Power & Market

Today in stupid lawsuits we have two Florida men suing McDonalds for not giving them a discount for asking for a Quarter Pounder with Cheese without the cheese. They are asking for $5 million in damages. 

As the Miami Herald reports:

The suit claims, "customers have been forced, and continue to be overcharged for these products, by being forced to pay for two slices of cheese, which they do not want, order, or receive, to be able to purchase their desired product."

Having to pay for cheese they do not receive because they asked that it be held off of the burgers, well, they are not "lovin' it," to borrow from McDonald's current slogan....

According to Lavin's suit, Kissner and Werner "have suffered injury as a result of their purchases because they were overcharged, and were required to pay for cheese, which is not a component of either a Quarter Pounder or a Double Quarter Pounder, that they did not want and did not receive."

As absurd as the lawsuit is, there is a worthwhile economics lesson here. The case is clearly grounded in the idea of a Cost Theory of Value, which basically viewed the price of goods as the result of combining the cost of production with enough profit to make the entire venture worthwhile. In the view of Mr. Kissner and Mr. Werner, the fact they are asking for a sandwich requiring one less factor of production means that McDonalds is now wrongly profiting more from their order than a fellow customer who likes their cheese. 

If McDonalds is in need of an expert to debunk this argument, I would suggest Bob Murphy.

As he explained in his excellent article Problems with the Cost Theory of Value:

Fundamentally, the cost theory is deficient because it doesn't actually explain the determinants of market prices. Rather, the cost theory merely explains relationships among market prices.

"Costs" are prices too. To "explain" the price of a $10,000 car by reference to the prices of the engine, tires, glass, and so on, doesn't really explain market prices per se. At best, it pushes back the explanation one step: Why does the engine have a price of $5,000, etc.?

 

Even on its own terms, the cost theory of value (at least as I have summarized it above) acknowledges that the present day "spot" price of a good is determined by something other than the costs of its production. The theory explicitly deals with the cases where the actual market price is either higher or lower than the long-run "anchor" price set by the cost theory, and tries to explain the forces that would move those "aberrational" prices back toward the long-run "natural" price.

The classical economists weren't dummies. They understood that a sudden urge among the public to buy more of a certain good would lead to an immediate increase in its price. But the cost theory could only comment on this situation by saying that the market would tend toward a restoration of the same rate of profit in the industry through an increase in production to match the increased demand.

In other words, the cost theory of value could explain the long-run target toward which the day-to-day spot prices would tend. The cost theory could not explain what actually formed those spot prices on any given day.

Because the cost theory couldn't explain how actual market prices were formed "from scratch," it was useless when it came to non-reproducible goods. Obviously the price of the Mona Lisa, or of an original Shakespeare manuscript, would have nothing to do with the cost of producing these masterpieces.

Cost Theory Has Things Backward

Here we see the methodological problem of the cost theory: By explaining final retail prices through the cost of making the goods, the cost theory implies that economic value is an objective property of physical items that flows from resources into the goods that they produce. In contrast, the subjective value theory of Menger and others starts with the valuation of consumer goods and works its way back through the prices of labor and other inputs accordingly.

When a consumer is deciding on a purchase, the cost of producing the item is usually irrelevant. For example, going along with our hypothetical example above, if a new company decided to use twice as many resources to make an equivalent car, it couldn't charge $20,000 simply because "that's how much it cost."

For a different example, if a farmer discovers a meteorite chock full of gold on his property, he will charge whatever the market will bear for it. He won't sell it for less than other gold producers on account of his virtually zero cost of production.

To put it simply, the fact these Florida Men purchased their Double Quarter Pounder without Cheese shows that they thought the sandwich was worth the price they paid for it. If not, they wouldn't have ordered it. That it costs the store slightly less to make that sandwich than others is entirely irrelevant, which explains why profit margins vary widely on the McDonalds menu. 

Case dismissed. 

Not a day goes by when the liberal media don’t telegraph to the world that a “Trumpocracy” is destroying American democracy. Conspicuous by its absence is a pesky fact: Ours was never a country conceived as a democracy.

To arrive at a democracy, we Americans destroyed a republic.

One of the ways in which the republic was destroyed was through the slow sundering of the 10th Amendment to the Constitution. The 10th was meant to guarantee constitutional devolution of power.

“The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

The de facto demise of the 10th has resulted in "constitutional" consolidation.

Fair enough, but is that enough? A perceptive Townhall.com reader was having none of it.

In response to “Whodunit? Who ‘Meddled’ With Our American Democracy” (Part 1), the reader upbraided this writer:

“Anyone who quotes the 10th Amendment, but not the 14th Amendment that supplanted it cannot be taken seriously.”

In other words, to advance the erosion of the 10th in explaining who did our republic in, without mentioning the 14th: this was an omission on the writer’s part.

The reader is admirably correct about Incorporation-Doctrine centralization.

Not even conservative constitutional originalists are willing to concede that the 14th Amendment and the attendant Incorporation Doctrine have obliterated the Constitution's federal scheme, as expressed in the once-impregnable 10th Amendment.

What does this mean?

You know the drill but are always surprised anew by it. Voters pass a law under which a plurality wishes to live in a locality. Along comes a U.S. district judge and voids the law, citing a violation of the 14th's Equal Protection Clause.

For example: Voters elect to prohibit local government from sanctioning gay marriage. A U.S. district judge voids voter-approved law for violating the 14th's Equal Protection Clause.

These periodical contretemps around gay marriage, or the legal duty of private property owners to cater these events, are perfectly proper judicial activism. It flows from the 14th Amendment.

If the Bill of Rights was intended to place strict limits on federal power and protect individual and locality from the national government—the 14th Amendment effectively defeated that purpose by placing the power to enforce the Bill of Rights in federal hands, where it was never intended to be.

Put differently, matters previously subject to state jurisdiction have been pulled into the orbit of a judiciary. Yet not even conservative constitutional originalists are willing to cop to this constitutional fait accompli.

The gist of it: Jeffersonian constitutional thought is no longer in the Constitution; its revival unlikely.

A Court System Centralized

For another example of the endemic usurpation of The People, rendering the original Constitutional scheme obsolete, take the work of the generic jury. With his description of the relationship between jury and people, American scholar of liberty Lysander Spooner conjures evocative imagery.

A jury is akin to the "body of the people." Trial by jury is the closest thing to a trial by the whole country. Yet courts in the nation’s centralized court system, the Supreme Court included, are in the business of harmonizing law across the nation, rather than allowing communities to live under laws they author, as guaranteed by the 10th Amendment to the Constitution.

States’ Rights All But Obliterated

Like juries, states had been entrusted with the power to beat back the federal government and void unconstitutional federal laws.

States' rights are "an essential Americanism,” wrote Old Rightist Frank Chodorov. The Founding Fathers as well as the opponents of the Constitution, the Anti-Federalists, agreed on the principle of divided authority as a safeguard to the rights of the individual.

Duly, Thomas Jefferson and James Madison perfected a certain doctrine in the Virginia and Kentucky Resolutions of 1798. "The Virginia Resolutions,” explains historian Thomas E. Woods, Jr., “spoke of the states' rights to 'interpose' between the federal government and the people of the states; the Kentucky Resolutions used the term nullification—the states, they said, could nullify federal laws that they believed to be unconstitutional."

“Jefferson," emphasized Woods, "considered states' rights a much more important and effective safeguard of people's liberties than the 'checks and balances' among the three branches of the federal government."

And for good reason. While judicial review was intended to curb Congress and restrain the Executive, in reality, the judicial, legislative and executive unholy federal trinity has simply colluded, over time, in an alliance that has helped abolish the 10th Amendment.

Founding Faith Expunged

And how well has First Amendment jurisprudence served constitutionalists?

Establishment-clause cases are a confusing and capricious legal penumbra. Sometimes displays of the Hebraic Decalogue or manger scene are taken to constitute the establishment of a state religion. Other times not.

This body of law forever teeters on conflating the injunction against the establishment of a state religion with an injunction against the expression of faith—especially discriminating against the founding faith in taxpayer-supported spaces.

The end result has been the expulsion of religion from the public square and the suppression therein of freedom of religion.

On the topic of religious freedom, Jefferson was prolific, too. The Virginia Statute for Religious Freedom was a crowning achievement for which he wished to be remembered, along with the Declaration of Independence and the founding of the University of Virginia.

Jefferson interpreted "Congress shall make no law respecting the establishment of religion, or prohibiting the exercise thereof"—as confirms by David N. Meyer, author of Jefferson's Constitutional Thought—to guarantee both "an absolute free exercise of religion and an absolute prohibition of an establishment of religion."

Yet somehow, the kind of constitutional thought that carries legal sway today prohibits expressions of faith or displays of a civilizing moral code in government-controlled spheres. Given my libertarian view of government’s immoral modus operandi, I find this amusingly apropos. Still, this is not what Jefferson had in mind for early Americans.

Indeed, why would anyone, bar Nancy Pelosi and her party, object to "thou shall not kill" or "thou shall not commit adultery, steal or covet?" The Ten Commandments can hardly be perceived as an instrument for state proselytization.

Nevertheless, the law often takes displays of the Decalogue or the nativity scene on tax-payer funded property as an establishment of a state religion.

"I consider the government of the U.S. as interdicted by the Constitution from intermeddling with religious institutions, their doctrines, discipline, or exercise," Jefferson expatiated.

He then gets to the soul of the subject: "This results not only from the provision that no law shall be made respecting the establishment, or free exercise of religion but also from the Tenth Amendment, which reserves to the states [or to the people] the powers not delegated to the U.S."

So, dear reader, if there’s one thing we know for sure, it’s that the Russians didn’t deep-six our republic of private property rights and radical decentralization—we did.

I almost feel guilty when I criticize the garbled economic thoughts of Pope Francis. After all, he was influenced by Peronist ideology as a youngster, so he was probably a lost cause from the beginning.

Moreover, Walter Williams and Thomas Sowell have already dissected his irrational ramblings on economics and explained that free markets are better for the poor. Especially when compared to government dependency.

But since Pope Francis just attacked tax havens, and I consider myself the world’s foremost defender of these low-tax jurisdictions, I can’t resist adding my two cents. Here’s what the Wall Street Journal just reported about the Pope’s ideological opposition to market-friendly tax systems.

The Vatican denounced the use of offshore tax havens… The document, which was released jointly by the Vatican’s offices for Catholic doctrine and social justice, echoed past warnings by Pope Francis over the dangers of unbridled capitalism. …The teaching document, which was personally approved by the pope, suggested that greater regulation of the world’s financial markets was necessary to contain “predatory and speculative” practices and economic inequality.

He even embraced global regulation, not understanding that this increases systemic risk.

The supranational dimension of the economic system makes it easy to bypass the regulations established by individual countries,” the Vatican said. “The current globalization of the financial system requires a stable, clear and effective coordination among various national regulatory authorities.

And he said that governments should have more money to spend.

A section of the document was dedicated to criticizing offshore tax havens, which it said contribute to the “creation of economic systems founded on inequality,” by depriving nations of legitimate revenue.

Wow, it’s like the Pope is applying for a job at the IMF or OECD. Or even with the scam charity Oxfam.

In any event, he’s definitely wrong on how to generate more prosperity. Maybe he should watch this video.

Or read Marian Tupy.

Or see what Nobel Prize winners have to say.

P.S. And if the all that doesn’t work, methinks Pope Francis should have a conversation with Libertarian Jesus. He could start here, here, and here.

Originally published at Dan Mitchell's blog International Liberty