Gates wrote

If people had understood how patents would be granted when most of today’s ideas were invented and had taken out patents, the industry would be at a complete standstill today…The solution is patenting as much as we can. A future startup with no patents of its own will be forced to pay whatever price the giants choose to impose. That price might be high. Established companies have an interest in excluding future competitors.

Copyrights are a superior alternative to software patents

The same legal principle that protects a book, song, or painting, automatically protects computer programs by forbidding copying or close paraphrasing of the code. Copyrights are straightforward to enforce because it is easy to identify what is being protected: a particular implementation of a set of algorithms to solve a problem, rather than the algorithm itself. They have the advantage of being automatic, free, and only useful against criminals. Copyrights allow the abstract ideas behind a software problem to be created by anyone, but protect an implementation of those ideas in concrete form, so developers who implement their own ideas do not have to worry that someone will put them out of business.

The protection of property rights requires standards that can be objectively enforced. Attempts to protect rights without the guideline of objective criteria will only violate real rights and nullify the benefit of protection.

Further reading:

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by | June 8, 2007 · 5:30 pm

The One Minute Case Against “Net Neutrality”

What is “net neutrality?”

To borrow Senator Ted Stevens’s infamous analogy of the Internet to a series of tubes, imagine a network of pipes connected by switching stations. The width of a pipe (bandwidth) determines the volume of messages (packets) than can be sent through it. Packets arriving at a switching station wait in a queue until they can be forwarded to their destination. The pipe’s diameter and the volume of traffic determines the total time (latency) that messages take to reach their destination.

Advocates of “net neutrality” argue against the right of the owners of the pipes (Internet Service Providers) to discriminate between different messages or to charge recipients of messages. So for example, an ISP would not be able to favor telephone calls sent over the net over movie downloads, or charge Google extra for the traffic sent their way, or to block a business if it competes with their own services, or to block malicious or illegal websites. Implementation of such regulations would require government surveillance of Internet traffic and FCC approval of new technologies and services which might violate “neutrality.”

Regulation stifles innovation

The limitations of the original Internet protocols became apparent as it transitioned from a monopoly network designed for government use to a competitive and decentralized marketplace. One limitation is the lack of ability to prioritize certain kinds of traffic. Different kinds of communications have different bandwidth requirements. Watching movies over the web is bandwidth-intensive, but not time-critical. Teleconferences are both bandwidth intensive and time critical. Some applications like remote surgery and other time-critical services are simply impossible over the public Internet with current technology.

Advances in technology are beginning to allow traffic to be analyzed in the process of transmission, so certain traffic, such as real-time video can be prioritized, while other traffic such as file sharing or spam can be given a lower priority or dropped. Along with dramatic increases in speed and performance, technological innovation is making entirely new kinds of services possible.

Net neutrality advocates want the government to regulate how ISP’s may and may not route traffic. Pressure groups such as consumer activist groups, major websites, small ISPs, and Internet backbone providers are fighting for controls that favor them. Once the precedent of regulation is established, competition will shift to passing the most favorable legislation rather than providing the best technology and service.

Regulations breed more regulations

While communications technology has experienced exponential growth, heavily regulated and monopolized consumer phone and cable providers have been slower to improve services. Consumers fed up with expensive cable and DSL services are demanding more government controls over the pricing and behavior of their ISP’s. They argue that regulations are necessary because telecommunications companies receive monopoly privileges and other benefits from the government. But the lesson they should learn is the opposite – regulations create the need for more regulations. The solution is to abolish coercive monopolies for cable and phone service providers and allow free and open competition.

The Internet is possible because many private networks find it in their mutual self-interest to cooperate and share traffic loads. When inequalities arise, networks compensate each other for the extra load. “Neutrality” regulations force companies to act against their self-interest, inevitably leading them to complain to Congress to impose ever more detailed controls to maintain “fairness.”

The Internet is private property

The Internet is not public property. Telecommunications companies have spent billions of dollars on network infrastructure all over the world. They did so in the hope of selling communications services to customers willing to pay for them. The government has no right to effectively nationalize ISP’s by telling them how run their networks.

Proponents of a mixed economy like to invent hypothetical scenarios of ways companies could abuse customers. It is true that a free society gives people the freedom to be stupid, wrong, and malicious. The great thing about capitalism is that it also gives people the freedom for the most consumer-friendly business to win.  A regulated Internet takes away that freedom and turn it over to politicians and lobbyists.   History shows that most attempts to improve outcomes by regulating markets worsen the very problems they were intended to solve.    That is how the USA ended up with the current overpriced, monopolistic oligopoly providers.  Why do “net neutrality” advocates ridicule politicians for comparing the Internet to a “series of tubes,” and then trust them to regulate it?

Real solutions to a better Internet 

  • End local Internet monopolies which prevent small ISPs from being successful
  • Remove local and federal (FCC) regulations which prevent all but the most powerful corporations from providing telecom services
  • Allow ISPs to innovate in by forcing cities to open up their infrastructure  without the threat that their business model will be nationalized or regulated out of existence.
  • Give capitalism and free markets a chance – America has already tried everything else

Further reading:

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by | June 5, 2007 · 6:28 pm

The One Minute Case For “Price Gouging”

“Price gouging” is a derogatory term for “unfair” prices on goods, typically in an emergency.The problem is that the perception of “unfairness” is totally arbitrary and stems from an ignorance of basic economics.Rather than create “fair” outcomes, “price gouging” regulations create the very problems they are supposed to solve.

What are prices?

A price is the value demanded by a seller in exchange for a good.The money paid for goods makes production of more goods possible.When the demand for a good suddenly goes up or the supply goes down, sellers raise prices to avoid a shortage.Higher prices cause consumers to limit their consumption.Higher profits pay for money to be invested in expanding production, and encourage other producers to redirect production from other uses to the goods most urgently demanded.

The disastrous effects of price controls during disasters

Consider what happens when politicians attempt to control a run on gas precipitated by an imminent hurricane:

When price controls are imposed, the market’s ability to respond to an emergency is paralyzed  Rather than distributing gas to those who value it the most, products are distributed to those who buy it first. This encourages those with time to wait in endless lines, or the most panicky individuals to rush to fill up their cars at the first sign of trouble. Runs begun whenever a minority of people expects a rapid increases in demand, and the entire stock is quickly consumed by a few.

Whereas a free market would quickly respond to higher prices by shifting supply to the stricken area, outside sellers have no incentive to make an effort to bring additional supplies to the stricken area when prices are fixed. To recoup the higher costs of delivering gas in emergencies and offset the risk of a run, gas stations keep prices at a higher overall level for a longer time.

Price gouging saves lives

Absent price controls, gas stations raise prices in an emergency to a level where everyone who is willing to pay the new price is able to buy gas.Badly needed resources are delivered to those who need them most.Rather than buying out stocks, consumers ration usage of expensive goods.Those in the most vulnerable areas are able to pay a higher price for the gas they desperately need, while individuals who are less vulnerable wait until stocks are replenished.

Price gouging remedies shortages

In addition to distributing existing stocks more efficiently, high profits pay for the higher cost of delivering supplies to a dangerous area.They also encourage stocks in other locations to be redirected to where they are most needed.The market’s natural response to shortages is far superior to government planning of how much of everything is needed and where. This was aptly demonstrated after Hurricane Katrina, when FEMA paid truckers exorbitant amounts to ship thousands of tons of badly-needed ice around the country before finally throwing it out.

Price gouging is the best solution to price gouging

A rapid price increase in anticipation of an emergency reassures buyers that supplies will be available if necessary, resolving the problem of runs caused by false alarms. In the long run, a high price on gas during an emergency encourages consumers to be better prepared for emergencies and find alternate means of transportation and encourages and pays for suppliers to increase production.Rather than face dry pumps during emergencies, consumers in vulnerable regions will pay a slightly higher price for fuel stations and stores to maintain higher reserves.Ultimately, the market’s natural response to shortages dampens price increases and shortens waiting lines.

Further reading:

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by | June 1, 2007 · 6:35 pm

The One Minute Case For Technology

What is technology?

Technology is the sum of material entities created by the application of mental and physical effort to nature in order to achieve some value. Technological progress is made possible by engineering, the field which applies scientific knowledge to solve practical problems by developing and applying new tools, machines, materials and processes.

The history of technology.

The evolution of technology has been a progression from reliance on physical effort to a growing role for the mind. The first tools, such as chisels and hammers, augmented raw muscle power. The creation of powered machines eliminated the reliance on muscle and allowed much more powerful mechanisms to be built than with human or animal power alone. The introduction of the automaton in the twentieth century embedded human knowledge in machinery. The trend continues as human beings improve their ability to exploit nature to meet their values through the use of automation and achieve more and more material values by mental effort.

Does technological progress cause unemployment?

In 1811, the Luddites became alarmed that technological innovations introduced by the Industrial Revolution threatened their livelihood. In a sense, they were right – most jobs that existed in 1811 have made superfluous by technology, and this process continues today. Yet outside of wage and price controls and other forms of interventionism, large-scale unemployment has never been a threat. Technology has not made most people permanently idle because it not only eliminates dreary, labor-intensive jobs, but also frees us to pursue more activities. The tremendous improvements in productivity that came with the Industrial and Information Revolutions gave us more free time and created opportunities to allow us to discover and pursue new passions. Highly repetitive agricultural and manufacturing jobs have been replaced by service industry and technical jobs. Entirely new institutions, such as professional and amateur sport leagues, museums, and online multiplayer clans have evolved as the public’s free time has grown.

Is technology good?

While the industrial revolution greatly improved the quality and longevity of human life, war and threat of nuclear annihilation have demonstrated the destructive power of technology. Rapid technological progress makes it likely that future inventions will increase both its creative and destructive potential. Yet there is reason to be optimistic that technology will be used for good.

While technology can be subverted and copied to serve evil, societies which enslave the human mind cannot sustain the capital stock or the intellectual base necessary for progress. Technological progress requires a society which values rationality, initiative, and voluntary cooperation. Most important is the need for freedom: inventors must be free to propose new ideas, and entrepreneurs must be free to turn them into reality. The failure of Fascism and Communism, and the success of the United States in the 20th century is a powerful testament to the power of a free society.

What is the future of technology?

Technological evolution follows two trends: the replacement of physical labor with more efficient mental labor, and the resulting greater degree of control over our natural environment, including our ability to transform raw materials into ever more complex and pliable products. This process culminates with man’s ability to achieve all of the material values technologically possible to him by mental effort. The growing importance of intellectual activity implies that intellectual property will become increasingly more important relative to material labor and physical goods. The current system of patent laws and copyrights will evolve dramatically as intellectual transactions evolve to meet the requirements of a civilization with rapid innovation on a global scale.

Further reading:

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by | May 30, 2007 · 5:35 pm

The One Minute Case for “Sweatshops”

The opposition to sweatshops

Opposition to “sweatshops” originated with the socialist movement and the first labor unions, and these groups remain their most vocal critics today. For labor unions, sweatshops are both competition and evidence that unions are not needed to raise wages and improve working conditions. For socialists, sweatshops are their last, best hope, that somewhere, somehow, capitalism causes suffering. Here are some of their loudest arguments against sweatshops:

“Sweatshops pay low wages and subject workers to harsh conditions”

It is ignorant and misleading to hold businesses in the developing world to the same standards as those in the West. Multinational companies face entirely different challenges and expenses than in the West: oppressive, unpredictable, and corrupt governments, long distances, language and cultural barriers, lack of a skilled or educated workforce, primitive infrastructure, and labor activists back at home.

Consider the condition of third world countries before the multinationals arrival. The majority of people live in the same state as they have for all of human history – in a permanent state of near-starvation, with no jobs and no future to look forward to other than the backbreaking labor of subsidence farming. Everyone works from almost from the time that he or she can walk, and most children die young from starvation or malnutrition. If they are lucky, they find work as scavengers, farm hands, prostitutes, beggars, petty criminals, or trash collectors.1

Sweatshops” offer a considerable improvement from this state: Sweatshop wages are more than double the national average in Cambodia, Haiti, Nicaragua, and Honduras. In Honduras, where almost half the working population lives on $2/day, “sweatshops” pay $13.10/day.2

“Sweatshops use child labor”

Child labor is not caused by markets, but a universal fact of human society throughout history.  It  is  necessary in the developing world because given the low productivity of their parents, the alternative is starvation.  It is only the unprecedented wealth generated by capitalism which created the possibility of most children (rather than a small elite) spending their childhood with play and learning rather than labor.

According to a 1997 UNICEF study, 5,000 to 7,000 Nepalese children turned to prostitution after the US banned that country’s carpet exports in the 1990s.  After the Child Labor Deterrence Act was introduced in the US, an estimated 50,000 children were dismissed from their garment industry jobs in Bangladesh, leaving many to resort to jobs such as “stone-crushing, street hustling, and prostitution.” The UNICEF study found these alternative jobs “more hazardous and exploitative than garment production.

The only way to eradicate child labor is the same as in was eliminated the West – by raising the productivity of adults sufficiently to feed their families.

“Sweatshops are coercive environments”

Workers in sweatshops are free to quit or look for another job anytime, but they remain because they consider it the next best alternative. Their pay and working conditions seem low to us, but they are an economic step forward compared to subsistence farming. Real slavery exists today not due to economic development, but due to totalitarian regimes that do not recognize basic human rights such as North Korea, Cuba, and the Islamist militias of Sudan.

“Sweatshops destroy local cultures”

One criticism with a kernel of truth, is that globalization obliterates local cultures by exporting Western values. Capitalism does encourage certain values such as productivity, rationality, independence, and equality of opportunity, which are incompatible with the fatalism, tribalism, caste-based discrimination, and misogyny of most primitive societies. Rather than condemn these values, we should recognize that they are responsible for the tremendous material success of Western civilization and urge their adoption worldwide.

References:

  1. UNICEF: State of the World’s Children 1997
  2. Ben Powell and David Skarbek: Sweatshops and Third World Living Standards: Are the Jobs Worth the Sweat? Journal of Labor Research; Spring 2006.

Further reading:

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by | May 29, 2007 · 8:36 pm

The One Minute Case For Free Trade

Why not be self-sufficient?

Do you make your own shoes? If you invested some time learning shoemaking, you could save the money you regularly spend on new shoes. What about butter – why not churn your milk? If, like cavemen, everyone was entirely self-sufficient, our monthly spending would be zero. That would be fortunate, because our income would be zero as well, since no one would buy anything from us either.

Everyone outsources

We don’t make everything ourselves because we don’t have the time to produce everything we want. Humans learned long ago that it is beneficial to trade our specialized labor in one field for the labor of others in another, with money as the means of exchange. The difference between the short hardscrabble lives of a hunter-gatherer society and our relatively luxurious existence is due to the gains in efficiency made possible by voluntary exchange.

Everything is outsourced

In “I, Pencil”, Leonard Read writes that there isn’t a single person on earth who knows how to make a pencil. The process of acquiring and assembling the cedar, lacquer, graphite, ferrule, factice, pumice, wax, and glue that compose a pencil are performed by thousands of people all over the world. No one individual is capable of understanding all the processes involved or arranging all the transactions that deliver the necessary supplies to the right step. Voluntary exchange between individuals who know only their immediate trading partners makes possible a process that no central planner could design. None of the participants engage in it because they need a pencil, but because they want the goods and services others produce in order to buy a pencil.

A policy of free trade is beneficial even when it is unilateral

Some isolationists argue that foreigners have “unfair” advantages due to lax labor or environmental regulations, industry subsidies, or restrictions on imports abroad. But such arguments miss the whole point of trade. Capitalism is not a zero-sum game where profits are redistributed from one producer to another. Consumers who buy cheap foreign goods make their money available to buy other products, increasing everyone’s living standards. Domestic producers who lose sales to cheaper foreign goods benefit from increased consumer spending at home, and foreigners with dollars clamoring to spend them on domestic industries.

Governments that subsidize export industries only rob their taxpayers to pay foreign buyers. When France subsidizes steel exports, American steel foundries lose money, but Americans get cheaper consumer goods, and “free” Euros to buy goods that would have belonged to French taxpayers. Ultimately, restrictions on trade based on international borders are arbitrary and just as destructive as internal barriers.

Trade deficits and surpluses are natural states of economic development

The U.S. has a trade deficit when foreigners accept more U.S. dollars for their products than vice versa. If a deficit were to continue indefinitely, Americans would have a permanent supply of “free” foreign goods, since dollars are worthless if they are never spent. Foreigners trade at a deficit with America because they are confident that the we will have products they want sometime in the future. Likewise, we accumulate foreign currency in the belief that foreign goods will be valuable. Surpluses and deficits are natural states that every nation experiences as it varies between being a net recipient of investments or a net investor.

Further reading:

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by | May 26, 2007 · 5:56 pm

The One Minute Case Against Malthusianism

The origin of apocalyptic overpopulation theory

In his 1798 Essay on the Principle of Population, Thomas Malthus argued that the growth in the food supply is linear, whereas the growth in the population rate is exponential. Whenever the population exceeds the food supply, social turmoil erupts until drastic checks such as famines, wars, and epidemics lowered populations down to sustainable levels. The only way to avoid periodic disaster is to implement strict population controls, which have historically included both voluntary restraints, as well as coercive measures such as limits on family size and mass sterilization of “undesirable groups.”

Malthus was wrong

Malthus predicted a population crash by the middle of the 19th century. In reality, living standards have increased over sixty times since 1820 despite a tripling of the European population in the 18th century.1 Meanwhile, family sizes fell naturally without the need for coercive measures.
Nevertheless, modern Malthusians perpetually extend the date of the inevitable apocalypse to the near future. Faced with the astounding growth of agricultural yields which virtually eliminated hunger in the West, environmentalists are continually discovering new resources to run out of, whether fossil fuels, metals, land, or water.
The discrepancy is explained by two errors in the Malthusian model: the population growth rate is not exponential, while the potential growth in human productivity is.

Family size is subject to individual cost/benefit analysis.

The reason for the natural decline in population growth rates is that children are much more expensive in industrial countries. Increasing productivity levels in the developed world mean higher standards of living, lower child mortality, and a higher opportunity cost of having children. Child labor is no longer necessary for families to survive, and children have become expensive in terms of both direct expenses and lost economic opportunities for parents. Rather than working in farms or factories to keep younger siblings alive, a smaller number of kids can take care of parents in old age. Welfare programs for seniors have actually tipped the balance below equilibrium levels in most developed nations.

Capitalism allows unlimited productivity improvements

Malthusian scenarios assume that the resources available to meet human needs are fixed — that each new human being requires a fixed amount of land, metal, and fossil fuels to live. But human values are ever-shifting, and so are the means to provide those values. Each baby born not only creates new demand for the products of civilization, but also provides new resources and insight for meeting those needs.

Our living standards are rising because we are finding more efficient ways to harvest existing resources, and improving the technology to produce the goods we consume. We are also exploiting new resources to create those goods. Whale oil, rubber trees, and native forests for paper and fuel have been replaced by petroleum, plastics, tree farms, and coal. This is possible because a free society allows a growing capital and knowledge base to be multiplied by entrepreneurs who find new methods to improve human life, resulting an exponential growth in wealth.

Malthus’s model applies to animals and collectivists

The Malthusian population model is not entirely without merit. Charles Darwin realized that it applies to the animal kingdom because animals lack the capacity to volitionally control reproductive rates, and their productivity is fixed by biology. Whereas humans adopt to environmental changes, animal populations can crash rapidly when the carrying capacity of their environment changes.

Human society experiences the same pattern in preindustrial and totalitarian societies. Whether it is the crushing mold of tradition or stagnant socialist states, when the potential of human beings to apply their mind to improve their quality of life is stifled, humans are reduced to survival on the animal level, and suffer similar cycles of periodic famines.

Further reading:

References:

  1. Angus Maddison, Phases of Capitalist Development (New York: Oxford University

Press, 1982), pp. 4-7.

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by | May 20, 2007 · 1:57 am

The One Minute Case For Unrestrained Profit

Profit is the engine of production

Restraining profit by taxing it or limiting it has the effect of limiting production. Restraining profit means an economy will produce fewer goods, of less variety, and at higher price. Innovation suffers. As a result, to the extent profits are restrained, all consumers suffer. Profit drives production in several ways:

Profit is the incentive for production

The profit motive is the supreme motivator of productive business activity. The creativity of scientists, the entrepreneurship of businessmen, and the resourcefulness of financiers are all motivated, in whole or part, by the pursuit of profits.

Profit provides the means of production

Profits and savings are the ultimate source of the investment capital (money) that finances construction of factories, research laboratories, distribution centers, ships, warehouses, and all of the equipment that is used to invent, produce and distribute the goods that we consume. To restrict profits is to deny a source of capital necessary for production.

Profit directs capital to the production of goods most urgently wanted

The highest profits are earned by the businessmen who can supply the goods most wanted by customers. iPods, portable generators after a hurricane, personal computers, fashionable clothes, and all of the goods consumers want most, are made by those who make the greatest profits. The profitability of an enterprise is the ultimate measuring stick of how well it has satisfied its customers. A money losing business is either making products consumers do not want or charging too much for them.

Profits result in everyone’s gain

Profits do not come from the net loss of anyone. On the contrary, profit results from the creation of goods that people voluntarily buy in the marketplace. A businessman who makes a huge profit makes things that are good enough that many people want them and willingly buy them from him.

Profit is property

Profits are the property of the shareholders and other investor/owners of the business. Restricting or taxing profits is not just impractical, but is theft.

Honest profits are an essential feature of capitalism

A profit honestly earned in a capitalist society is beneficial and good for all. Profits must be distinguished from the money a businessman might get because of special governmental favors, such as tariffs, regulations or subsidies. These interventions are contrary to capitalism and allow some businessmen to gain at other people’s expense. Their gain is not profits, but a form of theft.

Further reading

  • Capitalism: The Unknown Ideal by Ayn Rand
  • Atlas Shrugged by Ayn Rand
  • “Profit and Loss” by Ludwig von Mises

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