In the United States, I have noticed increasing amounts of local municipalities instituting minimum wage laws. This is happening in many states across America, with many people supporting it in the hopes of bettering workers’ wages. Unfortunately, minimum wage is economically dysfunctional and unethical, yet so many people who lack economic or ethical knowledge are […]
1. Gains from trade: In any economic exchange, freely chosen, both parties benefit–at least in their own minds.
2. Subjective value: The value of any good or service is determined by the individual human mind.
3. Opportunity cost: Nothing is free, and the cost of anything is what you give up to get it.
4. Spontaneous order: Society emerges not from top-down intention or planning but from individuals’ actions that result in unplanned outcomes for the whole.
5. Incentives: Individuals act to maximize their own reward.
6. Comparative advantage: Cooperation between individuals creates value when a seller can produce a given item or service at a lower cost than the buyer would spend to produce it himself.
7. Knowledge problem: No one person or group knows enough to plan (and force) social outcomes, because information necessary for social order is distributed among its members and revealed only in human choice.
8. Seen and Unseen: In addition to the tangible and quantifiable effects, there are quite often invisible costs and unmet opportunities to any action or policy.
9. Rules matter: Institutions influence the decisions individuals make. For example, property rights extend from the reality of scarcity which demands that ownership must be vested in individuals and not a collective.
10. Action is purposeful: Each person makes choices with the intention of improving his or her condition.
11. Civil society: Voluntary association permits people of all backgrounds to interact peaceably, create value, cultivate personal character, and build mutual trust.
12. Entrepreneurship: Acting on an opportunity to gather underused, misused, or undiscovered resources and ideas to create value for others.
It’s been my observation that the Left dismisses the notion of spontaneous order in markets (hence, free markets are rejected), while the Right dismisses the notion of spontaneous order in biology (hence, evolution is rejected). Apparently there are those who believe the Left’s rejection of spontaneous order is more widespread than just markets.
Bryan Caplan would disabuse them of this notion.
But ultimately, I think resentment of markets has little to do with incomprehension of “spontaneous order.” Key point: As Hayek emphasizes, markets are only one form of spontaneous order. Others include language, science, fashion, manners, and even informal hiking paths. In each case, individuals pursue their own plans with no central direction, yet a tolerably well-functioning social order emerges. And leftists rarely express resentment – or even worries – about the social value of any of these. So how can spontaneous order be the crux of the issue?
My preferred story is much simpler: Leftists look at the world of business and see greedy people leading and prospering. This upsets people of almost every ideology if they dwell on it. On an emotional level, human beings want people with noble intentions in charge. Who then are leftists? They’re the sub-set of humans who feel these emotions with exceptional intensity and durability – and accept a group identity that reinforces such emotions. Why is a power-hungry politician who bullies strangers with big plans and pompous speeches more “nobly intentioned” than a greedy businessman who woos strangers with fine wares and low prices? I don’t know, but clearly I’m in the minority here.
Now go read “Person or Principle” over on Sarah Hoyt’s blog.
Whether it’s Nation of Islam Minister Louis Farrakhan leading the Million-Man March, anti-WTO (World Trade Organization) protesters, or AIDS activists, we’re frequently treated to the chant demanding “People Before Profits.” Since profit demagoguery is a deceptively appealing tool used by scoundrels everywhere, let’s demystify the concept of profits.
Let’s first get its definition out of the way. Profits represent the residual claim earned by entrepreneurs. It’s what’s left after all other costs—wages, rent, interest—have been paid. The entrepreneur is generally seen as the person who takes risks, innovates, and makes decisions. It’s important to recognize that profits are a cost of business just as are payments to labor, land, and capital. If wages, rent, and interest are not paid, labor, land, and capital will not be offered; similarly, if profit is not paid, entrepreneurs won’t be seen either.
Here’s Williams’s law: whenever the profit incentive is missing, the probability that people’s wants can be safely ignored is the greatest.
The first lesson to be taught is that when we run across a situation we don’t like – “outrageous exploitation of sick people,” for example – we should start by asking how the situation came about and why it persists. What’s actually going on here? That’s an extremely important lesson: for the dinner table, the conference room, the legislative hall, and the faculty lounge as well as the economics classroom. We all have a tendency, especially when we’re filled with indignation, to begin with the conclusions and subsequently to choose the facts that will enable us to reach our preestablished results. That does little to promote understanding; it merely hardens opinions already held. It does not lead to learning. And it fosters debate rather than discussion. Doesn’t it make far more sense to ask why, if the situation is as intolerable as it seems to be, it continues to exist? Social phenomena are not facts of nature, like mountains. They emerge from the choices individuals make in response to the situations they encounter, situations that are in turn largely created by the choices other people make. If we want to change society, we must first understand it. The first step toward understanding how markets work, and the beginning, I would say, of all social understanding, is the recognition that social phenomena are the product of particular choices in response to particular incentives. Incentives matter! To fix any social problem, we must alter the incentives. To do that, we must first discover what they are.
Economists have long understood the dynamic at work here. Marx and other socialists thought that those in charge of the planning process, and for Marx that was the whole community, could rationally determine what to produce and how best to produce it in the absence of markets, exchange, and prices. Since Mises’s famous essay in 1920, however, we have known that doing so is not possible.
Genuine market prices are necessary for people be able to make determinations of value in anything larger than a household. Without prices, there is no way to know, not just what people value but (more importantly) how to make what they value using the least valuable resources possible.
In other words, rational production decisions are impossible without market prices, and market prices can’t exist without exchange and therefore there has to be private ownership, especially of the means of production.
But what happens when those given the power to make such decisions realize they cannot achieve their perhaps well-intentioned goals? The power does not go away. More often than not, the first reaction is precisely what we’ve seen in Venezuela: crack down harder on producers for not living up to impossible demands and ration goods to punish consumers for “hoarding.” And when that doesn’t work, go to more draconian authoritarianism, and do whatever it takes to hold on to power.
After a while, these exercises of brute power have consequences. They attract those with a comparative advantage in exercising such power (and perhaps those who have a high consumption value for doing so) into positions of power. Marxism is not Stalinism, but the inability of Marxian socialism to live up to its promises creates the conditions that make Stalinism possible and likely. In other words, Stalinism is an unintended consequence of Marxian socialism.
In addition, as state control becomes more clearly ineffective, people start to work around it by establishing distorted forms of market exchange. Bribery of politicians and bureaucrats, threats to producers, cronyism, and nepotism all become the ways of getting things done. Scarce resources have to be allocated somehow, and markets are like weeds in that they will grow in the cracks left by the failures of planning.
To the outside world, corruption and poor implementation caused socialism to fail. But that gets matters completely backward: corruption and ineffective political actors are not the cause of socialism’s failure, but a result of that failure. When you make real markets illegal and when your attempts at planning inevitably fail, what you get is the bribery and corruption of black markets. Once again, these are not what Marxism intends, but they are an inevitable unintended consequence.
The good news is that humanity is nowhere near peak everything; the bad news is that we are also nowhere near peak doom.
It didn’t take Congress or the president to force these changes. It wasn’t the courts (though lawsuits are pending). We didn’t need a new law or regulation. It was the pressure brought by individual consumers and investors acting on their preferences (and self-interest) in a free market.
This is hardly the first time that companies have had to respond to consumers pressure. From both right and left, consumer boycotts, bad media, and shareholder activism have forced companies to improve workers’ rights, product safety, political bias, the treatment of women and minorities, and more. Neither conservatives nor liberals will always agree with the purpose of such campaigns, but no one can deny that they work. Abuse your customers, they won’t buy from you. Abuse your employees, they won’t work for you. Produce a lousy product, someone else will produce a better one and put you out of business. That’s the power of free-market competition. Produce a lousy product, someone else will produce a better one. That’s the power of free-market competition.
Compare this to how government responds when it fails. We are still waiting for the Veterans Administration to change its behavior or punish those responsible for its various scandals over many years. The public schools fail year after year, decade after decade, and their response is to demand more money and try to prevent parents from going elsewhere.
Also posted to my Facebook page. I’ll be curious to see how many people chime in to say it’s all wrong.
In 2011, my wife and I were expecting our first child and had private health insurance which was slowly being limited more and more by regulations from the Affordable Care Act and Patient Protection Act. It was dreadful!
Six months into the pregnancy, we received a letter explaining that due to the changes in the law, our policy would no longer cover maternity or OB-GYN services. This meant that our insurance would no longer pay for anything related to the birth of our daughter. We searched and shopped for insurance that would help cover the cost of the hospital and birth, but the more government regulations and controls were placed on the market, the more difficult it became to actually get affordable medical insurance and health care.
We spoke with our doctor about it and found that by avoiding insurance altogether and paying the doctor directly, it reduced all costs associated with pregnancy by 60%. We avoided the government-burdened insurance market and paid the doctor directly.
Note this was in 2011, half a decade before Trump got in to office and started dismantling the program.