Power & Market
Outside of the D.C. Beltway, state capitols and city halls, bureaucrats receive something less than adulation from citizens. And libertarians often lead the chorus. But some bureau employees are necessary. One libertarian who recognized this long ago was Leonard Read, in “The Worrycrats,” part of his 1972 To Free or to Freeze.
Even when government is limited to codifying the taboos, invoking a common justice, and keeping the peace, there is…an operating staff: a bureaucracy…[following] procedures.
In other words, even a nation of “laws and not men” needs some people to enforce what laws there are, even though those people will often have far worse incentives in their bureaucratic determinations than in their private relationships (why America’s founders were so keen on carefully monitoring their behavior).
However, despite the necessity for some bureaucrats to defend legitimate laws, some clearly deserve our mistrust. Read called them Worrycrats.
Worrycrats…are a special breed of totalitarian bureaucrats who spawn rapidly as society is socialized. These people concern themselves with our health, education, welfare, auto safety, drug intake, diet, and what have you. Worrycrats today outnumber any other professionals in history, so rapidly have they proliferated.
Why should we mistrust them?
The activities of these worrycrats in no way resemble a free market operation. Freedom in transactions has no part in this political procedure. Citizens are coerced to pay these professional worriers whether they want their services or not. A nongovernmental operation of similar nature would be called a racket.
I question the propriety of our being coerced to pay worrycrats to worry about us. We worry enough on our own without paying to have our worries multiplied.
What is the evidence for the plethora of bureaucrats who want us to worry more?
Observe the massive outpourings of the worrycrats—over TV, radio, and in the press—about lung cancer, heart failure, mercury, cranberries, cyclomates, seat belts, groceries, and so on. Unless one sees through all of these unsolicited oral and verbal counsels, he is going to be unnecessarily concerned…ordinary fears and worries substantially multiplied...[but] fear and worry are far deadlier menaces than all the things from which the worrycrats pretend to protect us.
What are the qualifications of worrycrats as more effective worriers for us than we are? Little more than know-it-all overconfidence, reinforced by ignoring huge differences among individuals.
Are these political saviors really concerned about your welfare and mine? Actually, they do not know that you or I exist…What…[do] they know about what is good or bad for me…What is their competence...they are not experts when it comes to your welfare or mine.
Suppose that these worrycrats are the world’s most advanced physicians and scientists. Would they know enough of what is injurious or helpful to you or me to justify forcing this information upon us or frightening us about it?
Individuals vary widely…there is no average person!
I care not who sits behind the worrycrat desk…Prescribing for and presiding over 200 million distinctive, unique individuals is no more within man’s competence than… directing the Universe. Contrary to socialist doctrine, we are discrete beings—not a mass, a collective.
In fact, those worrying on our behalf may actually be undermining our health and well-being.
[There are] many illustrations of how death is hastened through fears, anxieties, rage, worries…The outpourings of the worrycrats tend to multiply our stresses, anxieties, worries…literally scaring us to death.
That does not mean there is not a role for government with regard to our health, but the role is essentially the same, rather than multiplied compared to other areas of the economy.
Ideally, there is a role for government with respect to health, education, welfare. That role is to inhibit misrepresentation, fraud, violence, predation, whether by doctors…or others. No false labels! No coercive impositions on anyone!...all of us should be prohibited from injuring others. Actions that harm others—not what one does to self—define the limits of the social problem and of governmental scope.
Americans are now confronted with an even vaster crazy-quilt of federal executive agencies, mandates, regulations, czars, etc., than when Read wrote (just under 50 years ago). Those bureaucracies now house phalanxes of worrycrats who inhibit choices individuals and groups would take in search of their own growth, fulfillment and well-being as they saw it, by infringing our right to choose how to live our lives, so long as we do not violate others’ equal rights.
Much that worrycrats do interferes with individual choices and mutual agreements with regard to risk. They try to scare us into “voluntary” compliance with what they decide is good for all of us, despite the huge variance in preferences, circumstances, health histories, etc., among us. Failing that, they move to forcibly override what we would choose because while they may not know us at all, supposedly they still “know better.”
It is not hard to see how such do-gooder regulations harms our economic health. What if mining, logging, cab driving, etc., were hugely restricted because they are “too risky,” even though people chose to take those risks voluntarily. Similarly, aren’t police and fire personnel, health care providers, etc., exposed to elevated risks? Should we ban those jobs? Asking the questions provides the answers. Even though there are vast differences in risks across many professions, that does not justify over-riding the choices adults make to bear those risks.
We are also faced with risk-justified restrictions and impositions that can actually impose greater risks in other areas. A good example is traffic-calming policies that may well increase heart attack deaths more than they decrease traffic deaths, by causing congestion that slows emergency vehicle response times. But there are many more.
Those also include many “green” policies that increase other forms of pollution and environmental hazards, such as wind farms (e.g., disposing of blades or the massive carbon emissions from the cement required) or battery backup systems, electric vehicle mandates, etc. (e.g., with cobalt and rare earth metals), or even kill oil pipeline projects, moving oil transportation into trucks with far greater pollution and risk of environmental harms. FDA regulations that unduly delay life-saving drugs in the name of safety fall in the same category. Similarly, efforts that force up energy costs reduce economic output and incomes, reducing the resources available to improve our health.
Leonard Read described worrycrats as practicing chicanery. And it is striking how much the scope of that chicanery has expanded since he wrote. But many people have started to see that as a result of the multiple forms of malfeasance COVID provided cover for, including a notable increase in more direct coercion and more violations of individual rights (e.g., mask mandates and the CDC’s unconstitutional ban on evictions). And Read ends his article with a good reminder for those thinking of such issues today:
You know yourself better than anyone else does. Better that you turn yourself toward what you think is your advantage than be turned by a worrycrat toward what he thinks is your advantage. You at least know something, whereas he knows nothing of you as an individual.
One of the Federal Reserve’s “temporary emergency lending facilities” is being wound down! As announced on Wednesday, all assets purchased under the Secondary Market Corporate Credit Facility (SMCCF) are expected to be sold. The nearly $14 billion facility holds approximately $8.5 billion corporate bonds, plus various bond Exchange Traded Funds (ETFs) valued at approximately $5.2 billion. Bond ETFs are essentially bonds traded on the stock exchange. As the name of the facility implies, both asset purchases occurred on the secondary market.
This begs the question: Why did the Fed make bond purchases on the secondary market?
The primary market for bonds is one where a corporation issues a debt to investors in exchange for money, similar to an Initial Public Offering (IPO) for stocks. Whereas the secondary market is where bonds are traded between investors with hopes of earning a profit from investment activities, no different than trading stocks on the NASDAQ after an IPO.
Contrast the standard use of the secondary market with what the Fed claims was the purpose for buying these bonds:
The SMCCF proved vital in restoring market functioning last year, supporting the availability of credit for large employers, and bolstering employment through the COVID-19 pandemic.
This restoration of proper “market function” has yet to be examined, while providing credit to large employers and job creation doesn’t quite add up, as the most recent Report to Congress shows. As of May 10, the SMCCF Transaction-specific Disclosures (XLSX) reveals the Fed held or is currently holding bonds of just over 500 companies: mainly large corporations, like Citadel LP, the privately held hedge fund who bailed out Melvin Capital at the start of the GameStop short squeeze, and some of the big automakers such as Honda, Hyundai and Toyota.
Despite the investment choices of the Fed, considering these were all purchased in the secondary market means the money from the Fed did not go to the company whose bonds it was purchasing. Rather, the investor who previously held the bonds in the market were the recipient of the Fed’s payment.
How a central bank trading in the bond market, the payment to investors, or the trading gains or losses translates into supporting credit to large employers, and in the Fed’s own words “bolstering employment” seems strange. One might say the Fed’s intervention and newly created money influenced investor behavior, rates, prices and the bond market itself; but the effect of $14 billion in bond purchases in the $46 trillion US fixed-income market cannot be measured. Since the Fed cannot measure or even clearly identify the effect of its intervention, it becomes impossible to say whether the intervention was a successful endeavor.
With the Fed commencing sales on June 7 and the expectation of completing by the end of this year, it will be interesting to see whether the Fed makes profitable trades or finds ways to lose money. Should trading loses ensue, the fine print in Note 3 on the May 10 Report to Congress explains who will cover the loss:
equity investment from the Department of the Treasury and related reinvestment earnings of $13,897,250,997…
If there is any consolation, understand, it could have been much worse. The SMCCF combined with the Primary Market Corporate Credit Facility (PMCCF) had authorization of up to $750 billion to spend. Comparatively, $14 billion on bonds and another $14 billion of an equity investment from the Treasury is merely a “small” anti-capitalist infringement to benefit a handful of wealthy individuals at society’s expense, a little price we pay to have a central bank.
The Federal Reserve Bank (the Fed) and the Biden administration are systematically undermining the stability of the American economy with a variety of unwise and destructive policies. The Fed and the administration defend these policies by denying obvious economic truths, which include their own inflation data.
Treasury Secretary Janet Yellen asserts that inflation is transitory and shortages are temporary. More than 300 American manufacturers have asked the Biden administration to end disruptive tariffs to ease shortages and reduce costs.
Galvanized steel has doubled in price and is only sold on allocation, resulting in severe shortages. Steel in the EU is 40 percent lower in cost, which provides a huge advantage to our EU competitors. The HVAC industry is experiencing the worst inflation since the mid-1970s. Housing is experiencing shortages and inflation.
Yellen also presses Congress to spend more money to aid the economy. She is likely detached from reality, as the Biden administration policies include massive spending up to a $6 trillion budget for fiscal year 2022, which expands deficits to frightening levels. Modern Monetary Theory, which promotes massive government spending and borrowing, has infected the brains of the Biden administration.
We have been justly proud of our energy independence, but now gas prices have increased 50 percent in just a few months. The Biden administration cancelled the Keystone Pipeline and new fracking on federal lands with the intent of ending the production of fossil fuels. It is clear that green energy is inadequate, but President Biden has made climate change his administration’s most important priority. These policies will not help the climate but will cause lower-income citizens to suffer with high energy, food, and housing costs.
Milton Friedman said many years ago that inflation is “too much money chasing after too few goods.” This assertion has been challenged in recent years, but today’s crises provide plenty of evidence for it: witness the massive inflation of the U.S. stock markets, housing, and most all capital goods. Consumer product inflation has been tame, but now the federal government is wiring money to consumers and states while expanding the federal government. This is why we’re seeing shortages, high demands, and inflation.
Jerome Powell is determined to be the worst Fed chair since Arthur F. Burns (1970–78), who created massive inflation with his policies and arrogance. Burns denied hard, factual data, and now Powell is following in his footsteps by doing the following:
- Powell’s Fed initially contracted the Fed balance sheet but reversed course and began to buy government and other securities at the rate of $150 billion per month. The balance sheet has expanded from $4 to $7.4 trillion. The impact of these purchases is to destroy market pricing of interest rates.
- Short-term interest rates are near zero, which denies savers any return and forces speculative investments, undermining orderly, rational markets.
- The worst Fed policy is their promotion of 2 percent inflation, which undermines the buying power of the lowest-income workers. This policy is cruel and stupid. Once inflation begins, it’s difficult to arrest. Paul Volcker tamed inflation in the ’80s, but very high interest rates crushed economic growth.
The following solutions will be difficult, but necessary, to achieve stable prices and economic growth:
- Immediately eliminate tariffs on steel, electronics, and lumber. Unilateral free trade is the best solution for low prices and high quality.
- Stop Congress from passing any new trillion-dollar spending bills, using borrowed money.
- End the obsession and false god of man-made climate change, and let the market create energy efficiencies.
- End deficit spending with the fiscal year 2022 budget, which will reduce the footprint of the federal government.
- Make the Fed discontinue purchasing bonds, and let the market determine short- and long-term interest rates.
Policymakers are headed to an economic cliff, which will lead to uncontrolled inflation and a recession. The U.S. dollar could lose its reserve status if the market loses confidence in it. If this happens, we’ll learn the hard way: the U.S. will have a lower standard of living, and the federal largesse will cease to exist.
Originally published at the American Spectator. Republished with permission of the author.
April’s 4.2 percent past year increase in the Consumer Price Index is not likely to dissuade the Federal Reserve from continuing its policy of near-zero interest rates. Fed Chairman Jerome Powell believes the rising prices are just a temporary phenomenon caused by the ending of lockdowns releasing pent-up consumer demand.
Powell may be right that the ending of lockdowns would inevitably be accompanied by a rise in prices. However, this is just the latest reason the Fed has given for putting off increasing interest rates. Powell does not want to admit that the real reason the Fed will continue to keep rates low is that increasing rates will cause the federal government's interest payments to rise to unsustainable levels.
One way the Fed increases the money supply — and thus lowers interest rates — is by purchasing US Treasury securities. These purchases increase demand for US government debt, keeping government’s borrowing costs low. An expansionary monetary policy thus enables increased federal spending and deficits. Since the lockdowns, the Fed has worked overtime to monetize federal debt, doubling its holdings of Treasury securities.
A Truth in Accounting report from April concluded the real federal debt is 123 trillion dollars — over four times larger than the 28 trillion dollars “official” debt. The higher debt calculation includes the federal government’s unfunded liabilities. The biggest unfunded liabilities are the 55 trillion dollars in promised but unfunded Medicare benefits and the 41 trillion dollars in promised but unfunded Social Security benefits.
Congress could transition away from entitlement and welfare programs without harming current or soon-to-be beneficiaries by cutting spending on militarism and corporate welfare. Part of the savings from these cuts could be used to pay down the debt, and part could be used to provide payments for current and soon-to-be beneficiaries of government programs while we transition to a free market.
Unfortunately, there is not much appetite in Congress for spending cuts. The main Democratic criticisms of President Biden’s 1.52 trillion dollars budget, which increases spending by 8.4 percent, are that Biden is not proposing bigger increases in spending and debt, or in taxes on “the rich.” Biden’s budget increases are in addition to the trillions in other spending Biden is pursuing, including related to Covid, infrastructure, and his “American Families Plan.”
Republicans are making obligatory attacks on Biden’s spending, while also attacking Biden for increasing military spending to “only” 753 billion dollars. Republican complaints about Biden's big spending ring hollow given their support for Presidents Donald Trump and George W. Bush’s spending increases and Republicans' proposals to spend billions on infrastructure.
Some conservatives have even embraced the madness of Modern Monetary Theory. These conservatives are urging people to stop worrying about spending and debt and instead figure out how to use Fed-financed government spending to advance conservative ends.
The refusal of Congress to cut spending means the Fed will keep increasing its balance sheet in an effort to monetize skyrocketing debt. Eventually, the increasing debt and inflation will lead to a major economic meltdown. The meltdown will likely include a rejection of the dollar’s world reserve currency status.
The only way to avoid the crash is to spread the truth among enough people to force Congress to reverse course. Early steps in reversing course are blocking Biden’s big spending plans and passing Audit the Fed so the American people can finally know the truth about the Federal Reserve’s actions.
Despite President Biden’s criticism of virtually every aspect of the U.S. establishment he has long been a part of, and whose policies he frequently played a principal part in authoring, as well as his stated intention of enacting sweeping reforms during his presidency, one part of the U.S. establishment is clearly safe from any such revisitation or revision: the military industrial complex.
Even with the country nearing 28 trillion dollars in debt, the administration has not seen fit to reevaluate the Pentagon’s budget, though by its own conservative reporting the Pentagon spends a staggering 1.3 million dollars per hour. In fact, he wants to increase its budget still further.
Biden’s choice for Secretary of Defense, Lloyd Austin, is equally telling of his commitment to the continued preservation of the fiscal-military state. A decorated Army Commander, Austin left the service in 2016 to take a job on the board of Raytheon, a long-standing pillar of the military industrial complex. It is unsurprising, then, that in the hundred days since his tenure began Austin has expressed his commitment to the continued projection of U.S. force abroad, in the South China Sea, Middle East, and Eastern Europe.
In more classic, Orwellian doublespeak Biden’s insistence on democracy promotion at home and in Myanmar has been coupled with simultaneous recommitment to the totalitarian Saudi regime – as well as to the continued tolerance of equally undemocratic regimes around the world in order to preserve U.S. basing rights in places like Egypt, Bahrain, the UAB, Burundi, et cetera. Depending on the definition one uses to describe a “base,” the U.S. maintains approximately 800 foreign military bases according to its count, though this number can be stretched to over 1,000 if smaller communications, refueling, special operations command posts, or other such “lily-pad” installations are included. Apart from the gross violations of human rights these regimes regularly precipitate, simply maintaining these bases costs, again according to its own internal estimates, approximately 25 billion dollars per year. This to say nothing of the fact that the “forward-presence” of U.S. bases abroad has long served as a focal source of anti-American sentiment, and likely makes us less safe – not more.
Astounding though they are, these are not even the heights of the gross inefficiency of U.S. military spending or impoverished strategic thinking. Apart from systematically overpaying for its procurement of basic items, first exposed in the 1980s by the Packard Commission, as Andrei Martyanov has detailed in his recent detailed survey, the problem of inefficient expenditures extends even to its most important technologies. To take just one example, with a price tag of over 14 billion dollars apiece, a single one of the U.S. Navy’s new Columbia-class submarines costs more than the entire fleet of new Yasen-class Russian submarines, whose capabilities are in the final analysis of stealth and destructive power virtually identical – and this is to make no mention of the vaunted Lockheed Martin F-35 fighter program, one of the greatest boondoggles in corporatist history, with a projected cost now totaling over 2 trillion dollars and operating at a cost of nearly 40k an hour.
Finally, in terms of hypocrisy, with his administration’s insistence on intruding into the lives of U.S. citizens and business owners with Green New Deal-inspired regulations, the U.S. military remains the world’s single largest polluter.
So just so we’re all on the same page: we have no money and need to raise taxes; democracy is very important; and U.S. citizens and business owners need to work a lot harder to save the planet.
Back in the wild west days of the housing boom, say 2004-2005, there was a mortgage loan officer who used to pitch an idea to us he called wealthbuilder. He would trot out a spreadsheet and plug in a person’s mortgage amount, and assume a variable rate loan with the low teaser rates that were being marketed at the time.
He then would subtract that minimum payment by the then going rate for a conventional 30-year fully amortizing loan payment. What to do with the monthly savings? Invest it in the stock market that was then roaring. The mortgage man would then assume that stocks appreciate 10 percent a year. At the end of the spreadsheet, voilà, you would have built lots of wealth.
Don’t worry about the debt, he’d claim, pay as little toward principle as possible, because, first of all, houses never fall in value and the stock market always goes up. In hindsight, that sounds crazy, but many financial pros were pitching the same idea. Chapter 5 of my book Walk Away is entitled, “Building Wealth by Never Paying Off Your Mortgage” where I mention numerous books and strategies published during that boom urging home owners to pay as little as possible towards their homes.
For instance, “The authors of Untapped Riches: Never Pay Off Your Mortgage— and Other Surprising Secrets for Building Wealth, Susan and Anthony Cutaia with Robert Slater claimed in their book that the fixed rate mortgage was the worst mortgage in history.”
“KEEP YOUR MONEY OUT OF THE BANK’S HANDS,” was the wealth-building strategy #3 from the husband and wife team. “NEVER PAY OFF YOUR MORTGAGE—NEVER!”
From the Journal of Financial Planning, September 2004, came this nugget, “The popular press, following conventional wisdom, frequently advises that eliminating mortgage debt is a desirable goal. We show that this advice is often wrong . . . mortgage debt is valuable to many individuals.”
Ric Edelman, listed as one of the top 100 financial advisors in Barron’s from 2006-2010 advised “Never own your home outright. Instead, get a big 30-year mortgage, and never pay it off (assuming you can afford to make the payments on the mortgage).”
Again, the assumption was home values never fall and stock values always rise.
What’s the use of this walk down bad memory lane? MicroStrategy’s Michael Saylor appeared with Dr. Saifedean Ammous on The Bitcoin Standard Podcast recently and essentially made the same case for Bitcoin hodlrs.
Speaking to corporate financial officers, Saylor said eventually no one will ever sell their Bitcoins, because it would be irrational to do so. Bitcoin will continue to appreciate while any U.S. dollar debt incurred will be depreciated away by the Fed’s money printing.
Saylor sees Bitcoin becoming the equivalent of Apple stock, the S & P 500, or 30-year treasury bonds, all stores of wealth. If cash is needed, borrow against your Bitcoin. He offered no instruction on where to find such a loan. But, it’s coming, he says.
Important to his thesis is that Bitcoin will double in value every couple years and that the top-shelf cryptocurrency brand will never see $10,000, $20,000, $30,000 or even $40,000 ever again. Meanwhile, the U.S. dollar is headed for the trash bin.
In one of Saylor’s “Bitcoin Corporate Strategy” podcasts he illustrates his point with a story about an Argentinian farmer converting all assets and cash flows to U.S. dollars, while borrowing in pesos. After all, the peso, in his example, goes from 1 to 1 with the dollar to 80 to 1.
It all sounds good on paper.
But, sometimes, reality bites.
Ex-Federal Reserve Chairman and current Treasury Secretary Janet Yellen is no fan, saying, “To the extent it is used I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.”
Be that as it may, traders Moritz Seibert and Jason Shapiro agree “clearly, the risk of not owning Bitcoin is higher and greater than the risk of owning Bitcoin.”
They said own, not leverage.
This month marks the anniversary of the pandemic induced stock market crash, inducing government launched emergency credit facilities, aided by the Fed who announced it would purchase:
Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy...
A year later, the US Debt has surpassed $28 trillion. US 10-Year Treasuries topped 1.6%, mirroring pre-COVID levels. Regardless of how the pandemic is resolved, the Fed will always intervene in our lives. There will always be economic problems which need addressing. Regarding what’s needed to support “smooth market function,” the initial $700 billion of securities has tapered to $120 billion a month… for now.
This brings us to the latest problem: rising interest rates.
Bond investors are getting worried about the potential for inflation.
This time the rise in yields is coming from economic growth, stimulus, and infrastructure. All of that is good for stocks.
Of course, the narrative is problematic. If yields rise due to price inflation, economic growth, and government stimulus (supposedly desirable), you’d think there shouldn’t be significant risk to the economy nor stock market when yields increase.
Luckily, the concern over rising rates can be explained: debt. Ironic, since we use a debt-based currency with the widespread belief spending leads to prosperity which government stimulates through borrowing. Somehow championed by those who claim debt doesn’t matter or deficits are a myth, we can’t deny this is where many of our problems stem.
When rates rise, interest costs increase. Imagine a world where the 10-year treasury is at, say, 4%. The interest expense on the $28 trillion would surpass $1 trillion a year. Mortgage rates would no longer be considered “cheap” and corporate bonds would be much higher. There are additional effects, such as making share buybacks not as attractive as they have been for over decade, but there are many areas of the economy that are affected.
If rising interest rates scare the market and the public now, what happens in the future when US Debt, household, and corporate debt are at greater highs and when asset valuations are even richer than today?
The US Debt will pass $30 trillion this year with no sign of slowing. The Fed would face difficulty if it wanted to raise rates then, or face backlash by not taking action when long dated bonds rise again.
Unfortunately, the Fed is stuck in limbo of sorts; letting rates rise would be economic destruction. But to keep rates low forever leads to a similar fate. The difference being, if rates are raised, the Fed will look like the villain. If they try to suppress rates and fail, they’ll be hailed as fallen heroes, whose earnest efforts to control the markets backfired due to uncontrollable forces, (e.g., blame capitalism).
Last March, Neel Kashkari, President of the Minneapolis Fed, gave a hint on 60 Minutes:
And there's an infinite amount of cash at the Federal Reserve.
His quote was an answer to the question of whether or not our bank deposits are safe. Yet, he captures the ethos at the Fed. Whether they revisit ideas of yield curve control or use alternative approaches, the only way rates stay low for perpetuity is via perpetual money creation.
The Fed has long since committed to buying any bond necessary in times of crisis. But the crisis will never end. Society’s debt level will never shrink and its growth will accelerate year after year. The only way to ensure rates don’t stay too high for too long is to utilize its infinite cash position, seeking to solve the problem with the same method used to create it in the first place.
The Austrian school and perspectives on economic theory apply very well to businesses in general, as seen in the thoughts of Clay Miller and articles by Hunter Hastings and Peter Klein, especially when it comes to developing advantages for responsive businesses in a dynamic environment. To expand on this, it would be good to look at how such perspectives can concretely be applied in certain industries, and for this article, we shall look at some specific applications of Austrian perspectives to tourism and hospitality.
The Value of Time
When on vacation, time is of the essence! Anyone who has been on an enjoyable holiday knows the importance of spending limited leisure time wisely. It is normal to expect that a tourist would want to maximize the time they have by any means necessary. Likewise, on the side of the businesses catering to the desires of tourists, coordinating the schedules of their clients can lead to better practices and more efficient methods of generating profit.
Concretely, knowing the expected times when guests arrive at, stay in, and leave a hotel, for instance, allows one to make highly effective decisions. A simple example would be that if a hotelier knows —because they asked— that a guest will be out of their room at 3:00 P.M. and won’t be back until late in the evening, then that is an opportune time window to have the room cleaned. This shows how knowledge of the way a particular client spends their time would lead to a better allocation of services.
The technical term for doing this on a grand scale in the hospitality industry is called “revenue management”. A more complex example of revenue management would be in anticipating how many guests will arrive in the hotel. Once the hotelier knows how many bookings are made, as well as the personal preferences of each booking, the rooms can be allocated to them according to their needs, ideally also in such a way that the rooms are filled so as to minimize the time and effort made to prepare these rooms according to specific preferences. After these rooms have been assigned, the remaining rooms can be sold to maximize the inventory. In doing so, profit is generated while loss is minimized, all through coordinating the times when these assets are used.
Running a hotel is a complex mechanism, not unlike the gears of a clock. If everything runs perfectly well against the hands of time, coordinated so that as guests arrive, rooms are cleaned and filled, technical issues are resolved, quality services are provided, and so on, the coming together of the system can generate maximum efficiency and profit. The opposite is a nightmare: if time preferences of the guests are unknown, the desired rooms are not available in a coordinated manner, technical issues don’t get resolved promptly, and services don’t know when and how to cater to clients, then time is effectively lost, and value is lost in the process.
The Value of Subjectivity
On the other hand, customer feedback in the world of hospitality is of vital importance. How else can one provide the best possible custom service to clients if we don’t ask them about their specific preferences? Of course, ultimately, each client is different, and has different reasons for, say, booking at a hotel: attending a business conference, having a romantic getaway, visiting friends and family, merely passing through as a stopover, and so on. That said, regardless of whether said hotel is in Vienna’s Altstadt or in Manila’s Intramuros, the principle remains the same, and understanding what each guest values allows for both customization and optimization.
Knowing the specific wishes of guests can also make things easier on the level of decisions made and in strategically allocating resources. Suppose that our theoretical guest mentioned earlier —the one whom the hotelier knows will be out of their hotel room at 3:00 P.M. and won’t be back until late in the evening— doesn’t want their room cleaned at all. Knowing this, a judicious hotelier would do well to ensure that housekeeping doesn’t clean the room, for not only is it against the desires of the guest, it is also a rather pointless opportunity cost: the resources and time of the housekeeping staff could be used to clean another room of another guest who wants it instead.
Being aware of customer preferences goes hand-in-hand with understanding how they value their own time. It allows the hotelier more opportunity to sell them services they would appreciate, as well as plan around specific requests, such as having a late check-out, which would affect how that room is prepared for the next guest. It is the burden of businesses to be able to provide and cater to these requests, but that doesn’t have to mean that the granting of these specific wants would be mutually exclusive of equally bespoke considerations towards other guests as well.
Lastly, the subjective experiences of guests are the ultimate standards by which their idea of a great vacation or excellent service was given or not. It is, as Hunter Hastings writes, about continuous value perception on the end of the customer, and as Mark Packard’s model shows us, empathy is a necessary skill to predict value on the end of the service provider.
Because everyone has a different notion of what a fantastic experience is, and what a worthwhile way to spend time entails, a hotelier must be willing to provide, to the best of their ability, a wide variety of potential services and a great degree of flexibility. This is so that every individual served in the tourism industry would feel that their own personal desires are being fulfilled for them, developing loyalty and patronage, which is the hallmark of any great service provider, regardless of the nature of their business.
Listen to the Audio Mises Wire version of this article.
Both the Senate hearings on “Big Tech” companies and the Department of Justice (DOJ) lawsuit against Google amplify popular misunderstandings of what drives competition in the market for information. In any market, competition is a means to consumer satisfaction, the ultimate governor of which firms prevail, and which firms fail.
Tech giants such as Google, Facebook, Amazon, and Twitter have found themselves under the microscope of the federal government and the media for supposed “anticompetitive practices.” The Senate and the DOJ have leveled accusations ranging from monopoly to censorship, alleging these firms’ practices are detrimental to consumers. However, the dominance of these firms is almost entirely driven by consumers, making them exemplary competitors in a largely unrestricted market.
The profits of the Big Tech firms are primarily generated by advertisers, who pay tech platforms for access to their users. Like any other firm in the market, these firms would not make profits or gain market share if willing customers did not derive value from their products. In the case of Big Tech, more users create more traffic for advertisers, which translates into increased revenue.
The size of a firm is determined by how effectively they satisfy consumers relative to available alternatives. The Big Tech firms are worth a combined $5 trillion and have expanded products and services significantly over the last several years. The pandemic has also facilitated strong growth in tech due to consumers’ transition to online platforms.
These practices are out of sync with the rhetoric of regulators, who have been flirting with the idea of breaking up large tech firms. For instance, the DOJ’s lawsuit accuses Google of stifling competition and harming consumers by acting as “gatekeepers of the internet.” They are particularly focused on Google’s exclusive agreement with Apple, which requires Google to be installed as the default search engine on Apple devices. According to the DOJ, this (among other practices) reduces “the ability of innovative new companies to develop, compete, and discipline Google’s behavior.”
Regulators fail to realize that Google’s practices are competitive since they are disciplined by consumer preference. Contrary to the DOJ’s claims, Google’s search market dominance is indicative of their ability to innovate. Google has used their profits to compete with other tech companies in a multitude of markets, especially through widely used products such as Android, Gmail, and YouTube.
Google’s exclusivity agreement with Apple also does not live up to allegations of consumer harm. While the deal requires the preinstallation of Google on Apple devices, it is a great deal for iPhone users. The contract essentially subsidizes Apple in exchange for default browser rights, which lowers Apple’s costs of production and, presumably, their prices. Another important benefit for iPhone users is that they can still use an alternative search engine by downloading another browser free of charge.
Those who charge the Big Tech firms with monopoly claim to be concerned about maintaining a competitive market. But what good is competition if the best firms cannot distance themselves from the pack? Tech giants such as Google and Facebook have gained leads over their competitors by developing new products at little to no cost for consumers. The telltale sign of a monopolist is just the opposite: restricting output and raising prices.
This is not to say that all the consequences of market dominance are desirable. The effort by Big Tech firms to mitigate “misinformation” through censorship threatens to suppress dissenting opinion on the highest-traffic platforms. However, the availability of alternatives encourages competition by providing unsatisfied users the opportunity to act on their preferences.
CNN Business reports that Exxon, which was the world’s largest company in 2013, is today being kicked out of the Dow. As CNN Business puts it, “Exxon is now a shell of its former self.” The company is losing money and its “market value has crumbled by a staggering $267 billion from the peak.”
What? That’s not possible! Haven’t we always been taught that big corporations just keep getting bigger and bigger? Don’t Keynesian economics professors all across America teach that oil companies are “oligopolies,” which enables them to raise their prices whenever they want and to make as much money as they want? Haven’t statists told us for years that it’s necessary for the federal government to break up these “big companies” because they have so much power over American consumers?
Well, if all that is true, then what’s the deal with Exxon? It was a big company. Why didn’t it keep growing?
What is happening to Exxon is just one more demonstration, among many, that no matter how big a company is, it can begin losing market share to competitors and even be driven out of business.
In a genuine free market, the consumer is sovereign. Through his buying decisions, the consumer decides which businesses are going to stay in existence and which ones are going to go out business. Those businesses that succeed in pleasing consumers with goods and services that consumers find attractive are the ones that are going to do well.
There is another factor involved here—the possibility of mismanagement or the making of bad or erroneous management decisions. That is one of the reasons for Exxon’s fall, given its heavy investment in natural gas more than ten years ago just before the price of natural gas collapsed.
Exxon’s fall goes to show that antitrust laws are ridiculous and destructive. They have no place in a free society. Bigness in a free-market system simply means that a company has pleased customers and made good management decisions. If a big company fails to please customers or makes one bad management or investment decision, it goes down.
Compare Exxon with a genuine monopoly, one that most leftists and Keynesian economics professors love—the Postal Service. It holds a privileged position in American society, because federal law protects it from competition in the delivery of first-class mail. If a private company tries to compete, a federal judge immediately orders it to shut down.
Imagine if Exxon had asked the federal government for a grant of monopoly. Why, statists would be screaming to the rafters—and rightly so. That is the type of “bigness” that is bad—because it is bigness based on government-granted monopoly privilege rather than on satisfying consumers and making sound management and investment decisions.
America should rid itself of monopolies, starting with the Postal Service, and restore a free market system to our land, one where company bigness reflects success in satisfying consumers and running a sound business.