How Austrian Economics Helps Entrepreneurs Understand The Mind Of The Customer

How Austrian Economics Helps Entrepreneurs Understand The Mind Of The Customer

11/14/2019Hunter Hastings

On the Mises Institute’s Economics For Entrepreneurs podcast, Dr. Per Bylund has stated more than once that entrepreneurs who can develop an understanding of both the laws of economics and the mind of the customer can thereby create a competitive advantage and a successful business.

The laws of economics he refers to are the principles of Austrian economics, including customer sovereignty, subjective value, and dynamic flexibility in resource allocation. Our podcast has covered these and many more from the entrepreneurial perspective. We pursue a value-dominant logic: that the role of the entrepreneur is to facilitate valued customer experiences; that value is in the mind of the customer; and that the tools of value facilitation for the entrepreneur are empathic diagnosis and imaginative innovation.

In other words, entrepreneurs need to understand the mind of the customer. Does this mean that we are crossing over some demarcation line between economics and psychology? Not at all. Economics seeks to explain why economic actors behave in the ways we observe them behaving. What motivates them? What incentives are at work? How do they make choices? The answers to these questions can form the building blocks of entrepreneurial success.

The analytical tools for the construction of an understanding of the mind of the customer are all freely available from the Austrian economics canon. In a new e-book, Understanding The Mind Of The Customer, a publication of the Mises Institute’s Mises For Business project, we offer an ordered presentation of some of the most important of these tools for entrepreneurs.

The Means-Ends Ladder

People select the means that they judge will best help them achieve their self-selected ends. It’s helpful for entrepreneurs to visualize the means-ends progression as a ladder or a pyramid. At the top are the ultimate ends that people pursue. Those ends are always values that they hold dear — values such as “a life of comfort” or “family security”. They are not material. People buy material things because they make a judgment about how those things will contribute to a feeling or an experience they value.

Just below the highest values on the means-ends ladder for consumers are the emotional benefits experience as a result of consuming an offering from an entrepreneur. These benefits are feelings, and it is through feelings that consumers experience economic value. For a consumer of a cola beverage, the emotional benefit might be feeling refreshed or energized or even joyful. If the beverage is consumed in a group setting, there might be a feeling of bonding or shared fun. Feeling better is a benefit that consumers seek from all their economic transactions. Feeling better is a means towards the achievement of higher values.

Supporting the emotional benefits, in the sense of occurring before them on the means-end ladder, are functional benefits. To continue with the cola beverage analogy, these might be good taste, and a distinctively enjoyable carbonated mouthfeel. The beverage container might be particularly convenient, and it may cool quickly in a refrigerator. The functional benefits are the means for the consumer to experience the associated emotional benefits.

The functional benefits result from features and attributes of the product or service itself. The consumer experiences these via sense perception, and they enable — are the means to — the experience of the higher-level benefits.

The base of the means-end ladder is the assortment of contact points at which the entrepreneur can make the consumer aware of the offering that will eventually escalate them through all these rungs of the means-end ladder. Contact points might include a retail store, or online advertising, or a coupon in the mail or word of mouth recommendation.

The means-end ladder is a business tool built on Austrian causal-realist logic. Stripping away the academic terminology, we can provide entrepreneurs with a useful tool with which to analyze the mind of the consumer when they contemplate, choose, consume and experience an economic good.

The Subjective Value Cycle

Subjective value is an important subject in economics. It’s even more important in entrepreneurship, where it is fundamental to what entrepreneurs do. It’s the critical factor in entrepreneurial success. Business schools talk about “creating value” and “value added” as if value creation were an objective process. But it’s not. And businesses can fail if they misunderstand subjective value, because they can easily produce something for which there is no market.

Value lies entirely in the mind of the consumer or customer. Therefore, the task of the entrepreneur is to try to understand consumers’ feelings and preferences, and to design a value experience — an experience in which the consumer will achieve desired ends by utilizing means made available by the entrepreneur. Ends are individually selected, and the entrepreneur can not forecast the ends for which a value proposition might be utilized. Value is uncertain.

Utilizing empathic diagnosis to give dimension to (some) customers’ ends, the entrepreneur designs a potential consumer experience — a good or service that is unique — for validation. Using economic calculation and resource assembly, the entrepreneur advances the design to the marketplace at a cost that he or she believes will yield a profit because the value it represents to the customer is greater than the price the consumer will pay, which is, in turn, higher than the production cost.

If the consumer does, indeed, experience value, the entrepreneur is encouraged to produce more and spread the word to additional consumers of the opportunity to experience value. Advertising and marketing are fundamental to the value formation system. More consumers experience the value, and spread the word even further. Some make suggestions about further improvements to the experience, which the entrepreneur can attempt to incorporate in future iterations. The process continues endlessly and the entrepreneur and the consumer practice continuous dynamism.

The subjective value cycle is a system of value formation. Our free e-book provides a map of the system for entrepreneurs to follow.

Values As A Basis for Brand-Building

People adopt values as ends in themselves, and as a signpost for prioritizing their preferences and choices. Entrepreneurs who fully understand and embrace consumers’ system of values can create strong brands — forms of advantaged intellectual property — and build strong relationships of loyalty and preference for their offerings.

What are the values that consumers hold so dear? Milton Rokeach was an American sociologist who wrote The Nature Of Human Values, reporting on his extensive research. There are 18 values that are classified as the “highest” that people strive for — they define people’s lives. They include Freedom, Family Security, A Sense Of Achievement, Wisdom, Pleasure, and 13 more.

In addition, Rokeach also identified 18 instrumental values: guides to their behavior when they are pursuing their ends, and a signpost for prioritizing their preferences and choices.

Entrepreneurs who can identify the values that guide customers’ choices can be more accurate in designing and communicating the ways that their offerings fit into people’s lives. When consumers recognize their own values embedded in brands and branded communications, a strong bond is created.

Empathy For Entrepreneurs

Empathy is the most important skill in entrepreneurship, and it is critical to achieving the uniqueness that characterizes successful entrepreneurial offerings. Uniqueness is a characteristic of customer perception, and empathy helps entrepreneurs to define and understand others’ perception.

Empathy is a human action: the action of understanding and even experiencing the feelings, thoughts and experience of another. Entrepreneurs employ it to understand subjective needs, dissatisfaction and unease among target customers — with a view to meeting the need, resolving the dissatisfaction and ending the unease. Entrepreneurs begin the value design process with an empathic diagnosis.

The new e-book provides a detailed description of the use of an empathic diagnosis tool called a Contextual In-Depth Interview. Understanding consumer feelings in the consumer’s own context is the key to diagnostic accuracy. Processing the results from the diagnosis will help the entrepreneur to improve consumer experience functionally, cognitively and emotionally. Consumers can be confident of a future feeling of betterment because of the empathy

the entrepreneur has exercised in developing an understanding of them, their dissatisfactions and their unique individual preferences. The entrepreneurial system is best for everyone because it’s based on empathy.

The Customer’s Opportunity Cost

Entrepreneurs are not in competition with other entrepreneurs. Rather, they compete with the customer’s opportunity cost. Opportunity cost is what the customer gives up in order to purchase your offering. Is that a direct substitute? An indirect substitute? Or a different use of the same dollars? (“Does she buy the dress or buy the handbag?”) Or, quite possibly, non-purchase or savings. Understanding the customer’s opportunity cost is an important part of making a sale.

Successful entrepreneurs train themselves to see opportunity costs in the way the consumer sees them. To do so, entrepreneurs can employ an opportunity cost calculator. It solves an equation: consumer value = the value of what the entrepreneur is offering minus

the customer’s perceived opportunity cost of acquiring it. The consumer’s cost is not only in dollars (and their alternative uses for these dollars) but also in the time and effort and convenience and fun of making the transaction.

The entrepreneur applies the discipline of the opportunity cost calculator for every potential consumer transaction.

Customer Journey Mapping

There is a technique to compress all of this Austrian entrepreneurship thinking into a single analytical tool: the customer journey map. This technique decomposes a customer’s purchase and usage of a service into a series of stages, and asks the question, “What is the customer doing, thinking, experiencing and feeling at each stage?”

This technique is a sound application of Austrian economics. It starts with human action — what is the observed behavior? Then, it asks about motivation (why did they act?). Finally, it examines the consequences of the action — customer experience — and tries to probe the emotional benefit, defined as feeling.

Customer journey mapping enables the kind of negative feedback that is most useful in the service improvement process. Does the customer’s experience fall short? When? At what stage? Why? Under what circumstances? All of these negative feedback hooks can be pointed towards opportunities to improve, further enabling the dynamic entrepreneurial system of betterment.

A Valuable Bundle of Tools and Techniques

Our Understanding The Mind Of The Customer e-book describes these six techniques, with accompanying tools, either in the text or via e-links. You can preview one chapter , and, if you would like to receive more, we’ll send it via e-mail to a valid address.

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What Defund the Police Gets Right

9 hours agoAndrew Cowley

For all the hullabaloo that surrounds the “Defund the Police” movement, we forget that our fellow citizens have legitimate concerns that must be openly and honestly discussed. Although the defund the police movement is surrounded by controversy, libertarians, conservatives, and liberals alike can find common ground in the sort of law enforcement that is required for a safe and secure neighborhood.

Those who embrace individual freedom and liberty should take the defund the police movement seriously. The driving force behind defunding the police is the thirst to govern our communities, and ourselves, without government coercion. If we defund the police, it must follow that communities are empowered to “police” their own neighborhoods as they see fit. Without government-sponsored police, law enforcement is privatized. And this is a good thing!

Libertarians hold the political philosophy that an individual needs to be recognized as such. Rights can only be applied to the individual, not to a group of individuals. The most supreme right of them all is the guarantee that personal property and individual freedom are never violated, without exception. This means that the rights to life, liberty, and the pursuit of happiness are not just ideals we strive for but actual rights that each individual person has been born with. These rights are not granted, given, or awarded to anyone by anyone. Instead, these rights are inherent in man’s existence and cannot be infringed upon by anyone or anything. The government is not exempt from this truth. No government, or individual, can violate the inherent right each person has to life, liberty, and the pursuit of happiness. Policing our communities is no different.

It is widely accepted that law enforcement is the responsibility of government. However, we must recognize that each community requires a different approach to policing. When considering population size, community diversity, resources available, etc., we can see that the law enforcement needs of places like New York City will necessitate a different approach from the one for Coeur d’Alene, Idaho—no matter how small the nuance. It is hard to deny that each specific community requires a unique approach.

Although the general theory of American individual liberty is recognized as good—life, liberty, and the pursuit of happiness—it is difficult to apply this theory to real-world circumstance. This is why the defund the police movement mistakenly conjoins two contradictory goals: (1) the freedom to police for communities to police themselves as they see fit, and (2) a heavy-handed government to make sure that happens.

The freedom to do what is best for your individual circumstance and a strong authority figure to enforce compliance cannot coexist. Unavoidably, the right to police the community you live in as you see fit will clash with some strong authority figure who wants to decide for you what they think the right way to police is. The ideal of people choosing what’s best for themselves becomes others deciding what’s best for them.

There are as many different opinions about what good policing looks like as there are politicians who lie—we couldn’t begin to count that high, even if we tried! The premise is correct—we must overhaul what policing looks like in practice—but the conclusion is wrong. Replacing one authority figure with another in order to rectify policing issues will not solve the problem.

Surely, the most ardent propolice individual must admit that a community where people feel safe is the prime goal, whether that is achieved through traditional policing or not. If we can offer people a safe community, is it important if that safety is achieved through a private company? Are we to believe that a community would reject a safe neighborhood merely because that safety was provided by a private company, rather than the government? I think not!

The defund the police movement makes a poignant case against the current system of policing and community involvement by the government. By uniting behind the cause of privatizing the police, we will make strides toward a safer and more respectful community.

History has shown that government will prioritize revenue and power over the safety of citizens. Enforcing arbitrary laws (like parking tickets) to generate revenue from fines, government funds bloated pensions and expands union control—and the safety and well-being of citizens takes a back seat. We can see this reality playing out in cities like Chicago, Baltimore, and Detroit. In Baltimore, government spending on police is more than half a billion dollars per year. Such a massive amount of money expended in the name of safety has produced one of the most dangerous cities in the United States.

There is a real, undeniable problem in minority neighborhoods—drugs, violence, and theft—and we must face that problem. The belief that the system (i.e., the police, government, capitalism, etc.) unfairly treats minorities (skin color, sexual preference, sexual identity, etc.) is a mainstay in modern culture and cannot be ignored. There is a prevailing belief that systemic racism has forced minority groups into a life of crime. Because government has a monopoly on law enforcement, there can be no solution that does not include cartel-like control without tearing down the entire system. This is why groups like Black Lives Matter believe that defunding the police is not a mere catchphrase—it is a call to reimagine the “system” in its entirety.

Although some state and local governments have agreed to “cut” law enforcement spending, calls for defunding the police have persisted. Appeals for compromise will go unheard. And this is a good thing!

Defunding the police and revamping law enforcement are legitimate goals that need to be addressed. Libertarians, conservatives, Republicans, and all other members of society should strive to recognize this ubiquitous issue.

The message of “defunding” the police is correct, even if the conclusion on how to fix bad community policing is not. It is true that government-sponsored policing has been, and is, destructive to some communities. We see this destruction nightly on our news channels. Elected officials have used law enforcement for their own protection, rather than for the protection of their constituents. Chicago mayor Lori Lightfoot used police as a personal protection service for her home as buildings burned and protestors looted stores nearby. Politicians claim gun laws are our way to salvation as they are escorted by an armed cadre of bodyguards. The police have been enlisted as a political tool rather than for public safety. It is hypocrisy at its finest!

Without government monopoly on law enforcement, no such abuse by politicians can exist. Why? Because paying customers are given preference, regardless of political standing.

The premise that a community has the right to decide how best to protect their neighborhood is a by-product of individual freedom. The defund the police movement is right: the government should have no say about how to police a neighborhood if that neighborhood doesn’t want the protection the government is offering. Forcing a community to accept whatever solution the government proposes has resulted in distrust of law enforcement personnel, runaway government spending, and the militarization of the police.

The conclusion the defund the police movement has come to—replace one government-controlled police force with another—is unfitting. The answer to creating a safer, more inclusive community is not through more government oversight and political heavy handedness. No! The answer is for the people to establish what works best for them in their individual circumstance. This is accomplished by privatizing law enforcement.

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Snowden and Assange: There Is Still Time for Trump to Do the Right Thing

It is amazing to me that President Trump has pardoned some people who he considered heroic while continuing to leave Julian Assange and Edward Snowden, two genuine heroes, in the lurch. Assange, of course, is getting the worst of it, given the brutal conditions under which U.S. and British officials have incarcerated him in England. But it still can’t be a bundle of joy for Snowden to be living in Russia, given the societal jail-like environment that comes with living under the Russian regime.

Consider Trump’s pardons of two former Border Patrol agents, Ignacio Ramos and Jose Campean. They were chasing an undocumented immigrant who was fleeing back to Mexico. The best account of what happened was detailed in a Texas Monthly article entitled “Badges of Dishonor.”

When the immigrant, Osvaldo Aldrete-Davila, held his hands up and tried to surrender, Campean swung at him with the butt of his gun. Aldrete-Davila then ran and both agents began firing at him. A bullet hit him in the buttock but he was able to make it back to Mexico.

The two agents then did their best to cover up their actions. They retrieved their shell casings and threw them into a ditch. When later investigated, they said that they had seen a shiny object in the victim’s hand and thought it was a gun. In their later criminal prosecution for assault, a federal jury concluded they were lying and convicted them.

One of the first things I learned as a kid from watching westerns on television was that you never shoot someone in the back. Doing that is about as cowardly and shameful as you can get.

But not according to Trump as well as a coterie of his conservative cohorts, They consider Ramos and Campean to be real heroes for “defending our border.” They point out that Aldrete-Davila’s vehicle contained 700 pounds of marijuana, as if furnishing pot to Americans who wish to smoke it is some sort of horrible offense. Never mind, also, that at the time they were firing their guns at Aldrete Davila’s back, they didn’t know about the pot.

Trump also pardoned another former Border Patrol agent, a man named Gary Brugman. He got convicted for brutally assaulting undocumented immigrants after they were already in captivity and behaving peacefully.

Trump also pardoned Joe Arpaio, the anti-immigrant crusading former Arizona sheriff who was convicted of contempt for refusing to comply with a court order to cease racial-profiling.

He also pardoned Blackwater personnel who were convicted of killing innocent Iraqis.

Now compare those people to Assange and Snowden, two men who have risked their lives, liberty, and well-being to disclose the truth about evil and immoral actions of the U.S. national-security establishment. That’s why the Pentagon, the CIA, and the NSA are going after them with vengeance — because they told the truth about the U.S. government.

Will Trump pardon these two genuine heroes? He might yet surprise me, but I doubt it because we can see from the people he has already pardoned that his values are warped and perverted. But he still has two weeks in which to do one right thing before he exits the White House.

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Fed Profit = Society’s Loss

01/15/2021Robert Aro

Given covid, the mutation, lockdowns, BLM protests and riots, the storming of the Capitol, impeachment and the first Biden stimulus bill on the horizon, it’s easy to miss headlines from the Federal Reserve. On Monday, the Fed released Reserve Bank income and expense data transfers to the Treasury for 2020. This is the central bank’s preliminary income statement and remittance figures for 2020, the headline number starting at:

$88.5 billion of their estimated 2020 net income to the U.S. Treasury.

Meaning, the Fed is to send $88.5 billion to “the people” via the US Treasury. However, more context and figures are required to reach a better understanding as to what this means.

Net income for 2020 was derived primarily from $100 billion in interest income on securities acquired through open market operations…

The Fed’s income primarily comes from owning US Treasurys and mortgage-backed securities (MBS), which makes sense because the Fed now owns $4.7 trillion and $2.0 trillion of these securities, respectively. This means $6.7 trillion was created and lent to the world. They can now receive over $100 billion a year in return (interest revenue) as compensation for their lending service.

Interest income on US Treasurys and MBS is hardly new. But this line item is:

The Federal Reserve Banks realized net income of $405 million from facilities established in response to the COVID-19 pandemic.

This might sound like a lot of money to most people, but is a relative drop in the bucket given the aforementioned $100 billion the Fed made off buying the nation’s debt.

As for the expenses, the largest cost to the Fed is the interest it pays to depository institutions (banks). This is interest paid to banks in order to compensate them for holding money at the Fed.

The Federal Reserve Banks had interest expense of $7.9 billion primarily associated with reserve balances held by depository institutions.

If this wasn’t confusing enough, it gets better:

We find operating expenses (mostly salaries and benefits) for $4.5 billion, plus $831 million for “producing, issuing, and retiring currency,” and $947 million for “Board expenditures.”

In what may come as surprise to most, the US Treasury is not the only entity the Fed is beholden to; this year the Fed paid:

$517 million to fund the operations of the Consumer Financial Protection Bureau.

And the payout to banks:

Statutory dividends totaled $386 million in 2020.

Numerous questions should come from this: 

These numbers are preliminary. We won’t have the finalized figures until March. But so far, the $88.5 billion remitted to the Treasury seems to be “pretty good” given the low interest environment and when compared to the last decade of remittances.

Of course, something doesn’t seem quite right. In order for the Treasury to get a remittance from the Fed, the Fed must expand the balance sheet and money supply, therefore buying interest-bearing assets. The interest income earned by the Fed pays for expenses such as billions of dollars in salaries and interest payments to banks. This gets reduced even more after payouts to another government agency and dividends to banks. What’s left gets sent to the Treasury. Keep in mind the US Treasury does the actual “money printing.” In effect, a significant cost associated with the Fed is paying for their knowledge, allowing them to manage the money supply.

It’s a system implemented well over a century ago, a system in dire need of repair if not abolishment. An entity which can legally create money runs the risk of eventually owning the assets of an entire nation, being insensitive to prices and immune to bankruptcy. This, as well as other pernicious effects such as causing the boom-and-bust cycle, increasing malinvestment, price distortions, and asset bubbles all make it strange to think that society pays billions of dollars for this knowledge-based service. Central banking is a service so slanted toward the banks and government, and against society, that it’s no wonder the general public isn’t meant to understand its inner workings.

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Food Prices Soaring

01/13/2021Robert Wenzel

The latest data from the Bureau of Labor Statistics shows twelve-month food prices climbing at a 3.9 percent annualized rate for 2020.

Overall price inflation for the same period, as measured by the government's Consumer Price Index, rose 1.4 percent.

Bottom line: the goods people are buying during this lockdown period such as food are soaring.

The advance in food prices was pretty much across the board.

All subcategories from cereals to fruit showed gains far in excess of the Federal Reserve's "target" inflation of 2 percent. But, hey, if you don't eat, price inflation is not as high.

In the EPJ Daily Alert, I am warning that as the lockdowns ease, price inflation across the board will rise to meet the advance in prices we are seeing in food prices.

Hug your gold coins.

Reprinted from EconomicPolicyJournal.com.

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What the Literature Actually Reveals about Raising the Minimum Wage

Despite economist Thomas Sowell’s laconically phrased observation that the real minimum wage is zero, progressive elements within the Democratic coalition are likely to push for increasing the federal minimum wage once Biden takes office. While whether or not to raise the minimum wage is therefore ultimately a political question, a school of thought has gained purchase within mainstream economic circles in recent decades that contravenes long-held classical assumptions about supply and demand. If the cost of a commodity increases, demand should fall if the price rises beyond the point at which the marginal utility of acquiring another unit of that commodity is less than the cost of another unit of that commodity (Sowell 2011). Not so with labor, argue these economists (Harris and Kearney 2016; Tcherneva 2020; Stiglitz 2012, 2020; Pollin and Luce 2000; Reich 2017). Because pay to labor constitutes a large part of aggregate demand, higher wages translate into more purchasing and hence an approximately equivalent increase in the sales of businesses to offset the higher cost of labor.

Such demand-side economics trace their origins to Keynes, but interest was rekindled by the publication of Card and Krueger’s empirical study of fast food workers in New Jersey and Pennsylvania (Card and Krueger 1993). Widely cited following its publication, the next decade saw a strong shift in opinion among economists. A survey by the American Economics Association found that well over half of its members now disagree or doubt that minimum wages by themselves cause unemployment or underemployment (The Economist, August 2020).

Such cautious inquiry has translated in the world of the post-2008 k-shaped recovery to demands for almost doubling the federal minimum wage. A host of academics have voiced their support for the Seattle minimum wage coalition, with even the formerly skeptical Paul Krugman making an about-face, writing in the New York Times that wages were so low that significantly raising the minimum wage would do no harm to the economy (Krugman 1998, 2015).

According to the literature, however, the real picture is more nuanced.

Based on the large body of research being compiled, we find evidence that raising the minimum wage affects different sectors of the economy differently, and that it is not clear what would happen in the event that the minimum wage is significantly increased (Neumark and Wascher 2007; Jardim et al. 2017).

Because of this, even left progressive economists like Thomas Picketty are skeptical of broadly raising minimum wages in an effort to offset wealth and income inequality. He is likely correct, as most of the economic inequality in the United States is structural in origin, the result of technological displacement, skills hierarchies, geographic concentration, and trade, fiscal, and monetary policies (Moore 2014).

Given the potential dangers and inability of the government to successfully execute such microeconomic tinkering during the 1960s and 1970s, a time of much more functional governance than now, it seems unlikely and unwise to grant the federal government the power to set wages in this way in an attempt to optimize economic growth.

Research indicates average take home income since 2014 has increased slightly in some sectors, while going down in others, but with no noticeable uptick in the cost of basic consumer items (Vigdor et al. 2016, 2017). This may be unique to Seattle, a diverse and competitive economic zone. More local experimentation in the coming years is likely and will provide us with a better understanding of the impact of raising the minimum wage on various sectors of the labor market. While nationally it may be that the Biden administration, which so far has boxed out the more progressive elements of the Democratic coalition, will not prioritize the fight over federal minimum wages, in any event, the public should not be misled into believing that the data unequivocally supports the fight for a fifteen-dollar-an-hour federal minimum wage.

Resources and Works Cited:

Card, D., & Krueger, A. (1993). Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania. doi:10.3386/w4509.

Harris, B., & Kearney, M. (2016, July 29). The "Ripple Effect" of a Minimum Wage Increase on American Workers. Retrieved October 06, 2020, from https://www.brookings.edu/blog/up-front/2014/01/10/the-ripple-effect-of-a-minimum-wage-increase-on-american-workers/

Jardim, E., et al. (2017, June 26). Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle. Retrieved January 05, 2021, from https://www.nber.org/papers/w23532

Krugman, P. (1998, September). The Living Wage. Retrieved October 06, 2020, from http://www.pkarchive.org/cranks/LivingWage.html.

Krugman, P. (2015, July 17). Liberals and Wages. Retrieved October 06, 2020, from https://www.nytimes.com/2015/07/17/opinion/paul-krugman-liberals-and-wages.html

Moore, H. (2014, June 03). Seattle Misreads Thomas Piketty as its Minimum Wage Mascot. Retrieved January 05, 2021, from https://www.theguardian.com/money/us-money-blog/2014/jun/03/thomas-piketty-seattle-minimum-wage-risks-jobs

Neumark, D., Wascher, W. (2007). Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research: Cambridge.

Pollin, R., & Luce, S. (2000). The Living Wage: Building a Fair Economy. New York: New Press.

Reich, R. B. (2017). Saving Capitalism: For the Many, not the Few. London: Icon Books.

Rolf, D., & Bryant, C. W. (2016). The Fight for Fifteen: The Right Wage for a Working America. New York: The New Press.

Sowell, T. (2011). Basic Economics: A Common Sense Guide to the Economy. Fourth Edition. New York: Basic Books.

Stiglitz, J. (2012). The Price of Inequality. New York: W.W. Norton Company.

Stiglitz, J. E. (2020). People, Power, and Profits: Progressive Capitalism for an age of Discontent. UK: Penguin Books.

Tcherneva, P. R. (2020). The Case for a Job Guarantee. Cambridge: Polity Press.

Vigdor, Jacob, et al. (2017). The Seattle Minimum Wage Ordinance October 2017 Update: Report on Employer Adjustments, Worker Experiences, and Price Changes. Seattle. University of Washington, Daniel J. Evans School of Public Policy.

Vigdor, Jacob, et al. (2016). Report on the Impact of Seattle’s Minimum Wage Ordinance on Wages, Workers, Jobs, and Establishments through 2015. Seattle. University of Washington, Daniel J. Evans School of Public Policy.

What Harm do Minimum Wages do? (2020, August 13). The Economist. Retrieved October 6, 2020, from https://www.economist.com/schools-brief/2020/08/13/what-harm-do-minimum-wages-do

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Why We Think We're Free

01/12/2021Shane J. Coules

There is a famous routine by the late, great American comedian George Carlin in which he talks about why he refuses to vote. In less than four minutes, he brilliantly captures the deep flaws of the US political process, and the futility of a system that has become irredeemably corrupt (“I’m sure as soon as the election’s over your country will improve immediately….This country was bought, sold, and paid for a long time ago”).

Italian-American lecturer and writer Piero Scaruffi opines that “a comedian is someone who tells the truth. Truth is the set of all jokes, told by all comedians in the world.” There is certainly more than an ounce of veracity in Carlin’s bit. But while that may be the case, the idea of abstaining from voting is seen by many as nothing less than the ultimate mark of disrespect to all those people who fought for “freedom” in the statist wars of the twentieth century.

Which prompts the question: What is freedom? Merriam-Webster defines it as “the quality or state of being free, such as…the absence of necessity, coercion, or constraint in choice or action.” If we agree on this definition (and—assuming the individual rights of another aren’t being violated by one’s actions—how could we not?) can we say that the tragic, bloodiest wars in history succeeded in delivering freedom to the citizens of the West?

Invisible force and The Freedom Delusion

Ask most people strolling down a London street, along a New York sidewalk, on the cobblestones of Dublin’s city center, or any other Western nation if they are free, and they will likely reply “yes, of course.” In the New Yorker’s case, he may even snap incredulously that this is the land of the free.

And looking at their surroundings, it may appear that these people are correct. When not in the middle of a pandemic (and the accompanying draconian government measures) they would usually walk around relatively free of physical force from police unless they’re breaking—or suspected of breaking—the law. (And when physical force is used, it is rarely seen as an assault on freedom.) But the apparent absence of physicality does not equate to a lack of coercion or constraint; like the invisible hand that guides the free market, there is an invisible hand of government which quells liberty.

In most if not all Western democracies, this semblance of a free society is in fact a mirage borne of sheer ignorance, effective indoctrination, or a mere misunderstanding of what it means to be free. A nation of denizens who believe they are free without knowing the true meaning of freedom is a nation enrapt in a collective hallucination (or a Bernaysian propagandist trap). This widespread phenomenon can be referred to as the Freedom Delusion.

The “Inviolability” of Democracy

Some argue that the act of voting renders the system “voluntary,” but this is not the case.

To channel Mr. Carlin, those who vote in modern democracies are merely party to a transfer of power from one corrupt or misguided cabal to another (“garbage in, garbage out”). And the vote which people in the West cast every few years is, flagrantly, a vote to empower the winning coalition to attack the individual rights of citizens.

Yet the legitimacy of democracy is almost universally (in the West at least) considered unquestionable, and any criticism of it taboo.

Yet, in practice, Western democracies in their current form amount to the tyranny of the majority, the continual assault on individuals, and the restriction of liberty.

What Genuine Freedom Means

A truly free society allows for some to purchase land and voluntarily attempt a socialist utopia, and for others to purchase land and live in a stateless, free-market, private-law society.

Be it anarcho-capitalism or minarchism, socialism or social democracy, communism or anarcho-syndicalism, or any other social system, genuine freedom in essence means the freedom to choose, so long as no one is compelled to join in. Some may freely choose to enter a “socialist” community and thus voluntarily give up much of their fundamental freedoms, subjugating themselves to the collective; others may freely choose to enter a communal agreement for an anarcho-capitalist society. The Freedom Delusion prevalent in the West today, however, essentially means that these ideas and questions surrounding what it means to be free are rarely—if ever—raised in mainstream debates over what freedom means.

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The Wall Street Journal Disappoints Yet Again

01/08/2021Robert Aro

The Wall Street Journal asked a valid question on Tuesday in an article titled: “How Much Debt Is Too Much? It Depends on Your View of Inflation.” Spoiler alert: for those who love liberty and freedom, this doesn’t end well.

The tone is quickly set when the author notes how Western nations have the highest debt-to-GDP ratio since World War II, citing “the pandemic” as the cause, not socialist governments nor their anti-capitalist central banks. Considering that long before covid, the world was already reaching exponential increases in debt and money supply, it seems unfair to absolve those responsible by putting the blame on the pandemic.

Per the article, we are told fears of high debt-to-GDP ratios have been repeatedly proven wrong. Despite this, some, like the UK Treasury chief who called public finances “unsustainable,” are now trying to set the nation’s debt limit. To combat the rising debt level, the author presents two choices for fiscal policy in one very vague either/or fallacy:

Should they aim to stave off “bond vigilantes,” or simply not stoke inflation?

The author tries to explain that the answer lies in our understanding of “how inflation works”:

If governments keep borrowing too much, the theory goes, interest rates will rise. At some point, printing money will be the only alternative to a default, creating inflation. By contrast, MMT [modern monetary theory] advocates see inflation as a result of too much spending, regardless of whether it is financed by money or debt.

The first view point is named the “traditionalist” school, though the name of the school or theory is never stated. According to this school, price inflation after money printing is the only solution to a default, and this only after governments borrow “too much” money causing interest rates to rise.

As for the MMT idea, it seems to say price inflation is a result of “too much” spending…

Generally, as a rule of thumb, anytime an economic idea cites “too much” of anything, whether it’s too much borrowing or too much spending, a red flag should go up. For anything to be too much would mean there exists a “too little” amount, or worse, an “ideal amount.” It’s ironic because the importance of data dependency is often touted, however, we’re only given vague notions which cannot be quantified. To say (price) inflation is the result of too much borrowing or spending doesn’t offer anything we can discern, while overlooking other crucial ideas such changes to money supply.

Beyond these ideas exists the problem with the “inflation” calculation, such as the consumer price index (CPI). This idea is somewhat touched upon:

What indicators should policy makers follow then? Inflation itself is a good bet, though consumer-price baskets are crude—they often obfuscate specific supply shortages, as happened this year.

While not taking the CPI as gospel is good, the article concludes with the solution that:

Governments will need to monitor and control consumer spending and industry bottlenecks, as well as automatically link stimulus programs to persistent increases in unemployment, rather than leaving them to officials’ discretion. Outside of the U.S., much more attention should be devoted to the exchange rate, since depreciation can create inflationary spirals.

In other words, governments should intervene further in the market, and in this instance literally control consumer spending and industry supply chains while stimulating the economy through programs to fight unemployment. The recommendation also mentions to pay more attention to the exchange rate. How this can be done is not offered, nor can an adequate solution exist unless one is to come up with the ideal exchange rate for the US dollar which the government defends at all costs.

So, how much debt is too much? We are never told. But as long as the Federal Reserve is in charge of our financial system, we’ll never be able to get out of debt. While the USA is unlikely to ever explicitly default, it will nonetheless continue to debase its currency to lessen the debt bill in real terms. Economics shouldn’t be about finding a view of monetary inflation that allows us to justify inflationary policies; yet, unfortunately, it seems we’ve come to that.

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If Congress Were Genuinely Interested in Democracy, They Would Welcome an Election Commission

01/05/2021Tho Bishop

Listen to the Audio Mises Wire version of this article.

America stands over two months after Election Day, and yet tension remains in the air over the outcome of the presidential race. Legally, little has changed. The full expectation should be—as it has from the start—that Joe Biden will end up being inaugurated later this month. Appropriately, the event will be very limited for the public.

Even still, in spite of the clear legal advantage Joe Biden has, the behavior of various institutions of power is one of growing unease. This is understandable, Donald Trump remains a populist political figure willing to take down any political leader—regardless of party—who does not remain loyal to his convictions that he was the victim of a fraudulent election. As a result, an impressive number of elected Republican officials have remained in lockstep with the president and his team on challenging the results. We are witnessing an unprecedented breakdown in political norms, and those who have long enjoyed true, unquestioned power are not reacting well to even a modicum of uncertainty.

The response to all of this is predictable. The corporate press has been firm on the line that any skepticism about the legitimacy of this election is beyond the realms of acceptable opinion. They have drawn direct connections between questioning the election and their current go-to boogeyman QAnon. Democratic politicians are calling for treating any Republican colleagues loyal to Trump on par with members of the Confederacy during the Civil War. Establishment Republicans whose political relevance has long since passed are trying to remind those still in positions of power that the proper role of political conservatives is to politely surrender to their ideological enemies or else risk the GOP losing the approval of voters who are increasingly beyond persuasion.

While it is fair to question what significant dents the Trump administration has left on policy, the significance of this backlash is worth noting. What we are seeing is a major shift of power within the GOP in which elected Republicans in Washington actually fear the Trump base more than they fear names like McConnell, Ryan, and Cheney. While this has long been clear during the theater of primaries, it has been less so in terms of votes within Washington. It took less than two years for a large class of Tea Party freshman to bend the knee to many of these same types of actors.

What is amusing is that the go-to criticism waged by Very Serious People is that the actions of Trump’s Republican Party represent some grave threat to American democracy. In reality, what we are seeing is just the opposite. Elected Republican officials are choosing to place greater value in the demands of their own constituents, over abstract concepts like the “national interest.” The process is messy, but it gives American voters the illusion of representation and self-governance.

Given that the American empire has long enjoyed democracy as a purely ceremonial act, it is not surprising that the Beltway is not well adjusted to seeing it in action. As a result, the arrogance of Washington politicians may end up doing more to undermine the perceived legitimacy of DC than any legal option that Trump ever had on the table.

For example, one option that has been proposed by Senator Ted Cruz is the creation of a commission dedicated to looking into the 2020 election and proposing steps to improve election security in the future. Historically, commissions into national controversies have been an obvious step. By their nature, the political powers that be ultimately get to decide what is and is not written, and so in practice, they effectively serve to bolster—rather than undermine—the official narrative. This is true even if you have individual investigators genuinely interested in the truth.

As such, Cruz’s proposal should be seen as an obvious and moderate position. Instead, it has been portrayed as a radical attack on democracy.

The reason is simple. Elections have become a part of our civil religion, and the “popular will” has been increasingly held up as more important than pesky inconveniences like constitutionally protected rights. To allow for a commission about the election results is to normalize questions about how our politicians are chosen in general.

So, instead of trying to treat the concerns of tens of millions of American voters with respect and empath, tomorrow we will see a bipartisan effort to dismiss these concerns entirely.

The consequences of this could end up having a remarkable impact on politics for the rest of the decade. We have seen the difficulty Congress can have in the face of simple political polarization. What happens when the federal government tries to govern a country with tens of millions of people knowing it to lack any legitimate democratic mandate?

More interesting still, what happens when the federal government tries to intervene in a state where a majority does not believe it has any democratic legitimacy?

Once upon a time, those in power were smart enough to recognize the importance of popular support and went to great lengths to help ensure a level of general consensus. While technology has made the manufacturing of consent more difficult now than ever before, it is ultimately the arrogant behavior of those in power that is sowing the seeds of true subversion of federal authority. Washington today is an increasingly isolated, imperial city, occupied by legions of mediocre and arrogant dunces who are incapable of empathizing with the sincere concerns of average Americans. Ultimately, this is a recipe for political instability and decline. 

At a time where there are many reasons to predict a lot of dire economic outcomes in the coming years, this is a political development that should be cheered on.

Just as Murray Rothbard understood.

Image source:
Ted Eytan
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Wikipedia, Markets, and Collaboration

01/04/2021Gary Galles

Listen to the Audio Mises Wire version of this article.

On January 15, Wikipedia turns 20. Its anniversary is a good time to celebrate the success of a service that has become so useful to so many.

Members of my family, for instance, have undertaken university training in mathematics, economics, accounting, philosophy, English, art history, theology, counseling, women’s studies, education, and digital editing. All of us agree that Wikipedia is valuable. When used sensibly, it can be highly productive, particularly as a place to start learning about a topic.

A good place to see Wikipedia’s usefulness can be seen in its entry on itself. It is a lengthy piece (and recently updated, of course) which clearly strives for balance. My recent search turned up fifty major headings, 365 footnotes, and many references for further study. That it offers such easily accessible information and connections for further investigation has made it the most popular general reference work site on the internet, with 365 million readers, 55 million articles (over 6.2 million in English) in 285 languages, and still growing, and has ranked it among the fifteen most popular websites overall.

While almost everyone I have talked to about Wikipedia has a generally positive view of it, as an economist, I found certain things particularly important. As Wikipedia’s former executive director, Sue Gardner, wrote on its twelfth anniversary:

An encyclopedia is one of humankind’s grandest displays of collaborative effort, and Wikipedia takes that collaboration to new levels.

I don’t know of a comparable effort, a more diverse collection of people coming together, in peace, for a single goal.

Wikipedia has become an indispensable part of the world’s information infrastructure.

Each of these statements draws on something—the degree of collaboration, the extent to which it incorporates diversity, the degree to which it achieves its goal in peace, that it is an indispensable source of information for many—that should remind us that anyone who likes Wikipedia should like markets more, because voluntary exchange in markets is mankind’s most productive collaborative accomplishment.

Wikipedia, with its thousands of contributors and millions of beneficiaries, is still a much smaller demonstration of the beauty of collaboration than we find in the voluntary associations that make up markets. Exchange interactions bring everyone into collaboration, whether they intend to collaborate or not.

In markets, every participant’s preferences and values are incorporated into the results. Everyone who chooses to buy does so voluntarily, reflecting the fact that they place a greater value on what they receive than on what they give up. Everyone who chooses to sell does so voluntarily, reflecting the fact that they, too, place a greater value on what they receive than on what they give up. And those market relationships move goods and services to more highly valued forms, locations, and time periods, as well as to owners who place higher values on them, which are the only changes self-interested parties will mutually agree to. That is a far vaster field of social cooperation than Wikipedia. And everyone who uses the prices that result as information about the tradeoffs others are willing to make—that is, everyone—benefits from it.

Because markets reflect the choices—and therefore the preferences, abilities, and circumstances—of their participants, they also reflect the changes that impact them, communicating that information to others through relative price changes. While Wikipedia is far more nimble than other reference sources when it comes to incorporating new information, markets incorporate vastly greater amounts of useful new information far more quickly.

In fact, as Friedrich Hayek pointed out in “The Use of Knowledge in Society,” markets can incorporate information initially known only to one individual, even if she has no intention of benefiting others by that knowledge. That is because her self-interested market behavior will be reflected in price changes that communicate the consequences of that information, regardless of her intent. And that will allow for its productive use not just in the market where the information makes its initial appearance, but in markets for related products, such as substitutes, substitutes of those substitutes, complements, etc., in an expanding universe of effects.

Further, Wikipedia focuses on presenting facts that can be articulated and whose sources can be traced. But in markets, there is so much more information—including all the details of time and place that can change individual evaluations of goods and services—that it overwhelms our ability to know and process it. Much of that information is transitory and often not even articulable. Markets still incorporate that information by answering the question we are typically most interested in with respect to our productive associations: How much?

How much will someone else give me for something, or how much will someone else demand from me for it? While sparing us from the need to know all the infinitely complex combinations of who, what, when, where, and how, drastically economizing on information costs, it communicates the most essential things we wish to know through prices and changes in them.

When one thinks carefully about the beyond-remarkable feats of social coordination markets make possible, it is not hard to understand why Hayek concluded:

I am convinced that if [the market system] were the result of human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind.

Add to these marvels the fact that the market’s amazing feats of cooperation are accomplished in peace. When one’s property rights are well defined and defended, only voluntary arrangements are possible. Or as Leonard Read put it in his most famous book, Anything That’s Peaceful is allowed, but nothing that is not. Force is employed only when necessary to stop those who would violate others’ rights.

Indeed, early leaders of the free trade movement emphasized not just markets’ advantages for society in general, and the poor in particular, but for the advancement of peace. In Richard Cobden’s words:

[We] advocated Free Trade, not merely on account of the material wealth which it would bring to the community, but for the far loftier motive of securing permanent peace [with] people…brought into mutual dependence by the supply of each others’ wants.

The peaceful nature of market interactions is all the more amazing in view of the fact that unlike the shared goals that motivate the writers of a Wikipedia article, markets do not advance a single agreed goal. They vastly expand social cooperation, but that cooperation is in service of individuals’ widely disparate, often conflicting, goals. For example, we all desire food, clothing, and shelter, but we do not want the same amounts or kinds of food, clothing, or shelter, nor do we want them for the same people, at the same time, in the same quality and form, or in the same place. And that holds for innumerable other things.

Markets are not just a far more “indispensable part of the world’s information infrastructure” than Wikipedia, they provide their services under a greater handicap: governments do not constantly attack and undermine the information Wikipedia provides. In contrast, the information infrastructure provided by markets is widely undermined by government through a panoply of intrusions, including price ceilings and floors, taxes and subsidies, protectionism (tariffs, quotas, and nontariff barriers), and regulations that deter entry and stifle innovation.

Wikipedia is an impressive success story. It is informative, collaborative, diverse, and peaceful. But it is not humanity’s greatest collaborative effort, nor its greatest source of useful information. Those arise from the incredible benefits of people’s peaceful, voluntary arrangements in markets, when they are not short-circuited by government interference and hindrances. Consequently, if we could only give voluntary market arrangements the kind of respect and freedom Wikipedia enjoys, it would provide a major step forward for humanity.

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Announcing the Winner of the Central Bank of the Year Award…

12/31/2020Robert Aro

The Swiss National Bank (SNB) wins 2020! Unfortunately, the Federal Reserve's hubris could not compete with the smug assertiveness of the Swiss. SNB chairman Thomas Jordan invoked a Ben Bernanke–like assuredness when he made his case that deflation shouldn't happen here. This comes the day after the US Treasury named Switzerland a currency manipulator, after they met the arbitrary threshold of having a:

$20 billion-plus (CHF17.7 billion) bilateral trade surplus with the United States, foreign currency intervention exceeding 2% of Gross Domestic Product and a global current account surplus exceeding 2% of GDP.

Chairman Jordan rejected the title, reported by Reuters, by saying:

Just to be very clear. The U.S. treasury report has no impact on our monetary policy.

The SNB's policy has led to the lowest bank rate in the world at –0.75 percent, and it remains fixated on ensuring the Swiss franc doesn't become "too strong." Whether it's the threat of deflation or the fallacy that exports will suffer, it's always uncanny to see central bankers deflect their actions back on the public. Like the Fed, which normally caveats its actions by referring to its mandate given by Congress, the SNB uses a similar tactic, as Jordan told reporters:

Our monetary policy is necessary and legitimate, in fact it's the result of our mandate that we were given by the Swiss people and parliament to maintain price stability….It is very important that we maintain this price stability in order to avoid a deflation in Switzerland.

The coup de grace was delivered in a formal statement the same day, when the SNB declared in writing:

The SNB's expansionary monetary policy provides favourable financing conditions, counters upward pressure on the Swiss franc, and contributes to an appropriate supply of credit and liquidity to the economy.

Apparently unaware that there is no such thing as an optimal supply of money and credit, the SNB refutes this in the most Keynesian fashion of all: declaring a truth simply by declaring it true. Similar to the comment that their monetary policy is “necessary and legitimate,” the Swiss bank claims it has found the “appropriate supply of credit and liquidity” without the slightest bit of proof, rationale, or calculation.

Additionally, they declared that:

In light of the highly valued Swiss franc, the SNB remains willing to intervene more strongly in the foreign exchange market.

If true, the SNB will increase its foreign purchases, and as with all other central banks, the race for expansionary policy with the goal of price inflation should make for an interesting 2021.

Still, the comedic element is not lost on us, considering The Economist's Big Mac Index shows Switzerland is still home to the most expensive Big Mac in the world, costing over $7 USD as of July 15. Yet the central bank still commits itself to weakening the franc,  because, apparently, there is nothing worse than a strong currency.

So the Swiss bank wins: currency manipulation, the lowest interest rate in the world, purchases of US equities and foreign currencies with money created out of thin air, all to support the untenable position of maintaining the "appropriate" supply of credit. While the US dollar remains the world's unofficial reserve currency, Switzerland's publicly traded central bank does things the Fed only dreams of. Similar actions would be unfathomable if ever implemented in America. We hope.

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