Mark Thornton Inspires BBC Radio Episode on Prohibition

Mark Thornton Inspires BBC Radio Episode on Prohibition

10/09/2019Tho Bishop

Recently, the BBC produced a radio series on "50 Things That Made the Modern Economy". One episode focused on the economics of prohibition, crediting the work of Mark Thornton's Economics of Prohibition for helping write the script for the show.

The episode is available here.

Dr. Thornton's book is available here.

(Thanks to Bob Broadfoot for letting us know!)

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Which Branch of Government Is the Worst? A Ranked List

11/21/2019Ryan McMaken

The US federal government is divided up into a variety of institutions, with the three main "branches" of government designed to compete against each other. Theoretically, these three branches were initially thought to place checks on the other branches of government, thus minimizing abuses of power by the federal government overall.

Things haven't really worked out that way. Thanks to the rise of political parties, coordination between the branches — along party lines — has often replaced competition between the branches. Moreover, as political parties vie for the a controlling majority in the various branches, they are loath to limit the power of these institutions lest these partisans limit their own power in the process. Nor do the different branches represent different socio-economic groups in the manner imagined by John Adams in his Defense of the Constitutions.

So weakened had this imagined separation of powers become by the time of the New Deal that Franklin Roosevelt asserted during the days of his court-packing scheme that the various branches of government existed to work together, rather than to mutually obstruct each other. In a 1937 "fireside chat," Roosevelt claimed the federal government is

a three-horse team provided by the Constitution to the American people so that their field might be plowed. The three horses are, of course, the three branches of government – the Congress, the Executive and the Courts. Two of the horses are pulling in unison today; the third is not.

FDR's point was that the Supreme Court was being obstructionist, and it ought to conform itself to the other two branches of government, since it was the duty of each branch to assist the other branches in "plowing the field."

The fact many people would find this theory remotely plausible speaks to the magnitude of the public's disregard for the notion the division of the federal government into branches was supposed to prevent government action, not facilitate it.

Not All Branches Are Equally Terrible

FDR, of course, is the poster child for claims the presidency has become lopsidedly more powerful than the other branches of government. Through the party structure, FDR was able to dominate Congress, and through the cult of personality that surrounded him, he was even able to intimidate the Supreme Court as well.

But FDR certainly isn't the only example of how the presidency has come to be the driver behind most of the federal government's worst abuses and usurpations of power.

For detailed accounts of these many crimes, the reader may consult Reassessing the Presidency, published by the Mises Institute in 2001.

In it, the authors explore how the presidency has greatly expanded its power at the expense of Congress (of, of course, ordinary Americans).

This has been made possible by both inaction and support from the other branches. For example, except in rare cases, the Supreme Court has tended to defer to the other branches of government — and especially the presidency — when the court perceived both of the other branches were unlikely to oppose the court's decisions on a topic.

Meanwhile, the Congress's danger has mostly manifested itself through inaction and through its deference to both the Presidency and the Supreme Court. Over the past century, Congress has repeatedly handed over its lawmaking authority to the executive branch and to a variety of independent regulatory agencies.

The Rise of the Fourth Branch

This capitulation to the presidency and the administrative state, however, has enabled what has become an essentially independent fourth branch of government. Yesterday, in an article titled "The Deep State: The Headless Fourth Branch of Government," I described how the regulatory and national-security agencies of the executive branch have evolved over the past century to become more or less autonomous in their own right.

These organizations are sometimes collectively called "the deep state," and their are characterized by a lack of responsiveness to the electorate or to any other branch of government.

Although the president is technically the head of these agencies, he can only count on cooperation if there is general agreement among the agencies' personnel that the president's agenda does not threaten them. In other words, the president can often count on cooperation from this deep state to expand the executive branch's power. These same agencies, however, tend to place insurmountable obstacles in the way of any president who might attempt to significantly curtail the powers of the federal bureaucracy.

While the president's formal power is certainly quite vast, the informal power of this permanent bureaucracy is much greater. The agency personnel can usually wait out any president, and if a president becomes too inconvenient, these same bureaucrats can engage in a variety of investigations, indictments, and leaks designed to undermine the president. What they do is often secret, protecting it from public scorn.

The fact many of these bureaucrats have tenured positions, and function largely in the shadows, increases their power further. Even enormous failures on their part — as evidenced in the failure to prevent 9/11, or to "win" the failed War on Drugs — only leads to even larger budgets and even broader prerogatives.

From Worst to Least-Awful

Since the New Deal, and especially since 9/11, I suggest this fourth branch of government has actually become the most dangerous one. Ranking the branches of government from the worst to least bad, it looks like this:

  1. The Permanent Administrative State
  2. The Presidency
  3. The Supreme Court
  4. The Congress

The bureaucracy, as we've seen, is dangerous largely because of its permanence and the lack of any means in ensuring accountability. While elected officials come and go, career bureaucrats (military and otherwise) are more or less permanent. Moreover, since the other branches depend on the bureaucracy to enforce the "rules," there is no means of enforcing accountability on the bureaucracy beyond the short term.

The Presidency, on the other hand, is dangerous for both administrative and political reasons. It can use hero worship and mass media to ram through legislation. The President can also issue executive orders, essentially creating new legislation without Congressional approval.

The problem with the Supreme Court stems largely from its exalted position in the minds of voters. Polls show Americans trust the "judicial branch" more than either the Presidency or Congress. Thus, when the Supreme Court hands down its decisions, these decrees are often considered to be indubitable fait accomplis. On the other hand, the court has no means of enforcing its decisions, lessening its de facto power.

And then there is the Congress — the least popular, least respected, and most disorganized branch of the federal government. This is the branch which has the least ability to capitalize on a cult of personality given its lack of any single established figurehead. Moreover, turnover in Congress is higher than most people think. Although some members of Congress serve for decades, most members have tenures that are much shorter. The average tenure for current members is 8.6 years in the House and 10.1 years in the Senate.This means many members of Congress come and go as quickly as the presidents.

So What?

But if we've determined which federal institutions are the worst, the question remains: so what?

Well, this sort of analysis may help us determine which side is the greater threat when observing conflicts within the federal government. It also helps us to see through the rhetoric of political parties who always insist attempts at limiting their guy's power is unconstitutional or inappropriate.

One example of this was Nancy Pelosi's diplomatic trip to Syria in 2007, during which the Speaker attempted to assert some Congressional control over the White House's foreign policy. Vice president Dick Cheney denounced the move, insisting "we don’t need 535 secretaries of state" and claiming Congress should defer to the president on all matters of foreign policy. Cheney, of course, was wrong, and it would be a good thing if Congress spent quite a bit more time "meddling" in the White House's foreign policy agenda. The proper view of this relationship between Congress and the White House, however, is often clouded by partisan loyalties.

On the other hand, during the Trump administration, we've seen the permanent bureaucracy assert itself in its attempts to undermine the presidency, and to protect the deep state's own interests. The House majority has been supportive of this for partisan reasons. But more fundamentally — as a recent New York Times article concludes — this has really been a conflict between the presidency and the deep state. Although the presidency's power is already bloated to dangerous levels, the power of the permanent administrative state is even greater, more unaccountable, and most dangerous of all.

Mere partisan analysis would impel us to overlook this, but by keeping an eye on the relative danger of each branch within the federal government, we may perhaps be more able to identify the worst of the bad guys in each new political controversy.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

The Civilian Government Doesn't Owe Deference to Military Officers

11/20/2019Ryan McMaken

On Tuesday, Congressional impeachment hearings exposed an interesting facet of the current battle between Donald Trump and the so-called deep state: namely, that many government bureaucrats now fancy themselves as superior to the elected civilian government.

In an exchange between Rep. Devin Nunes (R-CA) and Alexander Vindman, a US Army Lt. Colonel, Vindman insisted that Nunes address him by his rank.

After being addressed as "Mr. Vindman," Vindman retorted "Ranking Member, it's Lt. Col. Vindman, please."

Throughout social media, anti-Trump forces, who have apparently now become pro-military partisans, sang Vindman's praises, applauding him for putting Nunes in his place.

In a properly functioning government — with a proper view of military power — however, no one would tolerate a military officer lecturing a civilian on how to address him "correctly."

It is not even clear that Nunes was trying to "dis" Vindman, given that junior officers have historically been referred to as "Mister" in a wide variety of times and place. It is true that higher-ranking offers like Vindman are rarely referred to as "Mister," but even if Nunes was trying to insult Vindman, the question remains: so what?

Military modes of address are for the use of military personnel, and no one else. Indeed, Vindman was forced to retreat on this point when later asked by Rep. Chris Stewart (R-UT) if he always insists on civilians calling him by his rank. Vindman blubbered that since he was wearing his uniform (for no good reason, mind you) he figured civilians ought to refer to him by his rank.

Of course, my position on this should not be construed as a demand that people give greater respect to members of Congress. If a private citizen wants to go before Congress and refer to Nunes or any other member as "hey you," that's perfectly fine with me. But the important issue here is we're talking about private citizens — i.e., the people who pay the bills — and not military officers who must be held as subordinate to the civilian government at all times.

After all, there's a reason that the framers of the US Constitution went to great pains to ensure the military powers remained subject to the will of the civilian government. Eighteenth and nineteenth century Americans regarded a standing army as a threat to their freedoms. Federal military personnel were treated accordingly.

Article I, Section 8 of the Constitution states that Congress shall have the power "to raise and support Armies …" and "to provide and maintain a Navy." Article II, Section 2 states, "The President shall be the Commander in Chief of the Army and Navy of the United States, and of the Militia of the several States when called into the actual Service of the United States." The authors of the constitution were careful to divide up civilian power of the military, and one thing was clear: the military was to have no autonomy in policymaking. Unfortunately, early Americans did not anticipate the rise of America's secret police in the form of the CIA, FBI, NSA, and other "intelligence" agencies. Had they, it is likely the anti-federalists would have written more into the Bill of Rights to prevent organizations like the NSA from shredding the fourth amendment, as has been the case.

The inversion of the civilian-military relationship that is increasingly on display in Washington is just another symptom of the growing power of often-secret and unaccountable branches of military agencies and intelligence agencies that exercise so much power both in Washington and around the world.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Thiel on AI and Austrian Economics

11/20/2019Robert Wenzel

Last week Wednesday, Silicon Valley billionaire Peter Thiel delivered the 2019 Wriston Lecture at the Manhattan Institute. During the Q&A following the lecture, the topic of artificial intelligence was raised and Thiel discussed it within the context of Austrian economics.

He said (my highlight):

AI is sort of the buzz word of the day. It could mean the next generations of computers, the last generation of computers, anything in between. It can mean the Terminator movie where it's a robot that kills you, it can mean sort of all these sort of creepy social credit scoring things in China. But in practice, the main AI applications that people seem to talk about are using large data to sort of monitor people, know more about people than they know about themselves. And in the limit case, maybe it can solve a lot of the sort of Austrian economics type problems where you can know enough about people that you know more about them than they know about themselves, and you can sort of enable communism to work, maybe not so much as an economic theory, but at least as a political theory. So it is definitely a Leninist thing. And then, it is literally communist because China loves AI; it hates crypto. And so that, I think, tells you something. And then I think there's a commonsense level on which people are creeped out about it and this is why. And we should label it accurately.

Thiel, by singling out Austrian economic theory, seems to suggest that AI will solve some problems that Austrian economists raise.

But, for the record, both Austrian school economists Ludwig von Mises and Friedrich Hayek discussed the supercomputer situation decades ago, long before there were even smartphones or personal computers or much in the way of computers.

For example, the essay, The Equations of Mathematical Economics and the Problem of Economic Calculation in a Socialist State, was first written by Mises in German in 1920 as "Die Wirtschaftsrechnung im sozialistischen Gemeinwesen."

In it he wrote:

[E]ven if we know the present conditions, we are unable to say anything of a quantitative nature, on the basis of this knowledge, about the pattern of future values. This is the big mistake that has been made by all those who have wanted to substitute “quantitative” economics for “qualitative” economics. A quantitative treatment of economic problems can only be economic history: it can never be economic theory. And there is no economic history of the future. The equations which describe the state of economic equilibrium include consumers’ preferences. These are the preferences which will prevail at the moment when the equilibrium is established on the market. They are different from today’s preferences as we know them from the way in which they are expressed on today’s market. Today we know nothing about these future preferences and cannot predict what they will be. Thus, though we may know the present-day condition of the market and all the data determining the configuration of today’s market position, including consumers’ preferences as they are expressed in that market position, we still do not know the future preferences of consumers.

We may be justified in assuming that they change. This assumption does not help however. For the economic system is not in equilibrium today, and we want to know the consumers’ preferences for the point of time when it will be in equilibrium and when, in consequence, other conditions will prevail. The progressive approach of things towards an equilibrium situation which we have in mind, and which forms the subject of our inquiry, means the progressive transformation of the conditions determining the preferences and therefore also of the preferences themselves. The problem is not only that, in order to make use of the equations, we need to know the scale of preferences that will prevail at a future point of time and which are not known to us today. Even today’s preferences are only known to us in so far as they are reflected in the system of prices ruling on today’s market. That is to say we know roughly how great is the demand for a certain article by the price prevailing for it on the market today. But we know nothing of what the demand would be if another price prevailed. We do not even know the shape of the supply and demand curves; we only know the position of one point at which the two curves cut or, more precisely, have cut today. Experience tells us so much and no more. It can provide us with no information about the data which we require for solving our equations.

Finally there is still a third point which needs mention: The state of equilibrium which our equations describe is a purely imaginary state of equilibrium. It is merely a hypothetical, though indispensable, tool of analysis which has no counterpart in reality. Thus it is not only a future state which differs from the state of the moment that has just passed and with which we are acquainted: It is merely an imaginary theoretical construction which will never become reality. Hayek (1935, p. 211) has also pointed out that the possibility of using the equations describing the state of equilibrium for purposes of economic calculation presupposes a knowledge of the future scales of preferences of consumers. But here he has in mind only a complication of the practical task of applying the equations, and not a fundamental and insuperable obstacle to their use for any such process of calculation.

And Hayek makes the important point:

We should not expect equilibrium to exist unless all external change has ceased.

If there is external change, Hayek's implication is that some of these changes will not be known in advance and thus these changes in the environment will change individual valuations in unknown ways that even artificial intelligence can't anticipate.

No, artificial intelligence will not "solve" problems of changing valuations.

On a further point, Thiel in mid-sentence during his answer, after saying it is about Austrian economic questions, oddly says it may not be so much about economic theory but political theory.

I have no idea what Thiel means when he says that communism might work from a political perspective because of AI but not from an economic perspective. Communism is about the nature of the economic structure. It can not be planned if unknown changes can take place.

Originally published at Economic Policy Journal
When commenting, please post a concise, civil, and informative comment. Full comment policy here

Jeff Deist on the Death to Tyrants Podcast

11/18/2019The Editors

Jeff Deist joins the Death to Tyrants podcast to discuss themes in his recent article, "Politics Drops Its Pretenses" and his recent speech on how "meaningless words" create a narrative. Is "democracy" really a good thing? Do those who use it even know what it means? Are we best off when 51% of the voters force their will upon the other 49%? Is it realistic for libertarians to find the right presidential candidate that will win over a majority of voters in hopes to live in a libertarian society? What if secession and decentralization is the best way moving forward? We will hear the establishment tell us that "politics and voting will bring us together" and "democracy in action is a good thing". Why does it seem, then, that the further entrenched government becomes in our lives, the more divisive and at odds the country becomes?

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Is The ‘Mother of all Bubbles’ About to Pop?

11/14/2019Ron Paul

When the New York Federal Reserve began pumping billions of dollars a day into the repurchasing (repo) markets (the market banks use to make short-term loans to each other) in September, they said this would only be necessary for a few weeks. Yet, last Wednesday, almost two months after the Fed’s initial intervention, the New York Federal Reserve pumped 62.5 billion dollars into the repo market.

The New York Fed continues these emergency interventions to ensure “cash shortages” among banks don’t ever again cause interest rates for overnight loans to rise to over 10 percent, well above the Fed’s target rate.

The Federal Reserve’s bailout operations have increased its balance sheet by over 200 billion dollars since September. Investment advisor Michael Pento describes the Fed’s recent actions as Quantitative Easing (QE) “on steroids.”  

One cause of the repo market’s sudden cash shortage was the large amount of debt instruments issued by the Treasury Department in late summer and early fall. Banks used resources they would normally devote to private sector lending and overnight loans to purchase these Treasury securities. This scenario will likely keep recurring as the Treasury Department will have to continue issuing new debt instruments to finance continuing increases in in government spending.

Even though the federal deficit is already over one trillion dollars (and growing), President Trump and Congress have no interest in cutting spending, especially in an election year. Should he win reelection, President Trump is unlikely to reverse course and champion fiscal restraint. Instead, he will likely take his victory as a sign that the people support big federal budgets and huge deficits. None of the leading Democratic candidates are even pretending to care about the deficit. Instead they are proposing increasing spending by trillions on new government programs.

Joseph Zidle, a strategist with the Blackstone investment firm, has called the government — or “sovereign” — debt bubble the “mother of all bubbles.” When the sovereign debt bubble inevitably busts, it will cause a meltdown bigger than the 2008 crash.

US consumer debt — which includes credit cards, student loans, auto loans, and mortgages — now totals over 14 trillion dollars. This massive government and private debts put tremendous pressure on the Federal Reserve to keep interest rates low or even to “experiment” with negative rates. But, the Fed can only keep interest rates, which are the price of money, artificially low for so long without serious economic consequences.

According to Michael Pento, the Fed is panicking in an effort to prevent economic trouble much worse than occurred in 2008. “It’s not just QE,” says Pento, “it’s QE on steroids because everybody knows that this QE is permanent just like any banana republic would do, or has done in the past.”

Congress will not cut spending until either a critical mass of Americans demand they do so, or there is a major economic crisis. In the event of a crisis, Congress will try to avoid directly cutting spending, instead letting the Federal Reserve do its dirty work via currency depreciation. This will deepen the crisis and increase support for authoritarian demagogues. The only way to avoid this is for those of us who know the truth to spread the message of, and grow the movement for, peace, free markets, limited government, and sound money.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

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.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Why a "Crypto-Yuan" Won't Threaten the Dollar

11/12/2019Daniel Lacalle

A state-owned cryptocurrency is, in itself, a contradiction in terms. The main reason why citizens want to use cryptocurrencies or gold is precisely to avoid the government or central bank monopoly of money.

For a currency to be a world reserve of value, widespread means of exchange and unit of measure, there are many things that need to happen, but the first pillar of a world reserve currency is stability and transparency.

China cannot disrupt the global monetary system and dethrone the US dollar when it has one of the world’s tightest capital control systems, a lack of separation of powers and weak transparency in its own financial system.

The U.S. dollar is the most traded currency in the world, and growing according to the Bank of International Settlement. The Yuan is 4% of the currency trade. This is because the financial balance of the US is the strongest, legal and investor security is one of the strongest in the world, and the currency and capital markets are open and transparent.

Unfortunately for China, the idea of a gold-backed cryptocurrency starts from the wrong premise. China’s own currency, the Yuan, is not backed by either global use nor gold. At all. China’s total gold reserves are less than 0.25% of its money supply. Many say that we do not know the real extent of China’s gold reserves. However, this goes back to my previous point. What confidence is the world going to have on a currency where the real level of gold reserves is simply a guess? Furthermore, why would any serious government under-report its gold reserves if it wants to be a safe haven, reserve status currency? It makes no sense.

The Yuan is as unsupported as any fiat currency, like the U.S. dollar, but much less traded and used as a store of value. As such, a cryptocurrency would not be backed by gold either. Even if the government said it was, and deployed all its reserves to the cryptocurrency, what confidence does the investor have that such backing will be guaranteed when the evidence is that even Chinese citizens have enormous limits to access their own savings in gold?

China’s gold reserves are an insignificant fraction of its money supply. Its biggest weakness comes from capital controls, lack of open and independent institutions safeguarding investors and constant intervention in its financial market.

China’s Yuan may become a world reserve currency one day. It will never happen while capital controls remain and legal-investor security is limited.

Originally published at DLacalle.com
When commenting, please post a concise, civil, and informative comment. Full comment policy here

Economists Are Still Hooked on the Myth that Saving Is Bad for the Economy

11/08/2019Ryan McMaken

According to new data from the US Bureau of Economic Analysis, the personal saving rate in the US in September 2019 was 8.3 percent. That puts it near a six-year high, and comparable to the saving rate we saw during the early 1990s.

Indeed, the personal saving rate has been heading upward steadily for the past eighteen months. And that's a bit of an unusual thing. For at least the past fifty years, the saving rate has tended to increase when the economy is doing poorly, and decrease when the economy is doing well.

We saw this in the last 1970 and earl eighties during the age of stagflation and the 1982 recession. We certainly saw it in the wake of the 2008 financial crisis, when the saving rate quickly rose from a near-low of 3.8 percent in August 2008, more than doubling to 8.2 percent during may of 2009.

savingsrate.PNG

But if the BEA's numbers are correct, that pattern appears to be over, and Americans appear to be more willing to save even when job growth continues to head upward.

This change could be a result of several factors. It could be Americans are less confident about their prospects for future earnings, even if the current job situation appears bright. Many could be less confident that the assets they do have will provide a cushion in case of crisis. For example, many Americans may have learned their lesson about the myth that "housing prices always go up."

The fact that these numbers are averages makes it especially hard to guess. After all, surveys suggests a very large numbers of Americans are saving very little.

For example, CNBC reported in January that "Just 40 percent of Americans are able to cover an unexpected $1,000 expense, such as an emergency room visit or car repair, with their savings..."

A separate survey "found that 58 percent of respondents had less than $1,000 saved."

Regardless of who is doing it, however, increased saving can be a good thing for the economy overall. For instance, even if only the rich are the ones saving more, their saving increases the amount of loanable funds, decreasing the interest rate, and making lenders more likely to lend to riskier borrowers. That's good for farmers and small business owners.

Moreover, as the wealthy refrain from spending, they increase the value of cash held and spent by people at all income levels. For example, if the rich are spending less on restaurant meals and pickup trucks, this means the prices for those items are not being bid up as much. When the rich save, that means fewer dollars chasing goods and services, which can lead to more stable, or even falling prices. That can be good for many people at lower income levels.

Nonetheless, many mainstream economists continue to get hung up on the idea that saving "too much" hampers economic growth. For example, in a recent article at the Wall Street Journal titled "Americans Are Saving More, and That Isn’t Necessarily Good" Paul Kiernan writes:

if saving outstrips investment opportunities for a long time, some economists say, it can hold down interest rates, inflation and economic growth. Such “secular stagnation” may leave less room to cut interest rates, making it harder for the Federal Reserve to boost growth during downturns.

“Rather than being a virtue, saving becomes a vice,” said Gauti Eggertsson, an economist at Brown University.

This is an old story we've been hearing for years, and the idea that there is too much saving certainly received its share of promotion during the 2001-2002 recession, and during the 2007-2009 recession.

Economists do recognize that more saving helps increase loanable funds — and thus puts downward pressure on interests rates — and reduces inflation. But more saving does not, as they think, reduce real economic growth.

True, it might reduce economic growth as measured by government stats which mostly just add up money transactions . But properly understood, economic growth increases with saving, because the capital stock is increasing, making it easier for entrepreneurs to deliver new goods and services — and more goods and services — to consumers. As Frank Shostak explains, we need more saving to create more and better goods:

What limits the production growth of goods and services is the introduction of better tools and machinery (i.e., capital goods), which raises worker productivity. Tools and machinery are not readily available; they must be made. In order to make them, people must allocate consumer goods and services that will sustain those individuals engaged in the production of tools and machinery.

This allocation of consumer goods and services is what savings is all about. Note that savings become possible once some individuals have agreed to transfer some of their present goods to individuals that are engaged in the production of tools and machinery. Obviously, they do not transfer these goods for free, but in return for a greater quantity of goods in the future. According to Mises, "Production of goods ready for consumption requires the use of capital goods, that is, of tools and of half-finished material. Capital comes into existence by saving, i.e., temporary abstention from consumption."

The common view among many economists today, however, is that it's better for economic growth to make sure more people spend every last dime on trinkets at the discount store. Those who have been around long enough to remember previous business cycles will remember that this idea manifests itself during times of recession as pundits insist it's our patriotic duty to spend more, in order to create economic growth.

In truth, in a time like today, the best thing people can do is save more. We live in a time of multiple economic bubbles and non-productive sectors of the economy fueled by inflationary monetary policy. When recession finally does come, vast amounts of debt will never get paid back and immense numbers of "assets" held on balance sheets will evaporate. The result will be a lot of lost jobs and a lot of failed businesses. The only real cushion will be real savings which will be badly needed in a time of recession.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

A Note on Asset Prices, Wealth, and Inequality

11/06/2019George Reisman

Warren and Sanders et al. are misled by the government’s inflation of the money supply into believing that the stagnation and decline of our economic system in recent decades is the result of growing economic inequality.

The truth is that both the appearance of increasing wealth of the rich and the reality of declining actual wealth are the result of the government’s pouring new and additional money into the stock and real estate markets, where the effect is to raise prices.

Since the rich own far more stock and real estate than the average person, the effect of this rise in prices is that economic inequality appears to increase. (Somehow the sharp declines in apparent economic inequality that necessarily accompany market busts, are not reported.)

While the rich appear to gain because of the rise in the prices of their assets, in reality they lose.

This is because the taxation of their profits on the sale of stocks and real estate prevents the funds accruing to them from keeping pace with the rise in prices. Their funds grow only to the extent of what remains after the payment of taxes.

For example, imagine that the infusion of new and additional money into the stock and real estate markets increases prices there by 10%. Originally, one had an asset worth $1 million. Now it can be sold for $1.1 million.

But if the capital gains tax is 25%, the seller ends up with only $1.075 million, a 7.5% gain, while the prices of the assets available for him to purchase have increased by 10% on average.

This is a major way in which inflation — the government’s expansion of the money supply — destroys an economic system. It creates the appearance of business prosperity along with the fact of general impoverishment, which results in blaming poverty on business and profits.

The Problem with the Wealth Tax

One "solution" to inequality — put forth by Elizabeth Warren — is the wealth tax. Warren advocates a wealth tax that every year would take away 2% of the wealth of everyone worth more than $50 million, and 3% of the wealth of everyone worth more than $1 billion. This taxing away of capital means less means of production and thus less production and higher prices. At the same time, it means less demand for labor and thus lower wages. Elizabeth Warren’s program is a call for mass impoverishment. And the same is true of the essentially similar programs of her fellow haters of the rich, such as Bernie Sanders and Ocasio-Cortez.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Austrian Perspectives on Entrepreneurship, Strategy, and Organization, by Foss, Klein, and McCaffrey, Available Free for a Limited Time

We are happy to announce a new book by Nicolai J. Foss, Peter G. Klein, and Matthew McCaffrey, Austrian perspectives on Entrepreneurship, Strategy, and Organization, now available from Cambridge University Press. This short volume is a concise introduction to the work that's been done over the past few decades applying and extending the ideas of Austrian economics in the management disciplines. It's well-known that Austrian economics places entrepreneurship at the heart of economic theory, but Austrian work, especially the ideas of writers like Mises, also has a lot to offer scholars in disciplines like strategy and organization studies. The table of contents is as follows:

  1. Introduction
  2. What is Austrian Economics?
  3. Entrepreneurship
  4. Extensions of Entrepreneurship Theory
  5. Strategy in an Entrepreneurial Perspective
  6. The Entrepreneurial Nature of the Firm
  7. The Future of Austrian Economics in Management Research

Most important, the book is available free of charge until November 18th, so be sure to check it out!

When commenting, please post a concise, civil, and informative comment. Full comment policy here
Shield icon power-market-v2