Category Archive: Economics
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Myth 1 is that the government owes “only” $20 trillion. (In reality, it’s much more.) But luckily, Myth 10 is that there’s no way to fix this problem…
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Governments don’t work the way most people think they do. Public choice theory explores how voters, politicians, and bureaucrats actually make decisions. Prof. Antony Davies explains.
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If you really want to understand how the world works today, you need to rethink almost everything you’ve been told about inequality. Prof. Antony Davies explains.
Comments Off on The timber industry illustrates exactly what’s wrong with international trade restrictions.
In the August 4 issue of the Wall Street Journal, the CEO of a US lumber company claimed that “our trade laws exist to protect American businesses and jobs from unfair foreign trade practices, allowing our industries to grow and prosper.” His concern for American businesses and workers is commendable, but trade laws restricting our ability to do business with foreigners — even foreigners whose governments subsidize exporters — cause some industries to “grow and prosper” by causing other industries to shrink and struggle.
Let’s think about international trade restrictions on the timber industry for a minute.
Tariffs, quotas, and other restrictions on international trade make timber more expensive. With higher prices, timber companies can hire more people. It would be easy to look at the expanding timber industry and draw the conclusion that protection allows American firms to “grow and prosper.”That conclusion would be wrong. Just because a policy makes some American industries “grow and prosper” doesn’t mean the policy makes all American industries “grow and prosper.” In the case of restrictions on the timber trade, the higher costs and higher employment in the timber industry mean that money and labor aren’t going into other American industries. Specifically, higher timber prices mean higher costs for timber-using industries like construction, paper, and furniture. Higher costs mean lower output in these industries, which means they either don’t grow as rapidly as they otherwise would have or they contract outright.
Trade restrictions have several important effects.
First, they take money out of the pockets of consumers, who have to pay higher prices for timber and timber-using goods. Second, they draw resources into timber production. This sounds good until we realize that these resources could be used more advantageously elsewhere. Instead, they are being wasted producing timber that would have been cheaper had American companies been able to buy it at the world price without government interference. Third, there is less economic activity overall. At the world price, people would have bought more timber. When intervention raises prices, people buy less timber.There is a final cost associated with tariffs and other protections on international trade. Legislators have to be persuaded to vote for particular pieces of legislation, and persuasion isn’t free. Firms and trade associations dedicated exclusively to influencing the course of legislation have lobbying outfits in Washington, DC, and other seats of government. These groups produce nothing. Instead, they use their creative energies in a zero-sum struggle over the marginal increase in timber companies’ profits that results from restrictions on international trade.
This is one of the reasons the rules of social and economic order are so important. When market access and political access are limited, people can earn their incomes by getting legislators to protect them from competition. This protection allows them to cut back on output and raise prices.
It is an easy mistake to think that restrictions on international trade that help one industry “grow and prosper” will help all industries “grow and prosper.” When we look beyond the immediate beneficiaries, however, it becomes clear that we are helping some people by impoverishing others. If, instead, trade is open, our economic activities in and outside of the timber industry can make our whole society richer. Given that we impoverish one another by restricting competition, it’s important to have rules that make it hard to do this in the first place.
Comments Off on This is the best way to provide relief after a hurricane.
As we begin the cleanup in the aftermath of three very powerful hurricanes, Harvey, Irma, and Maria, we see devastation that has not been seen before. Irma at one point registered as a Category 5 hurricane and wreaked havoc on the Caribbean Islands, Puerto Rico, and parts of Florida. This just days after Category 4 Hurricane Harvey left Houston and the surrounding areas in shambles. Cleanup for Harvey alone is estimated as to cost as much as $100 billion. And now Hurricane Maria has left all of Puerto Rico in the dark.
It would be wonderful if we could enact a policy that would eliminate hurricanes and other storms that destroy cities and pull so hard on our scarce resources, but we can’t. In a world of scarcity, there are limits to what policy can fend off and protect against. That doesn’t mean we do nothing. It means we must do the best we can to overcome, provide aid, and rebuild.
So, how do we do that?
The Economic Way of Thinking as Our Guide
In the wake of unpreventable hurricanes and other natural disasters, our goal is to conceive of the best plan that will minimize costs and impact, where possible, and maximize the support that others can give. The economic way of thinking can and should be our guide. To maximize our efficacy, we need to understand what the market can do and what the state can do. In times of weather disasters and emergencies, people, often out of legitimate fear, seek refuge and protection through the power of the state. The economic way of thinking helps us understand whether the state can deliver the things we so badly need.Scarcity is always our problem. We always have desires and wants that exceed our ability to satisfy them. But scarcity is exacerbated when a hurricane or tropical storm strikes. People have vital needs for electricity, water, ice, and food. Those basic needs don’t go away because of the hurricane. The hurricane makes it harder for us to get the things we need because highways are impassible, fallen trees block roadways, buildings are destroyed, and electricity is lost. In anticipation of these problems, demand even increases as people stockpile to prepare for the uncertain future.
Thus, we are left with a supply and demand imbalance. We want more gas, ice, and water as we prepare for future uncertainties, but there is less of those things to go around. The question is what to do about it. Most of us agree that we must do something. Economics helps us reconcile, with as much precision as possible, exactly who should do what.
The economic way of thinking is all about relative prices and relative capabilities. Is the market capable of overcoming these supply shocks as quickly and cost effectively as possible? What can and should the state do, and how do for-profits and nonprofits fit into this equation?
What we know from basic economic realities is that when supply and demand are out of whack, disrupted so quickly and fiercely, we need a mechanism in place that redirects and rations those scarce resources most effectively. But it doesn’t end there. We also need a mechanism that induces greater supplies of the things we need so badly.
Prices and profits do this better than the state can because they are nimble and they allow dispersed individuals to act quickly and decisively to meet the needs of others. When we experience a large decrease in supply, or an increase in scarcity, the price mechanism helps us know what to do next in several ways.
First, the price acts as a signal. It helps us know that scarcity has increased — and we must have this information. Second, the price acts as an incentive — its increase tells potential suppliers to try and find more. This jumpstart is precisely what people need. Prices call suppliers and demanders into action to work to solve the new scarcity problem. As demanders, higher prices tell us to slow our consumption and be as prudent as possible with the goods that have become more scarce. Suppliers respond to the price increase with possible solutions to the problem, because the elevated price gives them a reason to do so.
The Morality of Market Responses
That might sound nice on paper, but does it work? It’s one thing to understand economic theory, but it’s another to see how it works in the real world. The result described above is not intuitive: that the short-term increase in prices of goods and services that are drastically scarcer than they were a few days before is good — necessary, in fact. Without that price increase, two things would occur that would make a terrible situation worse: consumers would not slow their consumption, which would deplete those goods faster, and would-be suppliers would have no incentive to apply entrepreneurial energy to solving the problem of scarcity.
The morality of the market is that through the interconnected system of prices, property rights, and profits and losses, we are better able to coordinate with each other (which promotes peaceful exchange), we are better able to find new ways of doing things (which fosters entrepreneurial creativity), and we are able to overcome the supply shocks of natural disasters and care for each other.
The morality of markets is that we don’t have to find a benevolent or omniscient leader to take care of this for us. Without prices, that’s exactly what we would need. Prices are the moral rationing agents of market exchange, and when allowed to function, they decrease scarcity rather than increase it. Moreover, these benefits are not only available to the rich, but they extend across all income groups.
The Immorality of State Responses
When we ignore economic realities and use the state to limit quantities that can be bought and sold, to fix price ceilings, or even to punish firms for prices we deem “too high,” we interfere with the corrective process of the market, and that exacerbates rather than corrects the supply shocks. These policy measures are often enacted by good people with good intentions, but the economic way of thinking helps us know that isn’t good enough.We need solutions and we need them fast so we can spur entrepreneurs into action to solve the problems and meet the needs of others. The well-intentioned “price gouging” regulations over market responses that emerge from weather disasters create immoral results — we curtail problem-solving, we encourage hoarding and even looting, and people remain in desperate need.
We can’t use policy to ward off hurricanes, but we can respond the best and most moral way possible. We can read the signals prices provide to us in times of distress and use them to overcome the problem. This is the moral response.
Comments Off on Stop saying that! Limited liability does not mean what you think it means.
In the much beloved movie, The Princess Bride, Inigo Montoya has spent his life seeking revenge against Count Rugen, the man who murdered his father. When he finally confronts Count Rugen, he keeps repeating, “Hello. My name is Inigo Montoya. You killed my father. Prepare to die.” Finally, in utter frustration, Count Rugen yells, “Stop saying that!”
I know just how Count Rugen felt.
Everywhere I go, people begin arguments for a wide variety of normative conclusions with the premise, “Corporations have the special privilege of limited liability.” Thus:
- “Corporations have the special privilege of limited liability; therefore, they have social responsibilities that individuals and other businesses do not.”
- “Corporations have the special privilege of limited liability; therefore, government regulation is required to level the competitive playing field.”
- “Corporations have the special privilege of limited liability; therefore, they are obligated to manage their company in the interest of all their stakeholders.”
I encounter this statement in so many contexts, both inside and outside the academy, that, like Count Rugen, I want to yell. “Stop saying that!”
However, in my case, it is not because I fear death, but because the statement is so patently false.
First of all, corporations do not have limited liability.
Shareholders have limited liability. If a corporation contracts a debt that it does not pay or is found liable for a tort, one hundred percent of its assets are available to satisfy the debt or judgment. If it does not have enough cash on hand to pay what it owes, its creditors may force the firm to liquidate and sell off its physical assets to discharge its debt. The corporation is fully liable for all the debts it incurs and all the torts it commits.
It is the corporation’s shareholders who have limited liability. They are liable to lose one hundred percent of their investment in the firm, but no more. The firm’s creditors may not collect the corporation’s debt or judgment out of the shareholders’ personal wealth. Thus, the shareholders’ liability for the debts of the firm is limited to the size of their investment in the firm.
But secondly, and most importantly, there is nothing special about this. Everyone has limited liability.
If your brother decides that he wants to buy an SUV to go into business as an Uber driver and you lend him $10,000 to help him do so, you are not liable to pay his judgement if he drives carelessly and injures a passenger. You may lose the $10K you lent to him if he goes bankrupt and cannot pay you back, but that is the limit of your liability.
Even if rather than loan him the money, you make a $10K investment in his business in return for two percent of the profits, you are still not liable for any unpaid debts or tort judgments he incurs. The most that you can lose is your $10K investment.
Our system of contract law does not hold one person liable for the debts of another unless he or she has voluntarily agreed to take on that responsibility. And our system of tort law does not hold one person liable for the wrongful acts of another. We all have limited liability.
The only exception to this is the rule of respondeat superior, which makes an employer liable for the debts contracted and torts committed by his, her, or its employees when they are acting within the scope of their employment. With this exception, our liberal legal system eschews vicarious liability. Unless we have control over someone else’s conduct, as an employer controls his, her, or its employees, we are not liable for that person’s debts or torts.
The definition of the modern corporation is a firm in which there is separation of ownership and control.
The shareholders — the owners — of the corporation exercise no control over the action of the firm’s employees. They are not employers. Their role is analogous to that of the person who gives his brother $10K for his business. Shareholders’ limited liability, therefore, is merely a reflection of the ordinary rules of contract and tort law at work in the context of the corporation.
Just for a moment, try to imagine what the world would be like if there were no limited liability for shareholders. How many people would invest in corporations if they knew that should a corporate employee screw up, they could lose everything they own?
We all have limited liability. We don’t lose it merely because we invest in a corporation, and for the health of our economy, it’s a good thing that we don’t.
So the next time someone starts explaining to you how government regulation is needed because corporations have the special privilege of limited liability, please channel Count Rugen, and tell them to stop saying that.
Comments Off on What’s wrong with being a rich kid with rich parents?
How much do your financial prospects in life depend on how well-off your parents are? If the answer is “a lot,” is that necessarily a bad thing?
In a free society, people’s incomes correlate with the marketable value they create for others. The traits that help you create marketable value include your work ethic, honesty, conscientiousness, and intelligence. Parents often pass down these traits to their children, whether through their genetic contributions or through training and socialization. So if two parents have traits that correlate with creating value for others, their kids are more likely to have those traits, too. And in a free society, that means parents with high incomes will tend to have kids who go on to earn high incomes, too.
Intergenerational mobility is the frequency with which children find themselves in a different income bracket than their parents. If children of rich parents frequently find themselves out of the “rich” income bracket, while children of poor parents frequently find themselves out of the “poor” income bracket, then there is a high level of intergenerational mobility (sometimes called “circulation mobility”). Many journalists and academics seem to assume that more intergenerational mobility is a good thing because it means a society has more equality of opportunity, but this view is clearly wrong.
Complete intergenerational mobility — in which one generation’s incomes do not correlate with those of the next generation at all — would indicate something seriously wrong with an economy. It would probably mean that incomes in that economy do not correspond at all to creating marketable value.
What’s the right level of intergenerational mobility, then?
If country A has more (or less) intergenerational mobility than country B, or time period A has more (or less) than time period B within the same country, how should we interpret those numbers? It’s unclear.
The media coverage of intergenerational mobility research often ignores these fundamental questions. In an otherwise accurately reported article for the New Yorker, John Cassidy says that the lack of a decline in intergenerational mobility in the United States is “good news,” while the United States “remains a highly stratified society” compared to Scandinavia. Even economist Raj Chetty, one of the field’s top researchers, claims that “improving the rate of upward income mobility is an important issue for policy makers.”
But do we really know that increasing the amount of intergenerational mobility would constitute an “improvement”? Clearly, a free society will have more intergenerational mobility than a feudal society in which parental status determines everyone’s economic prospects. But when comparing partly free societies like the advanced industrial economies, how should we interpret the intergenerational mobility numbers?
What could cause an economy to have too much intergenerational mobility?
One way a society could have too much intergenerational mobility is that the market does not determine incomes. If backing the right political leader is the path to individual prosperity instead, then high income might come from brown-nosing and good luck rather than marketable skills, while those with marketable skills might actually earn little money.
Immigrants still flock to the United States to earn far more than they could at home, suggesting that the US economy is doing something right: it’s providing opportunities for immigrants whose marketable skills do not earn them high incomes in the dysfunctional economies they came from.
Another way a society could have too much intergenerational mobility is that its economy is volatile. War and political instability can create a lot of intergenerational mobility. Furthermore, small economies that are highly dependent on the global markets for a small set of goods are more volatile. Now, you could think of a province or a city or a neighborhood as having a small economy, so by “small economies” here I mean places where it is difficult to emigrate during hard times — your income is volatile because you’re trapped in a particular place. The US economy might not have that much intergenerational mobility because it has a fair degree of political mobility and spatial mobility (you can move to places where the economy is doing better), and incomes are therefore not that volatile over a long period.
Certainly, the US economy has its share of problems, and some of those problems do reduce intergenerational mobility. It has become harder for people to move to economic opportunity because of land-use regulations that raise the cost of housing: more people are actually moving out of San Francisco than moving in, despite the tech boom, because housing is so expensive there. Racial disparities caused by legacies of severe discrimination, disparities in public school quality, and dysfunctional social patterns limit intergenerational mobility, too.
How should we interpret the intergenerational mobility numbers?
So, when comparing societies with different levels of economic freedom, how should we interpret the intergenerational mobility numbers? We can’t just assume that higher intergenerational mobility in the small economies of northern Europe is a blessing to the people living there. The optimal level of intergenerational mobility is likely close to whatever level would prevail in a free society, where people are rewarded for bringing their talents into the service of others’ wants and needs.
I myself grew up in a household with an income at various times below or just above the poverty line. I want economic opportunity for the poor, just like everyone else. But the intergenerational mobility statistics might not tell us much about economic opportunity. Instead, we need to look directly at government policies and social practices that may hold people back from bettering their lot.
Comments Off on Who are the most generous helpers in the wake of Hurricane Irma?
Mr. Rogers told his television audience that when we see scary things in the news, it’s encouraging to “look for the helpers.” It is heartwarming to see first responders rescuing people from the wreckage left by Hurricane Harvey and Hurricane Irma. Anonymous and generous men and women can become front-page heroes. The selfless efforts of these “helpers” in Houston and Florida no doubt saved lives. Their sacrifice cannot be overappreciated.
The efforts of people in the marketplace, however, can be underappreciated, if not vilified.
The media rarely celebrate ordinary people doing jobs for which they get paid, or the supply chain of goods that enables occasional acts of heroism, such as driving a truck to a disaster site.
If someone jumps in their pickup truck and drives to Houston with a case of water bottles to give away, we clearly see their contribution to society. What about the professional trucker who brings 500 cases of water to Houston every month to restock a big box store? Or the person who brought generators to Tampa to sell them to people after the power went out? Who helped more — the worker or the volunteer?
The Generous Volunteers after Hurricane Irma vs. the Florida Marketplace
If you measure helping by the helper’s sacrifice, then a citizen donating diapers is more of a helper than a diaper manufacturer, and the person giving away their spare generator is a bigger helper than a man selling generators for a profit. However, if you measure helping by the number of people helped or the helper’s actual material impact, then the diaper manufacturer is the more important helper. The man selling several generators is more impactful than the person giving one away.
Adam Smith famously wrote, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” We depend on other people to do their jobs, for which they get paid, to get our dinner every day. Sometimes we get food as a gift or a donation, but that’s not how billions of people are able to eat every day.Disasters, as tragic as they are, inspire people to be generous. Helpers send one-time donations to areas afflicted by flooding. Another event that inspires people to be generous is Christmas. Everyone wants to be a holiday helper. Food banks can be flooded with items in December and struggle to fill empty shelves in the summer.
Generosity can run out. Self-interest is something you can count on to feed your family.
Grocery Store Heroes: Just Doing Their Jobs
My city felt the outer bands of hurricane Irma. In preparation for a power outage, I bought peanut butter and canned fruit from the grocery store. The operators of the local grocery store helped my community and visitors to our city, just by doing their job. The value of the store’s service probably outweighs all the donations my town put together to help hurricane “refugees,” some of whom I hosted in my house.
Similarly, at a national level, many low-income countries get more money from trading with rich countries than they get in foreign aid. Do we think of an entrepreneur in a rich country who trades with people in a poor country as a helper? Rarely. Yet if we measure helping by the outcome, he or she makes a bigger impact than a charity auction once a year.Looking for the volunteer helpers in a scary situation is inspiring and reassuring. It can seem boring to look for those who provide the most material assistance to others, whether there is a disaster or not. Which do you think is more important to identify for making policy or for understanding the world?
When the wind dies down and the sun comes out, we don’t look for the helpers anymore. However, the need is almost as dire. Millions of people in Florida need to eat every day. How does that happen? For the most part, it happens through exchange in the market.
Comments Off on The real reason young people can’t get jobs in Africa
6.8 percent: that was July’s seasonally adjusted unemployment rate for US workers ages 18–44. For those ages 18–24, the rate was 9.5 percent. That’s a high rate for young people. But if you were 20 years old and lived in Africa, you might be thrilled with an unemployment rate like that.
Today, 60% of all those unemployed in Africa are youth. In South Africa, more than 55% of young people are unemployed. Those are staggering figures. And many who are working are underemployed: with a job in the informal sector, working only a few hours, or helping on family farms or in family businesses. They scrape by as “necessitous” entrepreneurs doing what they can to survive, often juggling multiple informal jobs.Given that Africa has the world’s youngest population, the lack of steady, formal-sector jobs is an enormous political and economic risk factor. Unemployed youth are more likely to be criminals, may be lured into militant groups, and contribute to political unrest. With few other opportunities, the cost of engaging in harmful behaviors is lower than it otherwise would be. Economic vulnerability among the young contributes in important ways to overall social instability that frustrates economic growth.
This is not a new problem — African countries have had a tough time creating formal sector jobs for youth for decades.
Bad policies contribute to poverty in Africa.
So what needs to change to fix Africa’s jobs problem? The problem of too few formal sector jobs for those who want to work is a problem of poor policies. In too many African countries, hiring and firing workers is too expensive. Governments create legal and regulatory barriers (or fail to address discriminatory social norms) that make it more difficult for employers to hire women. They restrict access to certain professions or limit the number of hours women may work. They also create barriers to firing poorly performing workers, which makes it riskier for businesses to take a chance on people with limited work experience. Youth and young women particularly tend to lose out.
As the most recent Doing Business report notes, “Low and lower-middle-income economies tend to have more rigid employment protection legislation compared to more developed countries.” These “rigidities” include things like limits on fixed-term (short-term or maybe part-time) work contracts — less than 60% of sub-Saharan countries allow for fixed-term contracts (Europe is even worse!). The legal requirement to give a worker severance pay when a job is ended may help in some cases but can have unintended consequences: it adds to the costs of hiring people, limiting the number of formal jobs created and the length of those jobs.For example, in Sierra Leone, an employer is required to pay 132 weeks of severance for a worker with 10 years of tenure. Ghana and Zambia both require more than 86 weeks, Mozambique requires 65 weeks, and Equatorial Guinea more than 64 weeks. This means that 5 of the top 10 countries with the highest severance payment requirements are in sub-Saharan Africa (no developed countries are in the top 10).
Fixing labor laws to encourage more participation from women and young people would be one important way to promote job creation. It’s also critical to improve the overall business environment and to support conditions that encourage, not discourage, business creation and enable entrepreneurs to flourish.
Here, there’s a huge scope for improvement in sub-Saharan Africa. The region continues to rank abysmally in terms of starting a business, enforcing a contract, registering property, trading across borders, getting credit, protecting minority investors, and getting access to electricity. While some countries are taking steps to make it easier to do business overall, African countries continue to make it too cumbersome and too expensive to start, run, and then, if needed, terminate a business. The result is a dearth of jobs for all Africans but especially for youth.
Is there hope for improvement?
Yes, so long as barriers to trade within Africa fall. In many countries, service industries are expanding. Economies still rely heavily on commodity production (oil, gas, gold, timber, etc.), but this is changing. More diversified economies are helping to meet domestic and international consumer needs for goods like processed agricultural products, cosmetics, textiles, and clothing. And African entrepreneurs, like entrepreneurs everywhere, are on the lookout for new and profitable opportunities.
Interested in seeing what some of Africa’s leading entrepreneurs are up to? They’re working in telecom, fashion, marketing, and branding for leading multinationals and the food industry, among other things. As they succeed, one hope is that they’ll push for more changes to African economies, creating a more vibrant, open, and competitive private sector. It’s this kind of change from within that holds the most promise for Africa’s millions of unemployed youth.
Comments Off on Permissionless innovation: The fuzzy idea that rules our lives
People sometimes ask me, “What is the most important concept in political economy?” The answer is easy, but subtle: permissionless innovation, a strong presumption in favor of allowing experimentation with new technologies and with new business platforms that use those technologies. A lot has been written about why this vague concept is so powerful (my own go-to source is Adam Theirer’s Permissionless Innovation).
It’s at the core of what Friedrich Schiller, the German philosopher and poet, wrote about in a letter to a friend in 1793 where he describes the beauty of the “Englische Tanze” (English dance):
I know of no better image for the ideal of a beautiful society than a well executed English dance, composed of many complicated figures and turns. A spectator located on the balcony observes an infinite variety of criss-crossing motions which keep decisively but arbitrarily changing directions without ever colliding with each other. Everything has been arranged in such a manner that each dancer has already vacated his position by the time the other arrives. Everything fits so skillfully, yet so spontaneously, that everyone seems to be following his own lead, without ever getting in anyone’s way. Such a dance is the perfect symbol of one’s own individually asserted freedom as well as of one’s respect for the freedom of the other.
This passage contains a fundamental insight, because the first sentence shows that Schiller intends more than admiration for the lovely order that emerges from the free expression of individuals’ dances within a set of rules that coordinate the whole. He intends this “image” to be a metaphor for human society.
Barriers to permissionless innovation
Permissionless innovation may seem like common sense, but it isn’t. For decades, the Bell telephone network refused to connect any phones except those it licensed. The claim was that the phones might not be safe; the effect was to arrest progress at the stage of rotary phones attached by wires to walls. The problem went far beyond phone sets, though: economist Tom Hazlett’s recent piece in Reason describes how requiring permission set back communications in the United States for decades.
There are two kinds of obstacles to permissionless innovation: requiring permission from regulators and requiring permission from competitors.The first type of obstacle, needing permission from regulators, seems more innocuous. But it isn’t. The delays in processing “applications” for permission to experiment sharply curtail the types and frequency of experiments that are possible. Worse, attempts by regulators to pick winners and losers can pose obstacles of their own. Suppose the authorities do not require licenses for technological experiments, but they do offer subsidies for the kinds of work that seems “promising.” Consider the massive government “incentives” that subsidize solar power in the USA. That’s not to say that policies are irrelevant — as this BBC podcast illustrates, deregulation is the way to foster solar power — but rather that market processes of discovery are better than bureaucrats at picking the precise form innovation will take.
The second type of obstacle seems absurd, since by definition most innovations harm competitors; that’s what makes them innovations. But there are many such requirements, as John Stossel recently pointed out, also for Reason.
Of course, the nature of innovation means that it is often the least “promising” technologies — in the view of experts — that turn out to be the most important. A Yale management professor famously told student Fred Smith, the founder of FedEx, “The concept is interesting and well-formed, but in order to earn better than a C, the idea must be feasible.” The idea of Federal Express may have gotten a C from Yale, but it got an A+ from the market once it was implemented.
In that instance, the “permission of competitors” and “permission of regulators” came down to the same body: the US Postal Service. FedEx was allowed to slip through only because there was a loophole for “extremely urgent” letters and parcels; that’s why “Extremely Urgent” still appears on every envelope FedEx delivers.
How Twitter exemplifies the golden age of permissionless innovation
We live in the golden age of permissionless innovation. The Internet offers an infrastructure where a bewildering variety of innovations can be tried out, and (almost) all of these experiments can be conducted without getting anyone’s permission. Think for a second what a dumb idea Twitter was. Surely, nobody was going to spend time writing clumsy haikus, and even fewer people were going to read them. Here’s what cofounder Ev Williams told Inc. in 2013, shortly before taking Twitter public was expected to make him a billionaire:
With Twitter, it wasn’t clear what it was. They called it a social network, they called it microblogging, but it was hard to define, because it didn’t replace anything. There was this path of discovery with something like that, where over time you figure out what it is. Twitter actually changed from what we thought it was in the beginning, which we described as status updates and a social utility. It is that, in part, but the insight we eventually came to was Twitter was really more of an information network than it is a social network.
I don’t want to get too “meta” here, but the point is this: Access to the Internet spawned an innovation called Twitter, but no one knew what it was for. A beautiful social media version of the English dance happened, though. It just happened. People figured out a use for Twitter, because once it was there, they could experiment without asking for anyone’s permission. No one, not even Twitter’s own founders, understood what would make it useful.
As Schiller might put it if he were on Twitter today:
A spectator following a hashtag observes an infinite variety of criss-crossing tweets which keep decisively but arbitrarily changing directions without ever censoring each other. Everything fits so skillfully, yet so spontaneously, that everyone seems to be following his own lead, but the thread builds into an informative whole without any guidance or central direction. Such an app is the perfect symbol of one’s own individually asserted freedom to convey useful truths, as well as of one’s respect for the freedom of the other to post random cat videos.
Permissionless innovation allows us to create truly new things for each other to enjoy — things the experts may not understand or approve of, but that nonetheless hold the potential to transform the world.
 Friedrich Schiller, Letters on the Aesthetic Education of Man, translated by E. Wilkinson and L. A. Willoughby (Oxford: Clarendon Press, 1967), p. 153. The Schiller quote and its implications were suggested to me by Dr. J. Fred Giertz of the University of Illinois.
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What a rip-off! Here’s what you’re really paying for when you buy the stuff you want. Watch more with Professor Dan Russell.
Comments Off on What most Americans have never heard about extreme poverty
That’s how many are living in extreme poverty today, defined by the World Bank as having roughly $2/day or less in current US purchasing power. Think about that number: seven hundred and sixty-six million, ten thousand human beings.
That’s a lot of people in poverty! It’s roughly double the population of the United States, all at a standard of living we in the USA cannot really imagine. Isn’t it unconscionable that so many live in poverty when we live in such affluence?
But here’s another number: 6,412,820,000. That’s the number of people who are not living in extreme poverty. And that’s great! Not only is it great, that number has roughly doubled since 1987. In just one generation, the number of folks not in poverty has doubled.Now to be fair, not being in extreme poverty does not make one Bill Gates. Some of those 6.4 billion people are just above that extreme poverty line. If we bump the line up to about $3/day, about 1 billion more people fall under it. And now, perhaps you have been thrust back into your normal state of pessimism.
But fear not, dear reader, there is cause for optimism. As Max Roser, guru of international data on poverty (and everything else), explains in a recent data-driven essay, you can take your pick: $1, $2, $3, even $10 per day. Global poverty has been declining under all of those thresholds.
But why? Consider China.
Enough of this data. Let’s get to the science. Why did poverty decrease so much over the past 200 years, and especially over the past 30 years? Let’s look at one key example; then we’ll zoom out to the broader research to make sure we aren’t cherry-picking.
China is the natural place to start. It’s the world’s largest country and, until recently, the home of close to half of the world’s poor. According to the World Bank’s estimates, in 1981 over 88% of people in China lived in extreme poverty. At the time, that was about 878 million people, which you may notice is about 100 million more than the number for the entire world in 2013! After 1981, extreme poverty fell rapidly in China — to 61% in 1987, 41% in 1999, 15% in 2008, and just 1.85% in 2013. Amazing!
No comparable poverty data for China exists prior to 1981, but the percentage of people in extreme poverty was likely close to 88%. Prior to 1981, China had roughly the same real income level per person as it did in the 19th century, with no real change until the 1980s.What changed around this time? Prior to the 1980s, China was living under communism, which means many things but most importantly the lack of property rights. Starting in a small way in the late 1970s, and then gradually throughout the 1980s, China began to recognize private property rights, as well as other aspects of economic freedom.
One attempt to measure economic freedom (which includes not just property rights but also taxes, tariffs, regulations, and more) is by the Fraser Institute. Their first estimate of economic freedom for China in 1980 gave China a score of just 3.6 out of 10. Slowly but surely China’s score increased almost 3 full points on the 10 point scale, to almost 6.5 out of 10 today.
China’s economy grew dramatically over this period, as did average incomes. And as the poverty data show, the poor were definitely not left behind. Those 878 million people in extreme poverty in 1981 in China? By 2013 it was only about 25 million.
China’s decline in poverty is dramatic, but are the results typical? Perhaps not in size, but the general story holds true in other countries. Research published by the Fraser Institute found that for every 1 point (on that 10-point scale) higher a country’s economic freedom score was in 1980, extreme poverty fell by about 4 percentage points over the next 25 years. Additionally, for every 1-point increase in economic freedom after 1980, a country’s extreme poverty rate fell by another 4–5 points.
Other academic research on economic growth, closely related to poverty, also finds that the level and change in economic freedom is correlated with growth.
But no one knows!
Sorting out causation is always challenging. But let’s circle back to the first point: poverty, by just about any measure, has declined worldwide in recent decades. Whatever the reasons, this is an extremely important recent historical fact.Now that you know this fact, you are among the elite in the world, at least on this one important topic. When asked in surveys what has happened to global poverty in the past 20 years, only 1% of those surveyed worldwide knew it was cut in half! Another 12% thought it had declined by about 25%, but 18% thought it had stayed the same and 70% thought it had increased!
Before you get too smug, please be aware that there were large differences across countries in knowledge about global poverty reduction. While overall 13% knew that poverty had declined, this figure was as high as 50% in China and 27% in India, but only about 8% in the US and Germany. This difference between countries is probably partly due to “availability bias,” where people tend to use readily available examples to extrapolate to the whole population. But it’s also likely a result of “pessimistic bias,” which Bryan Caplan uses as one of his four main biases affecting voter knowledge in democracies.
In other words, people in China know that poverty is declining, because it really is declining rapidly in their country and most Chinese people know it firsthand.
In the US, pessimism dominates, perhaps due to the long shadow of the Great Recession. The good news for you? By reading this article, you now know more than over 90% of Americans!
Ask the right question.
As we have seen, the decline in poverty has been dramatic across the world in recent decades. Based on this, we can perhaps ask a better question: Why aren’t there even more people in poverty? The answer has a lot to do with economic freedom, and the large increases in economic freedom in recent decades around the world.
 The data are from 2013, the latest available.