Category Archive: Entrepreneurship
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Learn Liberty recently released a video titled “What if There Were No Prices? Railroad Thought Experiment” with Professor Howard Baetjer of Towson University. The video argues that market prices communicate the value of goods and services in the economy so that those goods and services are allocated to their most productive (and value generating!) uses. And the market does this better than a central planner ever could. The YouTube comments section (usually a treasure trove of thoughtful and respectful academic discourse) blew up, and Professor Baetjer took the opportunity to address some of the more thoughtful questions and responses to the video. Here they are…
One of the points the video makes is that central planning fails because planners simply do not have access to the vast stores of information necessary to make decisions about where goods are most productively used. To this point, YouTube commenter IamRayson asked:
IamRayson: Would Artificial Intelligence solve the knowledge gap problem?
Howard Baetjer: This is an important question. We’re pretty sure the answer is no because the needed information about people’s preferences (as consumers) and judgments (as businesspeople) about how the relative usefulness of different (combinations of) inputs to their plans cannot be communicated to the AI any more than it can be communicated to a central planner. The key difficulty is not the central planner’s processing power, it’s his (or its) access to the specialized, local, changing KNOWLEDGE of the millions of individuals in the economy. Is this persuasive?
IamRayson: I am a libertarian, so I need no convincing about the superiority of a free market over central planning. I was merely curious how a communist would try to get around the knowledge gap. So theoretically, if AI could frequently collect surveys from people with modern electronics (and I don’t see why not, given communist have no trouble mandating stuff onto unwilling subjects), then could they possible overcome the knowledge gap?
Howard Baetjer: I don’t think so. I think by its nature it’s impossible to overcome. Here are reasons:
“Frequently” would be critical, wouldn’t it? Prices in the real world reflect people’s changing judgments as soon as those judgments change (e.g., a contractor decides which of several bids to accept, a farmer decides to buy a new harvester, a speculator decides to sell half his stock of soybeans…or maybe just a quarter). Any central planner would make those decisions, or adjust prices based on them, later than “the man on the spot” would.
And the surveys would have to be remarkably well thought-out to get at just what aspects of value, cost, or uncertainty about the future the “men on the spot” believe relevant.
And the planner or AI would have to decide how to weight the different survey answers from different people. Those weightings would of course need to change with changing situations.
Maybe the most insuperable problem, in principle, is that often people truly do not know for sure whether they value one thing more than another until an actual moment of decision. I don’t think the planner or AI could do as well as a free market price system unless it could faithfully represent all the different judgments of all the different agents in their actual circumstances, and decide for them as quickly as they could decide for themselves. If that’s true, we may as well just go with the distributed system we’d be trying to emulate.
Professor Baetjer then engaged with a commenter on the issues of consumerism and caring for the earth’s natural resources.
Bruno Ferreira: Capitalism, as we know it, is based on consumerism. That in itself produces a giant amount of waste and mismanagement of resources. New phones are constantly being produced. Minerals being mined and all the electronic capital that comes with it. It is only build to feed the “engine” of consumerism in order to keep the whole system afloat. It does not uses resources as society values the most since its values are skewed and not optimal for long term planning.
Howard Baetjer: Bruno, wouldn’t capitalism, in the sense of free exchange based on private ownership, be desirable even for people who eschew consumerism? If people had much more limited wants, the price system that arises out of private ownership would still allow for those limited wants to be satisfied with the smallest sacrifice of other wants. You seem more discontent with other people’s values than with free market pricing.
Bruno Ferreira: Howard, my only criticism is to the claim that free market pricing uses resources that society values. Since their values are manipulated by corporations it creates a new set of pricings that not reflect the real cost of the resources required. Please remember we live in a scarcity minded capitalist system with no real account (or measure) of earth’s mineral resources.
Howard Baetjer: I see two points here: 1) The people in society do not really value things as their prices indicate because corporations manipulate people’s values, distorting those values away from their true levels. 2) A free market price system does not take into account the actual scarcity–the ultimately hard limits–on “earth’s mineral resources.”
I concede that 1) might be true in some abstract sense; certainly people are constantly trying to influence others’ values. But I would deny that corporations can control people’s values: Blackberry could not maintain users’ loyalty when faced with the iPhone; Kodak could not make people prefer to take pictures on film rather than digitally.
Point 2) I think is mistaken because the owners of limited mineral resources have such a strong incentive to price them right. In the limiting case where some resource for which there is no substitute is literally running out, its owners would have every incentive to charge a shockingly high price for it, a price that would indeed reflect its actual scarcity. We don’t see such prices in the real world, I submit, because human ingenuity is “the ultimate resource,” as the great Julian Simon put it, and human beings are constantly finding new sources of, and substitutes for, every physical resource.
Even if we grant that both these points are valid, however, is there a better alternative than a free-market price system for ascribing value to goods? Even with its admitted imperfections, is there anything better to put in its place? I don’t think so. To what could we possibly turn, valuations by select committees of very smart people with their own prejudices and limitations?
Now it’s your turn to voice your opinions on prices, railroads, or Russian commissars. Have at it in the comments section below!
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One of the most valuable economic insights is that human creativity is The Ultimate Resource. (The great economist Julian Simon wrote a book by that name.) It follows that as long as we are free to use our creativity, we don’t have to worry about running out of resources. Truly, human creativity makes resources of mere stuff, because only when people figure out what to do with some particular stuff does it become a valuable resource.
The world has been experiencing a powerful illustration of this fact with respect to oil.
For over a century, people have been worrying about running out of oil. The Wall Street Journal published an entertaining report on the subject last September, leading with some noteworthy strong, and wrong, statements by leading experts about how little oil we have left. At this link, click on the circles below the first photograph to see them.
In our day the United States has become once again the world’s leading oil producer—we now produce more oil than Saudi Arabia—thanks to human creativity that has turned mere stuff into a valuable resource.
The stuff I mean is rock, shale rock. There are oceans of it down in the ground, miles below the surface. In that rock, oil is trapped, lots and lots of oil. But until about a decade ago, people did not know how to get at that oil; after all, it was trapped in the shale. So shale was not a resource.
Then came the marriage of two technologies, two techniques developed by human creativity, and married by human creativity: hydraulic fracturing (“fracking”) and horizontal drilling. The first involves breaking the rock by injecting it with water and some sand and chemicals at very high pressure. The sand holds open the tiny fractures so that the trapped oil can escape. This technique has been known since 1949, but it was not especially useful in wells that could only be drilled vertically and hence could break open only a little bit of shale.
The second technique, horizontal drilling, involves drilling sideways out into the shale from a vertical well. (How they manage to do that I don’t know.) It allows far more shale to be reached and fractured, so that far more oil can escape and rise through the well.
Voila! Thanks to The Ultimate Resource, human creativity, what was once useless rock far down in the ground has become a valuable natural resource, one able to satisfy human needs “for decades, if not centuries,” according to Matt Ridley.
I don’t mean to say that, thanks to the shale revolution, we’ll never run out of oil. Definitely not. We’ll never run out of oil because The Ultimate Resource, human creativity, will find a better energy source than oil before we ever run out of it. Saudi oil minister Sheikh Zaki Yamani made this wonderfully insightful statement in the 1970s: “The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.” The Stone Age ended because of The Ultimate Resource. Barring natural or political catastrophe, the Oil Age will, too.
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Did you know that American anarchist, abolitionist, and lawyer Lysander Spooner started the American Letter Mail Company in 1844? It succeeded in delivering mail for lower prices, but the U.S. Government challenged Spooner with legal measures, eventually forcing him to cease operations in 1851.
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Without economic freedom, we cannot exercise our other freedoms. The freedom to speak is meaningless if the government prevents us from traveling from our homes or paying for a phone call. The freedom to write is meaningless if the government prevents us from selling newspapers. The freedom to worship is meaningless if the government forces us to behave immorally. The violations of freedoms of speech and press and religion are why we resist government. But the violation of economic freedom is what we resist.
The data bear this out. In its Economic Freedom of North America and Economic Freedom of the World indices, the Fraser Institute rates societies on economic freedom according to the size of their governments (as measured by government spending and transfers, and the prevalence of government-owned enterprises), the extent of taxation (as measured by tax revenue, the top marginal tax income rate, and other taxes), and labor market restrictions (as measured by minimum wage legislation, and the prevalence of government-employed workers).
Fraser does not consider household income, unemployment, poverty, inequality, or any other environmental or social metric when rating societies for economic freedom. Cross-referencing Fraser’s data with these socioeconomic outcomes is revealing.
Consider the United States. In every year from 1987 through 2009, the 25 U.S. states that scored above the median on the economic freedom index also exhibited greater per-capita income than did the 25 U.S. states that scored below the median.
The 25 more economically free states also experienced a lower unemployment rate than did the 25 less economically free states.
They also experienced lower poverty rates. In fact, if the less free states had had the same unemployment rates as the more free states, there would have been 5 million fewer Americans living in poverty.
Certainly, economic freedom must come at a price. Advocates of controlled economies will argue that the price is inequality. Yet, the data suggest the opposite. Comparing available data from the Census Bureau to economic freedom reveals that the states that are more economically free actually experienced lower levels of income inequality than did the states that are less economically free. [A possible exception appears to be 2009. However, the difference in 2009 is not statistically significant (the other differences are), and 2009 was atypical in that it was the height of the Great Recession.]
People themselves appear to realize that life is better in more economically free states because migration data show a clear exodus of people out of less free states and into more free states.
A reasonable counterargument is that freedom might work for Americans, but that’s because Americans themselves tend to be atypically obsessed with doing as they please. A comparison of socioeconomic outcomes to Fraser’s Economic Freedom of the World index is telling.
Among the 79 reporting countries, those that are more economically free enjoy lower poverty rates.
Of course, this is likely due to the “rich country effect.” That is, rich countries tend to be more economically free and also have higher incomes with which they can provide social and economic infrastructure with which to fight poverty. Yet, the same pattern appears when we restrict our view to the 25 poorest countries. Poor economically free countries have lower poverty rates than do poor economically unfree countries.
Interestingly, the inequality phenomenon also appears at the country level. Among the 123 reporting countries, those that are most economically free exhibit less income inequality than do those that are least economically free.
Why would this be so? With economic freedom comes the ability to earn profits from one’s talents and circumstances, and some people are born with more talents and better circumstances than others. So, certainly, economic freedom should generate inequality. While true, the data suggest that the mechanisms governments use to reduce inequality actually promote more inequality than they correct. In other words, economic freedom may yield inequality, but it yields less inequality than arises when governments attempt to restrict economic freedom.
For the 75 reporting countries, child labor rates are lower among those that are more economically free.
Again, this could simply be the rich country effect. Rich countries tend to be economically free, and rich countries can afford to protect their children by instituting child labor laws. In fact, rich countries can benefit from child labor in other countries by importing cheaper goods that are made in countries that do not have child labor laws. Yet, if we look at the 26 poorest reporting countries, we find the same result. Although the child labor rates are incredibly high, they are lower among the poor economically free countries than they are among the poor economically unfree countries.
So what is worse with economic freedom? Not air pollution.
And not deforestation.
Of course, this might be another instance of the rich country effect. Rich countries can afford to preserve their forests while buying products from poor countries that have no choice but to cut down their trees. While we tend to see deforestation across the board for poor countries, poor countries that are economically free experience significantly less deforestation than do poor countries that are economically unfree.
Not only do more economically free countries enjoy more healthy economies and environments, they are also more peaceful. Countries that, according to Fraser, are more economically free are also, according to the Institute for Economics and Peace, more peaceful.
The evidence for the benefits of economic freedom doesn’t just show up at the country and state levels. It also shows up at the city level. U.S. cities (metropolitan statistical areas – MSAs) that are more economically free suffer less unemployment.
They enjoy higher median household incomes.
And they suffer less poverty.
A reasonable counterargument is that correlation is not causation and all we’ve seen here is that economic freedom is correlated with good outcomes. While true that correlation does not imply causation, also true is that the absence of correlation does imply the absence of causation. Nowhere here have we seen evidence that economic freedom is correlated with bad outcomes. Therefore, we can conclude – pending further evidence – that economic freedom does not cause bad outcomes.
What we do know is that across countries, states, cities, and time, the data tell a consistent and compelling story. Societies that are more economically free are also socioeconomically healthier.
Antony Davies is an associate professor of economics at Duquesne University and a Mercatus Affiliated Senior Scholar at George Mason University. His primary research interests include econometrics and public policy. Dr. Davies has starred in Learn Liberty programs and videos dispelling policy myths, protecting the environment, alcohol laws, government spending, immigration, and social security.
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It’s October, which means it’s one of the best months of the year for drinking beer. Whether it’s the crisp, clean taste of an Oktoberfest or the soft, spicy kick of a pumpkin ale, the seasonal brews available this month bring us some great variety after a summer of drinking our favorites.
In the three part video series below, Georgetown professor Peter Jaworski and George Mason professor Christopher Koopman discuss the economics of craft beer. They explain how the craft beer renaissance happening right now is a result of the legalizing of home brewing in the 1970s, the collaborative economy, and entrepreneurial resilience.
In the second and third videos in the series, the professors point out that beer is one of the most regulated and taxed goods in the country. These regulations, namely the three tiered distribution process, and taxes, which make up about 44 percent of the price of a beer, hurt the consumer and the industry as a whole.
If we reduce beer taxes and regulations, they explain, we’d have more beer variety at a cheaper price. Cheers to that!
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Earlier this year, I was making travel arrangements for a trip to Charleston. I booked my flight and hotel, and was about to book a rental car when I thought “wait a second. Charleston has Uber, doesn’t it?”
It does, and I took UberX—the service that allows anyone who meets Uber’s requirements to drive for money, and the service my city of Birmingham’s City Council is on record as saying it’s “what we don’t want”—all over town instead of renting a car.
Was I in danger because I was riding in minimally-regulated private cars driven by people who don’t have special licenses, special insurance, or regular government-mandated inspections? Hardly. Uber’s app gives me a driver’s rating, a picture of who is picking me up, the make, model, and license plate of the vehicle I should be looking for, and real time information on the car’s estimated time of arrival.
I have taken Uber in New York, Atlanta, San Antonio, Charleston, and DC, and I have taken Lyft in Phoenix and DC. A driver in Atlanta who picked me up at the Greyhound Station had mints and bottled water ready for passengers in his immaculately clean car. The Station is across from the Atlanta City Detention Center, so that laid to rest any fears about Uber drivers refusing service to and from “bad” neighborhoods.
I’ve had basically the same conversation with every driver: how do you like driving for Uber/Lyft? The drivers were all very enthusiastic. I met a retiree and a serviceman who were driving in order to earn extra money. I met a budding author who had just moved to Charleston to write a novel. I met someone who was driving for Uber because she was between jobs. I met at least one ex-cab driver. I met someone who owned a cab company and who preferred driving for Uber. I was “surge priced” in San Antonio. The higher price meant someone might have thought twice about taking Uber, but it drew forth an Uber driver who got me to the airport on time.
At no point did I fear for my safety. At no point did a driver carry on a phone conversation while I was in the car (that’s happened to me in a Birmingham cab) or stop for gas during my ride (same cab). Uber has never picked me up 25 minutes late and only after I called to find out where my cab was (happened with a cab). I didn’t have to fumble with credit cards and receipts or wait around while we completed the transaction after any of my Uber or Lyft rides, and I’ve never had a driver look at me like I’ve just handed him the Rosetta Stone when I’ve given him my credit card because I don’t have to reach for my credit card for Uber and Lyft rides.
Lyft and Uber offer transparency and rapid feedback opportunities. Not so with taxi companies. People are right that ridesharing services shouldn’t have their own set of special rules, but the appropriate response is not to regulate ridesharing services like they’re taxi companies. It’s to deregulate taxi companies and let competition rip.
Art Carden is an Economics Professor at Samford University and a Senior Research Fellow with the Institute for Faith, Work, and Economics, a Research Fellow with the Independent Institute, a Senior Fellow with the Beacon Center of Tennessee, and a member of the Adjunct Faculty of the Ludwig von Mises Institute. He has also starred in Learn Liberty programs and videos on personal finance, gas prices, and trade.