Category Archives: Central Planning

Central Planning Fails to Scale, Unlike Spontaneous Order

05 Tuesday Jun 2018

Posted by in Central Planning, Markets, Price Controls

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The proposition that mankind is capable of creating a successful “planned” society is at least as old as the Bronze Age. Of course it’s been tried. The effort necessarily involves a realignment of the economic and political landscape and always requires a high degree of coercion. But putting that aside, such planning can never be successful relative to spontaneous order of the kind that dominates private affairs in a free society. The task of advancing human well-being given available resources has never been achieved under central planning. It always fails miserably in this regard, and it always will fail to match the success of decentralized decision-making and private markets.

There are various ways to explain this fact, but I recently came across an interesting take on the subject having to do with the notion of scalability. Francis Turner offers this note on the topic at the Liberty.me blog. To begin, he gives a lengthy quote from a software developer who relates the problems of social and economic planning to the complexity of managing a network. On the topic of scale, the developer notes that the number of relationships in a network increases with the square of the number of its “nodes”, or members:

“2 nodes have 1 potential relationship. 4 nodes (twice as many) has 6 potential relationships (6 times as many). 8 nodes (twice again) has 28 potential relationships. 100 nodes => [4,950] relationships; 1,000 nodes => 499,500 relationships—nearly half a million.“

Actually, the formula for the number of potential relationships or connections in a network is n*(n-1)/2, where n is the number of network nodes. The developer Turner  quotes discusses this in the context of two competing network management structures: client-server and peer-to-peer. Under the former, the network is managed centrally by a server, which communicates with all nodes, makes various decisions, and routes communications traffic between nodes. In a peer-to-peer network, the work of network management is distributed — each computer manages its own relationships. The developer says, at first, “the idea of hooking together thousands of computers was science fiction.” But as larger networks were built-out in the 1990s, the client-server framework was more or less rejected by the industry because it required such massive resources to manage large networks. In fact, as new nodes are added to a peer-to-peer network, its capacity to manage itself actually increases! In other words, client-server networks are not as scalable as peer-to-peer networks:

“Even if it were perfectly designed and never broke down, there was some number of nodes that would crash the server. It was mathematically unavoidable. You HAVE TO distribute the management as close as possible to the nodes, or the system fails.

… in an instant, I realized that the same is true of governments. … And suddenly my coworker’s small government rantings weren’t crazy…”

This developer’s epiphany captures a few truths about the relative efficacy of decentralized decision-making. It’s not just for computer networks! But in fact, when it comes to network management, the task is comparatively simple: meet the computing and communication needs of users. A central server faces dynamic capacity demands and the need to route changing flows of traffic between nodes. Software requirements change as well, which may necessitate discrete alterations in capacity and rules from time-to-time.

But consider the management of a network of individual economic units. Let’s start with individuals who produce something… like widgets. There are likely to be real economies achieved when a few individual widgeteers band together to produce as a team. Some specialization into different functions can take place, like purchasing materials, fabrication, and distribution. Perhaps administrative tasks can be centralized for greater efficiency. Economies of scale may dictate an even larger organization, and at some point the firm might find additional economies in producing widget-complementary products and services. But eventually, if the decision-making is centralized and hierarchical, the sheer weight of organizational complexity will begin to take a toll, driving up costs and/or diminishing the firm’s ability to deal with changes in technology or the market environment. In other words, centralized control becomes difficult to scale in an efficient way, and there may be some “optimal” size for a firm beyond which it struggles.

Now consider individual consumers, each of whom faces an income constraint and has a set of tastes spanning innumerable goods. These tastes vary across time scales like hour-of-day, day-of-week, seasons, life-stage, and technology cycles. The volume of information is even more daunting when you consider that preferences vary across possible price vectors and potential income levels as well.

Can the interactions between all of these consumer and producer “nodes” be coordinated by a central economic authority so as to optimize their well-being dynamically, subject to resource constraints? As we’ve seen, the job requires massive amounts of information and a crushing number of continually evolving decisions. It is really impossible for any central authority or computer to “know” all of the information needed. Secondly, to the software developer’s point, the number of potential relationships increases with the square of the number of consumers and producers, as does the required volume of information and number of decisions. The scalability problem should be obvious.

This kind of planning is a task with which no central authority can keep up. Will the central authority always get milk, eggs and produce to the store when people need it, at a price they are willing to pay, and with minimal spoilage? Will fuel be available such that a light always turns on whenever they flip the switch? Will adequate supplies of medicines always be available for the sick? Will the central authority be able to guarantee a range of good-quality clothing from which to choose?

There has never been a central authority that successfully performed the job just described. Yet that job gets done every day in free, capitalistic societies, and we tend to take it for granted. The massive process of information transmission and coordination takes place spontaneously with spectacularly good results via private discovery and decision-making, secure property rights, markets, and a functioning price mechanism. Individual economic units are endowed with decision-making power and the authority to manage their own relationships. And the spontaneous order that takes shape remains effective even as networks of economic units expand. In other words, markets are highly scalable at solving the eternal problem of allocating scarce resources.

But thus far I’ve set up something of a straw man by presuming that the central authority must monitor all individual economic units to know and translate their demands and supplies of goods into the ongoing, myriad decisions about production, distribution and consumption. Suppose the central authority takes a less ambitious approach. For example, it might attempt to enforce a set of prices that its experts believe to be fair to both consumers and producers. This is a much simpler task of central management. What could go wrong?

These prices will be wrong immediately, to one degree or another, without tailoring them to detailed knowledge of the individual tastes, preferences, talents, productivities, price sensitivities, and resource endowments of individual economic units. It would be sheer luck to hit on the correct prices at the start, but even then they would not be correct for long. Conditions change continuously, and the new information is simply not available to the central authority. Various shortages and surpluses will appear without the corrective mechanism usually provided by markets. Queues will form here and inventories will accumulate there without any self-correcting mechanism. Consumers will be angry, producers will quit, goods will rot, and stocks of physical capital will sit idle and go to waste.

Other forms of planning attempt to set quantities of goods produced and are subject to errors similar to those arising from price controls. Even worse is an attempt to plan both price and quantity. Perhaps more subtle is the case of industrial policy, in which planners attempt to encourage the development of certain industries and discourage activity in those deemed “undesirable”. While often borne out of good intentions, these planners do not know enough about the future of technology, resource supplies, and consumer preferences to arrogate these kinds of decisions to themselves. They will invariably commit resources to inferior technologies, misjudge future conditions, and abridge the freedoms of those whose work or consumption is out-of-favor and those who are taxed to pay for the artificial incentives. To the extent that industrial policies become more pervasive, scalability will become an obstacle to the planners because they simply lack the information required to perform their jobs of steering investment wisely.

Here is Turner’s verdict on central planning:

“No central planner, or even a board of them, can accurately set prices across any nation larger than, maybe, Liechtenstein and quite likely even at the level of Liechtenstein it won’t work well. After all how can a central planner tell that Farmer X’s vegetables taste better and are less rotten than Farmer Y’s and that people therefore are prepared to pay more for a tomato from Farmer X than they are one from Farmer Y.”

I will go further than Turner: planning can only work well in small settings and only when the affected units do the planning. For example, the determination of contract terms between two parties requires planning, as does the coordination of activities within a firm. But then these plans are not really “central” and the planners are not “public”. These activities are actually parts of a larger market process. Otherwise, the paradigm of central planning is not merely unscalable, it is unworkable without negative consequences.

Finally, the notion of scalability applies broadly to governance, not merely economic planning. The following quote from Turner, for example, is a ringing endorsement for federalism:

“It is worth noting that almost all successful nations have different levels of government. You have the local town council, the state/province/county government, possibly a regional government and then finally the national one. Moreover richer countries tend to do better when they push more down to the lower levels. This is a classic way to solve a scalability problem – instead of having a single central power you devolve powers and responsibilities with some framework such that they follow the general desires of the higher levels of government but have freedom to implement their own solutions and adapt policies to local conditions.” 

Corporate Lapdogs of the Left

04 Wednesday Apr 2018

Posted by in Central Planning, Identity Politics, Progressivism, rent seeking

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ceo

Now don’t get me wrong, I definitely prefer to see private goods and services produced privately, not publicly. Private ownership of the means of production makes the world a better place because ownership and self-interest drive performance and value, to put it all too briefly. But corporate America is now so thoroughly encumbered by ideological distractions that it compromises the mission of creating value, risking shareholder returns and invested capital as well. Having spent the past 31 years employed successively by three gigantic corporate hairballs (with a 2-year stint at the central bank), the following thesis about corporate CEOs, and corporate America by extension, strikes me as wholly accurate:

“CEOs … mostly [reject] the ethos of rugged individualism in favor of a more collectivist view of the world. The capitalists [are] not much interested in defending the culture of capitalism. … the psychological and operational mechanics of large corporations [are] much like those of other large organizations, including government agencies … American CEOs [believe] that expertise deployed through bureaucracy [can] impose rationality on such unruly social entities as free markets, culture, family, and sexuality. The supplanting of spontaneous order with political discipline is the essence of progressivism….“

I changed the tenses used above by Kevin Williamson, who attempts to explain why American corporations became such progressive activists. The beginning of the quote describes interviews conducted by William H. Whyte in the 1950s, but it’s as true now as it was then, and probably much more so. The technocratic view of organizational efficacy may be true up to a point. In fact, there is undoubtedly an optimal size for any organization that is dependent upon it’s mission, the technologies at its disposal, and the range of prices it is likely to face in input and output markets. It’s all too easy for a successful firm to expand beyond that point, however, as many now-defunct businesses have learned the hard way. However, the quote merely highlights the sympathetic view often held by corporate managements toward the notion of a planned society, guided by a class of technocrats. They share this scientistic line of thinking with the statist left, though the corporatist vision is a world in which their private organizations play a critical role, with risks mitigated by “partners” in government.

Private incentives can produce wonderful results, but they are corrupted by the scent of private advantage that can be gained via government intervention in markets. The corporate practice of seeking rents through legislative and administrative action has been going on since at least the 1880s, when railroads sought protection from competition and other shipping interests via federal regulatory action.The symbiosis between government and corporate interests, or corporatism, has been growing ever since. Whether it is lucrative contract awards, subsidies, or favorable regulation, government has lots of goodies at its disposal by virtue of its exclusive ability to exert coercive power. This quote of David Cay Johnston describes the end-product of corporate rent-seeking behavior:

“Corporate socialism is where we socialize losses and privatize gains. Companies that have failed in the marketplace stick the taxpayers with their losses, but when they make money they get to keep it, and secondly, huge amounts of capital are given to companies by taxpayers.”

Risk mitigation is at the heart of a second variety of corporate leftism, and Williamson notes the asymmetry in the political risks faced by most corporations:

“Conservatives may roll their eyes a little bit at promises to build windmills so efficient that we’ll cease needing coal and oil, but progressives (at least a fair portion of them) believe that using fossil fuels may very well end human civilization. The nation’s F-150 drivers are not going to organize a march on Chevron’s headquarters if it puts a billion bucks into biofuels, but the nation’s Subaru drivers might very well do so if it doesn’t. … The same asymmetry characterizes the so-called social issues.“

At this point, Williamson goes on to describe a few social issues on which corporate leaders are frequently harangued by the left. Those leaders may view conservative positions on those issues as aberrant, according to Williamson, because the leaders inhabit an insulated world of elitist, media-driven, politically-correct opinion. They wish to be seen as “progressive” and discount the risk of offending conservatives. While I do not take Williamson’s side on all of the social issues he mentions, I concede that there is some truth to the asymmetry he describes.

An avenue through which corporate America is strongly influenced by the left is identity politics. This is partly an unfortunate side-effect of civil rights legislation and other anti-discrimination law, but in today’s litigious environment, there are excessive legal risks against which corporations must take precautions. This is embedded in human resource policies to the point at which hiring the best individual to fill a role is subject to a series of costly, time-consuming hurdles, and is sometimes impossible. Then, there are the mandatory “Diversity and Inclusion” courses that all employees are required to complete. These overbearing attempts to “educate” the work force consume valuable staff time and are of questionable value in light of the aggravation and resentment they inspire in employees. Finally, I can’t keep count of all the corporate-sponsored activities devoted to celebrating one identity group after another. Can we please get back to work?

Today, as a consumer, it is becoming more difficult to engage in commerce without exposure to a seller’s political positioning. For example, I buy about 90% of my clothing from a particular clothier, but last weekend I learned that the company had taken an objectionable position (to me) in the debate over gun legislation. I am certain that activists badgered the company, and it succumbed, and so I will change my shopping habits. People often find that it’s easier to engage in arms-length transactions when the other party stays off the soapbox. But it goes further than that. Here is Williamson:

“Whereas the ancient corporate practice was to decline to take a public position on anything not related to their businesses, contemporary CEOs feel obliged to act as public intellectuals as well as business managers.“

Well, “ancient” might take it a bit too far, but as a customer, employee, and especially as a shareholder, I would urge any company to steer clear of political posturing. Do not dilute your mission of delivering value to customers, which dovetails with serving the interests of shareholders. You must pursue that mission in a way that you consider responsible and ethical, which just might narrow the scope of the mission. And that’s okay. Just be as neutral as possible on extraneous issues as you reach out to potential customers, and do not respond to politically-motivated threats except in the most diplomatic terms.

Should I bother to say that corporations should eschew public subsidies? That they should respond to competition by improving value, rather than lobbying for advantages and protection from lawmakers or regulators? That they should not badger their employees to give to their company’s Political Action Committee (PAC)?

I must be fantasizing! Corporations would never follow that advice, not as long as they can capture rents through the seductive expedient of big government. If that were the only reason for the hate reserved by leftists for corporate America, I’d be right with them. But in fact, leftist rhetoric condemns the profit motive generally, both in principle and as a method of scapegoating for any social ill. Williamson marvels at the incredible irony of the corporate enterprise-cum-lapdog of the Left, which is especially palpable as the Left beats the dog so unrelentingly.

Carried Interest and Your Private Sweat Equity

30 Saturday Dec 2017

Posted by in Central Planning, Taxes

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Suppose your rich uncle buys an old house to do some fix-ups and hopes to resell it at a gain. He has the cash and is willing to split the profit 50-50 if you’re willing to handle a few restorations over the next year. Even better, under the partnership he’ll form with you, your profit will be taxed as a pass-through capital gain. You’ll be taxed at only 15% (or 20% if your income is already very high). You’ll provide the labor, but your cut won’t be taxed at ordinary income tax rates.

That’s Just Like Carried Interest

A similar example is provided by Greg Mankiw, along with several others, to illustrate the ambiguity of “capital gains” under our tax law. What might surprise you is that the tax treatment of the deal with your uncle is exactly the same as the tax benefit received by the general partner (GP) in a private equity fund. The GP is the “worker”, as it were, who manages the capital paid-in by the fund’s investors (or limited partners). The GP attempts to build the fund’s value in various ways. The investors, on the other hand, take the same role as your uncle. The GP earns fees as a cut of the investment gains; those fees are essentially treated as capital gains for tax purposes. In the case of the private equity GP, however, the income is called “carried interest”, but there is no real difference.

The tax treatment of carried interest has been a target of progressives and populist critics for many years. This article in The Hill derides the GOP’s failure to close the carried interest “loophole” in the Tax Cut and Jobs Act (TCJA) recently signed into law by President Trump. Of course, wealthy private-equity players have sought to protect the rule with generous campaign contributions to key politicians. However, as illustrated by the partnership with your uncle, pass-through business taxation combined with the treatment of capital gains provides the same benefits to any business-person who invests “sweat equity” into the improvement of an asset for ultimate resale, including the business itself.

Should “sweat equity” earned by a worker be taxed more lightly than the direct receipt of “sweat wages”? The worker does not “own” the asset in question prior to the work effort, a fundamental distinction from what we normally consider to be a capital gain. On the other hand, the worker shoulders risk that the asset’s value will fail to meet expectations. My view is that it is not appropriate for the tradeoff between private risk and return to be managed via the income tax code or by government generally. Nevertheless, the sweat-equity conversion of labor value into asset appreciation is treated by tax law as a capital gain and is taxed at a lower rate than wages (except at low levels of taxable income).

Equal Protection Under the Tax Law

The carried interest rule and relatively “light” taxation of returns on capital are not at the root of the problem here. Rather, it is the disparate treatment of different kinds of income for tax purposes and the high taxation of ordinary income, even in the wake of the the TCJA’s passage. Diane Furchtgott-Roth argues that the low carried-interest tax rate is necessary to encourage productive investment. Peter Wayrich agrees, but again, that is not a good rationale for disparate (and high) taxation of labor income. This note in the Economic Policy Journal contains a quote on Senator Ron Johnson’s proposal to tax all productive entities at the 20% carried-interest tax rate. The potential loss of revenue might require a higher rate, but the proposition that rates should be equal across all forms of business organizations is more sensible than the complex changes promulgated for pass-throughs under the TCJA. Moreover, the progressive premise that tax rates on capital income should be high is a prescription for low rates of saving, a diminished pool of investment capital, and ultimately low growth in labor productivity and wages.

Demonizing Private Equity

The private equity business is criticized for reasons other than carried interest, but mainly due to superstition that these firms routinely engage in plundering healthy enterprises to extract value and victimize helpless employees by reducing wages or leaving them without work. Simple economics reveals the shallow thinking underlying such claims. As a first approximation, private equity can be profitable only when target firms are under-performing or undervalued. A healthy market for business ownership is necessary to ensure that firms with untapped value survive. Weak performance might stem from any number of circumstances but must be addressable under new management. That includes a management shakeup itself, and it could include a capital infusion to upgrade facilities, elimination of unprofitable product lines, a spin-off from a neglectful parent company, or wage renegotiation to improve competitiveness (but never ask a leftist if wages are too high, even as the employer fails).

Interest Deductibility

The tax benefits of carried interest enhance private equity deals relative to traditional merger and acquisition activity. Again, that illustrates the oddity of having different tax rules for different firms. In the past, the gains from carried interest have been magnified by another unfortunate aspect of the tax code: the interest-deductibility of business debt. The TCJA doesn’t completely eliminate this economic peculiarity, but it places a severe restriction on its use (see #6 on the list at the link).

In general, interest deductibility has favored the use of debt in the capital structures of all businesses. That leverage increases financial risk and bids up the level of interest rates faced by all borrowers. Private equity firms have made liberal use of debt in structuring buyouts. Their borrowing capacity combined with carried interest and the debt subsidy has undoubtedly made deals more attractive at the margin.

The new restriction on interest deductibility is likely to reinforce an existing trend in private equity: gradually, GPs have been putting more “skin in the game“. That is, they are risking a bit more of their own capital. That is generally a good thing for investors. The article at the last link was written in March 2017, so the data shown for 2017 is almost meaningless. In 2016, however, the average GP commitment as a percentage of fund size was still less than 8% and the median was just 4%. These percentages should continue to increase with competition for deals and more restricted deductibility of interest expense.

Taxes and Value

If you want to encourage value-maximizing behavior, then don’t tax its makers (or its markers) heavily. Carried interest extends the tax treatment of “sweat equity” to those who “police” the private sector for unexploited value: private equity firms. By eliminating waste, resuscitating formerly productive enterprises, and exploiting new profit opportunities, their efforts are socially accretive. The popular narrative of an “evil” and “vulturous” private equity industry is both misleading and destructive. Beyond that, there is no reason to tax different forms of productive activity at different rates, but we do. The TCJA has lessened the tax disparities to some extent, but more equalization should be a priority. At least the business interest deduction has been restricted, which should lessen the artificial reliance on borrowed capital.

Suspending the Economic Problem With Free Stuff

27 Saturday Aug 2016

Posted by in Central Planning, Socialism, Subsidies

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denial

When things are scarce, they can’t be free. That’s an iron law of economics. It’s true of everything we ever wish for and almost everything we take for granted. Things are naturally scarce, but when we are told that things can be free, it always comes from likes of whom Jeffrey Tucker calls “scarcity deniers”. Bernie Sanders and Hillary Clinton have told America that a college education should be free, and a large number of people take that seriously. They are scarcity deniers. On one level, the Sanders/Clinton claim is like any other promise that simply cannot be met at the stated cost — a rather garden-variety phenomenon among politicians. These promises are not harmless, as such initiatives usually involve budget overruns, compromised markets, underproduction and wasted resources.

The Sanders/Clinton claim, however, is a form of scarcity-denial that comes almost exclusively from the political left. That is really the point of Tucker’s article:

“This claim seems to confirm everything I’ve ever suspected about socialism. It’s rooted in a very simple error, one so fundamental that it denies a fundamental feature of the world. It denies the existence and the persistence of scarcity itself. That is to say, it denies that producing and allocating is even a problem. If you deny that, it’s hardly surprising that you have no regard for economics as a discipline of the social sciences.“

Our socialist friends (who otherwise claim to be defenders of science) contend that free things can be offered to a broad swath of the population with little consequence. The least cynical among them (perhaps including Sanders) believe that the costs can be shouldered by the wealthy and/or big corporations and banks. Others (including Clinton) know that the cost of “free things” must be met by higher taxes on a broader share of the population. Doesn’t that mean they recognize scarcity? Only superficially, because they fail to grasp the dynamics of resource allocation, the subtle forms in which costs are imposed, and the true magnitude of those costs.

If a thing is scarce, available supplies must be balanced against demand. The reward to suppliers at the margin must match the willingness of buyers to pay. That means there is no surplus and waste, nor any loss attendant to shortage and non-price rationing. The price creates an incentive for consumers to conserve and an incentive for producers to bring additional supplies to market when they are demanded.

A crucial prerequisite for this to work is the establishment of secure property rights. Then, absent coercion, one can’t overuse what isn’t theirs. One can’t simply take a thing from those who create it without a mutually agreeable payment. Creators cannot be forced to respond on demand without compensation. No one can be required to husband resources for others to simply take. No one can be asked to pay for a thing that will be commandeered by others. The establishment of property rights serves these purposes. Incentives become meaningful because they can be internalized by all actors — those consuming and those producing. And the incentives solve the problem of scarcity by balancing the availability of things with needs and desires, and balance them against all other competing uses of resources. Then, the market-clearing price of a thing reflects its degree of scarcity relative to other goods.

The socialist bluster holds that all this is nonsense. Would-be central planners propose that more of a thing be produced because they deem it to be of high value. Furthermore, it must be made available to buyers at a price the planners deem acceptable, or quite possibly for free to their intended constituency! Property rights are violated here in several ways: first, the owner/producer’s authority over their own resources is declared void; second, the owner has no incentive to care for their resources in a responsible and sustainable way; third, a confiscation of resources from others is required to pay at least some of the costs; fourth, the beneficiaries overuse and degrade the resource.

We know a scarce thing cannot be provided for free. Here are some consequences of trying:

  • Overuse of resources. When the buffet is free, the food disappears.
  • The “free thing” will be over-allocated to those who benefit and value it the least. (Example: the education of students for whom there are better alternatives.)
  • Supplies will evaporate unless producers are fully compensated. Otherwise, quality and quantity will deteriorate. This is a form of “contrived scarcity” (HT: Don Boudreaux).
  • If supplies dwindle, new forms of rationing will be necessary. This might involve time-consuming queues, arbitrary allocations, bribes, side payments and favoritism.
  • If suppliers are compensated, someone must pay. That means taxes, public borrowing or money printing.
  • Taxes weaken productive incentives and chase resources away. The consequent deterioration in productive capacity undermines the original goal of providing  something “for free” and inflicts costs on the outcomes of all other markets. This creates more contrived scarcity.
  • So-called progressive taxes tend to hit the most productive classes with the greatest negative force.
  • Government borrowing to fund “free stuff” today inflicts costs on future taxpayers. More fundamentally, it misallocates resources toward the present and away from the future.
  • Printing money to pay for a “free thing” might well cause a general rise in prices. This is a classic, hidden inflation tax, and it may involve the distortion of interest rates, leading to an inter-temporal misallocation of resources.

Scarcity denial is a carrot, but it inevitably becomes a stick. To voters, and to naive shoppers in the marketplace of ideas, the indignant assertion that things can and should be free is powerful rhetoric. Producers, too, might happily accept “free-stuff” policies if they expect to be fully compensated by the government, and they might be pleased to have the opportunity to serve more customers if they think they can do so profitably. However, serving all takers of “free stuff” will escalate costs and is likely to compromise quality. It is also likely to create unpleasant circumstances for customers, such as long waiting times and unfulfilled orders. The stick, on the other hand, will be brandished by the state, blaming and penalizing suppliers for their failure to meet expectations that were unrealistic from the start. The fault for contrived conditions of scarcity lies with the policy itself, not with producers, except to the extent that they allowed themselves to be duped by scarcity deniers. Tucker notes the following:

“Things can be allocated by arbitrary decision backed by force, or they can be allocated through agreement, trading, and gifting. The forceful way is what socialism has always become.“

Politicians and would-be planners with the arrogance to claim that naturally scarce things should be free are dangerous to your welfare. These scarcity deniers cannot provide for human needs more effectively than the free market, and ultimately their efforts will make you subservient and poor.

The Fascist Roader

04 Thursday Aug 2016

Posted by in Central Planning, fascism

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Obamas - fascist world government

 

 

 

 

 

 

 

 

President Obama is a believer in centralized social and economic management, despite the repeated disasters that have befallen societies whose leaders have applied that philosophy in the real world. Those efforts have often taken the form of socialism, with varying degrees of government ownership of resources and productive capital. However, it is not necessary for government to own the means of production in order to attempt central planning. You can keep your capital as long as you take direction from the central authority and pay your “fair share” of the public sector burden.

A large government bureaucracy can coexist with heavily regulated, privately-owned businesses, who are rewarded by their administrative overlords for expending resources on compliance and participating in favored activities. The rewards can take the form of rich subsidies, status-enhancing revolving doors between industry and powerful government appointments, and steady profits afforded by monopoly power, as less monied and politically-adept competitors drop out of the competition for customers. We often call this “corporatism”, or “crony capitalism”, but it is classic fascism, as pioneered by Benito Mussolini’s government in Italy in the 1920s. Here is Sheldon Richman on the term’s derivation:

“As an economic system, fascism is socialism with a capitalist veneer. The word derives from fasces, the Roman symbol of collectivism and power: a tied bundle of rods with a protruding ax.“

With that in mind, here’s an extra image:

Mussolini Quote

The meaning of fascism was perverted in the 1930s, as noted by Thomas Sowell:

“Back in the 1920s, however, when fascism was a new political development, it was widely — and correctly — regarded as being on the political left. Jonah Goldberg’s great book ‘Liberal Fascism’ cites overwhelming evidence of the fascists’ consistent pursuit of the goals of the left, and of the left’s embrace of the fascists as one of their own during the 1920s. … 

It was in the 1930s, when ugly internal and international actions by Hitler and Mussolini repelled the world, that the left distanced themselves from fascism and its Nazi offshoot — and verbally transferred these totalitarian dictatorships to the right, saddling their opponents with these pariahs.“

The Obama Administration has essentially followed the fascist playbook by implementing policies that both regulate and reward large corporations, who are only too happy to submit. Those powerful players participate in crafting those policies, which usually end up strengthening their market position at the expense of smaller competitors. So we have transformational legislation under Obama such as Obamacare and Dodd-Frank that undermine competition and encourage concentration in the insurance, health care, pharmaceutical  and banking industries. We see novel regulatory interpretations of environmental laws that destroy out-of-favor industries, while subsidies are lavished on favored players pushing economically questionable initiatives. Again, the business assets are owned by private cronies, but market forces are subjugated to a sketchy and politically-driven central plan designed jointly by cronies inside and outside of government. That is fascism, and that’s the Obama approach. He might be a socialist, and that might even be the end-game he hopes for, but he’s a fascist in practice.

As Sowell points out, Obama gains some crucial advantages from this approach. For starters, he gets a free pass on any claim that he’s a socialist. And however one might judge his success as a policymaker, the approach has allowed him to pursue many of his objectives with the benefit of handy fall-guys for failures along the way:

“… politicians get to call the shots but, when their bright ideas lead to disaster, they can always blame those who own businesses in the private sector.  Politically, it is heads-I-win when things go right, and tails-you-lose when things go wrong. This is far preferable, from Obama’s point of view, since it gives him a variety of scapegoats for all his failed policies, without having to use President Bush as a scapegoat all the time.

Thus the Obama administration can arbitrarily force insurance companies to cover the children of their customers until the children are 26 years old. Obviously, this creates favorable publicity for President Obama. But if this and other government edicts cause insurance premiums to rise, then that is something that can be blamed on the “greed” of the insurance companies.The same principle, or lack of principle, applies to many other privately owned businesses. It is a very successful political ploy that can be adapted to all sorts of situations.“

Obama’s most ardent sycophants are always cooing that he’s the best president EVAH, or the coolest, or something. But the economy has limped along for much of his presidency; labor force participation is now at its lowest point since the late 1970s; and median income has fallen on his watch. He has Federal Reserve policy to thank for stock market gains that are precarious, at least for those companies not on the fascist gravy train. Obama’s budgetary accomplishments are due to a combination of Republican sequestration (though he has taken credit) and backloading program shortfalls for his successors to deal with later. Obamacare is a disaster on a number fronts, as is Dodd-Frank, as is the damage inflicted by questionable environmental and industrial policy, often invoked via executive order.  (His failures in race relations and foreign policy are another subject altogether.)

Fascism is not a prescription for rapid economic growth. It is a policy of regression, and it is fundamentally anti-innovation to the extent that government policymakers create compliance burdens and are poor judges of technological evolution. Fascism is a policy of privilege and is regressive, with rewards concentrated within the political class. That’s what Obama has wrought.

 

Big-Time Regulatory Rewards

27 Wednesday Jul 2016

Posted by in Big Government, Central Planning, Regulation

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Government Control

Why does regulation of private industry so often inure to the benefit of the regulated at the expense of consumers? In the popular mind, at least, regulating powerful market players restrains “excessive” profits or ensures that their practices meet certain standards. More often than not, however, regulation empowers the strongest market players at the expense of the very competition that would otherwise restrain prices and provide innovative alternatives. The more complex the regulation, the more likely that will be the result. Smaller firms seldom have the wherewithal to deal with complicated regulatory compliance. Moreover, regulatory standards are promulgated by politicians, bureaucrats, and often the most powerful market players themselves. If ever a system was “rigged”, to quote a couple of well-known presidential candidates, it is the regulatory apparatus. Pro-regulation candidates might well have the voters’ best interests at heart, or maybe not, but the losers are usually consumers and the winners are usually the dominant firms in any regulated industry.

The extent to which our wanderings into the regulatory maze have rewarded crony capitalists — rent seekers — is bemoaned by Daniel Mitchell in “A Very Depressing Chart on Creeping Cronyism in the American Economy“. The chart shows that about 40% of the increase in U.S. corporate profits since 1970 was generated by rent-seeking efforts — not by activities that enhance productivity and output. The chart is taken from an article in the Harvard Business Review by James Bessen of Boston University called “Lobbyists Are Behind the Rise in Corporate Profits“. Here are a couple of choice quotes from the article:

“Lobbying and political campaign spending can result in favorable regulatory changes, and several studies find the returns to these investments can be quite large. For example, one study finds that for each dollar spent lobbying for a tax break, firms received returns in excess of $220. …regulations that impose costs might raise profits indirectly, since costs to incumbents are also entry barriers for prospective entrants. For example, one study found that pollution regulations served to reduce entry of new firms into some manufacturing industries.”

“This research supports the view that political rent seeking is responsible for a significant portion of the rise in profits [since 1970]. Firms influence the legislative and regulatory process and they engage in a wide range of activity to profit from regulatory changes, with significant success. …while political rent seeking is nothing new, the outsize effect of political rent seeking on profits and firm values is a recent development, largely occurring since 2000. Over the last 15 years, political campaign spending by firm PACs has increased more than thirtyfold and the Regdata index of regulation has increased by nearly 50% for public firms.“

A good explanation of Bessen’s findings is provided by Guy Rolnik, including an interview with Bessen. Law Professor Glenn Reynolds of the University of Tennessee put his finger on the same issue in an earlier article entitled “Why we still don’t have flying cars“. One can bicker about the relative merits of various regulations, but as Reynolds points out, the expansion of the administrative and regulatory state has led to a massive diversion of resources that is very much a detriment to the intended beneficiaries of regulation:

“… 1970 marks what scholars of administrative law (like me) call the ‘regulatory explosion.’ Although government expanded a lot during the New Deal under FDR, it wasn’t until 1970, under Richard Nixon, that we saw an explosion of new-type regulations that directly burdened people and progress: The Clean Air Act, the Clean Water Act, National Environmental Policy Act, the founding of Occupation Safety and Health Administration, the creation of the Environmental Protection Agency, etc. — all things that would have made the most hard-boiled New Dealer blanch.

Within a decade or so, Washington was transformed from a sleepy backwater (mocked by John F. Kennedy for its ‘Southern efficiency and Northern charm’) to a city full of fancy restaurants and expensive houses, a trend that has only continued in the decades since. The explosion of regulations led to an explosion of people to lobby the regulators, and lobbyists need nice restaurants and fancy houses.“

Matt Ridley hits on a related point in “Industrial Strategy Can Be Regressive“, meaning that government planning and industrial regulation have perverse effects on prices and economic growth that hit the poor the hardest. Ridley, who is British, discusses regressivity in the context of his country’s policy environment, but the lessons are general:

“The history of industrial strategies is littered with attempts to pick winners that ended up picking losers. Worse, it is government intervention, not laissez faire, that has done most to increase inequality and to entrench wealth and privilege. For example, the planning system restricts the supply of land for housebuilding, raising property prices to the enormous benefit of the haves (yes, that includes me) at the expense of the have-nots. … 

Why are salaries so high in financial services? Because there are huge barriers to entry erected by government, which hands incumbent firms enormous quasi-monopoly advantages and thereby shelters them from upstart competition. Why are cancer treatments so expensive? Because governments give monopolies called patents to the big firms that invent them. Why are lawyers so rich? Because there is a government-licensed cartel restricting the supply of them.“

Ridley’s spirited article gives emphasis to the fact that the government cannot plan the economy any more than it can plan the way our tastes and preferences will evolve and respond to price incentives; it cannot plan production any more than it can anticipate changes in resource availability; it cannot dictate technologies wisely any more than it can predict the innumerable innovations brought forth by private initiative and market needs; it almost never can regulate any better than the market can regulate itself! But government is quite capable of distorting prices, imposing artificial rules, picking suboptimal technologies, consuming resources, and rewarding cronies. One should never underestimate the potential for regulation, and government generally, to screw things up!

Central Banks Stumble Into Negative Rates, Damn the Savers

01 Tuesday Mar 2016

Posted by in Central Planning, Monetary Policy

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Dollar Cartoon

Should government actively manipulate asset prices in an effort to “manage ” economic growth? The world’s central bankers, otherwise at their wit’s end, are attempting just that. Hopes have been pinned on so-called quantitative easing (QE), which simply means that central banks like the U.S. Federal Reserve (the Fed) buy assets (government and private bonds) from the public to inject newly “printed” money into the economy. The Fed purchased $4.5 trillion of assets between the last financial crisis and late 2014, when it ended its QE. Other central banks are actively engaged in QE, however, and there are still calls from some quarters for the Fed to resume QE, despite modest but positive economic growth. The goals of QE are to drive asset prices up and interest rates down, ultimately stimulating demand for goods and economic growth. Short-term rates have been near zero in many countries (and in the U.S. until December), and negative short-term interest rates are a reality in the European Union, Japan and Sweden.

Does anyone really have to pay money to lend money, as indicated by a negative interest rate? Yes, if a bank “lends” to the Bank of Japan, for example, by holding reserves there. The BOJ is currently charging banks for the privilege. But does anyone really “earn” negative returns on short-term government or private debt? Not unless you buy a short-term bill and hold it till maturity. Central banks are buying those bills at a premium, usually from member banks, in order to execute QE, and that offsets a negative rate. But the notion is that when these “captive” member banks are penalized for holding reserves, they will be more eager to lend to private borrowers. That may be, but only if there are willing, credit-worthy borrowers; unfortunately, those are scarce.

Thus far, QE and zero or negative rates do not seem to be working effectively, and there are several reasons. First, QE has taken place against a backdrop of increasingly binding regulatory constraints. A private economy simply cannot flourish under such strictures, with or without QE. Moreover, government makes a habit of manipulating investment decisions, partly through regulatory mandates, but also by subsidizing politically-favored activities such as ethanol, wind energy, post-secondary education, and owner-occupied housing. This necessarily comes at the sacrifice of opportunities for physical investment that are superior on economic merits.

The most self-defeating consequence of QE and rate manipulation, be that zero interest rate policy (ZIRP) or negative interest rate policy (NIRP), is the distortion of inter-temporal tradeoffs that guide decisions to save and invest in productive assets. How, and how much, should individuals save when returns on relatively safe assets are very low? Most analysts would conclude that very low rates prompt a strong substitution effect toward consuming more today and less in the future. However, the situation may well engender a strong “income effect”, meaning that more must be saved (and less consumed in the present) in order to provide sufficient resources in the future. The paradox shouldn’t be lost on central bankers, and it may undermine the stimulative effects of ZIRP or NIRP. It might also lead to confusion in the allocation of productive capital, as low rates could create a mirage of viability for unworthy projects. Central bank intervention of this sort is disruptive to the healthy transformation of resources across time.

Savers might hoard cash to avoid a negative return, which would further undermine the efficacy of QE in creating monetary stimulus. This is at the root of central bank efforts to discourage the holding of currency outside of the banking system: the “war on cash“. (Also see here.) This policy is extremely offensive to anyone with a concern for protecting the privacy of individuals from government prying.

Another possible response for savers is to “reach for yield”, allocating more of their funds to high-risk assets than they would ordinarily prefer (e.g., growth funds, junk bonds, various “alternative” investments). So the supply of saving available for adding to the productive base in various sectors is twisted by central bank manipulation of interest rates. The availability of capital may be constrained for relatively safe sectors but available at a relative discount to risky sectors. This leads to classic malinvestment and ultimately business failures, displaced workers, and harsh adjustment costs.

With any luck, the Fed will continue to move away from this misguided path. Zero or negative interest rates imposed by central banks penalize savers by making the saving decision excessively complex and fraught with risk. Business investment is distorted by confusing signals as to risk preference and inflated asset prices. Central economic planning via industrial policy, regulation, and price controls, such as the manipulation of interest rates, always ends badly. Unfortunately, most governments are well-practiced at bungling in all of those areas.

 

 

 

ZIRP’s Over, But Fed Zombies Linger Over Seed Corn

24 Thursday Dec 2015

Posted by in Central Planning, Monetary Policy, Price Controls

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Fed Rate Cuts

The Federal Reserve plans a few more increases in short-term interest rates in 2016, which should be welcome to savers who are not overexposed to market risk. The Fed took its first step away from the seven-year zero-interest-rate policy (ZIRP) last week, increasing its target rate on overnight loans between banks (“federal” funds) for the first time in almost ten years. ZIRP was grounded in the Fed’s desire to stimulate the economy after the last financial crisis, an objective that met with limited success. ZIRP’s most profound “success” was to distort prices, with negative consequences for conservative savers, those dependent on retirement assets, and the long-term growth of the economy.

ZIRP necessarily constitutes a price ceiling when expected inflation is positive. It implies negative real rates of return, but real rates of time preference are not and cannot be negative. Given the choice, no one intends to forego present pleasure to purposefully suffer a loss later. The imperative to earn positive real returns does not end simply because the Fed and ZIRP make it more difficult. 

Anyone with funds parked in near zero-return assets, such as money market funds and certificates of deposit, earned a negative real return during the ZIRP regime, as inflation remained positive despite misplaced fears to the contrary. Those kinds of savings vehicles earn relatively low returns and should carry little risk to savers.

What are savers and retirees to do under a ZIRP regime? If they absolutely must defer consumption, they can accept the predicament and leave funds to decay in real value. They can dis-save in response to the disincentive, consuming their accumulated wealth. Some, for whom retirement is near, might even put more aside with the full knowledge that it will erode in real terms. But many will seek out yield in other ways, investing in assets bearing greater risk than they would otherwise prefer. All of these alternatives are likely to be less-preferred by the public than rates of saving and portfolios constructed in the absence of the Fed’s rate distortions.

The Fed’s policies and zero rates have contributed to inflated equity prices over the past six years as savers sought enhanced returns, and those valuations are certainly vulnerable. Over the past week, market jitters have shown the extent to which traders and investors feel threatened by the Fed’s tightening move.

The impact of ZIRP on the well-being of savers is only part of the story, however. Such a regime compromises the fundamental process of aligning preferences with the physical transformation of present resources into future consumption. Like any price distortion, ZIRP misallocates resources, but it misallocates across time and across sectors of the economy. When discounted at ultra-low rates, the values of future financial flows are grossly inflated, diminishing the need to set additional amounts aside today. At the same time, zero or near-zero rate borrowing confuses the evaluation of alternative capital investment projects. Resources may be committed to projects that would be rejected given accurate price signals. The artificially-enabled bidding for resources prompted by ZIRP, and the distortion of the risk-return trade off, might even cause more worthy projects to be rejected. And there is every reason to expect that saving by some individuals will be channeled into immediate consumption by others.

Who would do such wasteful things, undertaking projects with low or nonexistent future returns? Those facing distorted price signals, most prominently government technocrats for whom meaningful price signals are seldom a concern. And that also goes for the subsidy-hungry private beneficiaries of the state’s tax-extracted and borrowed largess. The ultimate consequence of this behavior is a deterioration in the economy’s growth potential.

Ronald-Peter Stoferle provides a short catalogue of ZIRP’s destructive impacts in the “Unseen Consequences of ZIRP“. One of his more interesting statements is the following, with reference to “zombie” banks:

“Low interest rates prevent the healthy process of creative destruction. Banks are enabled to roll over potentially non-performing loans practically indefinitely and can thus lower their write-off requirements.“

Thus, ZIRP promotes economic rot in several ways. Last week’s rate move by the Fed is a step in the right direction, away from zero rates and drastic overvaluation of consumption flows now and in the future. However, the monetary excesses of the past six years will not be reversed by this one move. The Fed is still imposing an artificial ceiling on rates. Even if that restriction is eased in further steps during 2016, the Fed is committed for the long-term to the manipulation of interest rates in the execution of policy. That sort of activist market manipulation is likely to continue; like all forms of central planning, it will be based on woefully incomplete information, a poor understanding of individual and market behavior, and bad timing. It will degrade economic conditions and have the classic boom-and-bust repercussions typical of central bank intervention.

Would You Tax Coastal Development?

14 Monday Dec 2015

Posted by in Central Planning, Global Warming

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Sea Level

If sea levels are truly rising due to climate change, then public policy should stop encouraging new development in coastal areas. Stipulating that this threat is real for the moment, serious and damaging encroachment of the seas might be 50 years away or more. By that time, many of today’s coastal buildings will be gone, or at least candidates for replacement, under realistic assumptions about the average lives of structures. A relatively low-cost approach to the threat of rising seas would be to stop building along the most vulnerable coasts right now and move new development inland. Yet no one wants to do that, least of all coastal property owners. But there is little discussion of this alternative even among the true believers of a coming global warming apocalypse. Why not?

This and related questions have been asked recently by several writers, including Glenn Reynolds and economist Robin Hanson. There are alternatives to discouraging new construction along coasts. Other expensive abatement projects can be pursued, now and later, such as sea walls or even adding land mass excavated from the sea floor or inland. In fact, the prospect of damming the Strait of Gibraltar to protect Mediterranean coastlines has been discussed. The expense of such an unprecedented public works project is what prompted Hanson’s post. To the extent that such remedial projects are not funded privately, they represent social costs arising from coastal development.

The federal government still subsidizes flood insurance on many coastal properties, though efforts to phase-out this FEMA program have been underway for a few years. However, governments seem only too willing to undertake the investment in public infrastructure and ongoing maintenance made necessary by new coastal development. And like other development projects, tax abatements and other subsidies are still granted for coastal development. Why do these policies escape notice from coastal green elites?  Public outlays with private beneficiaries along threatened coasts are an immediate drain on resources, relieving private developers and property buyers of shoreline risk.

Reynolds (perhaps tongue-in-cheek) and Hanson suggest that new development should be taxed in coastal areas. That, and ending subsidies for development along coasts, is an economically and ecologically defensible alternative to the public expense of ubiquitous sea walls. However, a coastal tax might not be in the immediate interests of elites  who claim that mankind faces an insurmountable global warming problem. Better to put off these sorts of remedial measures, especially while you can tax and regulate fossil fuels, and maybe live on the coast!

The position of the warmist community is that carbon emitters must cease and desist, in the hope that the seas will stop rising. They are willing to destroy entire industries (fossil fuels) in pursuit of their goals, but are unlikely to achieve them without inflicting drastic economic harm. If greens are so amenable to central control of economic activity and individual behavior (so long as they are at the controls), it would be prudent to take precautions now that will help to minimize the damage later. Discouraging coastal development with taxes and denial of subsidies is the sort of classic intervention that any Pigouvian planner should love. There is even evidence that sea levels have been much higher at times in the past. An earnest central planner might say that coastal development should always be discouraged to mitigate the risk of destruction.

I am skeptical of alarmist claims, including those related to rising sea levels. In fact, the connection between carbon emissions, global temperatures and sea levels is not well established, and whether sea levels are rising due to human activity is a matter of some dispute. Furthermore, global sea ice extent is not declining dramatically, if at all, and the storied glacier melts have been greatly exaggerated. Climate activists pursue their agenda despite the gross inaccuracy of past carbon-forcing forecasts, the gaping uncertainty surrounding model predictions going forward, and the crushing expense of the measures they advocate. The expense, however, is not one that activists expect to compromise their own standard of living. They either assume that it will be borne by others or that their draconian prescriptions will usher in an era of “sustainability”, powered by new, renewable energy sources. Not many of these alarmists would boast that their policies can quickly reverse the sea level rises they’ve told us to fear, but they dare not suggest taxes on coastal development until they see more convincing evidence. At least that much is sensible, if ironic!

Government Economy; Government Science: You Wanted Growth?

28 Wednesday Oct 2015

Posted by in Central Planning, Regulation, Technology

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Economic growth allows us to enjoy an improving material existence and the wealth to pursue other goals as a society, such as a clean environment. Yet we often pursue other goals in ways that strangle growth, when in fact those goals and growth are fundamentally compatible.

Two articles that caught my attention today approach this issue from different but complementary perspectives. One is by John Cochrane of the University of Chicago, a lengthy piece called simply “Economic Growth“. At the outset, Cochrane asserts that the one, ultimate source of economic growth in the long-run is through advancing productivity. He notes, however, that the U.S. has been falling short in that department of late. Re-establishing growth should start with a clean-up of the many harmful public policies that have cluttered the economic landscape, especially over the last few decades. Unfortunately, politics makes this easier said than done:

“The golden rule of economic policy is: Do not transfer incomes by distorting prices or slowing competition and innovation. The golden rule of political economics seems to be: Transfer incomes by distorting prices and regulating away competition. Doing so attracts a lot less attention than on-budget transfers or subsidies. It takes great political leadership to force the political process to obey the economic rule.“

Cochrane’s discussion is wide ranging, covering a number of areas of public policy that require “weeding”, as he puts it: the regulatory arena (finance, health care, energy and the environment), tax policy, debt and deficits, the design of social programs and entitlements, labor law and regulation, immigration, education, agricultural policy, trade, and the process of infrastructure investment. There may be a year’s worth of blog posts to be drawn from Cochrane’s essay, but I think “weeding” understates the difficulty of the tasks outlined by Cochrane to reignite growth.

The second article that interested me today dealt with technological advance, which is a primary driver of productivity growth. Economists and pundits often prescribe policies that they believe will lead to transformational breakthroughs in technology. This usually manifests in advocacy for increased public funding for basic scientific research. This is a mistake, according to Matt Ridley’s great article, “The Myth of Basic Science“. In fact, one might say that he’s identified another government-nourished weed for Cochrane to pull. I found Ridley’s opening paragraph intriguing:

“Innovation is a mysteriously difficult thing to dictate. Technology seems to change by a sort of inexorable, evolutionary progress, which we probably cannot stop—or speed up much either. And it’s not much the product of science. Most technological breakthroughs come from technologists tinkering, not from researchers chasing hypotheses. Heretical as it may sound, “basic science” isn’t nearly as productive of new inventions as we tend to think.“

Ridley’s thesis (actually, he credits several others for formulating this line of thinking) is that technology growth is very much an independent process, impossible to push or steer effectively. He goes so far as to say that it can’t be stopped, but he also cites ways in which it can be inhibited.

This perspective on technology has implications for patent law, a subject that Ridley explores to some extent. It also reflects badly on government efforts to direct and stimulate advances by granting subsidies to favored technologies and more aggressive funding of  “basic science”. Government, in Ridley’s view, is largely impotent in spawning technological advance. By pushing technologies that are uneconomic, government distorts price signals, diverts resources from more productive investments, and embeds inferior technologies in the economy’s productive capital base.

But Ridley’s point has more to do with the futility of basic science as a driver of technological advance, and the strong possibility that causation often runs in the other direction:

“It is no accident that astronomy blossomed in the wake of the age of exploration. The steam engine owed almost nothing to the science of thermodynamics, but the science of thermodynamics owed almost everything to the steam engine. The discovery of the structure of DNA depended heavily on X-ray crystallography of biological molecules, a technique developed in the wool industry to try to improve textiles.

Technological advances are driven by practical men who tinkered until they had better machines; abstract scientific rumination is the last thing they do. As Adam Smith, looking around the factories of 18th-century Scotland, reported in ‘The Wealth of Nations’: ‘A great part of the machines made use in manufactures…were originally the inventions of common workmen,’ and many improvements had been made ‘by the ingenuity of the makers of the machines.’

It follows that there is less need for government to fund science: Industry will do this itself. Having made innovations, it will then pay for research into the principles behind them. Having invented the steam engine, it will pay for thermodynamics. This conclusion … is so heretical as to be incomprehensible to most economists, to say nothing of scientists themselves.“

It’s good to qualify that “industry will do this itself” only if it isn’t severely hamstrung by meddling politicians and regulators.

Ridley goes on to cite a few inconvenient historical facts that run counter to the narrative that public funding of science is a necessary condition for technical advance. He also cites empirical work suggesting that the return on publicly-funded R&D is paltry. In fact, he allows that government involvement in “basic science” may inhibit more economically viable advances and their adoption. There is no question that government often chooses unwisely without the discipline of market incentives. If it gets funded, then bad science, politically-driven “science” and ultimately nonproductive science might very well crowd-out better private science and innovation.

In a time of strained government budgets, public funding for basic science should be subjected to as much scrutiny as any other spending category. Like Ridley, I have much more faith in private tinkerers to choose wisely when it comes to the development of new technologies. Intimacy with actual markets and with the production process itself improve the odds that private developers and technologists will be more effective at boosting productivity.