Category Archive: Entrepreneurship

  1. Reddit AMA with Isaac Morehouse, founder of Praxis, Tuesday January 24th

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    Next week is National School Choice Week!

    Join us on Reddit for an AMA (“ask me anything”) discussion with Isaac Morehouse on Tuesday, January 24th, at 3:00pm EST.

    Isaac is the author or co-author of six books: Better Off Free, The Future of School, Freedom Without Permission, Why Haven’t You Read This Book?, How to Get Any Job You Want, and Don’t Do Stuff You Hate; and the founder and CEO of Praxis. He has written hundreds of articles and given hundreds of talks on education, entrepreneurship, philosophy, economics, how to change the world, and more.

    He’ll be talking with us about educational choice, homeschooling, unschooling, entrepreneurship, alternatives in higher ed, and his story as the founder of Praxis.


  2. Not your business: Let restaurant owners make their own decisions

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    Michael Lugo, owner of Michael’s Tasting Room in St. Augustine, Florida, recently received a note from a customer stating that the Christmas music playing in his restaurant was “offensive” and too “religious.”

    Meanwhile, across the pond, Hilary Penning, owner of Organic Kitchen in London, England, was heavily criticized by some of her customers and by the popular website for mothers, Mumsnet. They faulted Penning for her new policy of prohibiting children under 5 in her restaurant.

    Both of these are examples of a certain kind of popular arrogance when it comes to other people’s private property.

    The free-market concept is simple — private property owners should be able to preside over whatever policies they want. Restaurant owners do not owe anyone a restaurant experience. They cannot “hurt” customers by turning them away or playing music, because the customers have no right to be on another person’s property.

    Customer Freedom and Owner Freedom

    Nor do restaurant owners force any customer to enter their establishments.

    I have never been to a restaurant because I was hit over the head with a bat, dragged in, and then awakened to a meal placed in front of me at a table. In my experience, every time I have eaten a meal at a restaurant it has been because I have voluntarily chosen to walk in to the establishment, sit down, and order the food. If I didn’t like the ambience or anything else, I could have walked out. I have never eaten at a restaurant where I was chained to the table and forced to stay.

    Lugo was playing Christian music during the Christmas season —shocking, I know. But if Lugo wanted to play Christian music (or music from any other religion) every day of the year, that is his right, because it is his establishment. He is not forcing it on anyone else.

    Penning has justified her child policy by explaining that many customers had been complaining that they could not enjoy their meal because of the loud and ill-mannered behavior of young children. Penning has also argued that because her restaurant is small, having young children running around or baby strollers bogging down the limited space is a safety hazard for the food servers and for the customers.

    That is all fine and well, but she does not have to justify her policy. As a private property owner, she should even be able to be harsh and say, “I don’t like children so do not bring them inside my restaurant.” Period.

    Incidentally, Penning is a mother herself, so I don’t think her motivation is that she hates children. Rather, she is making a business decision that takes the majority of her customers into consideration.

    Again, I will repeat that Penning does not owe anyone a restaurant experience or a meal. Nor does she force her restaurant on anyone. People can go to restaurants that allow children, or they can cook for their own kids, or they can be entrepreneurial and open their own “child-friendly” restaurants.

    As a business owner, Penning should be able to determine whatever policy she believes is best. Keep in mind, if she is wrong — if child-welcoming restaurants will bring in more happy customers just as safely as her child-free one — she will suffer the wrath of the market, and that is fine.

    But when people get angry or offended at a business owner for their policies, they often act as if it was their right to eat or enjoy the property of another person. Instead, in a free market, individuals can vote with their money and just frequent the businesses they support and withhold their money from businesses with which they disagree.

    Individuals have a right to play whatever music they want in their own homes when they host a party and they have the right to put “no children please” on their wedding invitations. This same policy should hold true for private business owners, who should have the autonomy to determine their business policies.

  3. How entrepreneurs can make better schools for real kids

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    Suppose that there are children throughout America who are utterly disengaged in their assigned public school each day, but that are absolutely riveted by the sports news on TV or YouTube each night.

    Suppose that at least one set of their parents realize their sports nut child is uninterested in school because it targets the instruction and examples to generic children. Dad wonders how much better their son would do if only he was in a classroom (or an online setting) that taught math through sports stats, taught science through sports examples, and taught reading and writing through sports stories. Mom says there are probably a lot of kids like their son.

    They wonder, could a sports-stories-themed school be successful? Could it work as a private school or a chartered public school?

    Our diverse kids need diverse schools.

    Children are very diverse in terms of which instructional approaches and which subject themes will achieve the needed engagement in the learning process. This means that any single approach to education cannot achieve acceptable rates of success as long as children are mostly sorted into schools by attendance zone and into classrooms only by age.

    The public school system tries to address student diversity by creating options within large, comprehensive, mall-like campuses, often-impossible differentiated instruction, and sometimes with ability grouping within classrooms. That has created unmanageable school goliaths and student alienation, and stressed teachers, but not improved performance.

    Efforts to make this approach to student diversity yield acceptable outcomes will continue, but the evidence is overwhelming in volume and urgency that policymaking needs to pursue the engagement of diverse children in other ways.

    One of the roots of the problem is that political processes tend to create uniformity because of its appearance of fairness. So, as institutions under political control, even the best traditional public schools will fail to engage a significant percentage of their students in useful learning.

    That sad fact continues to survive frenzied efforts to improve materials, teachers, and a variety of other factors.

    To get diverse schools, we need entrepreneurs.

    My non-ideological premise is that an alternative to the current public-policy strategy of different options within huge mall-like schools is “school choice” from a menu of diverse schooling options, including choices developed through the entrepreneurial initiative that drives most of our economy.

    At present, private schools struggle to exist, and are rare now, because it is very tough to sell schooling when it is available from the government for no additional charge beyond taxes you must pay.

    The charter route to specialized schools, such as sports-themed schools, depends on state law (7 states don’t allow chartered public schools, and the feasibility of charter schools varies widely in the other 43 states). And because charter law does not allow tuition co-payments, the viability of an envisioned, innovative school largely depends on whether per pupil costs are below the state’s per charter pupil payment.

    An innovative school may need philanthropic support to meet that requirement; if not permanently, then still temporarily, in many cases, to get through the developmental stages when costs can be especially high. Dependence upon donor support severely limits the potential spread of innovative instructional approaches.

    Note that specialized schooling such as sports-stories-themed schools must be schools of choice. You cannot bureaucratically assign children to specialized instructional approaches. Many themes or pedagogies that could engage a lot of children would bore or disengage the vast majority.

    How could an entrepreneurial private school work?

    Suppose that our hypothetical family with their sports-obsessed boy finds teachers talented and passionate about using sports stories to teach general things like the three r’s. Suppose that they live in a state with a Nevada-style Education Savings Account program (a $5100 annual tuition discount) that makes parents’ money available for a school like this. Suppose that they find a great location for the school. And suppose that there is a local entrepreneur willing to take on the risk of leading and funding the project.

    With all these factors put together, the new school could fill all its seats with a tuition rate way above the cost of delivering the instruction. The owner-entrepreneur will charge “what the market will bear.”

    The school’s resulting profit would be a short-term reward for the entrepreneur’s risk and wisdom. It would also be a magnet for increased investment and competition by other entrepreneurs, who would force the tuition price of sports-stories-themed schooling down to the cost achievable by the most efficient schools.

    That process will discover, reinvent, and fill the highest value instructional niches. That combination of idea-driven enterprise, profit-and-loss, and price change is what would determine the public-private mix of diverse schooling options on a “playing field” leveled by tuition tax credits, tuition vouchers, or education savings accounts. Only school choice expansion through policies like these can unleash the entrepreneurial initiative we need to create the diverse schools our kids need.

  4. What standard should we use to judge school choice?

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    The United States spends a lot of money each year on public schooling. As a percentage of GDP, government expenditures on public education (five percent) exceed the amount we spend on defense (four percent) or welfare (two percent). But how do we know if we are getting our “money’s worth” on public school?

    Too often, the primary criterion of effectiveness is standardized testing. A school is rated almost exclusively on on how well its students perform on standard testing (usually limited to reading and math) as compared to other students in the same city, district, or state. When the issue of school choice comes up, critics assume that this standard is the only one that matters.

    If an experiment in school choice doesn’t show improvement on test scores, it’s often considered empirical proof choice doesn’t work. Yet as economist Tyler Cowen says,

    To be sure, we’re still not sure how well vouchers work, and I would suggest continuing experimentation rather than full-on commitment.  Frankly, I find a lot of the voucher advocates unconvincing, but let’s not forget the single most overwhelming (yet neglected) empirical fact about vouchers: they improve parent satisfaction.

    Cowen points out there’s almost no dispute that parents who take advantage of school choice are satisfied with their option, adding:

    Of course parents may like school choice for reasons other than test scores. To draw from the first link above, parents may like the academic programs, teacher skills, school discipline, safety, student respect for teachers, moral values, class size, teacher-parent relations, parental involvement, and freedom to observe religious traditions, among other facets of school choice.

    Perhaps now is the time to remind you that how the buyers like the product is the fundamental standard used by economists for judging public policy? That is not to say it is the final standard all things considered, but surely economists should at least start here and report positive parental satisfaction as a major feature of school choice programs. In fact, I’ll say this: if you’re reading a critique of vouchers and the critic isn’t willing to tell you up front that parents typically like this form of school choice, I suspect the critic isn’t really trying to inform you.

    Since the money for public schools is funneled through the government, the issue is often framed as if the government is the “buyer” of educational goods and services. If the faceless, impersonal bureaucracy is the “customer” then perhaps it does make sense to have standardized testing—which lumps all students together and reduces them to a statistical metric—as the criterion for satisfaction. But if we believe children belong to parents, and not the state, then we should allow the true customers of public education to determine if they are satisfied with the product.

    “Parents will not be perfectly informed consumers of public schools,” says economist Arnold Kling. “But bureaucrats in Washington will be much less well informed.”

    As Kling adds, “Perhaps the voucher movement ought to be called the ‘Make schools accountable to parents’ movement.”

    This piece was originally published at the Acton Institute Power Blog.

  5. Why schools should be businesses (sort of)

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    In an article called “Why Schools Aren’t Businesses,” a teacher is depicted challenging an ice cream company president on why schools can’t operate like ice cream companies. Ice cream companies, says the teacher, can send back ingredients that don’t meet their standards and can insist on only using the best ingredients they can afford. But schools, she says, do not have that luxury; they take the students they get. “We take them big, small, rich, poor, gifted, exceptional, abused, frightened, confident, homeless, rude, and brilliant… We take them all! Every one! And that, Mr. Vollmer, is why it’s not a business.”

    But are students analogous to the ingredients ice cream companies use to make their products — something to be packaged and sold to others? Or are students the patrons who benefit from the education schools sell? Ice cream companies may reject defective ingredients (just as schools may reject defective school equipment or curriculum packages), but schools’ not turning away students is more like the ice cream company that doesn’t reject customers it believes can’t benefit from their ice cream.

    Cleaning services don’t reject potential clients whose houses are too dirty. Doctors don’t turn down patients they believe to be too ill, though they may refer them to specialists.

    And if we are worried that schools-as-businesses would turn down students that they believe would cost too much to educate — perhaps the poor or the disabled — we can make those students more attractive to schools by designing vouchers or other programs to offer additional funding for those students. (Such weighted voucher systems have been proposed, most notably some decades ago in a book called Education by Choice).

    Democratic Education

    The article “You Should Run Schools Like Businesses… Well Not Really” suggests that “schools must be democratic if we want parents and taxpayers to have input into how schools are run. And schools must model democracy if we want children to be prepared to function in a democratic society.”

    Presumably, making schools businesses takes the “democracy” out of them.

    First, I’m not sure how many people would suggest that today’s public school systems allow parents and taxpayers any say outside of the ability to petition the school board or vote for its members. But it seems clear that a public system of schooling is not synonymous with allowing parents and taxpayers a real say in how schools are run.

    Second, we do live in a democracy, but we also live in a liberal market society. We buy goods and services much more often than we vote. Most of the goods and services we enjoy we buy through the market, and most of us understand why this is a good thing.

    Consumers get to shop around for what best suits their needs, producers are pressured to offer a product that keeps consumers coming back, and the involved parties transact directly. Markets mean that that consumer and producer can shop around and deal directly with each other. Markets empower.

    Neither does the profit motive create a problem for education. In fact, it provides the solution. We know that the companies we buy from strive to provide quality at least partly because of a desire for profit. And while some depict the profit motive as the only thing that drives people in the private sector, I find it hard to believe that the people who work at, say, Google, Apple, or your local supermarket are not in any way motivated by the personal satisfaction that comes from providing good service.

    I suspect that many folks who suggest schools shouldn’t be businesses have a particular type of business in mind: the large company that sells standardized widgets. If that is the kind of business we are talking about, I’d have to say that I agree: schools probably shouldn’t be those kinds of businesses. (Notice that the closest thing we currently have to that kind of business is the public school system.)

    But think about your local cleaning service, yoga studio, or — the more direct analogy — tutoring service. None of these is big and impersonal. None sells standardized widgets. All offer service tailored to the customer’s needs, or at least a variety of service packages to serve different needs. Maybe the critics of for-profit education aren’t thinking of the right kinds of businesses.

    This piece originally appeared at the Foundation for Economic Education.

  6. What is college good for?

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    There’s an old saying that you go to college to get more knowledge.

    I dare you to test this with any group of college students. I have, and the results tell a different story.

    Go to a room full of students at any college in the country — a community college, a commuter school, a state university, or an Ivy League university — and ask the students the following question:

    How many of you would spend the time you are spending, pay the money you are paying, and do the things you have to do as a student if at the end of your time at this university, you wouldn’t receive a degree? You would still learn all the things you are learning and still pick up the skills and knowledge you’re acquiring here, you just wouldn’t get the credential when you are done.

    I’ve asked this question to thousands of college students and fewer than a dozen have ever raised their hands, no matter the school at which I am speaking (and those who do raise their hands should go become college professors).

    The Signaling Theory of Education

    These students aren’t gullible, dumb, misguided, or nefarious. They understand the signaling theory of education, even if they don’t know what it’s called.

    The idea that you go to college to get more knowledge is inspired by the human capital theory of education. This is the idea that you consume educational services primarily for the skills and knowledge you gain through the process and not for the credential or the signaling value you can provide after going through with it.

    If the human capital theory of education were accurate, then Coursera and Udemy would be the earth-shattering, industry-disrupting innovations they were thought to be. Massive Open Online Courses (MOOCs) would have changed the landscape of education in a way that would have brought down universities and started a revolution. Instead, the MOOC is just another delivery mechanism for knowledge. In fact, the MOOCs that have proven more disruptive are those that provide some kind of signaling value, like Udemy’s micro-credentials that are accepted by employers in lieu of degrees.

    Instead, people buy a signal when they go through school, not knowledge. They purchase a way for employers, business partners, and peers to make shorthand decisions about them.

    Degree inflation is an indicator of this. As more people get a certain credential, like a high school diploma, the signaling power of that credential becomes weaker and weaker. In order to further sort candidates, employers are forced to either choose a new system of sorting or require another credential, like the college degree. Once this credential becomes inflated, the process starts all over again. How many entry-level jobs have you seen that request a Master’s degree?

    Build a Better Signal

    The signaling theory of education is an empowering bit of knowledge. It helps you understand that you can be much more entrepreneurial with your own education and career prospects than most people think.

    With the use of technologies like Google, LinkedIn, WordPress, and GitHub, employers can learn more about a candidate with a cursory search than they do from seeing your degree in Y studies from X State University.

    This means that the credential that most people are purchasing (i.e., the degree) is a bare-minimum tool. It’s a way for HR managers and online portals to filter out candidates. Being a bare minimum, it’s not hard to do much better than it.

    You can build a better signal in a few months of hard work and creative thinking than most people develop over four years at a prestigious university. Take the example of Nina Mufleh, whose viral Nina4Airbnb campaign showed off her design, storytelling, organizational, and travel skills in one simple webpage better than a transcript from a business school could.

    It’s easy to get discouraged about the signaling theory when you think about degree inflation, but the wonderful thing about the marketplace is that employers have a strong incentive to find the best talent possible. No company advertises, “we hire second-tier talent!” and employers know that the degree inflation game can’t go on forever.

    More and more employers are waiving degree requirements or removing them altogether because of the sorting power of tools like Google and LinkedIn. A candidate who has a well-maintained personal website with a professional portfolio and references is more likely to do well than a candidate who merely has a degree. They know this and this provides a unique opportunity to the entrepreneurial young person today looking to hack their education and career.

    The signaling theory is economics for the real world. Understand the incentives at play on the institutions that are employers and higher education and you can unlock new opportunities for yourself while everybody else stands on the conveyor belt.

  7. How to get millions of people working for you

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    How many people do you have working for you? Unless you own a business, it seems like a strange question. But even if you have nobody on your payroll, the reality is that you command the labor of more people than you can possibly imagine. Almost all of the goods and services you use on a daily basis are the product of the labor and cooperation of countless people.

    At this moment, there are thousands of people in your city ready and willing to prepare meals for you, tend to your medical needs, cut your hair, defend you in court, mow your lawn, clean your house, and even do your grocery shopping.

    These are a mere fraction of the services that others regularly provide for us. When you begin to think about how many people’s labor went into growing the food you eat, manufacturing the car you drive, and designing the device on which you’re reading this — and the amount of labor that went into helping all of those people — the number of people who have worked for you (or would like to) starts to reach into the millions.

    In The Wealth of Nations, Adam Smith defined wealth as the quantity of others’ labor you can afford to buy with the income you earn from supplying labor of your own.

    Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life. But after the division of labour has once thoroughly taken place, it is but a very small part of these with which a man’s own labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase.

    How did it become possible for even people of relatively modest means to employ the labor of countless other individuals? Adam Smith attributed this type of widespread prosperity to the division of labor and specialization. By breaking down the production of goods and services into smaller components, and specializing in one part of the process and then trading with each other, we can create far more together than we could working in isolation. The more people we are able to freely exchange with, the more opportunities we have to extend this process of wealth creation.

    The division of labor makes us wealthier in a number of ways. When you specialize in one particular job, you gain experience and proficiency at it. You become accustomed to the work, exploring all of its nuances and learning unique ways to deal with any challenges that present themselves. This also puts you in a better position to discover innovative ways to save time and effort while completing your job. In addition, when we are focused on doing one specific job, we waste less time making the physical and mental transitions from one task to the next. As a result of this process, we become more productive overall. Instead of wasting time doing everything pretty badly, we all do one thing pretty well, and then we effectively trade a tiny bit of our labor for the tiny bits of thousands (or millions) of other people’s labor that went into making everything we see around us. Not only are there more goods and services for us to consume, there are also many more people cooperating to produce them.

    We rely on the labor of strangers to provide us with the goods and services we want in exchange for some of the income we earn providing specialized labor of our own. Even our most basic needs are met in this way. Few people living in developed countries possess the skills necessary to grow or hunt their own food, to make their own clothing, or to construct shelter. Those who do possess these skills have either specialized in them to earn a living, or they engage in these activities as a hobby. Our survival no longer depends on knowing how to do all of these basic things.

    Of course, there are plenty of tasks that we perform on our own, such as the work we do in our households and at our jobs. But even then, our tasks are continually made more pleasant and less time consuming because of tools and innovations produced by the ingenuity and labor of others. Think of all the sprays, mops, vacuums, and brushes that today seem indispensable to doing simple household chores.

    Smith goes on to say, “The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.”

    The division of labor not only allows us to command the labor of a larger number of people, it also reduces the amount of time and effort we spend supplying labor of our own. Robert Whaples compiled the results of several studies providing historical estimates of how many hours an average American spends working, relative to other activities. From 1830 to 1890, the average workweek for manufacturing workers fell from 69 hours to 60 hours. By 1929, the average manufacturing worker spent only 50 hours per week working, nearly an entire day less than a century before. Manufacturing workers were supplying 38.5 hours of labor per week on average by 1955. Similar decreases in hours worked are seen across other industries.

    What are we doing with all this additional time? In 1880, Americans could expect to spend about 80 percent of their waking hours working, in both the market and at home, and only 20 percent engaging in leisure activities. By 1995, Americans were using only 41 percent of waking hours to work, and 59 percent in leisure.

    Our ability to command an ever-increasing amount of labor and to consume an increasing diversity of goods and services — while simultaneously spending more time engaged in leisure activities — can be attributed to this collaborative process of specialization and the division of labor. In this way, even the poorest people in our society are wealthier than members of the nobility were in Smith’s day. If we truly care about improving the lives of the least well-off among us, we should focus on expanding the size and scope of our trade network. When we consider protectionist trade policies that reduce the number of people with whom we can exchange, we limit this process and with it our ability to grow wealthier and more prosperous.

  8. Countries are not companies

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    One of the most persistent false beliefs held by American voters is that someone with “business experience” would do a better job “running the economy” than politicians have. Let’s put aside the idea that an economy is something that needs to be, or can be, “run” and explore whether a CEO of a major company as president really would be better for the economy.

    Of course we have precisely this situation in front of us as Donald Trump prepares to take the oath of office. There are dozens of theories about why so many voted for Trump, but surely one part of his appeal was that his apparently successful business career made him more qualified to fix the US economy. In his runs at the presidency in the 1990s, Ross Perot had a similar appeal.

    The problem is that business experience does not automatically translate into good economic policy.

    The businessperson’s knowledge is of a very different sort than that of the economist. Being successful in the business world doesn’t require any knowledge of what causes economic growth. Instead, one needs to know much about a particular market, the consumers you might serve, how best to acquire inputs at a profitable price, and how to hire good people to help you produce.

    All Trees, No Forest

    Historically, many businesspeople have been poor judges of good economic policy. One reason is that their perspective comes from being embedded in the thick of competition rather than being able to see the market process from a bird’s-eye view as an economist attempts to. This is clear in Trump’s emphasis on how America doesn’t “win” anymore and that he’ll negotiate better trade deals that enable “us” to “win.”

    From the perspective of a CEO, markets are very much about winning. The goal of economic competition for the participants is certainly to win, at least in the sense of making more profit than others and, ideally, running them out of business. More specifically, the world of the CEO appears to be a zero-sum game: my firm winning means your firm loses.

    This also helps explain why Trump cannot seem to see a difference between cronyism or rent-seeking and true market competition. If the goal is to win by profiting, it will not matter whether the profit comes from outdoing the competition or getting government to use eminent domain to reduce your costs or to give you a direct subsidy for your new project. Markets are about winning and winning is about profit, and your win is someone else’s loss.

    The other aspect of the CEO’s perspective is that they are running an organization with a specific purpose: to make profit. The firm is structured to achieve that goal, so the quality of decisions made by the CEO and others is judged by their contributions to the bottom line. Thus, for Trump the CEO, getting a “good deal” is a form of winning. If he can bargain hard with a supplier and reduce his costs, his profits go up and he wins.

    We Always Win

    Unfortunately, the perspective of the businessperson is not helpful for understanding economies as a whole.

    First, the whole justification for market competition is that it is not a zero-sum game. It seems to be zero-sum for those engaged in the actual competition, but for the rest of society, the process whereby some firms profit and others lose is one that benefits all of us over time. Firms that go out of business lose in some sense, but the reallocation of their resources to higher valued uses is a “win” for everyone else.

    When we discovered through competition that Borders books no longer had a value-creating business model, that enabled us to stop destroying value and use those resources in new ways that would create value. To the CEO of Borders, this was “losing,” but his perspective is not the same as that of the economist judging the social benefits or costs of market competition.

    So when Trump talks about how America doesn’t win anymore, presumably because other countries have, say, more manufacturing jobs, or because our trade deals have enriched our trading partners, he’s speaking from a CEO’s perspective, not an economist’s.

    That China and  Mexico have become richer by trading with the US does not mean they have won and we have lost. It means we all have won: they are richer for being able to sell us the things they make most cheaply (as we do for them), and we are richer for being able to acquire those goods at lower prices and have income left over to buy other goods and services and create new jobs in those industries.

    Countries are Not Teams

    International trade is not like a sports event where one “team” wins and the other loses. Once we stop thinking in terms of countries being like teams and start thinking about the individuals and organizations who are engaging in mutually beneficial trade, we can understand how the CEO’s perspective misses the point.

    Moving away from the “country as team” view also enables us to see the problem with Trump’s emphasis on getting “better deals.” The US economy is not an organization with a single purpose as is one of Trump’s firms.

    As Hayek reminded us, markets are “means-connected” institutions, while firms are “ends-connected.” What he meant by that is that a market is defined by agreeing to use certain means to pursue whatever ends we desire. We use the rules of property, contract, and exchange to achieve our own individual or organizational ends.

    The US economy does not have a specific goal or end or purpose other than to serve as a means for the multitude of projects we are all pursuing.

    Inside of a firm (or a sports team), there is a singular end to be pursued: profit (or winning for the team). Most, if not all, of the organization’s activities are aimed at that end, so it can be treated as a unified whole for which winning, getting a better deal, etc all might make sense. The CEO knows “a better deal” because it enhances profits, which is the singular end. That conceptualization isn’t relevant for a means-connected institution like a whole economy.

    There are other reasons why we might be suspicious that a CEO is properly equipped to know what constitutes good economic policy. However, in the case of Trump, the problem is clearly that he brings the mentality of someone inside of the competitive process to the activity of trying to understand that process from the outside, which is the task of the economist.

    We will not make America great by President Trump cutting better deals or trying to ensure that we are winning in international trade. Treating the spontaneous order of the means-connected economy as if it were the hierarchical constructed order of the ends-connected firm is a recipe for economic disaster.

    American consumers have “won” thanks to genuine market competition, including the globalization of the division of labor through international trade. We don’t need a president who will negotiate better deals so that we can beat other countries. We need a president who understands that real competition, both domestically and internationally, is good because it means everyone, whether Chinese, Mexican, or American wins.

    This piece was originally published at the Foundation for Economic Education.

  9. The robber barons weren’t robbers. Here’s why.

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    Among the great misconceptions of the free economy is the widely-held belief that “laissez faire” embodies a natural tendency toward monopoly concentration. Under unfettered capitalism, so goes the familiar refrain, large firms would systematically devour smaller ones, corner markets, and stamp out competition until every inhabitant of the land fell victim to their power. Just as popular is the notion that John D. Rockefeller’s Standard Oil Company of the late 1800s gave substance to such an evil course of events.

    Regarding Standard Oil’s chief executive, one noted historian writes, “He (Rockefeller) iron-handedly ruined competitors by cutting prices until his victim went bankrupt or sold out, whereupon higher prices would be likely to return.”

    Two other historians, co-authors of a popular college text, opine that “Rockefeller was a ruthless operator who did not hesitate to crush his competitors by harsh and unfair methods.”

    In 1899, Standard refined 90 percent of America’s oil—the peak of the company’s dominance of the refining business. Though that market share was steadily siphoned off by competitors after 1899, the company nonetheless has been branded ever since as “an industrial octopus.”

    Does the story of Standard Oil really present a case against the free market? In my opinion, it most emphatically does not. Furthermore, setting the record straight on this issue must become an important weapon in every free market advocate’s intellectual arsenal. That’s the purpose of the following remarks.

    Theoretically, there are two kinds of monopoly: coercive and efficiency. A coercive monopoly results from, in the words of Adam Smith, “a government grant of exclusive privilege.” Government, in effect, must take sides in the market in order to give birth to a coercive monopoly. It must make it difficult, costly, or impossible for anyone but the favored firm to do business.

    The United States Postal Service is an example of this kind of monopoly. By law, no one can deliver first class mail except the USPS. Fines and imprisonment (coercion) await all those daring enough to compete.

    In some other cases, the government may not ban competition outright, but simply bestow privileges, immunities, or subsidies on one firm while imposing costly requirements on all others. Regardless of the method, a firm which enjoys a coercive monopoly is in a position to harm the consumer and get away with it.

    An efficiency monopoly, on the other hand, earns a high share of a market because it does the best job. It receives no special favors from the law to account for its size. Others are free to compete and, if consumers so will it, to grow as big as the “monopoly.”

    An efficiency monopoly has no legal power to compel people to deal with it or to protect itself from the consequences of its unethical practices. It can only attain bigness through its excellence in satisfying customers and by the economy of its operations. An efficiency monopoly which turns its back on the very performance which produced its success would be posting a sign, “COMPETITORS WANTED.” The market rewards excellence and exacts a toll on mediocrity.

    It is my contention that the historical record casts the Standard Oil Company in the role of efficiency monopoly—a firm to which consumers repeatedly awarded their votes of confidence.

    The oil rush began with the discovery of oil by Colonel Edwin Drake at Titusville, Pennsylvania in 1859. Northwestern Pennsylvania soon “was overrun with businessmen, speculators, misfits, horse dealers, drillers, bankers, and just plain hell-raisers. Dirt-poor farmers leased land at fantastic prices, and rigs began blackening the landscape. Existing towns jammed full overnight with ‘strangers,’ and new towns appeared almost as quickly.

    In the midst of chaos emerged young John D. Rockefeller. An exceptionally hard- working and thrifty man, Rockefeller transformed his early interest in oil into a partnership in the refinery stage of the business in 1865.

    Five years later, Rockefeller formed the Standard Oil Company with 4 percent of the refining market. Less than thirty years later, he reached that all-time high of 90 percent. What accounts for such stunning success?

    On December 30, 1899, Rockefeller was asked that very question before a governmental investigating body called the Industrial Commission. He replied:

    I ascribe the success of the Standard to its consistent policy to make the volume of its business large through the merits and cheapness of its products. It has spared no expense in finding, securing, and utilizing the best and cheapest methods of manufacture. It has sought for the best superintendents and workmen and paid the best wages. It has not hesitated to sacrifice old machinery and old plants for new and better ones. It has placed its manufactories at the points where they could supply markets at the least expense. It has not only sought markets for its principal products, but for all possible by-products, sparing no expense in introducing them to the public. It has not hesitated to invest millions of dollars in methods of cheapening the gathering and distribution of oils by pipe lines, special cars, tank steamers, and tank wagons. It has erected tank stations at every important railroad station to cheapen the storage and delivery of its products. It has spared no expense in forcing its products into the markets of the world among people civilized and uncivilized. It has had faith in American oil, and has brought together millions of money for the purpose of making it what it is, and holding its markets against the competition of Russia and all the many countries which are producers of oil and competitors against American oil.

    A Master Organizer of Men and Materials

    Rockefeller was a managerial genius—a master organizer of men as well as of materials. He had a gilt for bringing devoted, brilliant, and hard-working young men into his organization. Among his most outstanding associates were H. H. Rogers, John D. Archbold, Stephen V. Harkness, Samuel Andrews, and Henry M. Flagler. Together they emphasized efficient economic operation, research, and sound financial practices. The economic excellence of their performance is described by economist D. T. Armentano:

    Instead of buying oil from jobbers, they made the jobbers’ profit by sending their own purchasing men into the oil region. In addition, they made their own sulfuric acid, their own barrels, their own lumber, their own wagons, and their own glue. They kept minute and accurate records of every item from rivets to barrel bungs. They built elaborate storage facilities near their refineries. Rockefeller bargained as shrewdly for crude as anyone before or since. And Sam Andrews coaxed more kerosene from a barrel of crude than could the competition. In addition, the Rockefeller firm put out the cleanest-burning kerosene, and managed to dispose of most of the residues like lubricating oil, paraffin, and vaseline at a profit.

    Even muckraker Ida Tarbell, one of Standard’s critics, admired the company’s streamlined processes of production:

    Not far away from the canning works, on Newton Creek, is an oil refinery. This oil runs to the canning works, and, as the newmade cans come down by a chute from the works above, where they have just been finished, they are filled, twelve at a time, with the oil made a few miles away. The filling apparatus is admirable. As the newmade cans come down the chute they are distributed, twelve in a row, along one side of a turn-table. The turn-table is revolved, and the cans come directly under twelve measures, each holding five gallons of oil—a turn of a valve, and the cans are full. The table is turned a quarter, and while twelve more cans are filled and twelve fresh ones are distributed, four men with soldering cappers put the caps on the first set. Another quarter turn, and men stand ready to take the cans from the filler and while they do this, twelve more are having caps put on, twelve are filling, and twelve are coming to their place from the chute. The cans are placed at once in wooden boxes standing ready, and, after a twenty-four-hour wait for discovering leaks, are nailed up and carted to a nearby door. This door opens on the river, and there at anchor by the side of the factory is a vessel chartered for South America or China or where not—waiting to receive the cans which a little more than twenty-four hours before were tin sheets lying on flatboxes. It is a marvellous example of economy, not only in materials, but in time and in footsteps.

    Market Competition Protects the Public

    Socialist historian Gabriel Kolko, who argues in The Triumph of Conservatism that the forces of competition in the free market of the late 1800s were too potent to allow Stan dard to cheat the public, stresses that “Standard treated the consumer with deference. Crude and refined oil prices for consumers declined during the period Standard exercised greatest control of the industry . . .”

    Standard’s service to the consumer in the form of lower prices is well-documented. To quote from Professor Armentano again:

    Between 1870 and 1885 the price of refined kerosene dropped from 26 cents to 8 cents per gallon. In the same period, the Standard Oil Company reduced the [refining] costs per gallon from almost 3 cents in 1870 to .452 cents in 1885. Clearly, the firm was relatively efficient, and its efficiency was being translated to the consumer in the form of lower prices for a much improved product, and to the firm in the form of additional profits.

    That story continued for the remainder of the century, with the price of kerosene to the consumer falling to 5.91 cents per gallon in 1897. Armentano concludes from the record that “at the very pinnacle of Standard’s industry ‘control,’ the costs and the prices for refined oil reached their lowest levels in the history of the petroleum industry.”

    John D. Rockefeller’s success, then, was a consequence of his superior performance. He derived his impressive market share not from government favors but rather from aggressive courting of the consumer. Standard Oil is one of history’s classic efficiency monopolies.

    But what about the many serious charges leveled against Standard? Predatory price cutting? Buying out competitors? Conspiracy? Railroad rebates? Charging any price it wanted? Greed? Each of these can be viewed as an assault not just on Standard Oil but on the free market in general. They can and must be answered.

    Predatory price cutting

    Predatory price cutting is, according to Armentano, “the practice of deliberately underselling rivals in certain markets to drive them out of business, and then raising prices to exploit a market devoid of competition.”

    Professor John S. McGee, writing in the Journal of Law and Economics for October 1958, stripped this charge of any intellectual substance. Describing it as “logically deficient,” he concluded, “I can find little or no evidence to support it.

    In his extraordinary article, McGee scrutinized the testimony of Rockefeller’s competitors who claimed to have been victims of predatory price cutting. He found their claims to be shallow and misdirected. McGee pointed out that some of these very people later opened new refineries and successfully challenged Standard again.

    Beyond the actual record, economic theory also argues against a winning policy of predatory price cutting in a free market for the following reasons:

    1. Price is only one aspect of competition. Firms compete in a variety of ways: service, location, packaging, marketing, even courtesy. For price alone to draw customers away from the competition, the predator would have to cut substantially—enough to outweigh all the other competitive pressures the others can throw at him. That means suffering losses on every unit sold. If the predator has a war-chest of “monopoly profits” to draw upon in such a battle, then the predatory price cutting theorist must explain how he was able to achieve such ability in the absence of this practice in the first place!
    2. The large firm stands to lose the most. By definition, the large firm is already selling the most units. As a predator, it must actually step up its production if it is to have any effect on competitors. As Professor McGee observed, “To lure customers away from somebody, he (the predator) must be prepared to serve them himself. The monopolizer thus finds himself in the position of selling more—and therefore losing more—than his competitors.
    3. Consumers will increase their purchases at the “bargain prices.” This factor causes the predator to step up production even further. It also puts off the day when he can “cash in” on his hoped-for victory because consumers will be in a position to refrain from purchasing at higher prices, consuming their stockpiles instead.
    4. The length of the battle is always uncertain. The predator does not know how long he must suffer losses before his competitors quit. It may take weeks, months, or even years. Meanwhile, consumers are “cleaning up” at his expense.
    5. Any “beaten” firms may reopen. Competitors may scale down production or close only temporarily as they “wait out the storm.” When the predator raises prices, they enter the market again. Conceivably, a “beaten” firm might be bought up by someone for a “song,” and then, under fresh management and with relatively low capital costs, face the predator with an actual competitive cost advantage.
    6. High prices encourage newcomers. Even if the predator drives everyone else from the market, raising prices will attract competition from people heretofore not even in the industry. The higher the prices go, the more powerful that attraction.
    7. The predator would lose the favor of consumers. Predatory price cutting is simply not good public relations. Once known, it would swiftly erode the public’s faith and good will. It might even evoke consumer boycotts and a backlash of sympathy for the firm’s competitors.

    In summary, let me quote Professor McGee once again:

    Judging from the Record, Standard Oil did not use predatory price discrimination to drive out competing refiners, nor did its pricing practice have that effect. Whereas there may be a very few cases in which retail kerosene peddlers or dealers went out of business after or during price cutting, there is no real proof that Standard’s pricing policies were responsible. I am convinced that Standard did not systematically, if ever, use local price cutting in retailing, or anywhere else, to reduce competition. To do so would have been foolish; and, whatever else has been said about them, the old Standard organization was seldom criticized for making less money when it could readily have made more.

    Buying out competitors

    The intent of this practice, the critics say, was to stifle competitors by absorbing them.

    First, it must be said that Standard had no legal power to coerce a competitor into selling. For a purchase to occur, Rockefeller had to pay the market price for an oil refinery. And evidence abounds that he often hired the very people whose operations he purchased. “Victimized ex-rivals,” wrote McGee, “might be expected to make poor employees and dissident or unwilling shareholders.”

    Kolko writes that “Standard attained its control of the refinery business primarily by mergers, not price wars, and most refinery owners were anxious to sell out to it. Some of these refinery owners later reopened new plants after selling to Standard.”

    Buying out competitors can be a wise move if achieving economy of scale is the intent. Buying out competitors merely to eliminate them from the market can be a futile, expensive, and never-ending policy. It appears that Rockefeller’s mergers were designed with the first motive in mind.

    Even so, other people found it profitable to go into the business of building refineries and selling to Standard. David P. Reighard managed to build and sell three successive refineries to Rockefeller, all on excellent terms.

    A firm which adopts a policy of absorbing others solely to stifle competition embarks upon the impossible adventure of putting out the recurring and unpredictable prairie fires of competition.

    Conspiracy to fix prices

    This accusation holds that Standard secured secret agreements with competitors to carve up markets and fix prices at higher-than-market levels.

    I will not contend here that Rockefeller never attempted this policy. His experiment with the South Improvement Company in 1872 provides at least some evidence that he did. I do argue, however, that all such attempts were failures from the start and no harm to the consumer occurred.

    Standard’s price performance, cited extensively above, supports my argument. Prices fell steadily on an improving product. Some conspiracy!

    From the perspective of economic theory, collusion to raise and/or fix prices is a practice doomed to failure in a free market for these reasons:

    • Internal pressures. Conspiring firms must resolve the dilemma of production. To exact a higher price than the market currently permits, production must be curtailed. Otherwise, in the face of a fall in demand, the firms will be stuck with a quantity of unsold goods. Who will cut their production and by how much? Will the conspirators accept an equal reduction for all when it is likely that each faces a unique constellation of cost and distribution advantages and disadvantages?

    Assuming a formula for restricting production is agreed upon, it then becomes highly profitable for any member of the cartel to quietly cheat on the agreement. By offering secret rebates or discounts or other “deals” to his competitors’ customers, any conspirator can undercut the cartel price, earn an increasing share of the market and make a lot of money. When the others get wind of this, they must quickly break the agreement or lose their market shares to the “cheater.” The very reason for the conspiracy in the first place—higher profits—proves to be its undoing!

    • External pressures. This comes from competitors who are not parties to the secret agreement. They feel under no obligation to abide by the cartel price and actually use their somewhat lower price as a selling point to customers. The higher the cartel price, the more this external competition pays. The conspiracy must either convince all outsiders to join the cartel (making it increasingly likely that somebody will cheat) or else dissolve the cartel to meet the competition.

    I would once again call the reader’s attention to Kolko’s The Triumph of Conservatism, which documents the tendency for collusive agreements to break apart, sometimes even before the ink is dry.

    Railroad rebates

    John D. Rockefeller received substantial rebates from railroads who hauled his oil, a factor which critics claim gave him an unfair advantage over other refiners.

    The fact is that most all refiners received rebates from railroads. This practice was simply evidence of stiff competition among the roads for the business of hauling refined oil products. Standard got the biggest rebates because Rockefeller was a shrewd bargainer and because he offered the railroads large volume on a regular basis.

    This charge is even less credible when one considers that Rockefeller increasingly relied on his own pipelines, not railroads, to transport his oil.

    The power to charge any price wanted

    According to the notion that Standard’s size gave it the power to charge any price it wanted, bigness per se immunizes the firm from competition and consumer sovereignty.

    As an “efficiency monopoly,” Standard could not coercively prevent others from competing with it. And others did, so much so that the company’s share of the market declined dramatically after 1899. As the economy shifted from kerosene to electricity, from the horse to the automobile, and from oil production in the East to production in the Gulf States, Rockefeller found himself losing ground to younger, more aggressive men.

    Neither did Standard have the power to compel people to buy its products. It had to rely on its own excellence to attract and keep customers.

    In a totally free market, the following factors insure that no firm, regardless of size, can charge and get “any price it wants”:

    1. Free entry. Potential competition is encouraged by any firm’s abuse of the consumer. In describing entry into the oil business, Rockefeller once remarked that “all sorts of people . . . the butcher, the baker, and the candlestick maker began to refine oil.”
    2. Foreign competition. As long as government doesn’t hamper international trade, this is always a potent force.
    3. Competition of substitutes. People are often able to substitute a product different from yet similar to the monopolist’s.
    4. Competition of all goods for the consumer’s dollar. Every businessman is in competition with every other businessman to get consumers to spend their limited dollars on him.
    5. Elasticity of demand. At higher prices, people will simply buy less.

    It makes sense to view competition in a free market not as a static phenomenon, but as a dynamic, never-ending, leap-frog process by which the leader today can be the follower tomorrow.

    Rockefeller was greedy

    The charge that John D. Rockefeller was a “greedy” man is the most meaningless of all the attacks on him but nonetheless echoes constantly in the history books.

    If Rockefeller wanted to make a lot of money (and there is no doubting he did), he certainly discovered the free market solution to his problem: produce and sell something that consumers will buy and buy again. One of the great attributes of the free market is that it channels greed into constructive directions. One cannot accumulate wealth without offering something in exchange!

    At this point the reader might rightly wonder about the dissolution of the Standard Oil Trust in 1911. Didn’t the Supreme Court find Standard guilty of successfully employing anti-competitive practices?

    Interestingly, a careful reading of the decision reveals that no attempt was made by the Court to examine Standard’s conduct or performance. The justices did not sift through the conflicting evidence concerning any of the government’s allegations against the company. No specific finding of guilt was made with regard to those charges. Although the record clearly indicates that “prices fell, costs fell, outputs expanded, product quality improved, and hundreds of firms at one time or another produced and sold refined petroleum products in competition with Standard Oil,” the Supreme Court ruled against the company. The justices argued simply that the competition between some of the divisions of Standard Oil was less than the competition that existed between them when they were separate companies before merging with Standard.

    In 1915, Charles W. Eliot, president of Harvard, observed: “The organization of the great business of taking petroleum out of the earth, piping the oil over great distances, distilling and refining it, and distributing it in tank steamers, tank wagons, and cans all over the earth, was an American invention.” Let the facts record that the great Standard Oil Company, more than any other firm, and John D. Rockefeller, more than any other man, were responsible for this amazing development.

    This piece was originally published at the Foundation for Economic Education.

  10. School choice benefits teachers too

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    Proponents of the public school system argue that school choice policies divert financial resources from public institutions and therefore harm teachers. While it is true that funds are reallocated, it is not clear that these policies actually make teachers worse off overall. What seems to be clear is that the current public schooling system is a zero-sum game where teachers benefit at the expense of parents and children. Alternatively, school choice policies benefit teachers and the rest of society at the same time.

    High-Quality Teachers Benefit

    This may seem counterintuitive to people that have continuously heard the message that school choice harms teachers. Obviously, diverting resources to private schools must harm teachers in public schools, right? This is debatable, especially since public school teachers do not face a serious threat of dismissal or decreasing salaries. Moreover, even if this caused a realistic dismissal threat, the high-quality teachers would certainly remain shielded. What is unquestionable, however, is that this diversion of resources benefits teachers in private schools voluntarily chosen by families.

    Which group of teachers should benefit more? The ones that forcefully receive resources from the taxpayers, or the ones that produce educational outcomes that are desired by children and parents?

    Better Teachers for a Lower Price

    Private school choice programs can do much more than divert resources in the short-run. Private schools are free to make decisions in order to incentivize high-quality talent to persist in the labor market for teaching. For example, private schools can promote pay-for-performance programs and improve the distribution of retirement benefits in order to attract motivated talent. Also, private schools do not face the same certification regulations, so they have a larger pool of potential candidates for any given position. Removing strict certification regulations would benefit teachers that would not have otherwise even come into existence. Overall, access to a larger supply of labor will guarantee that schools will be able to attain higher quality teachers at a lower price.

    Policies such as these can be made at the school level in the private sector. This is beneficial for teachers because individual schools will need to compete for a scarce resource: high-quality teachers. The schools that have the best working conditions for teachers will attract exceptional teachers; the schools that do not provide desirable conditions for employees will fail to survive in a competitive market. Just imagine how much better working conditions for teachers could be in a system of enhanced private school choice! Furthermore, a competitive system would reward the teachers that are improving educational outcomes for children. Families will obviously desire the high-quality teachers. This demand for effective teachers will support a high salary for those teachers and motivate lower-performing teachers to improve.

    If we really aim to benefit effective teachers and the rest of society, we should promote private school choice policies such as vouchers and education savings accounts. Doing so would compensate existing teachers for a job well done and even reward motivated people that would not have otherwise entered the teaching profession.

    This piece was republished from the Foundation for Economic Education.

  11. Liberalism reconstructed for a world divided

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    So 2016 is limping to an end with an assassination of an ambassador, another “inspired” attack on innocents at a Christmas market, and the formal election of a master crony-capitalist to the office of the presidency of the United States.  We have angry tweets, mean tweets, and self-congratulatory tweets defining our age.  But our age requires something different.

    The liberal project must be reconstructed for a world divided by ethnic, linguistic, religious, nationalist, and economic class.  The liberal project has always been an evolving project, not fixed in time.  It has taken on different meanings at different historical junctures.  Now is no different, and to do the necessary reconstruction, there must be no divide between the humanities and the social sciences.  Philosophy without economics is daydreaming, and economics without philosophy has no purpose, and both without politics are sterile intellectual exercises.

    In this reconstruction, we may draw inspiration from Smith and Hume, Mises and Hayek, Friedman and Buchanan, Nozick, etc., but repeating their answers to the problems of their day will not work.  We live in the post-colonial and post-communist era, where the neoconservative project of a ‘world order’ has only exacerbated the social tensions that define our age.

    This post is designed for one purpose — to encourage young scholars of classical liberalism — be they philosophers, political scientists, economists, historians, sociologists, etc. — to pick up this challenge and apply all their talents to be students of our civilization.  If the best and the brightest don’t pick up the challenge because of academic conformity methodologically, analytically, ideologically, then the necessary reconstruction will not occur.  Note I am not saying “restatement”, I am saying reconstruction.

    My career as an academic political economist began with studying the history, collapse and transition from socialism in the former Soviet Union, it then switched to the institutional lessons to be learned from the failure of development planning in Africa, Latin America and Asia.  This has led to studies on economic calculation and complex coordination; institutional infrastructure and economic development; endogenous rule formation and analytical anarchism; and social epistemology and comparative institutional analysis.  But, these are at best inputs into a study that seeks to addresses the problems that plague our world and the reconstructed liberal project.

    We have serious problems that require serious attention.  Let’s get to work.

    This piece was originally published at Coordination Problem.

  12. Why riots happen

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    After the Los Angeles riot in spring of 1992, almost every pundit in the country took a turn at explaining why riots occur. The conventional wisdom on the subject went something like this: certain dramatic events such as political assassinations or unpopular jury verdicts crystalize riots from social rage.

    So to understand riots, one must understand the causes of social rage, usually said to be racism, poverty, lack of economic opportunity, and why people who experience this rage manage it in such a destructive manner. The usual suspects include breakdown of the family, television, and a generalized cultural disorientation.

    All of these explanations have some truth in them, but are evidently incomplete. First, they explain too much. The predisposing social conditions are with us all the time, yet riots are episodic.

    Second, they explain too little. Many mob actions, like European soccer riots or the increasingly predictable civil meltdowns in the home cities of National Basketball Association champions, are triggered by good news, and not obviously related to social injustice or existential anomie.

    Indeed, during the Los Angeles riots, anyone with a TV set could see that jubilation rather than fury best characterized the mood of the people in the streets. It is hard to credit that these exhilarated looters with their new VCR’s and cameras were protesting the jury system, the state of race relations in Southern California, or anything else.

    They were, in fact, having a party. Moreover, many of those who risked life and limb opposing the more outrageous excesses of the rioters were themselves poor, unemployed, and victims of racism.

    Conversely, a crowd is not an incipient riot merely because it assembles a great many people with the predisposing demographic characteristics. For example, every Fourth of July in Chicago’s Grant Park there is a fireworks display that usually attracts about a million spectators. In certain parts of the grounds, people are packed together like sardines, so that individuals substantially lose their ability to decide where to go. One goes where the crowd goes. Going against it is impossible, and even leaving it (unless one is near the edge) may be difficult.

    Some people dislike the experience, but whatever its discomforts, the Fourth of July crowd at Grant Park is not a riot in the making. The crowd is big, it is loud, it is unmanageable, it is filled with people who have suffered from racial discrimination and economic deprivation, it has, in aggregate, drunk a lot of beer (which is legally for sale at dozens of kiosks at the event); but it is only a crowd, not an incipient riot.

    Day in and day out in any big city, police blotters will reflect the existence of a fairly steady background supply of theft, mugging, arson, and homicide. But this jumble of criminal mischief does not amount to a “riot”; riots are the coordinated acts of many people. If they are coordinated, who coordinates them? Authorities looking for ways to explain why trouble has broken out on their watch sometimes ascribe exaggerated organizational powers to “outside agitators.”

    While, as we explain, there is definitely a leadership niche in the ecology of a mob, it seems to become important only after the crowd has assembled. Riots are not, as a rule, plotted and scripted affairs.

    It would be very difficult indeed to “stage” a riot. A person who set out to do so would encounter a series of difficult challenges. When should the riot be held? Where? How should the participants be notified? Once marshaled, how should they be instigated to behave in a way that would expose them to arrest? Trying to organize a riot as though it were a company picnic would quickly attract the attention of the police. And with the police watching, who would be brave enough to cast the first stone?

    How, then, do riots begin?

    Assembling the Crowd

    When something happens that causes a large number of riot-prone people to mass spontaneously in one place, while police cannot mass at a correspondingly rapid rate, the cost of starting a riot, as any one participant would figure it before the fact, would begin to decrease dramatically.

    It would decrease still more if it seemed to a prospective troublemaker that his own hopes and expectations about the potential behavior of the crowd were also the hopes and expectations of many of its other members, because in that case it would seem a better bet that if he did cast the first stone, many others would follow.

    The most obvious way to get a riotous crowd to assemble is the occurrence of what could be called a “Schelling incident,” after Thomas Schelling, the great master of strategic theory. In The Strategy of Conflict (1960: 90) Schelling wrote,

    It is usually the essence of mob formation that the potential members have to know not only where and when to meet but just when to act so that they act in concert. Overt leadership solves the problem; but leadership can often be identified and eliminated by the authority trying to prevent mob action.

    In this case the mob’s problem is to act in unison without overt leadership, to find some common signal that makes everyone confident that, if he acts on it, he will not be acting alone. The role of “incidents” can thus be seen as a coordinating role; it is a substitute for overt leadership and communication. Without something like an incident, it may be difficult to get action at all, since immunity requires that all know when to act together.

    It is not crucial, in the generative stage of a riot, that the participants act literally simultaneously. What is crucial is that offenses occur rapidly enough to overwhelm the police. From the rioter’s viewpoint, there is safety in numbers. There comes a point at which the police pass from inadequacy to impotence.  In the Los Angeles riot, the police actually pulled back from the trouble when it became obvious to everyone, including themselves, that there was nothing constructive they could do.

    Certain kinds of high-profile events have become traditional “starting signals” for civil disorders. In fact, incidents can become signals simply because they have been signals before. What ignited the first English soccer riot has been lost in the mists of history; but they had become a troublesome problem sometime during the nineteenth century, as Bill Buford (1991) makes clear in quoting old newspaper accounts in his Among the Thugs.

    Today, there is a century’s weight of tradition behind soccer violence. People near a football ground on game day know that a certain amount of mischief, possibly of a quite violent kind, is apt to occur. Those who dislike that sort of thing had best take themselves elsewhere. Certain people, though, thrive on the action — relish getting drunk, fighting, smoking dope; enjoy the whiff of anarchy, harassing and beating respectable people and vandalizing their property.

    Such people — hooligans — make a point of being where the trouble is likely to start. The sort of “soccer fans” about whom Buford wrote were mostly interested in barbarian camaraderie, not soccer. Some of them do not even go inside the stadium, and some spectators do not watch the game but pass their time in petty thievery. Hooligans’ game is being a part of the crowd that congregates near a soccer stadium, belonging to and sharing its power, especially its power to flout the law.

    A Schelling incident is not a signal that tells a person what to do. It is a signal that tells a person what other people will probably do. In the United Kingdom even an ordinary minor league soccer match might well be a Schelling incident. Buford gives several examples.

    In the United States, that sort of game would not be — but having one’s team win a National Basketball Association championship increasingly seems to be. In Detroit in recent years, “Devils Night” (the night before Halloween) has become a springboard for multiple, independent, almost simultaneous acts of arson. These are examples, baleful ones, of how culture, habit, and tradition can overcome major organizational barriers to cooperative social endeavors and lower the cost of transacting business.

    As word spreads of a conventional triggering event — whether it is shocking (like an assassination) or rhapsodic (a three-peat) — crowds form spontaneously in various places, without any one person having to recruit them. Each member of the crowd will know more about the intentions of fellow crowd members than people usually know about the intentions of strangers, because once a starting signal has been given, people know that a riot is impending. They gather into crowds because they want to participate and they know why the other people in the crowd, or at least a great many of them, have come.

    Not every crowd threatens to evolve into a riot. In fact, the opposite is more often true: people bent on criminal mischief usually do not want lots of witnesses and possibly hostile bystanders around when they commit crimes. And so the psychology of the crowd’s members is crucial. A significant number of the crowd’s members must expect and desire that the crowd will become riotous. That is, there has to be a critical mass of people in the crowd who are making accurate judgments, not about their own desires and intentions, but about the riotous desires and intentions of other members of the crowd.

    The Role of the Entrepreneur

    For a riot to begin, it is necessary but not sufficient that there be many people who want to riot and who believe that others want to riot too. One more hurdle has to be overcome. Even in an unstable gathering, the first perpetrator of a misdemeanor is at risk if the police are willing and able to zero in on him. Thus, someone has to serve as a catalyst — a sort of entrepreneur to get things going — in Buford’s account, usually by breaking a window (a signal that can be heard by many who do not see it).

    In civil rights, anti-war, or anti-abortion marches, it is probably pretty common to find participants eager to expose themselves to arrest in exchange for the chance to optimize the desired impact of their protest.

    This sort of self-sacrifice is certainly rare in ordinary riots, where potential rioters’ behavior is consistent, we suppose, with something like the following calculation: “If somebody else gets the riot started, I can participate without much risk. But if I stick my neck out and nobody follows, I’ll be the only one arrested. So I’ll wait for somebody else to go first.”

    If every would-be rioter reasoned thus, nobody would cast the first stone, and the riot would not ignite. This is a typical free-rider problem, as economists have called it. It is usually sufficient to prevent riots from occurring, even where there is a plentiful supply of disposed participants. Riots await events that surmount the free rider problem.

    The entrepreneur will throw the first stone when he calculates that the risk that he will be apprehended for doing so has diminished to an acceptable level. The risk of arrest declines as a function of two variables — the size of the crowd relative to the police force available to control it, and the probability that others will follow if somebody leads. This latter point could potentially be tricky, because as we have noted, crowds will generally be inhospitable to the commission of violent acts. But it is possible for a crowd to telegraph its willingness to riot.

    Buford’s account (1991: 81—85) of a soccer hooligan rampage in Turin furnishes an example. Members of the crowd marched themselves around in a spontaneous formation with a stilted, unnatural gait, chanting the name of their team. This unmistakable token of cohesion stopped well short of anything that the Italian police could plausibly charge as solicitation or incitement, but served to assure the members of the crowd that a critical mass had formed.

    Sometimes a crowd will not clearly commit itself to riot, and in such instances an entrepreneur will take more of a risk getting things started. But if he has done his implicit calculations properly, once the first plate-glass window is broken, the looting will begin and will spread and continue until the civil authorities muster enough force to make the rioters believe that they once again face a realistic prospect of arrest.

    The Formation of Action Nodes

    As we saw in the case of Los Angeles, riots do not occur everywhere at once. Most of the homes and businesses in south-central L.A. and Koreatown (which cover a number of square miles) were untouched by the riot. Damage was concentrated at certain intersections and along certain strips, what we call “action nodes.” How did the rioters know where these action nodes were?

    Schelling (1960: 54—58) again offers a framework for analysis by offering powerful evidence for the existence of focal points in social life. People who may never have met are nonetheless capable of coordinating their behavior under some circumstances. In one experiment, two people were instructed to think of a number between one and ten and told that both would be paid a reward if each arrived at the same answer. Subjects’ ability to psyche one another out far exceeded chance.

    Perhaps even more surprising, certain open-ended questions can elicit a high amount of agreement. For example, in one experiment Schelling asked his subjects what they would do if they were simply told to go and meet someone in New York City on a certain day. Out of all the possibilities for when and where to meet, a majority, trying to intuit where and when other people would expect them to be, would have converged at the information booth in Grand Central Station at high noon!

    Nothing paranormal is reflected in these experiments. Although it goes beyond what is definitely known to say what makes for a focal point, some features do seem to emerge pretty clearly from Schelling’s experiments. For one thing, uniqueness seems to be important.

    When asked to pick a point on a map to await another person with the same map but with whom no meeting place has been arranged, many people will select a house on a map with one house and many crossroads, but will select a crossroads on a map with one intersection but many houses.

    And, of course, uniqueness makes sense when selecting focal points. Even if both parties select a house in the latter instance, the chance that they will select the same house is small. If one of many houses is distinct, however, it may be selected by some participants — a single mansion may be selected as a focal point even on a map with many houses.

    Another element that seems to figure in establishing a focal point is what could be called contextual prominence — for example, the number “one” in a series of numbers, or the center of a circular area or a mountain rising from a plane.

    We cannot say how a resident of South-Central L.A. might go about selecting a focal point. In fact it seems consistent with Schelling’s experiments that there would have been a number of focal points, although substantially fewer than there were residents. For example, any of several major intersections, parks or schoolyards may have seemed the natural place for a large number of riot-disposed people to gather following the acquittals in People v. Powell (the original Rodney King beating case), which amounted to a Schelling incident at least in part because for weeks it had been advertised as such by TV and newspaper accounts of the trial.

    One can hardly doubt that many residents of South-Central bent on making trouble arrived at places they expected to be “focal” only to find them largely deserted. But Schelling’s work implies that a substantial number of others would have guessed right — would have gone to a major intersection, Korean strip-mall parking lot, or other public space and found the crowd they had expected to find nearing its critical mass — waiting for some of the outliers from non-viable focal points to find their way to more promising locations.

    But here is a problem. Those who selected a non-viable focal point — in other words, those who guessed wrong — would now have to find out where everyone else went in order to join them. How did they get this information? Los Angeles’ television stations’ aggressive news coverage of the disturbance from its very beginning seems to have played a key role.

    Within minutes after the verdicts were announced in Powell, minicam crews were doing news “live from the scene,” letting everyone in town know where the trouble was. Innocents thus learned what neighborhoods to avoid; but non-innocents, who wanted to take part in the looting, also found out where to go.

    Although inadvertently, the stations lowered the search costs for aspiring rioters. Without TV, other techniques would surely have been used by people trying to find out where to go in order to loot and burn with little fear of arrest. But the broadcast media are by far the best way to get accurate information to many people at once. Especially in spread-out places like Los Angeles, rioting would be less likely to occur if information about the location of viable focal points were harder to come by.

    The Role of Reputation

    Although the conventional “racism-poverty-lack-of-opportunity” explanation is overly broad and somewhat shopworn, we do think it useful in explaining the makeup of a riotous crowd. Racism and poverty would clearly merit social concern even if they had no connection to people’s disposition to engage in rioting. But these are indeed predisposing conditions. One seldom sees riots break out at a convention of orthodontists. Why?

    Respectability — a reputation for behaving in a predictable, socially benign manner — is an extremely valuable asset for most people who live in the middle-class world. It is one of the key ingredients in career and personal success, and the need for it serves as a sort of performance bond to keep middle-class people in line. A person to whom respectability matters much should demand better odds before risking arrest and disgrace than would a football hooligan or a member of the American urban underclass or any other socially marginal character to whom respectability is of relatively little value.

    Such a person has something that a middle-class person lacks — a great deal of nihilistic freedom of the “nothing to lose” variety. Such freedom, experience suggests, is a perplexing and often malignant possession. Any social policy that would materially improve the life chances of a potential rioter would concurrently raise the value of respectability to such a person, and thus dampen the incentive to participate in civil disorders.

    This is not to suggest that reputation matters less to a hooligan than it does to an orthodontist. The question is, reputation for what. A valuable reputation among the thugs is a reputation for hard partying, physical toughness, “sticking by your mates,” and, above all, an ability to engage in predatory behavior without being arrested.

    British football hooligans and members of American street gangs do not direct their aggressive behavior at members of their own group, but only at outsiders. Reducing these individuals’ disposition to violence would seem, therefore, to involve getting them to identify with the larger community — making them middle-class, in other words.

    Alas, that is easier said than done. Many years of heavy social spending and a “war on poverty” have established that social and economic privations are very difficult to remove even in the long run, and in the short run can hardly be influenced at all. It follows, therefore, that riots are likely to be with us recurrently for the foreseeable future, and that the focus of public debate about riot management should concentrate on symptomatic remedies. Here, at least, some constructive ideas seem worth exploring.

    Stopping a Riot

    Once it gets started, rioting is difficult to stop by authorities as constrained as American police forces are. Indeed, two different kinds of constraints are important. The more obvious are the rules of constitutional law, which set stringent limits on how police officers may behave toward those whom they try to arrest. Second are the budgetary facts of life that guarantee that modem urban police forces will always be staffed well below peak load demand levels.

    Both these constraints should affect the probability of riots occurring and their duration and severity if they do occur. Traditional deterrence theory teaches that in order to discourage crime at the margin, one or both of two things have to happen: either the probability of catching the offender has to be visibly increased, or the harshness of the consequences to the offender in case he is caught have to be tangibly enhanced.

    In the case of riots especially, there is not much that police forces can do about either option.

    It is hard to imagine that the public would be willing to staff the police department at levels sufficient to deal with a riot immediately if one should break out: it costs a city’s budget about $60,000 or more to add just one additional officer to the force. Nor will there ever be enough prosecutors to try every rioter that could be arrested, nor enough prisons to house them if convicted. Every rioter understands these practical constraints very well. They spell practical legal immunity so long as a riot continues.

    If the police try to cover most of the serious action nodes that develop, they will be spread too thin to do much good anywhere. If they abandon some action nodes to concentrate on a few, the trouble can be stopped at the selected locations, but the procedure is like nailing Jell-o to the wall. The riot simply flows around the impediment and goes to locations the police have not covered. Until the National Guard arrives, quadrupling or quintupling available manpower and increasing the apparent risk of arrest, matters simply run out of control.

    Of course, authorities prepared to resort to brutality can terminate riots promptly. Buford gives the example of how the Sardinian police militia smothered a soccer riot during the 1990 World Cup matches. Hundreds of rowdy English soccer fans had flown in on chartered planes, and were determined to find trouble. The police did not try to cover every action node at once; this would have left them outnumbered everywhere.

    Instead, following textbook military strategy, they massed forces and surrounded first one, then another group of hooligans inglisi, rendering each in turn hors de combat by beating them senseless with truncheons. Few of the Englishmen actually had to be arrested (which would have been very time-consuming for the police). Nevertheless, because they were not allowed to innocently transpire through police lines to re-appear at some less well-defended action node, the riot soon collapsed.

    No one would suggest that American police should emulate this style of riot control. And almost as objectionable for other reasons would be censoring television or radio news in order to impede the formation of action nodes.

    The Supreme Court has often stated (although not often acted upon) the principle that censorship for compelling reasons of national security does not offend the First Amendment. Even if this tenet is defensible in wartime, it stretches the point considerably to apply it to riots. Clearly there would be serious danger of political opportunism if authorities were permitted to interdict the flow of news merely because they asserted a fear that riots might otherwise ensue.

    Presently, every politically incorrect public manifestation would be subject to seizure or arrest. Such a thing actually happened in Chicago some years ago, when a gang of vigilante aldermen, on the unlikely premise that they were trying to forestall civil unrest, stormed an exhibition hall at the Art Institute and commandeered an oil painting that disparagingly portrayed the recently deceased Harold Washington, Chicago’s first black mayor.

    There is a third option, however, that might ultimately prove more palatable. According to our analysis, the proximate trigger of a riot is an entrepreneur’s calculation that he is unlikely to be arrested if he breaks a window. If as swiftly as they developed action nodes actually could be covered by the authorities, riots might not begin at all. Cities should consider how they might accomplish this objective.

    Experience has shown that the National Guard is not well adapted to the mission of early containment of a riot. It takes the Guard several days to get into action because when it is called, it is not merely foot soldiers that are summoned, but their entire apparatus of logistics and command that must be mobilized as well.

    Moreover, even the hint that authorities are thinking about calling out the National Guard could be seen as a provocative acknowledgement of a riot’s incipiency. Public appeals that the Guard be summoned may therefore amount to a sort of focal incident and do almost as much to choreograph the beginning of a riot as to deter its occurrence.

    Of course, once it gets into action, the Guard does seem to pacify full-blown riots fairly swiftly. This fact suggests that sheer numbers of anti-riot personnel may be more important than tactics, training, or other variables in quietening civil unrest.

    For this reason, cities might well consider the benefits of using a civilian auxiliary to reinforce and supplement the police force. Such a force could be deployed rapidly and demobilized just as fast once the trouble had died down because its command infrastructure, that of the municipal police, is always up and running. Of course it is out of the question for police departments permanently to maintain as many full-time officers as might be required by peak load demand.

    An analogy might be drawn to volunteer fire fighters, who receive training, though far less than their full-time professional counterparts, to enable them to meet contingencies too remote to justify commissioning full-time personnel.

    The original idea of the militia, as envisioned by the drafters of the United States Constitution, reflected something of the notion that ordinary citizens bore the final responsibility for the security of the communities in which they lived (Dowlut 1983: 93). When not burdened with a command and control superstructure, but simply used to supplement law enforcement resources already in place, a modem equivalent to the militia might well serve to stop trouble before it started.

    According to our analysis, riots are apt to be a more or less recurrent, if unpredictable, feature of social life. It is odd that our law enforcement apparatus seems to be designed for a world in which riots do not occur at all. With some imagination, public administrators could ensure that these destructive episodes become rare indeed.


    • Buford, B. (1991) Among the Thugs: The Experience, and the Seduction, of Crowd Violence. New York: W.W. Norton & Co.
    • Dowlut, R. (1983) “The Right to Arms: Does the Constitution or the Predilection of Judges Reign?” Oklahoma Law RevIew 36(1): 65—105.
    • Schelling, T.C. (1960) The Strategy of Conflict. Cambridge: Harvard University Press.

    This article was first published in the Cato Journal in 1994 under the title “Understanding Riots.” © Cato Institute. All rights reserved. Reprinted with permission.