A Notable June Birthday

Originally Published in Flourishing May/June 2013 

Claude Frédéric Bastiat was born in Bayonne, Aquitaine, a port town in the south of France on the Bay of Biscay, on June 30, 1801. His father, Pierre Bastiat, was a prominent businessman in the town. His mother died in 1808 when Frédéric was seven years old. His father moved inland to the town of Mugron with Frédéric following soon after. The Bastiat estate in Mugron had been acquired during the French Revolution and had previously belonged to the Marquis of Poyanne.

Pierre Bastiat died in 1810, leaving Frédéric an orphan. He was taken in by his paternal grandfather and his maiden aunt, Justine Bastiat. He attended a school in Bayonne, but his aunt thought poorly of it and enrolled him in Saint-Sever. At 17, he left school at Sorèze to work for his uncle in his family’s export business. It was the same firm where his father had been a partner. Economist Thomas DiLorenzo suggests that this experience was crucial to Bastiat’s later work, since it allowed young Frédéric to acquire first-hand knowledge of how regulation can affect markets.

Bastiat began to develop intellectual interests, and he no longer wished to work with his uncle.  He dreamed of going to Paris for formal studies. This dream never came true, because his grandfather was in poor health and wished to go to the Mugron estate.  Frédéric accompanied him and took care of him.  The next year his grandfather died, leaving Frédéric the family estate, thereby providing him with the means to further his theoretical inquiries. He was 24.  Bastiat developed intellectual interests in several areas including philosophy, history, politics, religion, travel, poetry, political economy and biography. He was elected to the national legislative assembly after the French Revolution of 1848.

His public career as an economist began in 1844, when his first article was published in the Journal des Economistes in October of that year. His life and career were cut short by his untimely death in 1850. Stricken with tuberculosis, he was sent to Italy by his doctors. He first traveled to Pisa, then to Rome. On Christmas Eve of 1850, Bastiat called those with him to approach his bed. He twice whispered the words “the truth” and passed away.

***************

My thanks to the Library of Economics and Liberty for this biographical information. mh

Industry, Energy, and the Moral High Ground

Originally published in Flourishing Mar Apr 2013

I was watching television last night (March 26), when I was disturbed by a news item scrolling across the bottom of the screen.  Paraphrasing, the message was that the U.S. State Department will open new hearings on the Keystone XL pipeline project on April 18.  Huh?  I thought Hilary’s State Department had given President Obama clear passage to a decision on Keystone XL way back in 2012, long before the election.   And, I thought I’d read not long ago that the EPA Administrator was planning to resign, because she thought the President was going to approve the Keystone XL project.  So I checked, and my memory was correct.

This is why central planning and heavy-handed regulation don’t work; or perhaps I should say they don’t work for the American people or for economic progress.  We all know intuitively, I think, that political calculations in Washington more or less continuously trump reason and reality.  So, I’ve never understood how we get suckered into the belief that patently demagogic politicians and their swarm of camp followers can make better economic, environmental, and public safety decisions than the often brilliant and generally hard-working people who strive every day to offer life-enhancing products to increasingly discerning customers for a profit.  The historical evidence and our own life experience is virtually all to the contrary.  

We in the western world are the beneficiaries of the greatest development in human history—the Industrial Revolution—which enabled higher human productivity, more leisure time, faster and safer transportation, more complex scientific discoveries, safer and more comfortable places to live, and longer lives, to name just a few of its benefits; and left in its wake the Information Revolution and the emerging Biological Revolution. 

So, instead of trusting everything to the posers in Washington, I think we might want to once again embrace the free market principles that gave us that Industrial Revolution.  We could start, for example, by stopping the endlessly redundant nit-picking of every industrial project for the remote, one-in-a billion chance that somewhere, sometime, somehow, a pipeline will rupture and leave a temporary stain the size of a football field in some farmer’s patch of corn.  I mean no offense to the farmers, but do we think that the aggrieved farmer—who does retain his property rights—will not be recompensed, contractually or through the courts?

But wait, didn’t I also hear on the news yesterday that a Canadian freight train had derailed in Minnesota, spilling oil in a farm field?  Maybe we should weigh that all but trivial event—which I’m sure captured the President’s attention—against the incalculable human benefits of petroleum-based energy.  And, if you please, I’ll include nuclear and coal-based energy in my argument, too.

Really, it should be a moral embarrassment to us that in today’s world, millions of people die every year due to a lack of dependable energy supplies.  Isn’t it amazing that we environmentally aware, creature-sensitive Americans have cordoned off centuries worth of potential energy supplies in the form of natural gas, nuclear power, oil, and coal in the name of  “saving the planet”.  Rather than promote a better quality of life for desperate human beings throughout the rest of the world—which we could readily do at great economic, cultural, and moral benefit to ourselves—we instead celebrate, as  moral idealism, battery-powered cars with a driving range rivaling the distance of Tiger Woods’ 6 iron; and sorting through trash to put everything in its proper bin.  That’s a pitifully vapid—not to say inverted—path to moral self-esteem, don’t you think?

I’ve been watching this nonsense and remaining mostly silent for upwards of forty years.  But, yesterday I read something that was said by the greatest cultural icon of the 20th century in America:  Our lives begin to end the day we remain silent about the things that matter.   So—not to offend or debate, but to educate—my self-imposed muzzle has been removed.  (I know that you know that I write to you out of love; and if you’re not convinced by my argument, that’s ok.  I won’t hold it against you, and I’d appreciate the same consideration.)

We Americans have taken industrial and material progress for granted, and we’ve carelessly embraced “going green” as a moral ideal–expecting that the unprecedented standard of living we’ve enjoyed would continue.  For forty years, we’ve permitted relatively small, but politically connected and well-funded, groups of anti-industrial environmentalists to roadblock new energy production and industrial development at nearly every turn.  Some call them “tree-huggers”; but since I love trees—just as I value the clean air and clean water,  which are available only in the most energy–intense industrial economies—I just say they’re wrong.   Since policies have consequences, we’re paying the price for the government’s stifling of innovation, productivity, and growth in the energy industry with nearly nationwide economic stagnation and fruitless “green energy” cronyism.   “Going green” is doing more damage to our moral and economic future with every day that passes. 

If we freedom-loving, prosperity-seeking people continue to grant the anti-industrialists the moral high ground they claim to represent with their “green energy” agenda, they may continue to inspire support for their “green economy” suicide pact.  But, don’t miss my main point:  To sacrifice the modern human environment we enjoy here in America—fueled by petroleum, nuclear, and coal-based energy—to the non-human environment, as the anti-industrialists insist we do, is not just bad economic policy, it is immoral.  A mere moment’s reflection on the living conditions that exist in the non-industrialized world is evidence enough of that fact.  So, do we want to live like they do?  Or do we want to help them live like us?  Because those are our choices. 

The anti-industrialists like to talk about “industrial policy” by which they mean the obstruction of private industry initiatives and the demise of the large-scale energy production our modern economy requires.  The only industrial policy we really need to assure ourselves of a healthy environment, and to restore prosperity and abundance, is one which respects private property rights and individual self-determination.  As the history of western civilization since the beginning of the Industrial Revolution has demonstrated, human ingenuity and the natural human desire to create better lives for ourselves and our families will take care of the rest. mh

A Notable February Birthday

Originally published in Flourishing Jan/Feb 2013

Joseph Alois Schumpeter believed that capitalism would be destroyed by its successes.  He predicted that by its unparalleled economic output, capitalism would spawn a large intellectual class that made its living by attacking the system of economic freedom that made its own existence possible.  But, unlike Karl Marx, Schumpeter didn’t take pleasure in his predicted destruction of capitalism.

In his most famous book, Capitalism, Socialism, and Democracy1, Schumpeter defended capitalism, primarily for nurturing entrepreneurship.  Indeed, he was among the first to distinguish entrepreneurship from inventing and inventions, pointing out that entrepreneurs also innovate by creating new uses for old products, new markets, and new forms of business organization and management.  The question he said is not “how capitalism administers existing structures, … [but] how it creates and destroys them.”  This “creative destruction” is what causes continuous economic progress and improvements in the standard of living for everyone.

Schumpeter was also a giant in the history of economic thought. His magnum opus, History of Economic Analysis2, was edited by his third wife, Elizabeth Boody, who had a PhD. in English; and published posthumously in 1954.

Joseph Schumpeter was born on February 8, 1883 in Třešť, Habsburg Moravia, then part of Austria-Hungary, where his parents owned a textile factory. 

Though his father died when Joseph was just four years old, he was very familiar with business when he entered the University of Vienna to study economics and law.  While there, he was one of the more promising students of the great Austrian economist, Eugen von Böhm-Bawerk.  He earned a PhD.  in 1906, and at the age of twenty-eight he published his first major work, Theory of Economic Development3. 

After serving in several teaching appointments throughout Europe, and a brief stint as Finance Minister of Austria; Schumpeter immigrated to the United States in 1932, accepting a permanent position at Harvard.  He remained at Harvard until his retirement in 1949. 

Joseph Alois Schumpeter died at his home in Connecticut on January 7, 1950.

********************

 1.  1942. Capitalism, Socialism and Democracy.New York: Harper and Brothers. 5th ed. London, George Allen and Unwin, 1976.

2.  1954.  History of Economic Analysis. Edited by E. Boody. New York, OxfordUniversity Press.

3.  1912.  The Theory of Economic Development. Leipzig: Duncker and Humblot. Translated by R. Opie. Cambridge: HarvardUniversity Press, 1934. Reprint. New York, OxfordUniversity Press, 1961.

Hercules vs. the Hydra

Originally published in Flourishing November/December 2012

In the June 2012 issue of this newsletter, I asked you to think about the reasons for America’s high unemployment rate.  Then in the next two issues, I wrote that government interference in the form of minimum wage laws have helped raise the unemployment rate among black inner city youth to nearly 40%; and that laws favoring union bosses over non-union workers have in many states forced wages to uneconomic levels. 

The important thing to keep in mind is that for most businesses, wages are their most significant cost.  So, when the price of labor is forced to uneconomic levels by government interference, unemployment and business failures are certain to be the result.  The principle also applies to government mandated, one-size-fits-all, health insurance benefits. All labor costs—however necessary or desirable they may seem—consume capital that might otherwise be deployed in new business investment and in creating new jobs. 

Now, as an exemplar of government overreach in other areas, let’s consider the national 55 miles-per-hour speed limit.  Passed by Congress in 1974 with the intention of reducing fuel consumption, that law—when it was obeyed—increased labor costs for the obvious reason that it required at least twenty percent more time for shippers to deliver the goods.  Because it was virtually unenforceable and widely ignored, the 55 miles-per-hour speed limit was ultimately repealed in 1995.  That alone tells you just how economically silly the law was. 

Then consider that from January 1, 2009 through December 31, 2011, the Code of Federal Regulations has increased by 11,327 pages.  According to the Office of Management and Budget, that brings the total register of federal regulations to 169,301 pages.  That’s a stack of paper 32 feet high.  I’m not sure I can throw a football that high.  Common sense tells me that every one of those pages adds to the cost of doing business.  And, what are the odds that in 169,301 pages of regulations there will be contradictory and ambiguous rules? The probability must be pushing 100%.  If I’m right, a regulatory violation is virtually guaranteed for every business in America.  That makes me suspect that the real purpose of our government is not to catch criminals, but to create them. I have to ask, “How many productive jobs could be created with the dollars it takes to pay and entertain the little Caesars who dream up 11,327 pages of regulations in just three years?”

Taxes come at businesses from virtually every legislative body, and for an unending variety of “needs”.  These costs—with the exception of most sales taxes—are not generally passed along to consumers, as is frequently claimed. It’s a myth; like labor costs, they’re usually paid out of capital.  Virtually every dollar taken out of the private economy by taxes is consumed; either by the government directly—where waste, fraud, and abuse are notoriously rampant—or by those who are the beneficiaries of government largess.  These are all dollars that won’t be voluntarily invested in the expansion of existing businesses, the launching of new enterprises, or the creation of new jobs.  Higher business taxes mean fewer jobs. 

Contrary to another myth, most entrepreneurs and business managers aren’t keen to take unnecessary risks.  In recent years, though, they’ve faced bellicose, irresponsible, and undeserved taunts and vague economic threats; all for the purpose of media attention and/or political expediency.  When the most productive people in America are collectively demonized by politicians and pundits for allegedly being selfish, predatory, unpatriotic, and unnecessary—as if every successful business in America is run by Bernie Madoff or Vito Corleone—is it any great surprise that many companies, especially relatively small businesses with 50 to 500 employees and limited legal budgets, are reluctant to expand and hire new workers?  I think not.

Finally, if this discussion wore you out or made you angry—as it just did me—I’m sorry.  But, just imagine how a business executive or small business owner must feel.  Concerned for the welfare of her employees and their families, responsible to her bankers and her investors, trying desperately to provide quality products and services to her customers—all the while dealing with government’s taxes, rules, mandates, and threats—she  must feel as Hercules felt in his battle with the Hydra.  She is my hero. mh

A Notable Spring Birthday

Originally published in Flourishing April/May 2012. 

Friedrich August von Hayek was born in Vienna, Austria on May 8, 1899.  A prolific author, he made fundamental contributions in political theory, psychology, and economics. In his book Commanding Heights (1998), Daniel Yergin called Friedrich Hayek the “preeminent” economist of the last half of the twentieth century.

The major problem for any economy, Hayek argued, is how people’s actions are coordinated. He noticed, as Adam Smith had, that in a free market, the spontaneous price system did a remarkable job of coordinating people’s actions, even though that coordination was not part of anyone’s intent.

By “spontaneous” Hayek did not mean that prices were unplanned; rather, he meant that they are planned by each independent economic actor, based on his own unique circumstances, rather than by a central planning authority.  In other words, the current state of the market was not designed by anyone, but evolved slowly as the result of voluntary human interactions.

One cause of unemployment, he said, was increases in the money supply by the central bank. Such increases, he argued in Prices and Production (1931), would drive down interest rates, making credit artificially cheap. Businessmen and consumers would then make capital investments and long-range purchases that they would not have made if they had understood that they were getting a distorted price signal from a manipulated credit market.

Hayek died in 1992, but his theories, gleaned from events of the 1920s and 1930s, have proved prescient in the bursting of the Tech Bubble and the Housing Bubble. mh

Fishing for the Truth

Originally published in Flourishing April/May 2012.

It’s been said that a fish is unaware of the water in which he lives.  Similarly, many Americans have no awareness of the nature or institutions of capitalism, which make modern life the miracle it has become.  Ignoring pandemic corruption in government, and thanks to swarming political demagogues, abetted by a similarly corrupt and swarming mainstream media, many people see only instances of corruption on Wall Street and conclude that capitalism itself is corrupt.

This brings up an interesting question:  Why do even the avowed anti-capitalists rely so thoroughly on the products and institutions of capitalism?  They do it, because – as a fish lives in water – they have no choice.  Capitalism and its institutions are how human beings deal with each other spontaneously, naturally, rationally, and harmoniously.  The alternative, as history testifies – and much of Europe shows currently – is not some other viable and lasting system, but mob violence and the virtual collapse of all economic activity. 

Capitalism is the system used by anyone who wants to get things done through peaceful and voluntary cooperation with others.  Even where it has to work outside of the law, capitalism still finds some kind of traction.  Indeed, this underground capitalism, the global black market, has grown into a vast $10 trillion shadow superpower1.  We’re not talking drug dealers and human traffickers here, but networks of peaceful entrepreneurs quietly trading everything from sand and shovels to haircuts and hosiery. 

This underground capitalism is one of the world’s largest employers.  Nearly two billion people are working in jobs that are neither registered nor regulated2. They are usually paid in cash and they are frequently avoiding income taxes.  At best, this is a primitive form of capitalism, and the inexhaustible Peruvian economist Hernando de Soto3 has repeatedly shown that this is the price paid by corrupt and over-regulated economies for ignoring the virtues of free markets and the institutions of capitalism, including – most notably for de Soto – property rights and the institution of bank lending, which those rights engender.

However, we’re talking about America, the world’s most sophisticated economy.  So, suppose an American entrepreneur begins by borrowing against his savings or other valuable and legally titled assets at his local community bank; and that as his business grows, he decides to incorporate and sell shares in his business to investors.  If growth continues, he might then expand further by seeking foreign direct investment in his business in the form of additional loans that would allow him to manufacture and sell his products in countries like China and India, or Chile, Brazil and Argentina –even Europe.  But, such erudite investors might not commit to making these loans unless they’re able to limit their liquidity risk by securitizing those loans for potential resale to other investors in secondary markets, or to limit their exposure to default risk with a type of financial insurance known as a credit default swap.  How many business owners do you suppose have the ability to do all this without help?

Exactly!  That brings us back to our local community banker who first helped our “little guy” get started with a loan against his home, or his farm, or his VW microbus. Much later, perhaps, come those guys in expensive suits and ties, who know how to make billion dollar deals over dinner at Del Posto4 in New York.  We may not see it, nor fully understand it, but this is indicative of the cooperative division-of-labor process that can provide us with the miracles of modern life – from  iPods to artificial hips.  It also helps make America the world’s richest, deepest, and most resilient economy5.  [The European Union (EU) is ranked number one in GDP ($15.39 trillion versus $15.04 trillion); but of course, the EU consists of twenty-seven countries.]

Community banks are essential to local prosperity, and most of us recognize that.  But, we must also know that international banking and finance are necessary for First World prosperity and, not coincidentally, for turning New York City into a superlative urban playground, not only for the well-turned-out, but for you and me, too.

Despite the improvident pejoratives hurled by its critics, if modern capitalism didn’t exist, we would simply have to invent it.  My proof is that where it doesn’t exist, people do try to invent it. To truly prosper, a country must make it possible for savings to become capital. That means that we require banking and all of the people and institutions involved in raising, managing, and distributing capital to its highest and most effective uses.

The truth is that capitalism and its institutions of high finance are the water we swim in; and corruption aside, Wall Street’s profits are a small price to pay for our innovative and bountiful civilization.  mh

1 http://www.foreignpolicy.com/articles/2011/10/28/black_market_global_economy

2 ibid

3 The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else,  Hernando de Soto, PhD.  Basic Books, 2000.

http://delposto.com/home.htm

5 https://www.cia.gov/library/publications/the-world-factbook/rankorder/

A Notable March Birthday

Originally published in Flourishing March 2012.

The American economist James Tobin was born on March 5, 1918.  He received the 1981 Nobel Prize “for his analysis of financial markets and their relations to expenditure decisions, employment, production, and prices.”  

Tobin argued that one can’t predict the effect of monetary policy on output and unemployment simply by knowing the interest rate or the rate of growth of the money supply. Monetary policy has its effect, he claimed, by affecting capital investment, whether in plant and equipment or in consumer durables. And, although interest rates are an important factor in capital investment, they are not the only factor.

Tobin introduced the concept of “Tobin’s q” as a measure to predict whether capital investment will increase or decrease. The q is the ratio between the market value of an asset and its replacement cost.  For example, if an asset’s q is less than one—that is, the asset’s value is less than its replacement cost—then new investment in similar assets is not profitable.

Tobin’s insight was also relevant to his ongoing debate with Milton Friedman (Nobel Prize 1976) and other monetarists. Tobin argued that his q, by predicting future capital investment, would be a good predictor of economic conditions.

Tobin’s portfolio-selection theory is another of his contributions. He argued that investors balance high-risk, high-return investments with safer ones so as to achieve a balance in their portfolios. Tobin’s insights helped pave the way for further work in finance theory. 

James Tobin died on March 11, 2002.  mh

A Notable January Birthday

 

Originally published in Flourishing January 2012. 

Vernon Lomax Smith was born in Wichita on January 1, 1927.  After his father lost his job as a machinist during the Great Depression,Vernon’s family moved to a farm in western Sedgwick County.  As a teenager, he attended my parents’ alma mater,Wichita North High School, graduating in 1945. 

Vernon said that after high school, he wanted go to Cal Tech, but his high school grades weren’t good enough; so, he attended Friends University in Wichita to rehabilitate his academic record.  He then went on to earn a B.S. in Electrical Engineering from Cal Tech in 1949, an M.A. in Economics from the University of Kansas in 1952, and a PhD. in Economics from Harvard in 1955.  I guess that ain’t too bad for a farm kid. 

Dr. Smith has since held teaching and research positions at Stanford, Brown, Cal Tech,Arizona, and George Mason University, among others.  He is currently Professor of Economics at Chapman University’s Argyros School of Business and Economics and School of Lawin Orange,California; a research scholar at George Mason University Interdisciplinary Center for Economic Science; and a Fellow of the Mercatus Center.  But Wait!  There’s more:  

In 2002, Dr. Vernon Smith was awarded a Nobel Prize in Economics for his work in behavioral and experimental economics.  Most of the research that earned Dr. Smith the Nobel Prize was conducted at the University of Arizona between 1976 and 2002.

Then, at the age of seventy-eight, Dr. Smith spoke publicly for the first time about having Asperger’s Syndrome, a developmental disorder on the Autism Spectrum.  Social deficits, communication difficulties, stereotyped or repetitive behaviors and interests, and cognitive delays often characterize these disorders. 

Thank you, Dr. Smith, and Happy Birthday!

******************

I wonder….  Who—other than Vernon, and perhaps his mother—would have predicted his outstanding achievements?  mh

Entrepreneurs, Capitalists, and Income Inequality

Originally published in Flourishing January 2012.

In 2009, there were 211,254,000 Americans over the age of fifteen who earned income.  If you earned more than $205,000 in 2009 you were in the top 1%.  If you earned $55,301 or more, you were in the top 20%.  Median household income in 2009 was $49,777. * 

So, for those of you in the top 1%, please know that I appreciate that you don’t have to be on Wall Street, much less the head of Goldman Sachs, to earn at that level.   I also know that none of you started in the top 1%, and I know that concerns about falling from the 1% can keep you awake at night.  Nobody wants to travel backwards in life. 

For the rest of us, it might be helpful to ask, who are the 1%?  The answer is that they come from all walks of life, but they generally fall into three broad categories.

Many of the top 1% of income earners in Americaare small business owners or entrepreneurs.  An entrepreneur can be defined as someone who acts to identify and fulfill the needs and desires of others in the marketplace in an attempt to earn money over and above the cost of acting; e.g., to earn a profit. 

Entrepreneurship—or running a business—involves every bit as much creativity as oil painting or novel writing. It requires imagination, understanding of the relevant tools and resources, and combining them into something new and different and valuable to others.  It’s hard work, even if—and especially because—it’s mostly mental work.  Very few people want to think as much, work as hard, take as much personal risk, or assume as much responsibility as is required of the successful entrepreneur and small business owner.

Others in the top 1% of income earners inAmericainclude highly skilled professionals, such as doctors, lawyers, executives, athletes, and entertainers.  Let’s give them their due; most of them work really hard, put in very long hours, and they have to study and train continuously to keep up with the demands of their professions.  For better or worse, most of us are lacking either the candlepower, or physical attributes, or work ethic that it usually takes to succeed in these challenging fields of endeavor.

That brings me to the capitalists, who make up a substantial portion of the 1% and much of the top 20%.  Most of today’s capitalists are people just like you and me.  In fact, they include you and me.  So, what do we do that makes us capitalists?

We do two things, and each is an incredibly valuable service to our fellow human beings; and each was an essential factor in the advance of our species from cave-dweller to homeowner, from fruit scavenger to grocery shopper.  The two things?

We defer consumption (we wait); and B) We assume risk.

Deferred consumption (waiting) was and is essential to human advancement for the simple reason that the production of food, clothing, and shelter takes time.  While we capitalists are waiting for the return of our money, entrepreneurs are using it to build and finance factories, houses, and automobiles; to create and market cell phones; to plant and harvest crops; and to do a million other things that take both time and money—a lot of time and a lot of money.  Because we wait for the return of our money (our capital), entrepreneurs and businesses can offer their hourly or salaried employees a regular paycheck.

We capitalists also bear the risk that the money we’ve saved and invested (rather than consumed) will be lost.  While the worker expects to be paid regularly, usually at least once a month, the capitalist may have to put his money at risk for years while awaiting a return on his investment. 

Sometimes, of course, two or more of the roles of entrepreneur, professional, capitalist, and employee are combined in one person.  And for each of those functions, it’s reasonable to expect compensation—sooner or later—depending on the terms and performance of each role. So now, let’s consider the fact of income inequality. 

First, although members of each of the three top earning groups I’ve just discussed are typically very smart, work really hard, and are very disciplined; that’s not the only reason they are in the top 20%, or even the top 1%.  We know this, because there are millions of smart, hardworking, and disciplined people, who are not in the top 20%.

The most basic reason that people make it into the top tiers of income earners is that there is a significant demand for who they are, or for what they do, or for what they’re selling—and they fulfill that demand more effectively or more completely than their competitors.  Each and every day, millions of Americans, and billions of people around the world, make purchasing decisions.  Those decisions ultimately determine what every product and service will cost, how many of each will be produced, and who will be rewarded.

If you’re a really good soldier, marine, or sailor; or teacher, or policeman, or fireman; or if you’re working in any of the thousands of worthy occupations from which we all choose, and you’re not in the top tiers of income earners, that may not seem fair.  But, of course, each of us makes our own “purchasing decision” when we decide what kind of work we want to do.   

We know going in what the potential of any job or career is or might be.  That potential is set by the demand for our occupation, how well we perform in it, and how many others are competing with us for a limited number of jobs, customers, clients, patients, investment opportunities, etc.

For example, investment bankers generally earn more than accountants, because, although accountants may be just as smart and hard-working, they are usually less tolerant of risk.  There are many more good accountants, therefore, than there are really good investment bankers.  A good chef will usually earn more than a short-order cook for very similar reasons.  In any field, skill and the willingness to tolerate risk and uncertainty are rarities, and they are usually accompanied by higher compensation. 

Which brings me to the concept of The Pyramid of Ability and The Law of Comparative Advantage

When it comes to playing basketball, I’m no Michael Jordan.  Heck, I’m no Jay Hrabik.  You may not know Jay, but he was the best player on our high school basketball team. (I was the 25th player on a team of 12.)  After serving in the U.S. Army for three years during theVietnamera, Jay became a CPA; but I’m getting ahead of myself.

After high school, and before Jay enlisted in the Army, he and I worked together at Bike’s Burger Bar.  Though Jay still disputes it, our skills as hamburger flippers were about equally developed.  I’m just guessing, but in hamburger flipping, Michael Jordan could probably have kept pace with either of us.  My point is that on the pyramid of ability, the three of us may have been equally talented hamburger flippers, and if we had all held that job at that time, we might have earned similar incomes. 

Again, I’m just guessing, but it’s very possible that Michael Jordan could have become either an investment advisor or an accountant.  On the pyramid of ability with regard to numbers, Jay, MJ, and I may have been similarly skilled, and we might have earned similar incomes, just as in flipping burgers. 

The good news for Jay and me is that fewer people can qualify to be accountants and investment advisors than can flip hamburgers.  That helps to explain why we gave up our jobs at Bike’s Burger Bar. 

But, Michael Jordan not only waived the opportunity to flip burgers, he passed on the chance to become either an accountant or an investment advisor.  That may not have been good news for the few people who would have become MJ’s clients, but it was great news for the millions of people who enjoyed watching “His Airness” play basketball. 

That’s The Law of Comparative Advantage, which probably also explains why Michael Jordan is making underwear commercials, and I’m not.   Neither, as far as I know, is Jay.

Do I resent the fact that Michael Jordan is in the top 0.01% of income earners?  Would I be better off if Michael Jordan earned less than he does?  Is Michael Jordan somehow taking something away from me? 

If Jay had grown up in another town, would that have made me a better basketball player?  If Michael Jordan had earned less money, would I have earned more?

The answers to all of these questions are obvious:  No!

Now, imagine that instead of becoming the greatest basketball player of all time, Michael Jordan had become a billionaire oil producer; or a billionaire investment banker; or a billionaire movie star. Are the answers any different? 

They are not.  Each of us is judged in the marketplace by our employers and our potential employers, our customers and our potential customers, our clients and our potential clients, our fans and potential fans.  Through their purchasing decisions, they tell us what our products and services are worth to them, and we can choose whether to provide them, or not. 

The incredibly wide range of products and services—and the equally wide  range of qualities and skills—offered in the marketplace, explains why there is such a wide range of income. 

Sometimes, we may feel we’re being judged unfairly or inaccurately.   But if that’s truly the case, it’s our responsibility to seek other markets or to develop new skills.  mh

*http://politicalcalculations.blogspot.com/2010/12/thats-your-us-income-ranking.html

Congress and the Fed: Unindicted Co-Conspirators

Originally published in Flourishing November 2008.

In a brazen display of ignorance and/or cynicism, members of the media and virtually every nationally recognized politician have characterized the current credit crisis as a failure of laissez-faire capitalism.  Excuse me?  This crisis was created by the Federal Reserve, aided and abetted by the explicit demands made of the private capital markets by an irresponsible and unrepentant Congress.  An unregulated market would never have tolerated debt-to-equity ratios of 20:1, 30:1, 40:1 or in the case of those government sponsored entities, Fannie and Freddie, 70:1.  It’s plain as the nose on my face:  Take a look at the balance sheets of the best-managed companies in unregulated industries.  You’ll find debt-to-equity ratios in the range of 1:2 or 1:3.  In an unregulated, un-coerced mortgage banking industry, similar ratios would undoubtedly be demanded by shareholders and lenders.

The fact is that job-creation and economic progress depend on private savings, massive private investment in capital goods (plants, tools, and equipment), and innovation; and that these in turn depend on an economically sound banking system and the freedom of businessmen, entrepreneurs, and capitalists to earn high profits and to accumulate great wealth.  None of these depend on “easy money” doled out by the Federal Reserve Banking System or Congress.  Our leaders do not see—or will not admit—that production must precede consumption.  In an attempt to overturn this causal order, they still throw more cheap money at the problem they created with cheap money.  Good luck, boys and girls; for as history and the great economists—from Adam Smith to Ludwig von Mises—have long ago shown, cheap money ultimately begets hyperinflation or deflation or both.

The menacing truth—ignored by the pundits and posers—is that government-mandated credit expansion was never more than the attempt by politicians to gain favor with their contemporary electorate at the expense of tomorrow’s taxpayers.  My economics professor, Dr. George Reisman, calls this “the loot and plunder theory” of economics.  It is the loot and plunder theory—being practiced against every productive and conscientious American—that is responsible for the credit crisis.  mh