Tag Archives: Jeffrey Tucker

Initial Coin Offerings: Bits of Capital For Little Guys

27 Wednesday Sep 2017

Posted by in Capital Markets, Technology, Transaction Costs

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It’s possible for relatively small ventures to raise significant sums of capital without meeting onerous government filing requirements or venture capitalist demands and controls. This is enabled by a sort of hybrid between an initial public stock offering (IPO) and the issuance of private crypto-currency (like Bitcoin). It’s called an initial coin offering (ICO), and it is growing in importance as a funding source, primarily (but not exclusively) for applications leveraging blockchain technology. ICOs themselves are enabled by blockchain, through which a system of virtual, shared accounts is maintained in the cloud, essentially a ledger of who owns (and owes) what claims on whom (and to whom). Like stock or a venture capital investment, its value is tied to the success of the venture or project:

“When a cryptocurrency startup firm wants to raise money through an [ICO], it usually creates a plan on a white paper which states what the project is about, what need(s) the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for. During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an Initial Public Offering (IPO) transaction.“

Scanning though a list of ICOs or “token sales” just might make your eyes glaze over. The descriptions of some of the ventures sound impossibly intangible (or ethereal… a major blockchain application platform is called Ethereum). A few relatively accessible examples: augmented reality platforms; crypto-payment mechanisms; gaming community services; software platforms for dentists and “gig” economy providers; “tokenized” real estate investment; and peer-to-peer property rental.

Crypto-currencies like Bitcoin are viewed as highly speculative by many investors; likewise, ICO tokens are very risky. In fact, the ICO “space” has been fertile ground for fraudulent activity, pyramid schemes, and “exit scams”. Investor due diligence is often no better than guesswork, unless there is already an established product or service related to the project. The last link quotes a Bitcoin expert name Andreas Antonopoulos:

“The best way to learn which ICOs are worth it is to lose money. Waiting for the wash-out. When these people promise great riches, they usually mean for themselves. If you have a viable product… build it first and they will come. I do not treat these technologies as investments but learning opportunities.“

Very comforting! Some guidance and a framework for ICO due diligence are offered here and here, respectively. More guidance is here. And here is an actual due diligence report on an ICO. Suffice it to say that ICOs are not a perfect match for my risk-return preferences!

Nevertheless, there is a lot to like about ICOs. Jeffrey Tucker writes enthusiastically about their disruptive and innovative nature. The heavily regulated world of investment banking tends to deny smaller firms access to capital, and venture capitalists have their own, frequently costly demands on start-ups. ICOs open a new, low-cost channel through which funds can be raised from investors with a greater appetite for risk. Here is Tucker:

“Why is this strategy for raising money for new ventures working so well? There is the most obvious consideration of low barriers to entry. Anyone can float them and anyone can buy them–from and to anyone in the world regardless of geography. There is a larger pool of investors that can bypass the impossiblycostly and complex national regulatory machines that have gummed up capital-raising methods in conventional finance.

It has been a long time since the financial markets have been free. That the market is mostly deregulated and decentralized, and thereby more active and effective, is itself interesting. No sector is more replete with the myths of ‘consumer protection’ than this one. …

And the solution is absolutely ingenious. It relies on decentralized markets that live on the Internet, combined with the invention of new tokens that have all the qualities of traditional money, depending entirely on supply and demand for their value, and also serve as asset titles to the protocol of the company itself.“

Unfortunately, governments and large private players do not always wish to promote decentralized markets. Quite the contrary, and in the case of ICOs, governments and regulators are already “chomping at the bit”, so to speak, to impose regulation. Warnings of ICO risks have been formally issued by the SEC, and China has placed a freeze on ICO activity pending inspections of exchanges, reports and the likely issuance of regulatory measures. Given this scrutiny, Tucker might be a bit too optimistic about the ongoing development of the ICO market. It will depend in large part on the success of efforts by participants at self-governance. That’s something financial markets have traditionally done well, despite shrill claims to the contrary. Let the investor beware!

ICOs will tend to encourage the development of competitive forces in the broader economy. And while investment banks might view the funding objectives of many ICOs as table scraps, ICOs will create more competition for those banks if the volume and breadth of “coin” funding continues to grow. ICO’s won’t find their way into my portfolio any time soon, but they show great promise as an economic development.

Paris Climate Dance: a Concon

07 Wednesday Jun 2017

Posted by in Global Warming, Redistribution, Uncategorized

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Ah, Paris, we bid you adieu. For both scientific and economic reasons, the Paris Climate Accord is pure numbskullery. We should all be grateful that President Trump has decided to revoke the expensive promises made by Barack Obama under the agreement in a willful effort to appease the world’s rent seekers.

From a scientific perspective, the accord’s prescriptions are premised on a partial effect: absent any feedbacks, carbon emissions would raise the atmospheric temperature slightly. But feedback effects are massively important, as anyone familiar with the climate models’ terrible track record of predictive performance might guess. Water vapor, cloud formation, wind currents, and the response of the Earth’s biomass are just some of the effects that impinge on the relationship between atmospheric carbon and temperatures. In addition, carbon forcings are relatively minor compared to the energy impulses delivered by natural sources, including solar activity and the Earth’s varying axial tilt. Paleoclimate data shows that the world has been this warm before, and warmer.

The economic case against the Paris Accord is even stronger. The very idea that authorities would impose huge material sacrifices on mankind in an effort to prevent a threat for which the evidence is so weak should give pause to any rational individual. Beyond that, however, the real function of the accord was not so much carbon mitigation as it was a shift in the distribution of wealth. This quote of Steven Allen, in a scathing assessment of the agreement, is instructive (forgive his mid-sentence switch to sarcasm):

“Mainly, it’s about taking money from taxpayers and consumers and businesspeople and electricity ratepayers and giving it to crony capitalists, and taking money from people in relatively successful countries and giving that money to rich people in poor countries, to the benefit of members of governing elites who support the Paris deal for the good of humanity and not at all because they expect to line their pockets with it.“

World carbon emissions were expected to keep rising at least through 2030 under the agreement. The subsidies it promised to crony capitalists in the renewable energy industry were to generously fund technologies that are not economically viable without government support, to the detriment of relatively clean-burning fossil fuels, not to mention nuclear power. The U.S. promised to reduce absolute carbon emissions, but the world’s greatest emitter of carbon dioxide, China, promised only to seek to limit emissions per unit of GDP, but not until sometime down the road. That means China’s level of emissions might not reverse, given the rapid growth of the Chinese economy. India’s commitment is similar. And Russia promised a reduction relative to a depressed 1990 level of emissions, which means they have plenty of room for growth.

As for the U.S., where absolute carbon emissions have been decreasing since 2007, the Paris Accord relied on so-called “voluntary” limits to be imposed by federal mandates. Financial demands were made by developing countries under the deal: $100 billion per year. And who would pay for that? Taxpayers in the developed countries, of course. One can only imagine the lust of unaccountable third-world officialdom for those funds. Thus far, the U.S. has paid only $1 billion into the so-called Green Climate Fund, and at least half of that was taken from a State Department account from which disbursal did not require Congressional approval.

Jeffrey Tucker, who is anything but a fan of Donald Trump, minced no words in his assessment of the Paris “treaty”. Here are a few selected quotes:

“The Paris Agreement is a ‘voluntary’ agreement because its architects knew it would never pass the US Senate as a treaty. Why? Because the idea of the agreement is that the US government’s regulatory agencies would impose extreme mandates on its energy sector: how it should work, what kinds of emissions it should produce, the best ways to power our lives (read: not fossil fuels), and hand over to developing world regimes billions and even trillions of dollars in aid, a direct and ongoing forcible transfer of wealth from American taxpayers to regimes all over the world, at the expense of American freedom and prosperity. …

The exuberant spokespeople talked about how ‘the United States’ had ‘agreed’ to ‘curb its emissions’ and ‘fund’ the building of fossil-free sectors all over the world. It was strange because the ‘United States’ had not in fact agreed to anything: not a single voter, worker, owner, or citizen. Not even the House or Senate were involved. This was entirely an elite undertaking to manage property they did not own and lives that were not theirs to control. …

The Paris Agreement is no different in its epistemological conceit than Obamacare, the war on drugs, nation-building, universal schooling, or socialism itself. They are all attempts to subvert the capacity of society to manage itself on behalf of the deluded dreams of a few people with power and their lust for controlling social and economic outcomes.“

The popular fascination with climate scare stories has provided a useful channel of influence for would-be central planners and redistributionists. These social dementors reject the proposition that science is a process of continuing challenge and testing, thereby subverting the very notion of scientific inquiry. They make the laughable claim that 170 years of temperature data, much of which is quite sketchy, is sufficient to draw strong conclusions about the trends and dynamics of the climate on a four billion year-old planet.

Even worse, the climate alarmists insist that they have a monopoly on scientific knowledge, despite a significant share of skeptics in the climate science community. But in pursuit of that monopoly, the alarmists have gone so far as to undermine the integrity of the peer review process in the climate literature and to manipulate temperature data to exaggerate recent records. They have promoted the false claims that cyclonic storm energy has increased with carbon concentration and that sea levels are rising at an increasing rate. (Coastal property values don’t seem to reflect those concerns.) They would have us confuse actual climate data with model predictions, and they continue to offer prescriptions based on carbon-forcing models after many years of terrible forecast performance. They claim that a small increment (one part per 10,000) to the concentration of a trace atmospheric gas will dominate other forces exerting far greater variations in energy. They ignore the benefits that an increase in nourishing carbon dioxide and warming can provide. And they make the anthropocentric claim that a costly sacrifice by mankind, in an attempt to reduce that trace gas slightly if at all, will pay off reliably by reducing global temperatures, despite the very modest claims on those grounds by the Paris Accord itself.

Here is a link to 17 earlier posts on Sacred Cow Chips having to do with the hypothesis of anthropomorphic global warming, including this one written in late 2015, at the time of the Paris Climate Summit.

Markets and Mobility

25 Thursday May 2017

Posted by in Markets, Poverty

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Government aid programs tend to perform poorly, especially in developmental terms. In the U.S., anti-poverty programs keep the poor running in place, at best. Yes, they provide minimal income, but they seldom offer a way out and usually discourage it. Moreover, the administration of such programs diverts a significant share of funds to well-heeled civil servants and away from the intended recipients. Foreign aid programs are probably even worse, functioning as catch basins for funding corrupt officials. Progressives, in particular, persist in taking the paternalistic view that we must rely on government action to “care for” and “protect” the poor, able or not. Markets, on the other hand, are held to offer no promise in fighting poverty. In fact, the general assumption made by the progressive left is that markets exploit them.

The truth is that markets offer great promise for encouraging economic mobility. Arnold Kling offers a good conceptual construct in a recent post: while humans are often subject to irrational tendencies in their assessment of choices, their interactions in markets offer a way of smoothing irregularities and disparate bits of information, providing useful signals about the availability of resources and demands for their use. The result is a flow of information that best signals opportunity. Kling calls the process of market interactions the “collective mind”. Rather than encouraging individuals to fully participate in effective markets, free of intervention, we instead deny them the best opportunities for gain. The notion that the poor must be “protected” from markets is embedded in policies like wage and price controls, benefit mandates, overtime rules, drug laws, occupational licensing, and innumerable other harmful regulations. The poor should have the unfettered ability to avail themselves of the social efficiencies of Kling’s collective mind.

Last Thursday, Don Beaudroux’s “Quotation of the Day” was taken from an essay by Ludwig von Mises in which he characterized private property in a market economy as “property by consumer consensus”. In other words, consumers reward sellers who create value, and those rewards accumulate in the form of private property. Likewise, consumers punish poor performance, which has a cumulative negative impact on one’s ability to accumulate or hold onto private property. The benefits conferred by consumer preference do not stop with the owners of the firm. Others productively affiliated with the firm also reap gains in rewards, allowing them to accumulate private property. And of course, consumers are the beneficiaries in the first place: in their judgement the firm delivers value in excess of price. The key here is that free market rewards and penalties are deserved and based on productivity in meeting desires, and only the market can distribute property so efficiently. The able poor can certainly add value and thereby accumulate property, if only given the opportunity.

Jeffrey Tucker has stated that “Only Markets Can Win the War on Poverty” (ellipses are my edits):

“The default state of the world is grueling poverty, universal insecurity, and short lives. When governments do come along, they nearly always serve themselves first. … Capitalism made huge progress toward the conquest of poverty. For the first time in history, the productive resources of society turned from serving mainly the elites toward serving the common person. This change alone began to flip the power narrative of social evolution.

And this revolution continued for two some two-hundred years, during which time the average life span expanded dramatically, infant mortality collapsed, incomes rose, and the great project of universal ennoblement achieved an unprecedented boost. And this trend continues today wherever markets are given freedom to function, property rights are secure, and people can associate and trade without molestation by the elites. … In short, capitalism made huge progress toward the conquest of poverty.“

Markets are not harmful to the poor. To the contrary, as Tucker says, they have helped lift billions out of poverty around the globe. But government increasingly plays the role of big provider and arbiter of what can and can’t be traded, by whom, and at what price. The suspension of the market mechanism by this process denies the poor the opportunities made possible via participation in free markets, whereby Kling’s “collective mind” processes massive quantities of information and acts upon it spontaneously. But the “collective mind” concept, as a description of market interactions, is too simple: we know that individuals act on the signals provided by the market and are rewarded based on how effectively they do so. There is no doubt that the poor can do that too. It’s time to cast aside the paternalistic and destructive notion that the able poor must be insulated from markets.

Toodle-oo, President Cool Fool

20 Friday Jan 2017

Posted by in Government

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The durability of Barack Obama’s achievements as President of the United States will go down in history as … an oxymoron. He will likely be remembered more for his failures in social, economic, foreign policy and political leadership. Obama has himself to blame for the lack of a durable legacy. From the beginning of his administration, Obama’s mentality with respect to policymaking was always “my way or the highway” (“The election’s over, and I won”), and his consequent failure to achieve legislative victories during his last six years in office was always Congress’ fault. He would share no blame. But it was cool, ’cause Obama had “a pen and a phone” and was willing to act by executive fiat to affect changes he desired. His hope, I suppose, was that his regulatory diktats would become so ingrained in our way of life that rescinding them would be political suicide, much like some of the programs of the New Deal and the Great Society. Well, that backfired! Most of Obama’s executive actions can be undone by executive or legislative action, and while it won’t be costless, it will happen.

The fact of the matter is that Obama’s policies were not productive and not popular. Not only did they contribute to the election of Donald Trump, but they helped fuel the massive losses suffered by Democrats in state houses and governorships over the past eight years. But Obama was always right as rain.

The Planner’s Conceit: A big believer in the power and goodness of government, Obama attempted to usher in a great wave of new regulation and social planning. Here is David Harsanyi in Reason:

“The president’s central case for government’s existence rests on the notion of the state being society’s moral center, engine of prosperity and arbiter of fairness. Obama speaks of government as a theocrat might speak of church, and his fans return the favor by treating him like a pope.“

Obama is a man who lacks any understanding of the causes of prosperity: personal and economic freedoms, individual initiative, and healthy private markets. Jeffrey Tucker makes this point eloquently in “Why Obama Failed“:

“Despite his vast knowledge on seemingly everything, and endless amounts of charm to sell himself to the public, he missed the one crucial thing. He never understood wealth is not a given; it must be created through enterprise and innovation, trade and experimentation, by real people who need the freedom to try, unencumbered by a regulatory and confiscatory state. This doesn’t happen just because there is a nice and popular guy in the White House. It happens because the institutions are right.“

Obama’s results underscore his ignorance regarding the fundamental drivers of material well-being: economic growth during the post-recession years has been very sluggish, and while the unemployment rate has declined, it is not as impressive as it might appear: many workers have been forced into part-time jobs, and the decline in the jobless rate was exaggerated with declines in labor force participation to levels not seen since the late 1970s. Perhaps not coincidentally, the number of workers claiming Social Security disability benefits happened to soar as employment prospects remained grim. Slow growth in the economy and budget sequestration (an action Obama blames on republicans despite having proposed it himself as a cudgel) have reduced the annual budget deficit, but the nation’s outstanding debt under Obama has increased by $10 trillion, doubling the total outstanding over his eight years. Future annual deficits are projected to soar under his policies, according to the Congressional Budget Office.

Two factors that would contribute to ballooning deficits, if allowed to stand, are the Paris Climate Accord, signed by Obama without the Senate’s consent, and Obamacare. The climate treaty would do little to change global temperatures, but would impose heavy costs on the U.S. in terms of subsidies for foreign energy projects, regulatory burdens, and energy bills.

Failing Health Care: The future budget impact of the Paris Accord could be minor compared to Obama’s greatest source of pride: the Affordable Care Act (ACA), a.k.a. Obamacare. Recent scare stories have softened public opinion regarding the ACA, but so unpopular was this “landmark” legislation that Donald Trump was elected in part because he promised, along with congressional republicans (who played no part in its passage) to “repeal and replace” the law. The failures of the ACA were covered in my last post, “Death By Obamacare“.

Foreign FUBARs: The foreign policy foibles of the Obama Administration are legend. From Benghazi to the Syrian “red line”, from the botched deal on nuclear weapons development by Iran to the weak stand on Russian expansionism, American foreign policy has never been such an embarrassment. Obama, the recipient of a dubious Nobel Peace Prize, has been an avid drone warrior, collateral damage be damned. Our continued involvement in Afghanistan and the reentry of U.S. forces into Iraq must be sorely disappointing to the anti-war constituency Obama once courted. He has alienated our longstanding allies and cooed in the ears of avowed enemies. His grants of clemency in recent days to the likes of the treasonous Chelsea Manning and terrorists like Oscar Lopez Rivera are symbolic of the contempt in which he holds the lives lost at their hands. Our weakness abroad has led to a loss of respect for the U.S., signaled vividly by our exclusion from peace talks in Syria. Recent events have increased public awareness of our vulnerability to cyber-attack from foreign enemies, but Obama has failed to provide leadership on the issue.

Scandalous: Obama’s tenure as president has been marked by a number of scandals, contrary to what his admirers would have us believe. The Fast and Furious operation by ATF agents put guns in the hands of criminals and drug cartels, resulting in the death of a border control agent, but the Obama Justice Department sought to obstruct an investigation. The massacre at the U.S. consulate in Benghazi, Libya led to the death of four Americans, including Ambassador Chris Stephens. The White House and State Department sought to create a misleading story line, claiming an anti-Muslim video was responsible for a protest gone-wrong, when in fact they were well aware that it was a planned terrorist action. A deeper question is whether Stephens was in Benghazi attempting to arrange arms sales to “Syrian rebels”. Then there are the attempts by the IRS to target opposition to Obama, and conservative groups generally, and an apparent effort to conceal that activity, as well as cases in which it appeared that the administration was targeting members of the press whom they considered unfriendly. There were a number of other scandals and events such as the Solyndra subsidies, which suggested high corruption and cronyism. Here is an excellent discussion of a variety of dubious antics by the Obama Administration, and the shady efforts to keep them quiet.

Racial Muckraking: Ironically, Obama’s greatest failing might well have been the racial discord that boiled up during his two terms. As the first African-American president of the U.S., there was a considerable expectation that his legacy would be one of racial healing. Instead, it was as if he deliberately sought to encourage discord. Here is Joel Kotkin’s description of the president’s missteps on race relations:

“Whenever race-related issues came up — notably in the area of law enforcement — Obama and his Justice Department have tended to embrace the narrative that America remains hopelessly racist. As a result, he seemed to embrace groups like Black Lives Matter and, wherever possible, blame law enforcement, even as crime was soaring in many cities, particularly those with beleaguered African American communities.

Eight years after his election, more Americans now consider race relations to be getting worse, and we are more ethnically divided than in any time in recent history. As has been the case for several decades, African Americans’ economic equality has continued to slip, and is lower now than it was when Obama came into office in 2009, according to a 2016 Urban League study.“

The Liar: Obama is an unrepentant liar. Even the Washington Post felt it necessary to catalog some of the Obama lies that made it into their headlines (through many did not). There was the infamous Benghazi deception; the “Like Your Plan, Keep Your Plan” fib; he quoted enrollment numbers on the Obamacare exchanges that were greatly exaggerated; he publicly denied that domestic surveillance was a reality; he claimed that he was not responsible for our withdrawal from Iraq… what? There were efforts to cover and dissemble regarding details of all the scandals referenced above. By now, Obama’s insistence that his would be the “most transparent administration in history” is rather humorous. Most of Obama’s lies were motivated by ideology, and that might make it worse in my book. What’s particularly galling is the lie that Obama has any respect for the Constitution. He has attempted to subvert it with regularity.

I, Barack Obama: Another common trait among politicians is narcissism, but few are as obvious about it as Barack Obama. He has a habit of self-referencing that may be unequaled in political oratory. In fact, last July at the Democratic National Convention, he mentioned himself 119 times in a speech about Hillary Clinton. He is always eager to invoke his personal story as a possible source of inspiration for others. He is seemingly preoccupied with his legacy, going out his way to issue additional executive orders in the waning days of his term, and giving a “final” address in which he glorified his accomplishments. And then there was a final-final press conference at which he did the same. He has always encouraged the perception that Barack Obama is the “smartest guy in the room”. Of course, he is never wrong, and everything is cool. Obama seems to believe that he can make reality conform to his every assertion –oh yeah, I already talked about lies!

Did Obama’s narcissism contribute to his failed presidency? It’s plausible because he invested too much in his own ability to teach, influence others,  and control events. Collaboration with important stakeholders was unnecessary, and indeed, it was often better to demonize anyone who stood in the way of the world according to Barack. That world was a sad self-delusion.

Suspending the Economic Problem With Free Stuff

27 Saturday Aug 2016

Posted by in Central Planning, Socialism, Subsidies

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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.

Coerced Fairness: Wronging Every Right

14 Thursday Apr 2016

Posted by in Discrimination, Liberty, Tyranny

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A nurse says, “If I can bring myself to treat a patient tattooed with a swastika, then a baker can bake a cake for a gay wedding.” Of course, the statement ignores any differences in the values held by these individuals, their right to hold different values, or at least their right to act peacefully on those values. It makes an arbitrary presumption about what is “fair” and what is “unfair”, which is seldom well-defined when two parties hold sincere but conflicting beliefs. Yes, the baker can bake the cake, but should he be forced to do so under state compulsion? Coerced behavior is the product of aggression, but declining business for personal reasons is not an act of aggression, though the “safe-space” crowd would do its best to convince us otherwise. Sorry, hurt feelings don’t count!

Imposing the machinery of the state on private decisions about how and for whom one’s art must be practiced invites even more coercive action by the state going forward. Jeffrey Tucker addresses this in “Must a Jewish Baker Make a Nazi Cake?“, using the teachings of Ludwig von Mises on the implications of voluntary and coerced behavior.

Discrimination occurs in markets in many forms. Consumers discriminate between sellers and products based on quality, price, convenience and trust. In turn,  producers or sellers discriminate between workers based on skill, effort, wages and trust. They discriminate between local markets or areas of specialization based on profitability. They discriminate between buyers based upon ability and willingness to pay. All of these forms of discrimination are rational because they result in better value for the discriminating consumer or better profitability for the discriminating producer. In other words, these forms of discrimination align with economic self-interest.

Other forms of discrimination do not align strictly with economic self-interest, but they may be preferred by the individual based on other criteria. It’s probably not possible to justify these forms of discrimination from all perspectives. Some may be abhorrent to most observers, including me. Certainly more consensus exists on some than on others. Nevertheless, these non-economically motivated forms of discrimination are always costly to the discriminator. For example, a consumer who refuses to frequent certain establishments owned by members of an out-group will forego opportunities for more varied experiences. Also, she will tend to pay higher prices due to her lack of interest in the competitive effort made by the out-group. An employer who refuses to hire certain minorities faces a more limited labor pool. He is likely to face a higher wage bill and will get a less efficient mix of skills in his workers. A seller who discriminates against certain groups by turning them away foregoes revenue, and the action may have negative reputational consequences. Obviously, other competitors can profit from another seller’s discriminatory behavior. Almost by definition, markets impose penalties on discrimination not borne out of economic self-interest.

Anyone with doubts about the effectiveness of markets and capitalism to overcome this latter type of discrimination should look no further than the broadly integrated activity that occurs within markets every day, and at the extent to which markets have become more diverse over time. Here is a choice quote of Tucker:

“Commerce has a tendency to break down barriers, not create them. In fact, this is why Jim Crow laws came into existence, to interrupt the integrationist tendencies of the marketplace. Here is the hidden history of a range of government interventions, from zoning to labor laws to even the welfare state itself. The ruling class has always resented and resisted the market’s tendency to break down entrenched status and gradually erode tribal bias.

Indeed, commerce is the greatest fighter against bigotry and hate that humankind has ever seen. And it is precisely for this reason that a movement rooted in hate must necessarily turn to politics to get its way.“

The hypertext within the quote links to an excellent piece by Andrew Berstein on “Black Innovators and Entrepreneurs Under Capitalism”, which covers the sad history of efforts to use government to undermine black commercial success.

Social justice activists argue that the state has a compelling interest in ending all discrimination, but the courts have followed a circuitous path in thrashing out whether (and what parts of) the U.S. Constitution might protect individuals or groups against private discrimination. But my interest is in what happens when the state endeavors to end discrimination in markets that are otherwise self-regulating: the state infringes on other rights that are clearly and definitively enshrined in the Constitution, and it arrigates power to itself that far exceeds the limits defined there. It may compromise the freedom of association, the freedom of religion, the right to private property, and the right to privacy. I believe the government has a compelling interest in protecting those rights, which apply to all individuals. It is also worth noting the absence of a limiting principle in defining what counts as fairness or discrimination. The Left finds it easy to denigrate and dismiss these as selfish concerns, proving how little regard they have for individual liberty. Establishing government control over the extent of those rights represents the end of our Constitutional Republic and is a prescription for tyranny.

Consider the ways in which government often attempts or is asked to create accommodations for marginalized groups, through laws on hate speech, compulsory service, hiring quotas, admission quotas, lending fairness, pricing equity, wage laws, work rules, mandatory facilities and the forced transfer of income. Tucker argues that this complex web of resource manipulation and mandatory and proscribed behaviors has several “unintended” consequences. I already mentioned the obvious abridgment of freedoms. Another negative consequence is that this approach does not promote unity; it breeds resentment and is likely to end in greater disunity. Furthermore, self-sufficiency is undermined by policies that hamper economic growth, and all of the general measures just mentioned redound to the detriment of that objective. Finally, many of these “fairness” policies run directly counter to the interests of the marginalized, such as wage floors that eliminate employment opportunities for the least-skilled, and means testing that discourages labor market effort through income “cliff” incentives.

The most menacing aspect of the effort to stamp out all forms of discrimination is a state with power to impose its own rules of legal “fair” treatment. Tucker appeals to Mises’ views on this point:

“[Mises] said that a policy that forces people against their will creates the very conditions that lead to legal discrimination. In his view, even speaking as someone victimized by invidious discrimination, it is better to retain freedom than build a bureaucracy that overrides human choice. …

Sacrificing principle for the sake of marginalized groups is short-sighted. If you accept the infringement of human rights as an acceptable political weapon, that weapon will eventually be turned on the very people you want to help. As Dan Sanchez has written, ‘Authoritarian restriction is a game much better suited for the mighty than for the marginalized.’“

Proponents of legal, compensatory  handicapping by the state in favor of those pressing any and all grievances ask us to compromise basic constitutional rights, including the rights of association, free expression, privacy and private property. A corresponding effect is to grant the state more complete coercive power in almost every aspect of life. The unavoidable focus of such policies is not unity, but group identity, a divisive result that should give us pause. The power granted to the state in this context is as arbitrary as the currently fashionable definition of “fairness”, and it cannot be rolled back easily. Furthermore, economic vitality is not easy to restore once basic institutions and freedoms have been destroyed. This is evident from the sad history of socialism throughout the world. Ultimately, the coercive power granted to the state can be used in ways that should horrify today’s proponents of social and economic redress for every real or imagined inequity.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Addendum: Just over a year ago, I made a qualified defense of the right of a business to refuse service based on religious principles in my post “Suit Me, Or Face a Lawsuit: Adventures In Litigationland“. There, I made a distinction between “public accommodations” versus work for which a business-person must use her art, which is a form of expression, to provide customized service to a potential customer. I had the baker in mind, or the photographer asked to work a gay wedding. As I have in this post, I maintained that if a business-person finds some aspect of a request objectionable for any reason, she has the right to discriminate by refusing the business as a matter of freedom of expression.

I left a huge loose end in the argument I made in the earlier post. It had to do with the presumed requirement to serve all potential customers through the “public accommodations” of a private business. However, if the baker creates a beautiful “love cake” for sale to the general public, why can’t he refuse to sell it to a gay couple for their wedding as a matter of freedom of expression? After all, it involves the baker’s art. If a stationer has created an artful collection of cards for sale to the public, why can’t she refuse to sell them to a gay couple for their wedding invitations on account of her religious convictions? And what about the nurse? If he is in private practice, can’t he refuse to practice his art of healing on the “swastikaner” as a matter of free expression? I believe that’s a constitutional absolute, though professional oaths may dictate that care be delivered. An emergency room nurse would not have any choice but to deliver care under federal law, but it is not clear whether the law would withstand a constitutional challenge by a private hospital on these grounds. As things stand, the nurse can only refuse employment or resign if the rules are not to his liking.

 

 

Trump Flaunts Shape-Shifting Powers

06 Thursday Aug 2015

Posted by in Government, Liberty, Tyranny

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trump characature

Donald Trump could take just about any position on any issue and defend it with conviction and blustery passion… until he changes his mind. At this point in his presidential bid, there is nothing on his campaign web site in the way of specific policy statements. Here is an “On The Issues” post showing the evolution of Trump’s positions in a number of policy areas. Just about anyone on the left or the right should be able to get a few chuckles out of this list. It’s truly astonishing.

A few of Trump’s current policy positions are discussed below, but before getting into that, it’s interesting to consider the overall tenor of his rhetoric. Most observers will happily admit that they find his bombast entertaining, and I do too. He’s outspoken and unapologetic, confronting his critics head-on, often to powerful effect. Many are drawn to this sort of candidate, and his popular image as a skilled businessman doesn’t hurt. But while all politicians are capable of disappointing supporters, Trump fans do not know, and cannot know, what they’re getting.

Trump is almost always critical but rarely suggests actual solutions, making it difficult to discern whether he really has policy positions. So much so that it’s incredible to hear praise for his “clarity”. For a more sober take, read Andy Kroll’s account of frustrated attempts to get direct responses on a few policy issues from the Trump campaign, and of Trump’s bizarre tour of Laredo, Texas. A related piece by Peter Suderman appears at Reason.com. Politico has emphasized the same point in “Will the real Donald Trump please stand up?“. Kroll says this:

“I have zero to report about Trump’s plans for actually being president—except that, from all available evidence, he hasn’t given it a moment’s thought.“

An interesting piece on Trump comes from Jeffrey Tucker in “What is Trumpism?“. A longer version appeared as “Trumpism: The Ideology“. Here is one bit from Tucker, written after hearing “The Donald” speak at FreedomFest:

“The speech lasted an hour, and my jaw was on the floor most of the time. I’ve never before witnessed such a brazen display of nativistic jingoism, along with a complete disregard for economic reality. It was an awesome experience, a perfect repudiation of all good sense and intellectual sobriety. …

His speech was like an interwar séance of once-powerful dictators who inspired multitudes, drove countries into the ground, and died grim deaths.“

Here are a few examples of Trump’s “nativism”, as described by Tucker:

“I did laugh as he denounced the existence of tech support in India that serves American companies (‘how can it be cheaper to call people there than here?’ — as if he still thinks that long-distance charges apply). 

When a Hispanic man asked a question, Trump interrupted him and asked if he had been sent by the Mexican government. He took it a step further, dividing blacks from Hispanics by inviting a black man to the microphone to tell how his own son was killed by an illegal immigrant.“

Two issues on which Trump has been outspoken are international trade and immigration. As an aside, I note that he is always quick to qualify any aggressive statements he makes on these topics with a quick “I love the Chinese”, or “I love the Mexicans”. Tucker, at the link above, highlights Trump’s backward views on trade, which focus almost exclusively on U.S. producers without considering the benefits of trade to U.S. consumers. He sees big ships coming into port, and thinks only of cash flowing abroad: “What do we get?” Well, we get nice foreign goods, thank you very much. But Trump blames foreign trading partners for many ills, despite the fact that his Trump-label ties are made in China! Are we somehow being cheated on those ties? Trump says we need smarter people negotiating “these deals”. Okay… is that a policy?

We don’t need trade wars if we want to avoid a much weaker economy. Yet Trump’s trade rhetoric suggests that he would be tempted to employ trade restrictions like tariffs as a bludgeon. For example, consider one of his other big talking points: illegal immigration (despite the fact that the inflow of illegals has slowed to a trickle over the past few years). Trump wants to build a wall across the length of the U.S.-Mexican border, and he says he’ll make Mexico pay for it. To get a wall built, Trump might well decide that he can raise tariffs on Mexican goods to prohibitive levels as a way of twisting Mexican arms. That sort of action is likely to be very costly for U.S. consumers, and ultimately producers as well.

Trump’s latest pronouncements on immigration policy have been described as confusing. In a nutshell, he wants to deport “the criminals” (and not just those already doing time) and deport all other undocumented aliens; create an expedited process whereby we can let “the good ones” back into the country with legal status; “maybe” create some sort of path to citizenship (because “who knows what’s going to happen”), but not right away; and “we’re going to do something” for the “DREAMers”. Trump says he’ll know how to identify the “good ones”. If he’s so confident of that, then why would he, a smart “business guy”, allow the country to incur the expense of deporting millions of them?

Who knows what Trump will propose in terms of tax reform, health care and gun control? Ditto on welfare policy, defense, the drug war, foreign policy and energy. He wisely spoke against the drug war in 1990, but I’m not aware of any recent statements on the issue. Also in his favor, he does not accept the “consensus” on climate change and opposes Common Core. He has criticized crony capitalism but has undoubtedly benefited from cronyism, enlisting governments in the pursuit of eminent domain action. He is said to favor cuts in federal spending, but he has opposed cuts in Social Security and Medicare. He opposes an increase in the minimum wage, but he has proposed a wealth tax in the past.

Trump has not offered many specifics in this campaign, and the GOP debate this Thursday night will not provide a decent forum for articulating policy. In general, his positioning is a very mixed bag. One gets the sense that he is doing his best to appeal to a sort of populist conservatism. Unfortunately, his signature “positioning” on trade and immigration qualify him as something of a statist. He has certainly held a number of other statist views in the past, though he has disavowed at least some of those.

In closing, here are two more quotes from Jeffrey Tucker about Trump that I found both ominous and plausible:

“What’s distinct about Trumpism, and the tradition of thought it represents, is that it is not leftist in its cultural and political outlook (see how he is praised for rejecting “political correctness”), and yet still totalitarian in the sense that it seeks total control of society and economy and demands no limits on state power.“

“These people are all the same. They purport to be populists, while loathing the decisions people actually make in the marketplace (such as buying Chinese goods or hiring Mexican employees).“

Hillary’s Got Some Promises and a Rat’s Nest

03 Monday Aug 2015

Posted by in Big Government, Central Planning

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Hillary

Hillary Clinton is an advocate for governmentalizing the social order, and asks America to trust that central control, under her command, will accomplish great things such as upward mobility for the middle class, a rising standard of living, green energy for all, a “fix” for Obamacare, and much else. Jeffrey Tucker writes of Hillary’s delusions in “Hillary Clinton’s Ideological Vortex of Power and Planning” and her assurances that she’ll take measures with predictable impacts on the global climate, measures that will direct all details of energy production and use.

Tucker throws cold water on Hillary’s promises by viewing them in the context of F.A. Hayek warnings about the ruinous effects of central planning and control:

“That brilliant economist spent 50 years explaining, in book after book, that the greatest danger humanity faced, now and always, was a presumption on the part of intellectuals, politicians, and bureaucrats that they know better than the emergent and evolving wisdom of social forces.

This presumption might seem like science but it is really pretense. Civilization arises from, is protected by, and advances through the dispersed knowledge of billions of individual decision makers and the institutions that arise from them.

Hayek called the issue he was investigating the knowledge problem. Society needs to know how to use scarce resources, how to navigate a world of uncertainty, how to form rules that turn struggle into peace. It is a problem solved through freedom alone. No ruler, no scientist, no intellectual can substitute for the evolving process of decentralized decision making and trial and error.“

I discussed the fatuous presumptions of the left in an earlier SCC post entitled: “Conscious Design, the Collective Mind and Social Decline“. In that post, I used the wonderful Hayek quote:

“We flatter ourselves undeservedly if we represent human civilization as entirely the product of conscious reason or as the product of human design, or when we assume that it is necessarily in our power deliberately to re-create or to maintain what we have built without knowing what we were doing.“

More specifically, on energy policy, Clinton says she will set an agenda for the country to produce enough renewable energy within 10 years to power every American home, and to install half a billion solar panels across the country by the end of her first term. As Ira Stoll says at Reason.com, this is “central planning at its worst“.

“Clinton assumes that man-made climate change is a risk serious enough to try to mitigate, and that America should try to mitigate it by reducing its carbon emissions. These are big ‘ifs,’ but ones I will grant for argument’s sake. Even granting those assumptions, there is a humongous logical leap to the conclusion that the appropriate policy response is setting a national target for the number of solar panels installed.

For one thing, it’s a classic error of measuring inputs rather than outputs. If the goal is the reduction of dangerous emissions, why not set a goal for that, and support any energy method—solar, wind, algae, hydroelectric, nuclear, hydrofracturing—that gets America closer to that goal? Why privilege solar over all the other technologies, including some that may not even be invented yet?“

Certainly, proposals like this create tremendous opportunities for rewarding cronies. Stoll also notes that solar technology will improve over time, but rushing to install millions of panels, undoubtedly encouraged by heavy subsidies, would saddle users in the long-term with less efficient versions. With future improvements in efficiency and cost, the technology will gradually draw users in without the need for subsidies. That’s what rational economic decision-making looks like!

A specific economic proposal from the Clinton camp would increase the capital gains tax rate on asset sales held from 364 days up to six years. The rate would double if the asset was held up to two years. The increases become gradually smaller for two-to-six year holding periods. Hillary’s is somehow unaware that the government has already made it incredibly difficult for businesses to raise capital to invest in new buildings, equipment, and technology. Capital gains taxes are punitive: they represent double taxation of income to investors and they further distort rates of return by taxing assets on inflationary increases in value, which diminish their real value. Larry Kudlow wrote a good opinion piece on this proposal, called “Hillary’s Inconceivably Stupid Capital-Gains Tax Scheme“. He focuses on Hillary’s attack on the alleged “short-termism” in the economy, but this is a little odd, because her plan essentially discourages saving.

On health care, Clinton has pledged to “improve” Obamacare, but not repeal it. Too bad. It is similar to the plan she put forward as a Senator, including the individual mandate. The only piece of good news here is that she has discussed eliminating the employer mandate, which has been deferred by the Obama Administration twice already. However, some effects of the employer mandate have been felt, as it has tended to discourage employers from taking on full-time employees.

On foreign policy, Clinton is probably more hawkish than President Obama. Her stint as Obama’s Secretary of State was not marked by any noteworthy accomplishment.

Then there is the question of Clinton’s integrity. She’s been tainted by scandals before (e.g., Whitewater). She told a Brian Williams-like lie about being fired upon in Bosnia. The role of the Clinton Foundation, and whether it served as a mechanism for influence-buying, has also been in question, not to mention its seeming role as a personal slush fund for the Clintons. Her ties to Wall Street probably exceed Obama’s. And she maintained a private email server while Secretary of State, which was imprudent at best, and depending on the the classification of what went through that server, criminal at worst. Finally, her involvement in the Benghazi tragedy has been in question from the beginning. On some events related to Benghazi, including Hillary’s potential involvement in suspicious arms trading activity, Andrew Napolitano insists that “Hillary Keeps Lying“.

And here is Jeffrey Tucker waxing sarcastic about Hillary in another context: “Just trust her. Truly, just trust her …” 

The Government Inequality Machine

17 Wednesday Jun 2015

Posted by in Big Government

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Cronyism cartoon

Some perceive the government as an ideal agent of redistribution, but they fail to apprehend the many ways in which government policy undermines equality. Scott Sumner and Kevin Erdmann have written an excellent essay on this point entitled “Here’s What’s Driving Inequality” at National Review. They focus on three areas of government action with the unavoidable side-effect of upward redistribution: housing policy (at all levels of government), regulation, and excessive protections for intellectual property.

Sumner and Erdmann briefly cover Thomas Piketty’s controversial view that wealth becomes increasingly concentrated under conditions of secular stagnation. However, they note that over the past few decades:

“... almost the entire change in the share of domestic income going to capital in major developed economies was explained by rising rents on residential real estate. Non-rental capital income (including the corporate sector) still has a fairly stable share of domestic income.“

Housing policy has driven rents upward in myriad ways. For example, restrictive zoning laws, environmental regulation of new building and regulation of bank lending have all made homeownership less feasible and renting more expensive. If you’re already in your own home, you’re safe! If not, welcome to the have-nots! Here’s a story on government insurance programs that offer massive subsidies to wealthy homeowners. All these redistributional effects are compounded by a tax code that has inflated housing prices through the home mortgage interest deduction, and at the same time inflated rents via the incidence of higher taxes on rental income and real estate capital gains.

Regulation of private business activity is often viewed naively as a necessary, protective function of government, but regulation acts in perverse ways:

“Unfortunately, many government regulations tend to favor larger firms. In recent years we have seen the passage of some extremely complex regulations involving thousands of pages of rules, such as Sarbanes-Oxley, Dodd-Frank, and the Affordable Care Act. The Food and Drug Administration, the Department of Defense, and the public health-care complex tend to create opportunities for uber-firms within industries, which act as clearinghouses for public contracts and regulatory demands.”

Large firms tend to pay higher wages and salaries than small firms. By favoring large firms, regulation in turn favors their relatively high-income workers. In addition, regulation such as occupational licensing, labor regulations and local wage controls damage the health and growth potential of small firms and the mobility of individuals at the bottom of the economic ladder.

Finally, Sumner and Erdmann discuss the often bizarre extension of intellectual-property (IP) rights and the way it favors large firms:

“Copyright protections once lasted for 14 years, applied only to maps and books, and could be renewed once if the author was still alive. Now they’ve been extended to many other products, extend for 50 years after the death of the author, and last for at least 95 years for corporations. These extensions are widely seen as reflecting the lobbying power of companies such as Disney. In the high-tech sector, patents are often granted for seemingly minor and obvious innovations.“

Sacred Cow Chips featured a piece on IP several months ago called “Is The Patent a Perversion?” The Libertarian view of IP is skeptical, to say the least, and favors limited protection at most. In that post, I quoted Jeffrey Tucker of the Beautiful Anarchy blog:

“Through intellectual property laws, the state literally assigned ownership to ideas that are the source of innovation, thereby restricting them and entangling entrepreneurs in endless litigation and confusion. Products are kept off the market. Firms that would come into existence do not. Profits that would be earned never appear. Intellectual property has institutionalized slow growth and landed the economy in a thicket of absurdity.“

There is little doubt that economic mobility is not well served by excessive grants of IP rights that extend monopolies indefinitely.

Government fosters inequality in many other ways. The mere existence of a confiscatory mechanism for legal revenue collection, and a complex bureaucracy in charge of distributing the spoils and making rules, will always attract high-powered rent-seeking resources and encourage cronyism. It is a graft machine. The very complexity of the tax code creates fertile ground for transfers via obscure breaks and carve-outs, while higher tax rates on others are required to fund the exceptions. Here’s another: the Export-Import Bank, which subsidizes exports for large corporations. A nice run-down of some of the many areas of “Welfare for the Rich” was provided a few years ago by Robert P. Murphy in The Freeman.

Unfortunately, direct efforts by the government to help the poor are often mere palliatives. At the same time, many of these programs are notorious for destroying work incentives, which undermines equality and economic mobility.

Government is simply not as well-suited to promoting equality as well-functioning markets, free of government meddling and government grants of monopoly. Profits in such markets attract new resources that compete away excess returns and bid prices downward, actions that tend to promote equality. The opportunity to compete without restraint not only vitiates artificial or permanent claims to profits; along with strong property rights, it encourages invention, economic mobility and growth.

Is The Patent a Perversion?

28 Tuesday Apr 2015

Posted by in Property Rights

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money-tree-patent-cartoon

No one likes a monopoly except the monopolist, and a monopoly granted by patent is generally no exception. Patents are intended to be temporary, but they are often extended, at high cost to customers, beyond what many consider necessary as an incentive for innovation. There is also doubt about the validity of many “innovations” on which patents are issued. Alex Tabarrok once posted this cute illustration on the excesses of patent law. He has also discussed the existence of “patent thickets”, situations in which “a new product can require the use of hundreds or even thousands of previous patents, giving each patent owner veto-power over innovation“, or at least a way to skim some of the profits. Such thickets serve as a detriment to innovation, contribute to excessive litigation, and ultimately defeat the purpose of rewarding an innovator. Patent “trolls”, who threaten litigation over patent issues but may not own any patents themselves, have become a growing problem. In many ways, intellectual property laws begin to look like a rent-seeker’s playground. James Pethokoukas blogged late last year about a new study by the Congressional Budget Office stating that the U.S. patent system had “weakened the linkage between patenting and innovation“.

There is strong disagreement among libertarians about the validity of intellectual property rights (IP — copyrights, trademarks and patents). My natural sympathies are with the individual who rightfully seeks to benefit from their own creativity and hard work, but whether an innovator should enjoy a state-enforced monopoly on any and all applications of an idea is another matter. If potential competitors, customers and society have an obligation to this individual, some would insist that it is merely an ethical obligation, not one that should be sanctioned by the state.

In what follows, I will mostly refer to generic “ideas”, with the caveat that there are important distinctions between patents, trademarks and copyrights. I do not mean to minimize those distinctions. Rather, my interest lies in the general notion of intellectual property and any fundamental rights that successful “ideation” should confer. I confess that I have a bias in favor of rewarding innovators, but that might be a mere mental remnant of our legacy of IP protection in the U.S.

Suppose that some person, Mr. I, has an idea, and it is the first of its kind. Should Mr. I be granted an exclusive right to the idea and a monopoly on its application? Two qualities of tangible property are thought to be helpful in thinking about this kind of problem: rivalrousness and exclusivity. Rivalrous benefits make sharing difficult and make a thing more suitable as private property. Exclusivity means that others can be restricted from enjoying the benefits. If ideas had these qualities, then possession of an idea would settle the issue of rights without the need for special recognition of IP by government.

Pure public goods like air are non-rivalrous. Ideas themselves are often said to be non-rivalrous, but what is done with them might produce rivalrous benefits. If the benefits of Mr. I’s idea can be enjoyed by one individual without diminishing the benefits to others, then the idea is non-rivalrous.

Exclusivity is a closely-related but separate concept meaning that the benefits can be enjoyed privately, to the exclusion of others. Pure public goods lack both rivalrousness and exclusivity. On the other hand, a painting can be owned and kept in a private home, thus making it exclusive despite the fact that its benefits are largely non-rivalrous; though multiple individuals can enjoy a film simultaneously (non-rivalrous), it can be screened in a private venue charging admission; and while software can be shared, it is possible to achieve a measure of exclusivity by limiting the media (and replicability) through which it is available. However, the idea underlying a productive machine or process may be exclusive only to the extent that it cannot be discovered or reverse-engineered. While a new machine may be purchased from Mr. I and then owned and used exclusively, the idea itself has only limited exclusivity.

To strip the problem down to bare essentials, suppose there are no frictions in the transmission of information and that if Mr. I makes any practical use of his idea, or even mentions it to someone else, then the idea will be immediately known to all others. The idea itself is non-rivalrous and non-exclusive. There could still be gains to marketing applications if there are production costs involved (as that discourages entry), and those gains are rivalrous if the number of potential buyers is limited. To slightly rephrase the original question: Should Mr. I be granted, by the power of the state, an exclusive right and a monopoly on applications of his idea? A brilliant idea may have a rivalrous dimension and its benefits may be exclusive, but any non-exclusivity of the idea itself will diminish its market value. Does that offer sufficient grounds for the existence of IP?

This was essentially Eugene Volokh’s position when he asserted, in 2003, that a non-rivalrous good (water from the water table) has a market value, like any piece of tangible property, as long as it is possible to exclude others from access (to a well). (But that was not Volokh’s main argument in support of IP — see below.) Lawrence Solum at Legal Theory Blog took issue with Volokh’s position on valuation, insisting that it is often impossible to price IP optimally and therefore it is not like tangible property. Here is Volokh’s brief rejoinder, which rests partly on the argument discussed in the next paragraph.

A standard defense for IP is that rewarding invention and creativity enhances incentives for “great works” and technological advance. This was Volokh’s main defense of IP. Many libertarians find this hard to swallow, however. First, they insist that creative action is often driven by non-pecuniary motives. Nevertheless, art and invention are facilitated by funding, so the existence of IP rights may help to secure that support. A second objection is that ideas are frequently not unique; there are many examples of near-simultaneous discoveries. So, as this objection goes, if A hadn’t thought of it, B would have, and the incentive is often unnecessary. That is anything but absolute, however.

A very libertarian argument against property rights for ideas is that defining such a right infringes on the property rights of others. That is, any law restricting the use of an idea by others necessarily prevents them from using their own resources in a particular way. It therefore represents a kind of taking. This post by Stephan Kinsella at the Mises Daily stakes out this position:

“Patents grant rights in ‘inventions’ — useful machines or processes. They are grants by the state that permit the patentee to use the state’s court system to prohibit others from using their own property in certain ways — from reconfiguring their property according to a certain pattern or design described in the patent, or from using their property (including their own bodies) in a certain sequence of steps described in the patent.

In both cases, the state is assigning to A a right to control B’s property: A can tell B not to do certain things with it. Since ownership is the right to control, IP grants to A co-ownership of B’s property.“

Kinsella’s view is that creation, in and of itself, does not imply ownership. It is a transformation of resources, but ultimately the owner of those resources must own the creation. My difficulty with this argument is that an idea, if previously unknown to anyone, has no necessary impact on a prior use of resources owned by others. The ex ante value of those resources is based on their prior use, and that use can be continued. Certainly, if the new idea implies that the prior use is no longer the best use of those resources, then an patent-like restriction on the use of the new idea represents a harm. For example, if the new idea reduces production costs and an established competitor is restricted from using the idea, they will be harmed. Nevertheless, I hesitate to call this a “taking” because there is no restriction on the prior use.

Roderick T. Long makes the same argument as Kinsella in “The Libertarian Case Against Intellectual Property Rights“:

“... information is not a concrete thing an individual can control; it is a universal, existing in other people’s minds and other people’s property, and over these the originator has no legitimate sovereignty. You cannot own information without owning other people.“

Long makes the further claim that ownership of inventions embodying IP is not legitimate because one cannot own a “law of nature”:

“Defenders of patents claim that patent laws protect ownership only of inventions, not of discoveries. (Likewise, defenders of copyright claim that copyright laws protect only implementations of ideas, not the ideas themselves.) But this distinction is an artificial one. Laws of nature come in varying degrees of generality and specificity; if it is a law of nature that copper conducts electricity, it is no less a law of nature that this much copper, arranged in this configuration, with these other materials arranged so, makes a workable battery.“

I find this view preposterous. Nature exists apart from our ability to exploit it. A new piece of knowledge or practical technique is not itself a “law of nature”. It is a discovery about the laws of nature.

Here are Arnold Kling’s thoughts on these and other IP posts, including this short piece from Daniel Drezner, who discusses the importance of credible commitment in protecting rights. A credible commitment does not exist when ex ante assertions of IP protection prove to be malleable ex post, under pressure from critics pointing to the larger gains of rescinding those protections.

I was motivated to write about IP after reading a post by Jeffrey Tucker at the Beautiful Anarchy blog, who wrote about the severe handicaps imposed by government regulation on society. In that post, he briefly disparaged IP. Tucker noted the spooky similarity of the present regulatory environment to Ayn Rand’s novel Anthem. I agree, but there is some irony in this, as Rand herself was a strong supporter of IP rights. Here is what Tucker said about IP:

“Through intellectual property laws, the state literally assigned ownership to ideas that are the source of innovation, thereby restricting them and entangling entrepreneurs in endless litigation and confusion. Products are kept off the market. Firms that would come into existence do not. Profits that would be earned never appear. Intellectual property has institutionalized slow growth and landed the economy in a thicket of absurdity.“

The nation’s founders certainly wished to recognize IP rights, but only within limits. The so-called Copyright Clause in Article I of the U.S. Constitution empowers Congress:

“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

So, like it or not, IP is recognized in the Constitution. The libertarian arguments against IP are persuasive in some respects, but I am not wholly convinced of their wisdom in terms of promoting innovation and economic growth. However, I am persuaded that shorter patent duration and severe limits on extensions would reward innovators and offer them incentives without the loss of growth implied by a long-term grant of monopoly. And this sort of modification might encourage more efforts to handle IP contractually, a topic that is discussed in detail (and with skepticism) in the post linked above from Long. There may be benefits as well to defining a higher threshold as to patentable ideas. For example, some say that only discoveries, not mere innovations, should be granted patents. “Mere” innovators could still capture gains via first-mover advantage and their own branding efforts, but not via patents.