Compounding Shortfalls in Innovation

Compounding Shortfalls in Innovation

08/30/2021Hunter Hastings

Curt Carlson, the world’s leading authority on innovation and how to implement it, worries that the US is under-performing on this front – badly. 

On LinkedIn, he writes:

Almost all measures of innovative performance today are wanting.  Only 3% of patents recoup their investment; the rest are mostly waste that costs many tens of billions of dollars a year just in maintenance fees.  Only one in ten new venture-backed companies has any real success.  Most venture capitalists lose money, and 5% make 95% of the gains.  Only 20% of university tech-transfer programs break even, and those few are often the result of a new drug.  In our workshops with almost a thousand global teams from leading companies, universities, and government agencies, typically, only 25% of the projects under development would provide any meaningful new customer value if completed.  

This issue profoundly affects civilizational progress and quality of life. Innovation is value-creation and value-creation improves society for all.

Through innovation we address society’s grand challenges, create prosperity and jobs, and provide resources for social responsibility.  Consequently, one of society’s most critical opportunities is to improve our value-creation capabilities.  Improvements in value creation are exponential amplifiers of innovative performance.

He applies the term exponential in a carefully considered way. There is the opportunity for rapid, accelerated advance from where we are today to where we could be tomorrow. Problems can be solved quickly. Conditions we experience as disappointing or even dismal can become uplifting and exciting in a short period of time.

That is, if we are innovating and generating new value.

The opposite is also true, however. Compounding works in reverse. If we fall behind, the distance we have to go to recover becomes exponentially longer. If this year, we realize only 50% of our value creation potential, then next year or in the next relevant period, we’ll have 50% of the resources we would otherwise have had, and we’ll drop to 25% of potential, and so on and so on. The shortfall compounds and our level of performance declines exponentially.

Professor Per Bylund of Oklahoma State University has the same concern about our country’s economic under-performance. He gives a name to the gap between the value that’s actually created by entrepreneurial businesses and what could have been created: The Unrealized. In his book The Seen, The Unseen, And The Unrealized, he describes this value generation shortfall in economic terms, and attributes it to government regulation. Whether in the form of legislation or bureaucratic rule-making, regulation distorts the market, redirecting entrepreneurial creativity into channels favored by politicians and government departments, or curtailing it with enforcement rules, or prohibiting it entirely in some cases. The regulated economy simply can’t evolve and grow in the same way it would if unhampered.

The Unrealized is, similarly, a compounding problem. The number of regulations increases each year, so The Unrealized expands and grows each year. If the economy grew at only 50% of its potential in a base year, then the next year is constrained in the base from which it grows, and this negative compounding extends annually into the future, forever. Since regulation has been with us for a couple of centuries, the compounding of The Unrealized is incalculably high. We simply can’t imagine the dimensions of what could have been. 

Einstein famously said about compound interest that it “is the eighth wonder of the world. He who understands it, earns it…..he who doesn’t….pays it”.

Unsurprisingly, given the source, this is a very important observation. Compounding can work for us or against us. Saving and investing and re-investing can compound in our favor. Interacting more and more with smarter and smarter people can compound in our favor. Iterating a creative idea in critical forums can compound its innovativeness and applicability until it breaks into the market. Exercising and healthy eating every day can compound for us as we age, making us relatively more and more healthy than our age cohort and standard norms. 

The same is true on the negative side. As Einstein said, if we don’t earn compound interest, we pay it. If we get into debt, interest is working against us, especially if we borrow more and more. If we are not continuously engaged with other smart people and iterating our ideas with them, we are less and less likely to make a creative breakthrough. And if we permit ourselves to avoid fitness activities and if we eat an unhealthy diet every day, we are making things worse for ourselves at compounding rates. Every day we are a little less healthy and fit than we could have been – every daily sugar intake, or alcohol intake or cigarette smoke intake compounds, so that, every day, the impact of unfitness and bad diet is a little more harmful on our less-fit body than it would otherwise have been.

Curt Carlson and Per Bylund teach us to concern ourselves with the compounding of The Unrealized in value generation activities. We should bear this in mind – and, at the same time, make sure that compounding is working for us in our personal and family life.

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America Is Not Meant to Recover

09/27/2021Robert Aro

It’s been said that the war is not meant to be won; but what about America’s recovery from COVID-19? Hearing Fed Chair Jerome Powell speak last week as he held interest rates steady and continued with monthly billion-dollar asset purchases didn’t offer any assurances that victory is on the horizon.

The way he uses the word recovery, a word he uses six times in his speech, should cause the public to wonder what exactly is going on. Pay attention to the message he conveys through his various quotes below, starting with some justification of easy money policies:

These measures, along with our strong guidance on interest rates and on our balance sheet, will ensure that monetary policy will continue to support the economy until the recovery is complete.

Meaning, if the recovery never happens, then monetary accommodation will never stop. He continues:

Progress on vaccinations and unprecedented fiscal policy actions are also providing strong support to the recovery… Real GDP rose at a robust 6.4 percent… The sectors most adversely affected by the pandemic have improved in recent months, but the rise in COVID-19 cases has slowed their recovery.

Per above, he cites vaccinations and fiscal response being the reason for a rise in GDP. There exists this bizarre negative feedback loop, because GDP includes government spending. Ergo, the greater the fiscal response (i.e., government spending), the greater the increase to GDP. However, the more the government spends, the worse off society becomes. Yet the worse off society becomes, the more society becomes reliant on the government...

The path of the economy continues to depend on the course of the virus… The Delta variant has led to significant increases in COVID-19 cases, resulting in significant hardship and loss, and slowing the economic recovery.

According to Powell, economic recovery depends on the virus. This is unfortunate as the new Delta variant is taking a real toll on the country.

Luckily, the Fed Committee members closely monitor for signs of the recovery. He speaks of the upcoming asset tapering:

While no decisions were made, participants generally view that, so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate.

The key phrase being: so long as, meaning the tapering will begin so long as the recovery continues to stay on track. Also notice how he doesn’t mention the start date but believes the end date will be next year, probably June/July.

At last, the speech concludes, but not before reminding us:

Everything we do is in service to our public mission. We at the Fed will do everything we can to support the economy for as long as it takes to complete the recovery.

Something just doesn’t add up. If the Fed will only stop once the recovery is finally complete, then one thing becomes certain: The Fed will never stop helping.

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The Rise of the Digital Hand and The Emerging Class of Digitalpreneurs

09/27/2021Raushan Gross

In An Inquiry Into the Nature and Causes of the Wealth of Nations, Adam Smith described what he called the Invisible Hand - a metaphor to describe the mechanism of the market and the social benefit that individuals who participate in the market in self-interested ways intentionally and unintentionally serve others. The invisible hand guides individuals entrepreneurially to improve their own circumstances, and they unintentionally or unconsciously create social benefits for everyone by serving the ultimate purpose of creating markets, economic growth, trade and prosperity. The invisible hand guides individuals’ purposes to the most needed ends – the benefit that customers value most highly - and they express these purposes by using their skills and resources in market pursuits that benefit the larger society, intended or otherwise.

Alfred Chandler, on the contrary, took the opposite approach and described the visible hand, which he said was a managerial revolution. The visible hand guided the managerial class of large enterprises and replaced the spontaneous order of the invisible Hand with the visible hand of experts managing production, focusing on mass manufacturing and distribution. Alfred Chandler said, "Such internalization permitted the Visible Hand of administrative coordination to make more intensive use of resources invested in these processes of production and distribution than could the Invisible Hand of market coordination." Chandler sought to replace the implicit guidance of the invisible hand with the explicit control of an elite management class and the tools of organizational structure, command-and-control methods and tightly constructed processes.

We are seeing the results of the visible hand today, in the rigid structures of established businesses that struggle to respond to fast-paced change and rapid innovation, and also in the rejection of business by younger generations who see it as elitist and exploitative.

Happily, the visible hand is losing its grip. Today, what I see emerging is the Digital Hand.

Table 1: Descriptions and Characteristics of The Market Hands

 

As Table 1indicates, the digital hand is the enablement of a broad and deep population of new entrepreneurs who have easy access to infrastructure and resources available via the internet and who can connect to every available source of knowledge, expertise and support. The digital hand opens economic opportunities for everyday people who can participate as entrepreneurs in today's economic marketspaces. Ecommerce and digital marketspaces are giving rise to digitalpreneurs, both nationally and globally. Chandler's visible hand has made significant improvements in the production of economic goods and mass service offerings, no doubt. However, never in human history has there been a digital hand guiding individuals who offer services, products, and entertainment, with the power of prosperity except in this current time of mass accessibility of eCommerce platforms.

Recent data suggests that social e-platforms, digital stores, and online marketspaces are a $200 billion industry. The cause of this boon is the result of human action and not of human design; the effect is the opportunity for regular people – not Chandler’s elite - to be guided to economic success by the digital hand. Now brick-and-mortar business models can be offered through a digital marketspace or a hybrid of both click-and-mortar. One person startups or small teams or small and medium sized businesses can harness the virtually unlimited resources of the digitally interconnected global economy and serve its digitally interconnected markets.

Is the entrepreneurial participation of everyday people using digital platforms via the digital hand the final, irreversible shift to free and unhampered markets? Is the level of ease for the average person to be involved in the market process the great breakthrough for individual economic freedom, even though their investment in entrepreneurial endeavors is not as consequential as an investment of a high-profile millionaire or billionaire? In the short run, we see more real people – you, your neighbor, and your friend – profitably exercising their talents, serving consumers, using the digital hand. In the long run, an entire emergent class of individuals can realize their positive impact on society using the digital hand.

With a tremendous uptick in digital businesses opportunities within the past decade, there is anticipation that more digitalpreneurs will arise in the future, thereby expanding this class of entrepreneurs. Facebook's Marketplace has grown to millions of sellers across many countries, providing real people with enormous entrepreneurial and innovative opportunities within just a few years of its formation in the digital space. No matter the division of labor one represents in the eCommerce sphere, there are sufficient and inexpensive marketspaces to enable the expression of entrepreneurship. Poshmark, eBay, Etsy, Shopify, Volusion, and other eCommerce marketspaces have built-in buyer networks serving millions of people. These e-platforms remove arbitrary barriers to the advancement of everyday people who wish to participate in the marketspace. Digitalpreneurs, newcomers, or entrepreneurs transitioning to digital platforms develop entrepreneurial skills and can profit from them.

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A Word on Statism

09/27/2021Oliver Adamson

His reply read, “Ok, found the statist.” A grin spread across my face as I chuckled at his response. It was, after all, in jest. My friend was well aware of my hesitant feelings towards the state. But many online are deadly serious while machine-gunning the term “statist” at anyone failing to toe their line. Unable to pinpoint its earliest deviation point, it’s fair to look to the anarchist movement’s recent involvement in redefining the term for its purposes. Much like the struggle to reacquire the term “liberalism,” some are not in the habit of affording groups the right to redefine words to suit their needs.

The term statism first appeared circa the 1600s in reference to church-state matters. The two were nearly inseparable and exercised substantial control over the individual. By the late 19th century, the term represented the “art of government” before eventually signifying the political opposite of individualism by the early 20th century. In his book, “Socialism: An Economic and Sociological Analysis,” Ludwig von Mises referred to it as “etatism” and wrote:

“Marxism relies upon the infallible judgment of a proletariat filled with the revolutionary spirit, Etatism upon the infallibility of the reigning authority. They both agree in belief in a political absolutism which does not admit the possibility of error.”

 

Mises preferred the term “etatism,” which contains the French word “état,” meaning “state,” over “statism.” This change reinforced that the statist mindset had not originated in the Anglo-Saxon culture. Origins aside, the term has more recently come to be defined as:

“Concentration of economic controls and planning in the hands of a highly centralized government often extending to government ownership of industry.”

 

Add to this that when looking up the term “statist,” many dictionaries merely describe it as an advocate of statism. Therefore, classically defined, a statist argues for and pursues a high degree of government centralization and control, which stems from their belief in the superior nature of central planning over free-market actions. 

Statism implies a preferred or desired state of affairs – not someone’s acceptance of unavoidable compromise. Many individualists dream of a world where voluntary interactions and mutual respect for private property abound; perhaps an impossibility if we are to believe the 17th-century English philosopher Thomas Hobbes’ view of the state of nature. Arguably, without the rule of law, the unprotected fundamental securities of life would lead to continual wealth destruction and de-civilization. Christianity also addresses this precept when pointing to the depraved state of humanity, a consequence of sin entering into the world.

Recognition and mindfulness of such foundational beliefs are essential to the discussion at hand. There is no contradiction in acknowledging the government’s inevitable existence and coercive nature and then seeking to restrict its power as the end goal. Political activism towards reducing government does not positively represent government endorsement. It merely represents a pragmatic rather than idealistic approach to remedying a problem: large-scale co-existence and civilization-building in light of the human tendency towards plunder and violence. 

Etatism or statism is altogether different; the deep-seated belief in a benevolent and far more efficient central authority flies in the face of free markets and personal responsibility. The statist and utilitarian are united in their view that government planning, decision-making, and emphasizing collective happiness are morally superior to individualism and its relationship with private property.

By definition, statism propagates activities that validate increasing government control over our lives. Voting for political parties who endeavour to reduce government size and promote free-market friendly policies is disharmonious with the statist worldview and does not follow its classical definition.

Social media platforms are ripe with pseudo-intellectualism and hurlers of insult. A better strategy would be to pursue sober-mindedness and become better acquainted with one’s arcs of fire. Indeed, there is nothing wrong with idealism, for without it, to what would humanity aspire? But to discount pragmatism, which confronts the world as we know it, would be disastrous and short-sighted. 

The tornados of life don’t whirl about the inside of vacuums. We often experience the tug of wars between principle and pragmatism and the difficult decisions that go along with them. Human tribalism and the need to organize aren’t going anywhere, and so it seems degrees of governance aren’t going anywhere either. While the individualist works to curtail this reality, the statist will always devote his efforts to its expansion. 

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A Problem with Mathematical Economics

09/27/2021Myles Watts

Eighty years ago, the American economist Paul Samuelson published his acclaimed doctoral dissertation "The Observation Significance of Economic Theory," which would later form the basis of his book Foundations of Economic Analysis. These works were instrumental in convincing the majority of economists that the use of mathematical and statistical methods are the indispensable means of investigating economic phenomena. Any economist who objects to the “Samuelsonian consensus” is derisively referred to as a literary economist. The literary economist is not really an economist at all because he refuses to use the superior methods delineated by Samuelson and other mathematical economists. To the mathematical economists, the Austrians are the vanguard of literary economics and thus not authentic economists; they are aberrant logicians who obstinately cling to anachronistic methods, which have been rendered defunct by the advent of quantitative economic methods. 

Yet, this was not always the case. Before empiricism-positivism swept through the economics discipline, virtually all economists conceived of economic theory as a purely deductive framework. Indeed, Lionel Robbins' book The Nature and Significance of Economic Science, which was first published in 1932, is essentially praxeology in all but name, and it was heralded as the gold standard of economic methodology for almost twenty years. In his preface, Robbins expresses his intellectual indebtedness to Ludwig von Mises, whom he identifies as the foremost influence on his own methodological position. 

Moreover, while mathematical economics can be traced back to the marginal revolution of the 1870s, it was not, as aforementioned, until Paul Samuelson’s treatise appeared in 1947 that the quantitative approach usurped the traditional qualitative approach – the approach to economics propounded so eloquently by Carl Menger in his 1871 Principles of Economics. Clearly, then, the qualitative economics practiced by the Austrians is not a mere idiosyncrasy peculiar to the Austrian school; it was once the dominant methodology.

The fundamental defect of quantitative, mathematical economics is manifest. Quantitative analysis implies the possibility of measurement, but measurement implies relating something to a standard. Without a standard, there is no measurement. In the realm of economic phenomena, there are no standards and, therefore, there can be no measurement. Mises has poignantly articulated this point, "There are, in the field of economics, no constant relations, and consequently no measurement is possible." 

Menger postulated that all economic phenomena are ultimately caused by the purposive actions of individuals. But there is no objective, fixed standard for measuring the minds and values of men; they are not perfectly predictable inanimate objects, but conscious actors with minds of their own. In short, there is no constancy in the province of human behavior. Accordingly, mathematical economics is nothing but an epistemologically sterile exercise in symbolism. It cannot yield explanations of economic phenomena and has contributed nothing but confusion and intellectual incoherence to the science of economics. 

In sum, the absence of empirical constants precludes the fruitful use of mathematics in economic theorizing. Contrary to the prevailing doctrine, economics is not an empirical, a posteriori science—it is a deductive, a priori science. The whole corpus of economic theory can be deduced from the axiom of purposeful human behavior. And since it is strictly impossible to derive true economic propositions from the use of mathematics, the attempt to do so can produce nothing but empirically redundant formalisms. The adoption of mathematical economics by the great body of economists represents a profound regression in our economic understanding, and it is the noble endeavor of the Austrians to oppose this inherently unscientific and perverse doctrine. 

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Name, Image, and Likeness

09/22/2021Connor Mortell

It’s the best time of the year: college football season. However, this is a particularly unique college football season because this year, for the first time ever, players will be able to be paid for their name, image, and likeness. This is the culmination of a long raging debate over whether or not college football players should be paid for the work they do. Arguments for paying players claim that they rake in cash for their schools, they give their schools valuable exposure, playing for the team is hard work, sports detract from studies, athletes need spending money, and the potential for injury compensation is a must. However, while these are initially convincing, upon further examination they are somewhat lacking. It is true that these athletes provide valuable exposure for their schools, but it is equally true that the universities provide valuable exposure for the athletes. However, the strongest critique that comes from those opposed to paying players is that these players are already receiving scholarships and are thus already being paid. The belief is that none of these arguments for paying players are in dispute because players are already being paid. For this reason, while we describe the argument as whether or not we pay players, the real debate is whether or not we pay players enough in the form of scholarships. This is what makes this college football season so exciting for economists, as this question can finally be addressed.

Because we as Austrians understand that value is subjective, we therefore also understand that we cannot say whether or not a scholarship is the appropriate amount to pay a college athlete. The answer to that has to come from the market process of economic calculation. Each player who takes the action to play football in exchange for a scholarship demonstrates that he values the scholarship and perhaps the potential future offered there more than he values the time spent and effort exerted playing football. In an unhampered market, as these decisions are made at different levels by different individuals; we see economic calculation take place and we see prices that we expect as market rates begin to form. As Ludwig von Mises explains in Socialism: An Economic and Sociological Analysis,

Every man who, in the course of economic activity, chooses between the satisfaction of two needs, only one of which can be satisfied, makes judgments of value. Such judgments concern firstly and directly the satisfactions themselves; it is only from these that they are reflected back upon goods.

In order for us to understand the values appropriate for college football players, we must allow for calculation so that we can see these judgments reflected back upon the players. However, a flaw has always existed for calculation in the world of college athletes. Mises goes on to explain that for calculation to exist, units must exist—prices must exist. Scholarships serve that purpose for us here. However, scholarships have a distinct ceiling of being able to offer at most the price of attending the university. Calculation has never been able to occur at a higher price point than that of tuition. Until now, the best of college football players have received these scholarships; however, it is entirely possible that they could find an incredibly higher value on an unhampered market. For the first time in the history of college sports, we will finally be able to run this experiment, as the ceiling of scholarships is finally gone.

However, the fact that athletes may be compensated for their name, image, and likeness still leaves one wanting in terms of calculation, as it only allows one form of competing on the market above the price of tuition, and that is in sales based on your fame. However, a lineman may not end up having the same demand for commercial appearances as a quarterback, despite the fact that it's possible a quarterback may only be so successful because he has such an exceptionally talented offensive line. Thus only certain members of the community may contribute to the new calculation that is taking place. For that reason, I will conclude with a few options that would allow for more effective economic calculation to allow us to understand better how much any given athlete brings to a school. First and foremost, it’d be helpful if schools were allowed to directly pay players and thus enter the competition themselves. This would lead to the school being allowed to calculate and we’d see the most direct valuations of what the player brings to the school. Additionally, if the National Football League did not require experience playing in college to enter the draft—as several other sports allow—we would see even more competition in the marketplace. Most importantly, this suggestion would allow us to evaluate the degrees, exposure, and potential that the schools offer the players, because right now every player is forced to receive this exposure and pursue a degree, whether they want it or not. Each of these suggestions has its own ethical arguments for and against it, but from a perspective of economics, this is the only way to better answer the question of how much athletes deserve to be paid. If we want to honestly understand this question, we must listen to what Florida state representative Chip LaMarca, said while running the bill to allow compensating players in Florida, “You either allow someone to enter the free market, or you don’t. I don’t think you put training wheels on them.”

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On Powell’s Plate

09/20/2021Robert Aro

This Wednesday concludes September’s Federal Open Market Committee (FOMC) meeting. It couldn’t come at a more tremulous time for Chair Powell and the Board of Governors. As of Monday, the Dow saw massive sell off, news headlines over China’s Evergrande facing bankruptcy continued, DC is facing another debt ceiling debate and COVID continues to dominate. As for the Fed, they too have been coming under scrutiny. A CNBC headline reads:

After years of being ‘squeaky clean,’ the Federal Reserve is surrounded by controversy.

And another titled:

Fed Chief Powell, other officials owned securities central bank bought during Covid pandemic.

Those were last week's headlines as the story only recently broke. To their credit, CNBC is asking novel questions like:

Should the Fed have banned officials from holding, buying and selling the same assets the Fed itself was buying last year when it dramatically widened the types of assets it would purchase in response to the pandemic?

The security trading involved key members, such as Powell, who held municipal bonds from around $1.25 to $2.5 million. Other Fed Presidents were also named in the press. Perhaps top ranking decision members at the Fed should not be able to own the same securities they were buying through America’s central bank? It would at least remove the optics of having a conflict of interest or acting in a way that is against the public's interest.

To be clear, as far as the public is aware, no member of the Fed violated any laws. But one should always remember there is a difference between law and ethics.

Adding to Chair Powell’s agenda is what appears to be a growing divide amongst the Board of Governors over the timing of the Fed’s tapering strategy. Per CNBC:

By Goldman Sachs’ count, six officials who have spoken publicly on the issue of tapering asset purchases are for it and six are against.

Having a split board on something as large as asset purchases doesn’t make his job any easier. The voting results and minutes will reveal if they managed to work out their differences during their closed door meetings this week. And what of inflation? Do they still believe we’re living in a transitory period?

With uncertainty over Powell’s term as chair, which expires in a few months, the last quarter of 2021 promises to make for interesting news stories. As to what Biden might do, a former chief economist of the National Economic Council provided a solution:

The administration is understandably going to wait and see how the Fed handles the taper and what the markets do. That could be the determining factor in whether he’s reappointed.

An interesting feature of the Fed becomes captured: For the entity entrusted to manage the nation’s unemployment and rate of inflation, it seems we’re always concerned as to how the market, namely stock, bond and real-estate reacts to every move the Fed makes. While not in their job description, the Fed has, for a very long time, been the de facto market savior.

Should Biden, or his advisors, use market performance to judge the merits of Powell’s tenure, as the article suggests, then Powell would be confronted with another moral dilemma. Trading securities as Fed chair has already pushed ethical boundaries. But having one’s job security tied to stock market performance, when you have legal authority to increase the money supply at will, creates another set of challenges. One can only hope those in charge use more than the market’s response as a barometer of Powell’s achievement... but it must be reiterated: one can only hope.

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Do Monarchies Have Higher Rates of Economic Growth?

09/20/2021Lipton Matthews

In its June edition, Cato Unbound published a feature discussing the pros and cons of constitutional monarchies. Quite surprisingly, mainstream academics are expressing a renewed interest in studying monarchies. Originally, arguing for the utility of monarchies was the reserve of libertarian intellectuals like Hans-Hermann Hoppe and Erik Kuehnelt von Leddhin. Nevertheless, during the past ten years, we have been fed a welter of empirical studies articulating the superiority of constitutional monarchies relative to democracies.

Following this trajectory, the scholars hosted by the Cato Institute proposed decisive arguments favoring their respective positions. Launching the debate lead essayist Vincent Geloso marshals a powerful justification for retaining constitutional monarchies where they already exist: “By investing in symbolism to reach high levels of popularity, ceremonial monarchs could be generating higher levels of trust…In so doing, they may be allowing a stronger civil society that can act as a substitute for government and as a check on the democratic tendencies to over-legislate and over-regulate.”

That monarchies cultivate social capital by serving as a symbol of political unity is an appreciated observation. Geloso is cognizant of monarchical virtues, however, other parties in the debate appear unimpressed. In his presentation “Monarchy: Cause of Prosperity or Consequence?” Rok Spruk submits that the survival of constitutional monarchies is a consequence of long-run economic growth. Spruk rubbishes the argument that monarchies motivate prosperity by asserting that the success of monarchies is a result of economic progress. For Spruk, economic prosperity is linked to the longevity of monarchical rule.

He claims that monarchies collapsed in European countries where the economy was underperforming. Spruk introduces an interesting counterpoint, but the story chronicled by history is more complicated. Thinkers like Alexis de Tocqueville, Erik Kuehnelt von Leddhin, and Ted Gurr have demonstrated that rising affluence can provide fertile ground for revolutions. Economic sluggishness may infuriate the working classes, but usually, revolts are orchestrated by socially ambitious intellectuals, as James Billington points out in his riveting tome Fire in the Minds of Men.

Primarily, revolts reflect the insecurities of thought leaders who demand greater prestige. Because revolutions do occur in prosperous times, one must be skeptical of the thesis that European monarchies imploded in the twentieth century due to an inability to record high growth rates. Neither is there a direct link between economic stagnation and political turmoil. In the Caribbean, there are many countries with sub-par growth rates and high levels of income inequality, yet their governments are indeed stable with Haiti being the outlier.

Similarly, Spruk’s contention that affluent European countries only retained the monarchical rule because of economics warrants scrutiny: “The wealthier European countries remained monarchies in the twenty-first century not necessarily because constitutional monarchies intrinsically develop better safeguards against arbitrary executive power but precisely they were able to achieve high levels of per capita income prior to major shocks like World Wars I and II.”

Spruk in his working paper on which the article is based cites the constitutional monarchy of Portugal as evidence for his theory. Though it seems odd to compare Portugal to constitutional monarchies like Britain and Sweden. Portugal functioned as an absolute monarchy for most of its royal history and unlike Sweden, Britain, and Denmark, she never experienced an age of free market reforms on a similar scale.

By the nineteenth century the Portuguese Empire was perceived as decrepit and lacking in modern sensibilities. Institutionally, Portugal was never in the league of the monarchies that survived hostile shocks of the twentieth century. It would be instructive to test the quality of Portugal’s monarchy comparing her to her peers. Spruk’s objection to the preservation of constitutional monarchies is a welcomed challenge for thinkers aiming to elucidate the merits of monarchical rule.

Admittedly, Spruk’s argument is one of the better objections to preserving constitutional monarchies, but on average, it seems that the evidence favors monarchies. Collins C. Ngwakwe and Mokoko P. Sebola in “Republics and Monarchies: A Differential Analysis of Economic Growth Link,” opine that though there is an insignificant relationship between regime type and growth “the mean GDP is slightly higher for monarchies than in republic countries”. Their conclusion is indeed striking: “Similarly, the variance statistic (a measure of instability) is lower for constitutional monarchies and higher for republics, indicating that constitutional monarchies appear more stable than republic countries.”

Additionally, Garmann (2017) supplements the literature by statistically proving that monarchies are associated with significantly better institutions. Though monarchies evidently possess some advantages, the evidence furnished in this piece is not to suggest that we should revert to monarchical rule, but rather indicate that the merits of studying alternatives to democracy.

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The Makings of a Fed Chair

09/17/2021Robert Aro

The speculation of whether Biden will reappoint Powell has been gaining media attention, as Powell’s term expires in February of next year. A few peculiarities stand out, as reported by the New York Times when they asked:

Should he reappoint Jerome Powell to lead the Federal Reserve when Mr. Powell’s term ends early next year, or select a replacement who is more fully aligned with the Democratic policy agenda?

But what about Fed independence?

We’ve long been told the Fed acts independently, ensuring the President and his cabinet does not control the nation’s fiscal and monetary policies. This reads as though the Fed should properly align itself to carry out the bidding of the ruling party.

It gets stranger! Earlier this week, two Democrat Senators, John Dodd and Barney Frank urged Biden to reappoint Powell for a second term. Reuters reports that the Senators believe:

Powell's approach to monetary policy - downplaying the risk of inflation in favor of encouraging stronger employment gains - would help Biden achieve his broader economic goals.

Any notion of appointing a Fed chair to help Biden achieve his goals flies in the face of Fed independence and raises alarms as to the state of monetary policy in America. The exact quote, as written in The Hill, sounds more bizarre. When referring to Powell, the Senators wrote:

His denial that excessive inflation is either imminent or inevitable given current Fed policy comes from a Trump appointee (as chair, although not initially as a governor) not previously known as a liberal and/or a subscriber to the “deficits don’t matter” school. 

Powell, who apparently downplayed the increase in prices, really impressed the Senators. They effectively approve of the Fed misleading the public, and clearly… debt doesn’t matter.

The Senators followed with:

Immediately, for moderate Democrats, Powell offers both a much bigger shield against conservative accusations of fiscal irresponsibility than the same actions coming from a newly appointed liberal. 

Providing three additional reasons why Powell makes for a good chair:

First, these were not major attacks on the legislation, and nothing in Powell’s performance contradicts his assertion that he supports the basic framework we put in place.

The Fed chair is supposed to be responsible for monetary policy. This should have nothing to do with any framework the ruling political party has in place.

Second… it is wholly implausible that Powell would initiate controversial deregulatory steps while he continues to focus on the economy.

This only becomes admirable if one is of the mindset that deregulation is bad or that it would cause too much of a headache if politicians were forced to go through any deregulation proceedings. The Senators concluded that:

Finally, as to climate change: Nothing a Fed led by a liberal Biden replacement could do on its own would be nearly as important in dealing with this issue as the substantive provisions in the legislative package that the reappointment of Powell would facilitate.

While somewhat childish, they’re argument is that it’s better for a Republican to tackle climate change through the Federal Reserve than a Democrat.

Again, it just seems all so strange. An unapologetic endorsement for Powell comes not on the basis of virtue, economic acumen, or any past accomplishment; rather, his ability to make the party, for all intents and purposes, look good while playing by their rules.

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Rational Markets, Irrational Politics

“Government is that great fiction, through which everybody seeks to live at the expense of everyone else.”

~ Frederic Bastiat

If everyone was irrational all of the time we would be in big trouble. You’d never know when someone was suddenly going to swerve off the road for no apparent reason and drive into a building, or start babbling to you in tongues over the phone when all you wanted to do was order a pizza.

(I will define, for our purposes, rational as: having and acting upon beliefs that are in accordance with reality.)1

That being said – people are irrational enough of the time, that behavioral economists are never done telling us that they are not suitable for a market economy and need regulations to “nudge” them in the right direction. They illustrate the point with examples such as the fact that if you want to motivate someone to run you are better off giving them $105 dollars a week and fining them $15 a day every day they don’t run, than rewarding them with $15 a day every day they do run — even though these things essentially amount to the same thing. So, naturally, we need policymakers to save us from ourselves and make us do the right thing. The irony of this position is that it presupposes that people are rational enough to respond to the incentives the behavioral economists want to mete out to them. Meanwhile, entrepreneurs have been going more to devise apps that interphase with human psychology and help them adopt better habits than governments ever have! After all, it was the market that gave us Fitbit, mindfulness apps, nicotine gum, calendar apps with built-in alarms to make sure we don’t forget appointments; the list goes on and is ever increasing.

The Market Rewards Rationality

Meanwhile, for the main part, the market defends us against the consequences of the irrationality of others.  If someone was irrational at all times in all respects, they could not meet the demands of life or sustain themselves, therefore they would either be dead, under the care of others, in a mental institution, or in prison. So, while no one is rational all the time, most people are apparently at least rational enough of the time to exist within a society.

The great thing about the market is, as far as we are concerned, others only need to be rational upon the basis we deal with them. My mechanic might be a raving lunatic who drives his wife up the wall (no pun intended) with his crazy theories about the flat earth and interdimensional big foot people when he is at home, but so long as he is rational when it comes to the operations of fixing my car, it need not be any concern of mine. The pizza delivery guy could have views on race that most people find abhorrent, and I would never even know so long as he delivered it on time! The architect hired to design a bridge for a new highway might be a fanatical communist who thinks all property should be publicly owned, but as long as he is rational enough to follow the laws of physics when it comes to the blueprints, the bridge won’t be built upside down and will not collapse under the weight of the vehicles crossing over it. No one is remunerated on the market for doing irrational things, for example, bringing Squid Waffles to market. No one is interested in buying or eating Squid Waffles. Therefore, they don’t exist.

Political Institutions, Unlike Markets, Reward Irrationality

Now, need I point out, that none of this is the case when it comes to the alternative to the market, which is the political process. All of a sudden everyone’s crazy, irrational views that were none of my business become very real problems to me, because they are going to entre the voting booth and try and model a society that is fashioned based upon them. Someone might even lobby for a government subsidy to open up the first ever Squid Waffles diner! Sound crazy? Well how come the government both subsidizes and taxes tobacco at the same time? This is seemingly “irrational” but it makes sense when you understand that one lobbying block wants tobacco farmers to remain in business, and another wants people to smoke less.

While people’s performance on the market is tied to their rationality, ie., the fact that their views conform to reality and therefore they can deliver the desired results, there is no such failsafe at the ballot box. In fact, as the public choice theorists have been pointing out to us, it’s rational for voters to be ignorant about abstract topics like economics, political science, sociology, statecraft and basically anything necessary to cast a good vote, because learning the facts is time consuming and costly with very few payoffs.2

Typically, when you go into the world with irrational views that affect your day-to-day life you will be met with negative consequences. If you have irrational views about eating, you will get sick; if you have irrational views about how to treat your spouse, you will have unpleasant arguments or even a divorce; if you have irrational views about how to run a business, you will soon go bankrupt. In other words – reality provides a corrective against irrational views, or at least tries to!

The dirty secret about government is that replacing the market with its “democratic” control – be it public institutions or regulations – ends up removing this corrective mechanism and encouraging irrational behavior. No one wants to suffer the negative consequences of their own irrational behavior, whether it be an illness resulting from not having taken care of their health, or having a child they can’t support, or setting up a business to sell a line of products for which there is no demand. But democracy is inherently a system where people can make bad decisions and then vote to expropriate the consequences of those decisions to everyone else via the tax system. Those people who conform to reality by building products and providing services that meet the real needs of other people will essentially be punished for good behavior when the tax man comes around to expropriate their gains to pay for rent seekers and vagrants. This creates a tendency towards more costly, irrational behavior and less beneficial, rational behavior in society relative to what there would be on a free market. Over the long term, everyone will be disadvantaged on the whole, including those who seemingly profit from exporting the negative economic consequences of their actions to the body politic because the society they live in will be far less prosperous.

  • 1. I note that some economists, following Ludwig von Mises, take the position that people are always rational. What they mean by that is that all human behavior is goal-directed behavior and that when someone makes a choice they are choosing what they think will make them achieve that goal. (Mises: “A historian can say... In invading Poland Hitler and the Nazis made a mistake... All that another man can say about it is: I would have made a different choice.” – Theory and History) In my view that is a very specialized usage of the world rational, so I am going with the more commonly used understanding of the term. 
  • 2. See, for example, Caplan, B. (2007) “The Myth of the Rational Voter.”
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The Paradox of Anti-Utilitarianism

Most libertarians reject the utilitarianism as a moral philosophy because it would seem to grant people the right to initiate force upon one another (via the state) so long as the cause is thought to promote happiness.1 The paradox is that, while a free society does not aim at the maximization of happiness, only in a free society is the maximization of happiness possible.

Some things are obviously detrimental to overall happiness. If people in a free society choose, for example, to smoke, it is obvious that this is less utilitarian than to feed the world's poor with the cost of the carton of cigarettes - especially if the smoker has got to the point (which many do) where they no longer even enjoy smoking but just do it because they are addicted to it. If people in a free society pursue diets that lead to chronic illness later, all we can say is: “I would choose differently.”

Nonetheless, whatever one might do to regulate or stop any such “non-utilitarian” decisions would no doubt result in more misery over the long term. Take for example Prohibition in America which greatly expanded the power of the mafia. Or consider the War on Drugs which – in addition to being waged at incredible expense – has separated fathers from children and left people to rot for the crime of smoking a plant, while bringing cartels of gangsters to South America. Regulating non-utilitarian behaviors always bears a high price tag to the taxpayer which would no doubt create more happiness if it was allocated by the consumer to buying those things that they at least believe will maximize their pleasure.

In addition, when it comes to freeing the world’s poor of poverty, the massive economic growth created by the conditions of freedom far outpace the money thought to be “wasted” by truly consistent utilitarians on the caprices of the consumer. It may seem, on the face of it, “unutilitarian” that we “allow” the poor of the world to live on less than $1.90 a day while billionaires heat their outdoor swimming pools. Can’t we just tax the rich and send it to Africa? We can leave aside the point that when this has been tried the funds have invariably been wasted by dictators and central planners. Those who actually take the time to understand the market process, and how poverty has actually been eliminated in all those nations where it has, can look to the horizon and understand that it is in fact the assets of the wealthy which are destroying poverty and maximizing utility. All those billions are invested in the factories, machines and technological research which are pulling those nations which have moved from command economies to market economies out of poverty as we speak. Redistribute the money to the poor and they’ll soon be poor again, all the while destroying their employment prospects through lost wealth that could have been invested in wealth-creating industries and technology.

Allow the market to allocate resources to their most profitable ends (according to supply and demand) and companies will rush to world’s poorest nations to take advantage of cheap labor and develop sustainable infrastructure which will bring them out of poverty for good. In Bangladesh, the number of extremely poor fell from 44 to 26 million, and poverty in Cambodia has been cut in half. We see this trend all across the world. To the extent developing countries free their markets poverty falls - while those countries that hold onto autocratic control of the economy remain impoverished.

The paradox of libertarian opposition to utilitarianism is that when we resist the temptation to regulate people into pursuing happiness for a quick fix, over the long term, the market maximizes utility.

Recommended for Further Reading:

  • 1. Most notable exceptions being David Friedman, and then Mises, Hazlitt and Hume who were “rule” utilitarians, which is slightly different.
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