Power & Market

Henry Hazlitt's Forgotten Book on Willpower

09/26/2019Jeff Deist

Self-help is largely a disreputable genre, in main because most answers to life are found internally, through trial and error. Digital charlatans, many of whom lack any real success in life beyond their dubious roles as "life coaches," litter our social media feeds. The fundamental question goes unasked and unanswered: "Why should anyone listen to you?" 

The old wisdom of truly self-made men like Dale Carnegie and Og Mandino, rooted in common sense and discipline rather than unwarranted self-regard, is largely gone now. But another unlikely source exists in the man of Henry Hazlitt, the great economics journalist who made himself into a financially successful writer and aristocratic figure—despite the modest circumstances of his birth.

Early in his career, just a few years following his Air Force stint during the Great War, he wrote a curious short book titled The Way to Will Power. It reads as you might expect from a young writer still finding his voice and style. But it is absolutely fascinating, and can be read (free here!) in just an evening. So put aside your Jordan Peterson or Gary Vaynerchuk1 videos and spend some worthwhile time inside the mind of the great Henry Hazlitt!

As a taste, here is Hazlitt's conception of willpower as the maintenance of a dominant, sustained desire. It is time preference applied to life's goals:

Will-Power, then, may be defined as the ability to keep a remote desire so vividly in mind that immediate desires which interfere with it are not gratified.

Understand me, I pass no moral judgment on the will per se. I do not condemn it, neither do I praise. It may be evil as well as good. A man may devote years to avenging himself upon another. He may put up with inconveniences; endure privation; submit to insults, humiliation, and risks of exposure, all of which he could avoid if he would consent to give up his aim. Napoleon consecrated his colossal will to the once glorious and now discredited occupation of trying to conquer the world.

But will does imply thought of the future. It is ready, if need be, to sacrifice the present to the future. And that is one of the great distinguishing marks between the civilized man and the savage. The savage did not save; he did not plant crops; he did not provide for old age. He did not even set aside food for the next day. When he got a piece of meat, he gorged himself, until he slept. He died young.

  • 1. I am not implying Messrs. Peterson or Vaynerchuk are charlatans, but merely that old wisdom should be sought out.
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How Entrepreneurs Can Survive the Next Recession

09/20/2019Per Bylund

There has been increasing talk of a burgeoning recession, whether because of a historically rare decade-long economic expansion or recent reports of an inverted yield curve, which is traditionally an indication of a downturn. Any recession is hard on all Americans, but it can be particularly devastating for entrepreneurs, who often have more to lose. Not only does an economic ebb add to the uncertainty of owning and running a business, but it also means opportunities become scarcer, with fewer potential partners willing to invest, consume and otherwise enter into deals.

Recessions, of course, are famously hard to predict, but even when there's mounting evidence of a looming crisis, it can be hard to anticipate timing and how it will affect your industry. Simply closing shop is no solution. It might not even be an option. A better strategy is to prepare for the worst and make your business downturn-proof. But how does one do that? Here are four things to think about that can help make your business recession-ready ... just in case.

Full article at Entrepreneur

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Happy Birthday Hans!

09/02/2019David Gordon

Today is  Hans Hoppe's birthday. He is an outstanding libertarian theorist, in the tradition of Murray Rothbard, and his strikingly original work ranges widely over philosophy, history, and economics. Among his many contributions are a defense of self-ownership and property rights through argumentation ethics and a trenchant criticism of democracy.  He is a scholar of the highest integrity and courage, and all lovers of liberty are in his debt.

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Hanke: Business Roundtable Suffers from Economic Illiteracy

08/29/2019Steve H. Hanke

Last week, the Business Roundtable launched a major attack on property rights, the bedrock of capitalism.

In a stunning new mission statement, the Roundtable, which represents nearly 200 of America’s blue-chip companies, downgraded shareholders. According to the Roundtable, the purpose of a corporation will no longer be to conduct business with the sole objective of generating profits for shareholders. Owners of corporations (read: shareholders) will now just be one of five “stakeholders”— alongside customers, workers, suppliers and communities — that will call the tune for corporations.

The Roundtable’s new anti-capitalist mission statement promises to dilute and muffle shareholders’ voices and further politicize corporate governance.

Read the full article at USA Today
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Harvard Economics is Changing

06/26/2019Mark Thornton

Harvard has been a leader in the economics profession for better or worse. In recent years the economics department has been viewed as relatively free market oriented where human action is seen as rational, research is guided by economic theory, and where markets work most of the time. Symbolically, the introductory undergraduate course was taught for many years by conservative economist Martin Feldstein and since 2005 by Gregory Mankiw, who could be described as a middle of the road Republican. Mankiw is also the author of the leading textbook for principles of economics, a sign of Harvard's broader influence. The faculty has several noteworthy free-market-leaning members, including libertarian Jeffrey Miron.

However, there have been big signs that things are changing for Harvard economics and not for the better. In March, Markiw wrote that he would be stepping down from teaching the principles of economics course. There has been no official replacement announced, but Raj Chetty teaches a popular alternative course called Economics 1152: Using Big Data to Solve Economic and Social Problems.

This course provides an introduction to modern applied economics in a manner that does not require any prior background in economics or statistics. It is intended to complement traditional Principles of Economics (Econ 101) courses. Topics include equality of opportunity, education, health, the environment, and criminal justice. In the context of these topics, the course provides an introduction to basic statistical methods and data analysis techniques, including regression analysis, causal inference, quasi-experimental methods, and machine learning.

This data driven approach should rightly scare traditional economists because "data driven" often results in "personal viewpoint driven" conclusions, even by professional economists. In the hands of undergraduate students there is no telling how many more crackpot progressives might graduate from Harvard or how many economics departments might be influenced in this direction. 

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How Not To Use Percentages In a News Story

06/18/2019Joakim Book

Using numbers to describe the world is fraught with peril. The problem is not that you can prove anything with statistics (you can’t) or the Mark Twain quip equating statistics with lies, but rather that numbers unaccompanied by correct reference points tend to be very misleading. Hayek’s famous quote where aggregates conceal is merely a subsection of this larger mistake; to report one number (an average, a percentage, a growth statistics) when the correct or more fully elaborated story includes that number in combination with other numbers, is the major concern.

In politics (and the media tasked with covering it), the stakes to portraying numbers in one’s own favor are very high and so we see this mistake all the time. Let me address what may be the most common one: failing to divide by the correct denominator – disguised by the frequent and careless use of percentages.

Normally, claims expressed in percent such as “87.2% of American households have a computer” have straightforward meanings; the word ‘percent’ literally means “by the hundred.” If there were 100 American households, we would know that about 87 of them have a computer. Our brains correctly read “almost all American households”, since 87.2 is the vast majority of 100. If we have some additional information about the number of households (119 million) we can quickly establish that some 104 million households have a computer; the remaining 12.8% (around 15 million or so) don’t, which we know since the groups are mutually exclusive (either your household has a computer or it doesn’t) and that percentages sum to a hundred (87.2+12.8=100). Easy.

Dealing with non-negative numbers such as car-owners, votes, revenues or incomes like this is rarely a problem, and percentages are ideally suited to perform that task; they don’t require the reader to have detailed information about the number of households in order to gauge the meaning of the 87.2% digit. Numbers reported in percent give us a natural reference point: households with computers divided by all households.

This quickly changes when the subset of numbers you’re describing may include negative numbers, such as net job creation or income growth. Since those numbers can occasionally turn negative for even large subsections of a population, the meaning of “percent” is completely lost. The intuition is this: when you include negative numbers in a sample, and take a percentage based on some remaining (positive) number, individual percentages easily sum to more than a hundred.

Here’s an illustration of a hypothetical economy of three people (A, B, and C), whose combined earnings in the first year is $300 (distributed as $50 for A, $100 for B, and $150 for C). In year two, A increased his income to $70 (a 40% increase), B only earned $80 (a 20% reduction) and C’s income went from $150 to $180 (a 20% increase). The total growth of income in our economy was 10% (A+B+C equaled $300 in year one, A+B+C equaled $330 in year two), for a total income gain of $30. If we divide A’s income gain ($20) with the total income gain ($30) we find that two-thirds, or 66.7% of the income gain went to A. If we similarly divide C’s income gain ($30) by the total income gain ($30) we find that a 100% of the year’s income gain went to C. How in the world can C have gotten the entire income gain when we just said that A received two-thirds of it?


Year 1

Year 2

Income gain

Income gain

Income gain
% of total


























Any data presented this way would quickly raise questions: clearly, there’s something wrong with the statement that A and C together received 166.7% of total income gain. Because B’s negative income gain distorts the picture, the percentages reflecting A’s and C’s share of income gains no longer mean what they usually mean.

What Has Gone Wrong Here?

As made evident in the table, we can quickly see that because A’s income gains in absolute numbers cancel out B’s income gain, any discussion including somebody’s share of income growth is seriously misleading. The shares of income growths only sum to a hundred when we include B’s negative income gain, but if we only care about the top earners – in this case C – we could easily (and erroneously) conclude that all the income gain was captured by the rich.

Let’s use another example to make the mistake even more blatantly obvious. If you remember Mitt Romney’s job creation debate in the run-up to the 2012 election, this is a great illustration of using incorrect denominators. The RNC and the Romney Campaign calculated that the net job loss from January 2009 to March 2012 was 740,000 , but that the net job loss for women during the same period was 683,000. Quick calculations show that women accounted for 92.3% (683,000/740,000=0.923). Of course, we can make this even more absurd by comparing February 2009 to March 2012 instead, where the net job loss was 16,000 jobs. On net, women lost almost half a million jobs during that period, which yields a result of around 3100% of all job losses! The straightforward meaning of “percent” as fraction of a hundred has entirely disappeared.

Because “net job losses” involve jobs created minus jobs lost, dividing the number of jobs lost by women by net job losses is entirely the wrong denominator to use. “Percent” no longer carries the straightforward meanings it usually does, but it still conveys that message to the uninformed reader.

Percentage-Flingers Abound

Sure, anybody with even rudimentary understanding of statistics knows not to use selected percentages when underlying set of numbers can be negative. But the skilled deceiver or the careless fool can still say things like “100% of the income gain between year one and year two went to earner C”, and the reader will interpret “100%” with its usual meaning (“all”). But whenever the full set includes negative numbers, the relevant denominator is no longer 100.

Either through malice or ignorance, economists and media pundits fall into this trap all the time. CNBC reported last year that “in nine states, the income growth of the top 1 percent was half or more of all income growth in that time period.” A few years ago, the inequality Joseph Stiglitz wrote that “all the growth in recent decades — and more — has gone to those at the top”. A recent working paper by Emmanuel Saez — a U.C. Berkeley economist who really should know better — summarized his findings that the “top 1% families captured 49% of total real income growth per family from 2009-2017”. Coming out of the Great Recession, the British Magazine The Economist remarked that “around 95% of the increase in American income since 2009 has gone to the top 1%”. Of course, leftist politicians make these kinds of claims on a regular basis, but they are statistically unsound.

In his successful How Not To Be Wrong, Maths professor Jordan Ellenberg concluded that “the combination of positive and negative allows you, if you’re not careful, to tell a fake story, in which the whole work of job creation in the tradeable sector was done by [a single] industry.”

Reporting percentages when the underlying dataset include negative numbers removes the standard meaning of percent. 90% of something that includes negative numbers no longer means "almost all" or "a very large majority."

Numbers presented alone indeed conceal or mislead the reader; “Always Be Comparing Thy Number” ought to be a statistical commandment. While numbers reported in percentages do provide a useful reference for the reader, dividing by the wrong denominator or involving negative numbers, seriously distorts the story. Be aware when statistical deceivers or careless fools fling percentages around. Sometimes they really shouldn’t.

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Hayekian Insights from The Road to Serfdom

05/08/2019Gary Galles

Friedrich Hayek’s The Road to Serfdom reached its 75th anniversary this year. This classic, published near the end of the World War II, was incredibly influential. In fact, Milton Friedman wrote that he had made it a practice to ask believers in individualism how they got there in the face of the “collectivist orthodoxy,” and reported that the most frequent answer involved The Road.

As it is one of my favorite books and I have long been an avid collector of some of the finest words in defense of liberty (See my Lines of Liberty), I thought I would use the occasion to collect some of The Road ’s most insightful passages, hoping to stimulate reflection. However, I quickly discovered that despite being a short book, The Road had too much material for one short article. As a consequence, I decided to organize the material by breaking it into three parts. Below is Part 1—Freedom or Coercion.

  • We are fighting for freedom to shape our life according to our own ideas.
  • We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past.
  • Wherever the barriers to the free exercise of human ingenuity were removed, man became rapidly able to satisfy ever widening ranges of desire.
  • The fundamental principle is that in the ordering of our affairs we should make as much use as possible of the spontaneous forces of society, and resort as little as possible to coercion.
  • To the great apostles of political freedom the word had meant freedom from coercion, freedom from the arbitrary power of other men.
  • People still believe that socialism and freedom can be combined…the realization of their program would mean the destruction of freedom.
  • The argument for freedom is precisely that we ought to leave room for the unforeseeable free growth.
  • While there is nothing in modern technological developments which forces us toward comprehensive economic planning, there is a great deal in them which makes infinitely more dangerous the power a planning authority would possess.
  • The very men who are most anxious to plan society [are] the most intolerant of the planning of others.
  • Under the Rule of Law, the government is prevented from stultifying individual efforts by ad hoc action. Within the known rules of the game the individual is free to pursue his personal ends and desires, certain that the powers of government will not be used deliberately to frustrate his efforts.
  • That people should wish to be relieved of the bitter choice which hard facts often impose upon them is not surprising. But few want to be relieved through having the choice made for them by others.
  • The economic freedom which is the prerequisite of any other freedom…must be the freedom of our economic activity which, with the right of choice, inevitably also carries the risk and responsibility of that right.
  • The system of private property is the most important guaranty of freedom, not only for those who own property, but scarcely less for those who do not. It is only because the control of the means of production is divided…that nobody has complete power over us…If all the means of production were vested in a single hand…whoever exercises this control has complete power over us.
  • Those who are willing to surrender their freedom for security have always demanded that if they give up their full freedom it should also be taken from those not prepared to do so.
  • The more we try to provide full security by interfering with the market system, the greater the insecurity becomes; and …the greater becomes the contrast between the security of those to whom it is granted as a privilege and the ever increasing insecurity of the under-privileged.
  • In order to achieve their end, collectivists must create…power over men wielded by other men—of a magnitude never before known…There is, in a competitive society, nobody who can exercise even a fraction of the power which a socialist planning board would possess.
  • The competitive system is the only system designed to minimize by decentralization the power exercised by man over man…an essential guaranty of individual freedom.
  • The “substitution of political for economic power” now so often demanded means necessarily a substitution of power from which there is no escape for a power which is always limited…centralized as an instrument of political power it creates a degree of dependence scarcely distinguishable from slavery.
  • It could almost be said…that wherever liberty as we understand it has been destroyed, this has almost always been done in the name of some new freedom promised to the people.
  • Collective freedom…is not the freedom of the members of society but the unlimited freedom of the planner to do with society what he pleases.
  • Contempt for intellectual liberty…can be found everywhere among intellectuals who have embraced a collectivist faith.
  • There is no other possibility than either the order governed by the impersonal discipline of the market or that directed by the will of a few individuals.
  • Individual freedom cannot be reconciled with the supremacy of one single purpose to which he whole society must be entirely and permanently subordinated.
  • The conflict between planning and freedom cannot but become more serious…as the scale increases.
  • A community of free men must be our goal.
  • The guiding principle that a policy of freedom for the individual is the only truly progressive policy remains as true today as it was in the nineteenth century.

Friedrich Hayek ability to lay out the striking contrast between freedom and coercion is a central reason for the impact The Road to Serfdom makes on thoughtful readers. And that is just as true 75 years after its publication as when he wrote it. And as we have chosen to move along the wrong road in many ways since, Hayek’s insights into freedom remain central to our ability to defend it from the many centralizing efforts that would eviscerate it.

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Holcombe on Political Capitalism

04/27/2019David Gordon

Political Capitalism: How Economic and Political Power is Made and Maintained. By Randall G. Holcombe. Cambridge University Press, 2018. X + 294 pages.

Randall Holcombe is best known as an economist for his work in public choice, but in this impressive new book, he adds a historical dimension to public choice by combining it with “elite theory.” In doing this, he arrives at a controversial thesis: a new economic system, “political capitalism,” has come to replace market capitalism. In arguing for his thesis, Holcombe shows a remarkable knowledge of the literature in economics, political science, and sociology.

By “political capitalism”, Holcombe means the same as what is often called “crony capitalism,” and as he notes, the concept is a well-established one. There is widespread agreement by people with different political views that the American economy is dominated by an alliance of elite business and political interests. David Stockman and Joseph Stiglitz are usually at odds, but not here. Stiglitz argues, “’We have a political system that gives inordinate power to those at the top, and they have used that power not only to limit the extent of redistribution but also to shape the rules of the game in their favor.’ Echoing those views, Stockman says. . .’the state bears an inherent flaw that dwarfs the imperfections purported to afflict the free market, namely that policies undertaken in the name of the public good inexorably become captured by special interests and crony capitalists who appropriate resources from society’s commons for their own private ends.’” (p.5) (Besides the many works that Holcombe cites, the outstanding book of Hunter Lewis, Crony Capitalism in America, deserves mention in this connection.)

Holcombe contends that political capitalism is a new system, distinct from market capitalism and socialism. The term, he tells us, comes from Max Weber, who used it to “describe the political and economic systems of ancient Rome.” (p.8). Holcombe applies the concept to contemporary America.  “The analysis that follows concludes that political capitalism, in which the political and economic elite control the system for their own benefit, is not market capitalism and should be analyzed as a separate economic system.” (p. ix) It is this thesis that I should like to examine.

He argues for it by extending the public choice analysis of government by James Buchanan and Gordon Tullock. These economists challenged, though they did not altogether reject, the standard neoclassical contention that the free market cannot adequately supply public goods and so needed to be supplemented by state intervention. In the standard view, economic actors motivated by self-interest will tend to “free ride,” relying on others to produce public goods. The consequence is an underproduction of them.

Buchanan and Tullock posed a devastating question that weakened the force of the standard view’s policy conclusions, though doing so without challenging the assumptions of the neoclassical model. Why assume that government policymakers are less self-interested than market actors? “Government is not omniscient. Policymakers do not have all the information necessary to allocate resources to match the theoretically optimum welfare maximum. Government is not benevolent. People in government look out for their own interests just as people do in the private sector. Their incentives need to be taken into account to understand how public policy works in the real world.” (p.14)

Buchanan and Tullock rejected theories of group exploitation, but Holcombe does not agree: “Buchanan and Tullock ‘also reject any theory or conception of the collectivity which embodies the exploitation of a ruled by a ruling class. This includes the Marxist vision, which incorporates the polity as one means through which the economically dominant group imposes its will on the downtrodden.’ The public choice approach to analyzing political decision making, as Buchanan and Tullock see it, leaves no room for the group behavior and elite theories that are the subject of this chapter[and book].” (pp.64-65)

How does Holcombe accept group exploitation theories without rejecting Buchanan and Tullock’s stress on the motivations of individual actors? The key to the mystery lies in the Coase theorem. “When transaction costs are low, people can bargain to allocate resources in a way that maximizes the value to the members of the low-transaction cost group---the people who are able to bargain. When transaction costs are high, people will not be able to bargain to allocate resources to maximize the value to them. . .The people in the low-transaction group bargain with each other to make public policy. The people in the high-transaction cost group . .. .find themselves subject to the policies designed by those in the low-transaction cost group. Those in the low-transaction cost group are the elite; those in the high-transaction cost-group are the masses.” (p.76)

This difference in transaction costs permits the continuity over time that elite theory requires. So long as the difference persists, long-lasting dominance by an elite group or class is possible. For example, incumbents in Congress, regardless of party, are often allied against challengers. Owing to the difficulty of ousting them, they can retain power for a substantial period of time. “Those who have political power conspire to keep it, and have more in common with each other than with others in their same party who do not have that power. . The more significant dimension of political competition is between those who with power versus their challengers for that power, not the competition of one party against another. This is true in political capitalism, but also true of government in general.”(p.191)

Holcombe devotes a great deal of attention to the mechanisms of rent-seeking and regulatory capture, by which elites in government join forces to exploit the masses. It is sometimes difficult to tell whether government or business interests dominate the coalition. In one maneuver, the legislature will threaten to pass laws that would adversely affect certain interests, inducing the interested parties to offer “donations” to induce the legislature to turn its attention elsewhere. “Those in government have an incentive to extract payment in exchange for legislative action, or inaction, and those who are paying have an incentive to continue paying to avoid having costs imposed on them.” (p.129)

Holcombe’s argument within its own terms is powerful, but it suffers from a limitation that the more wide-ranging approach of Murray Rothbard avoids. The public choice school says, in effect, “Politicians are not impartial public servants, aiming for the good of all. They too are self-interested actors.” Everyone’s dominant motivation is to gain wealth, and ideological considerations play a minor role. Why, for example, do incumbents want to remain in power? The primary reason as Holcombe views the matter is to extract economic rents.

Rothbard allows far more room to those dominated by ideas, though he also emphasizes people’s economic self-interest. People made the American Revolution, for example, in part because they genuinely believed in the ideals stated in the Declaration of Independence. Lenin genuinely believed in communism: he did not start the October Revolution to make himself a millionaire. It is of course true that both of these revolutions also benefited some at the expense of others.

To this contention, there is a well-known public choice response, best expressed in Gordon Tullock’s The Social Dilemma. Revolutionary action is a public good, and ideological revolutionaries will prefer to free ride on the actions of other revolutionaries, thus avoiding costs to themselves. Even if this analysis is correct, it proves less than Tullock and other exponents of public choice think it does. Tullock has applied the standard neoclassical analysis of public goods to revolutions, but, as previously mentioned, the standard model concludes that a public good will not be supplied efficiently. It does not hold that the good will not be supplied at all. If Tullock is right, perhaps we have less than the efficient quantity of ideological revolutions. But the historical record shows that we have some of them.

Given the malign effects of political capitalism, Holcombe naturally wonders what can be done to restrain it. He says that his book is concerned primarily with an analysis of the system rather than remedial action, but he does suggest that limiting the power of the state through constitutional checks and balances is desirable. Such limits hold some promise to impede a rapacious government. The Progressive movement of the late nineteenth and early twentieth centuries favored government action to limit corporate predation, but this did not work: “The Progressive ideology legitimizes the use of force for the economic benefit of some at the expense of others.” (p.230) Holcombe’s suggestions are all to the good, and he has written in greater detail with insight and erudition about this topic in From Liberty to Democracy.

There is another limit to political capitalism, and explaining it requires us to challenge Holcombe’s central thesis that political capitalism is a new economic system. From a Misesian point of view, there are no intermediate economic systems between capitalism and socialism. As Mises remarks: “With regard to the same factors of production there can only exist private control or public control. “ (Human Action, Scholar’s Edition, p.712) Measures of the sort analyzed in Holcombe’s book hamper the free market, but they do not provide an alternative way to allocate resources efficiently. If political capitalism were a “third system,” it would be faced with the calculation problem. Because economic calculation requires a free market, political capitalism is inherently parasitic on the free market and this is a barrier to the damage it can do. Given its bad results, that is small consolation.

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Holcombe: Capitalists, Not Socialists, Pose the Greatest Threat to Capitalism

In the 1940s, economist Friedrich Hayek said in his book, "The Road to Serfdom," that the road to serfdom was socialism. Economist Joseph Schumpeter, in "Capitalism, Socialism, and Democracy," feared that socialism would displace capitalism even though capitalism was a better system.

In the 21st century, self-proclaimed socialists like Sen. Bernie Sanders (I-Vt.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) are keeping the fears of Hayek and Schumpeter alive. Those fears are misplaced. The biggest threats to capitalism aren’t socialists, they are capitalists. 

While socialists float aspirational ideas for a better society, capitalists conspire with the political class to enact policies that benefit the political and economic elite at the expense of the masses.

The result is that business profitability increasingly comes from political connections rather than by satisfying the demands of consumers, undermining free markets and the capitalist system. 

This is widely recognized, if not widely understood. People talk about cronyism, corporatism, the division between the 1 percent and the 99 percent and the threats of the military-industrial complex. In my recent book, I call this phenomenon "political capitalism" and explain how it undermines the market system and threatens capitalism. 

When capitalists tout pro-business policies, they inevitably are talking about policies that use trade barriers and regulatory impediments to give themselves advantages over competitors.

Read the full article at The Hill

Watch Dr. Holcombe's talk on Political Capitalism from this year's AERC:

Political Capitalism: How Economic and Political Power is Made and Maintained | Randall Holcombe


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How Many Economists Still Get Subjective Value Wrong

03/14/2019Per Bylund

Subjective value is not objective. Sounds obvious, but the distinction is lost on most — scholars and practitioners alike.

People seem to think subjective value is simply a person's 'willingness to pay' a price. Well, it's not. Subjective value cannot be expressed in dollars and cents, because that would simply mean subjective value is an expression in terms of objective market purchasing power.

If value is subjective, however, that purchasing power too is subjectively valued, in terms of what subjective value it can provide (through the actual goods and services the money can purchase). And, in any market-like setting, willingness to give up purchasing power for a good only indicates that the person subjectively values that purchasing power (however it is appreciated by him/her) less than the value expected from the good that can be purchased.

Willingness to pay, expressed in the dollars and cents that in turn can command goods and services, only means the buyer expects to be better off from going through with the exchange. In terms of value theory, there may be no connection between the value of that which is forgone and that which is gained in return, other than them being valued differently (the former higher than the latter). 

Scholars should know better than to confuse these things, but they're obviously quite confused. 

Instead of thinking about the meaning of what they say, they adopt a practical shorthand used to get a dollar amount on a customer's valuation. This makes some sense from a practitioner's perspective, where a customer's willingness to pay for one's good is a rough estimate of what money price could potentially be charged for the good. 

It's not accurate, however, which is why entrepreneurship models suggest that entrepreneurs should make sure to charge a price lower than customer's stated willingness to pay (if it can at all be trusted). 

Also, the actual willingness to pay depends on offering the actual good along with the argument for why it would be valuable for the customer to have/buy it.

In a different time and place, and with different messaging, this 'willingness' changes both with how the good is subjectively appraised and with the other opportunities available to the customer. I might value a hamburger, but I value a hot dog more

Consequently, if there are hot dogs my willingness to pay for hamburgers is practically zero; if there are no hot dogs in sight, my willingness to pay for hamburgers may be significant. See how this works?

One's willingness to pay is not about the [subjective] value of the good itself (that is, the satisfaction experienced, or in any case expected), but is contingent on alternatives available. Practitioners who are careful can gain insights from willingness-to-pay estimations. But it is still a very blunt tool, since what actually matters is the subjective valuation of a good and the subjective valuation of alternative goods (the comparison/tradeoff). 

That scholars equate subjective valuation with objective money prices should be considered severe professional misconduct. For those who are in the business of thinking carefully about things, there is no place for conflating things. 

Or, as in this case, mistaking (interpreting, really) subjective value for being objective. This is inexcusable and should disqualify you from the academy.

Originally published on Twitter @PerBylund

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