Tag: markets

The Justice-Morality Matrix

There’s a lot of discussion about whether particular policies or outcomes are just or moral.  Often the terms are used synonymously or never really defined or distinguished.

I have written about what I see as crucial and fundamental differences between justice and morality in this post.  I claim that justice is public and subjective – an emergent phenomena to deal with conflict and coordinate peace – while morality is private and objective – and internal compass to deal with self-regulation and coordinate peace of mind.

“Justice is about living with other people, while morality is about living with yourself.  Justice is about right relation to others as measured against the mores of society, while morality is about right relation to right itself, as measured against your own beliefs”

To further illustrate what I mean by this, here’s a matrix showing four actions and where they might stand in relation to justice and morality:

Justice-Morality Matrix (1)

Just-Moral is pretty easy to accept and needs little clarification.  No parties are harmed and the actor feels no guilt.  We’re assuming this action was not in violation to any belief or commitment to abstain from boat-buying on the part of the buyer.

Just-Immoral depends more on your own beliefs about right and wrong, but regardless of belief systems or acceptance/rejection of any divine or natural morality, all humans have a sense of guilt.  The just-immoral quadrant is for those actions that cause no one else any harm, but harm the actor by giving him/her a sense of guilt and wrongdoing, regardless of its origin.  The point is that the act feels wrong to the actor, and they in fact believe it to be wrong.

Moral-Unjust is when an act clearly causes harm to someone even though the actor feels complete confidence it was the right thing to do.  Justice, in service to maintaining cooperation and peace, might demand recompense, but no guilty feelings are associated with the action.  Third parties observing may be inspired by the morality of the action, but to conflate that with justice is unfair to the harmed party.

Immoral-Unjust is pretty easy as well.  A party was wronged and the actor violated conscience or belief in right/wrong.

These examples may be flawed, but I think the fact that justice and morality are not the same thing is incredibly important.  When they become conflated, and far worse when either become conflated with government edict, moral atrocities and grave injustices unfold on small and large scales.

The key for both is an open, spontaneous, evolving system of give and take – a market for norms and institutions – rather than a tightly defined universal and centralized enforcement.  Common law and basic manners are good examples of this, whereas criminal law and legislation are the opposite.

Every Industry Gets Worse When Government Gets Involved

This is easily provable with Public Choice Theory, and consistently proven in practice.

Contrary to the absurdly naive belief that monopolizing an industry will produce “efficiencies”, it has the opposite effect.  All the wrong things are incentivized and no one has any clear signal of what creates value. (See “Socialist Calculation Problem“)

Antony Davies shared this depressing graph with me last week.  If you’ve been to a health care provider in the last few years, you’ve felt the pain this causes in the realm of customer experience.

 

Non-Physicians in Health Care

Intellectual Property and Incentives

The standard theory behind support for creating a legal monopoly for certain ideas, processes, and inventions is that absent such promise of monopoly there would be far less innovation.

It has a surface level logic to it.  People respond to incentives.  Legal monopoly means more money for the one who has it.  People tend to like the money incentive.  Therefore, more people will innovate because they have the incentive to capture greater rewards by securing a monopoly on the production or sale of their invention.

The weird thing is it doesn’t play out like this in the real world.  Something is missing.

Inventions typically spring from technicians and masters at a craft.  These are the types who are driven by a passion for what they do.  They want to solve problems, discover things, build things, and create things.  So they do.  If they seek a legal monopoly on their invention this happens after the fact.  It is hard to imagine many innovators saying, “Oh wow!  Think of possibility of solving this chemistry problem and discovering an entirely new way to do X!  Wait…get a lawyer in the lab before I go any further.  I refuse to make any discoveries without proof that I’ll be protected from competition once I do.”

And innovation doesn’t look like that.  You can see this by observing areas without the ability to get legal monopolies on their inventions.  Fashion, food, and football are a few of my favorites.  You can copy, borrow, and imitate fashion designs, recipes, and defensive schemes with abandon.  Many people do.  Yet each of these fields is as dynamic as any industry, constantly evolving and introducing new things.  Apparently the innovative offensive coordinator, cook, and designer don’t require the promise of monopoly to entice them to innovate.

People do respond to incentives.  This is a fact of life and one that need not be overturned to overturn the belief that IP laws are required for innovation.  Any good economist will tell you that incentives are many, and value is subjective.  The innovators are certainly responsive to money incentives, but 1) legal monopoly is not the only or best way to earn money for inventions and, 2) money isn’t the only incentive driving invention.

As for number one, consider how many people are typically working on a similar innovation simultaneously.  With the current IP regime, only one can get the monopoly.  If we want to take incentives seriously, what kind of incentive does this create for all the others?  Furthermore, the one most likely to get the monopoly is the one with all the lawyers and accountants and resources and willingness to take others to court, not the one with the greatest contribution to the discovery.  This would seem to drive upstart innovators away from the task for fear of being sued by the big guys as much or more than it would drive them to innovate for the possible promise of securing a patent.

As for number two, while the promise of monopoly may be the dominant incentive for lawyers and R&D departments, it’s not the dominant incentive for inventors.  They innovate first, driven by a passion for the task, the desire to solve a problem, create their dream, help a colleague, or improve their own daily life with some small innovation.  Yes, they want and seek money for the invention once successful, but the absence of a promise of monopoly does not stop them from creating.

Understanding incentives is crucial to really understanding how the world works and how to change it.  But an elementary look at incentives that examines only dollars and cents and only their intended, not actual, beneficiaries will not get you very far.

For more on the problems with intellectual property laws, check out “Against Intellectual Monopoly“.  It’s excellent.

The Two Great Secrets of Higher Education

  1. Tuition is paid for one reason: to buy a signal.
  2. That signal is not worth the investment compared to what you can create elsewhere.

These two great secrets are known to almost nobody.  A few people know secret number one, but falsely conclude that the signal is still the best option.

A small but growing number of people partially understand what’s behind secret number two, but because they do not grasp that the product universities sell is a signal, they compare only alternative social and learning experiences to universities, not alternative ways of creating a signal.

The combined understanding of both of these secrets will completely revolutionize the way people think about and engage in education, career preparation, work, and life.

The Signal Secret

  1. Tuition is paid for one reason: to buy a signal.

A small number of economists and thinkers have identified that higher education is valued because of its signalling power.  That is, the college experience does not form people into more valuable or learned individuals capable of doing good work, but it sorts people into groups and attaches degrees to those who were already capable.

Signals are not bad things.  They are very valuable.  Employers need a way to narrow the pool of applicants and weed out the least likely to succeed.  There is a correlation between completing college and being a better worker on average.  But there is no causation.

Harvard doesn’t make you more likely to succeed.  The type of person who gets accepted into Harvard is already more likely to succeed.

Almost everyone objects to calling the product universities sell a signal.  They claim it’s a big bundle of goods.  It’s a social experience.  It’s a network.  It’s knowledge.

It is indeed a bundle of these things and many more, but these are all fringe benefits.  None of them are the core product being purchased.  When you pay to get your oil changed and the waiting room has coffee and magazines it’s a nice perk, but it’s clearly not the service you are purchasing.  If the auto garage didn’t have these comforts you might still go, but if they only sold coffee and magazines without oil changes, you wouldn’t.

College is the same.  Whatever other activities and benefits students may derive from their experience, none of them are the reason they are paying to be there.  They are paying for the signal, period.

It’s easy to prove this point.  List every other element of the higher education bundle.  Sports, parties, talks with professors, lectures, books, living with other young people, etc.  Now ask which of these would be possible if you never paid tuition?  All of them.  Move to a college town, sit in on classes, join clubs, go to events, read books, and live the college life to your heart’s content.

When you take away the credential at the end, it becomes clear how easy it is to get all the other aspects of college for free or very low cost, and often better.

This is also evidenced by the fact that everyone is happy when class is cancelled.  What other good do people pay for upfront and then cheer when it’s not delivered?  It’s because the classroom lectures and tests are not the good being purchased.  They are an additional cost that must be borne in order to get the real product, which is the piece of official paper.  The signal.

Young people may or may not enjoy some or all elements of the college experience.  But the reason they go and pay is because, in their minds, they have to.  They have to to get the signal, because without the signal you can’t get a decent job or be seen as a decent human being, so the prevailing narrative goes.

The signal is the product.  Until that is understood, no amount of tweaking or reforming or innovating any of the other parts of the higher education bundle will matter.

And it turns out, you don’t need the signal college sells after all.

The Alternatives Secret

  1. That signal is not worth the investment compared to what you can create elsewhere.

Everyone is thrilled to show you charts and graphs and statistics about the correlation between degrees and earnings.  None of that matters.

It doesn’t matter because aggregates are not individuals and because data can never show causation.

What happens to the average of some aggregate does not determine what course of action is most beneficial for an individual.  The average Ferrari owner earns a lot more than the average Honda owner.  No one assumes this means buying a Ferrari is a great way to improve your earning potential.

To the individual, the question is not whether college is a good investment for all young people on average.  The question is whether you can build a better signal with less than four plus years and five plus figures.  Turns out, that’s a pretty low bar.

The degree signals that you are probably a little above average for someone your age.  Maybe not even that as degrees proliferate.  This means if you are average or below average in ability, creativity, or work ethic, the degree signal may help you get a better job than you could without it.  (Though it won’t help you keep it.)

If you are above average in ability, creativity, or work ethic the degree signal sells you short.  It makes you blend in with all the lower quality people coming out of the same institution.  (Not only that, the college experience itself tends to foster habits that make you less able, creative, and hardworking.)

Young people today have at their fingertips tools to create signals far more powerful than generic institutional credentials.  Consider the impact of a tailored website that demonstrates the value you have created?  Better yet, a website or product that demonstrates to a company the value you will create for them?

Consider the value of working alongside a successful entrepreneur or industry leader for free or low pay for a year or two and parlaying that into a full-time gig?  Companies hate the searching and hiring process.  They’d always rather promote someone within who has a proven track record of value creation.  Compare the cost of low wages for a year or two to the cost of no wages and huge debt for four.

Businesses need value-creating employees.  They use degrees as an early proxy to eliminate some chunk of applicants (though even this practice is declining for big and small companies alike), but they only use them in absence of a better, clearer, more powerful signal.  When one exists, it trumps the academic credential.  When you realize all they want is proof of ability to create value, the world begins to open up.  How many ways are there to prove that you can?

It’s not only about getting hired.  Professors are quick to tell you that wages are not the only thing that matters when it comes to happiness and success in life.  They are correct.  Yet chasing the degree as the only signal often leaves people with debt that requires a relatively high wage to service, thus cutting off options and opportunities to explore and experiment.

Not least of these explorations is the wonderful and growing world of entrepreneurship.  It’s easier and cheaper than ever to create your own product or launch your own venture.  It’s also more and more valuable.  Machines and software can do rote tasks.  Humans’ greatest value add is creative problem solving and innovation.

The ability to freelance for a living, launch a micro business, or create a major enterprise is expanding every day.  There is no benefit to the degree signal in the world of entrepreneurship.  There are no HR departments wading through resumes looking for checklists.  Here, in fact, the college experience can be more of a detriment than a benefit.  It tends to restrict the imagination to known methods, restrict your network to same-aged people, restrict your financial flexibility and risk-taking, and cut into many of the easiest years for trying something bold when the cost of failure is lowest.

A 20-year-old who launched a KickStarter campaign, built an app, created a website, apprenticed for a small business owner, read 50 books, or even just has an amazing online presence signals more value creation potential than a 22-year-old with a BA and a 3.7 GPA.  Yes, you can supplement the college experience with these other things, but classes and obligations (not only time but financial and parental) get in the way of fully unleashing your independent signal-creating potential.

The Real Revolution

The real revolution in higher education will not come from better delivery mechanisms for lectures, or new platforms to sell the same signal.  It won’t be disrupted by online versions of the brick and mortar establishment.

The real revolution will look as varied as the people participating in it.  It will begin when people understand the two secrets of higher education.  When it is realized that college is selling a signal and that signalling your ability to create value can be done far better in myriad other ways, the world will bloom with alternative methods of getting young people from where they are to where they want to be.

Instead of 16, 17, and 18-year-olds stressing about how to get into colleges, they should focus their energy on how to begin building a better signal.  Instead of 19, 20, and 21-year-olds stressing about majors and minors and GPA’s, they should focus their energy on creating value and building a way to prove it.

What are you signalling?

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Want more?  Check out Praxis, a one-year apprenticeship + professional development + coaching educational experience for young people who want more than college.

The Economic Argument Against Immigration is Pretty Gross

The economic argument against immigration is especially disgusting.

You might think cultural arguments about keeping a country “pure” or safety arguments claiming all immigrants are criminals are more offensive.  But let’s examine what the economic argument against immigration really means.

The idea of forcibly preventing individuals from crossing a border in order to give an economic advantage to those on the other side of the line is barbaric when you ponder it.  Immigration restriction for the purpose of “protecting jobs” really means the violent prevention of people born in certain places from trying to earn a living.

Imagine you want a certain job.  So does your neighbor.  Would you slash his tires to keep him from getting to the interview?  Would you build a wall around his house preventing him from leaving because he might compete with you in the market?  Would you shoot him if he tried to scale it for the chance of landing the job?

If you knew a person living in horrible conditions, whose children may well die of an entirely preventable disease, and they just need a decent job to be able to afford better environs for their family, would you feel proud for sending armed thugs to follow that person around and ensure they never left their crappy neighborhood to apply for jobs elsewhere?  Even if it meant grinding poverty and possible sickness and death for the family?  Would you cheer and say, “Yeah!  I’m protecting my job opportunities!”

If you support immigration restrictions that’s exactly what you’re doing.

Economies are best served with open competition.  No one thinks forcibly shutting down competitors or collaborators is a good move or morally permissible…unless those competitors and collaborators happened to be born in certain places.

Can you think of more blatantly bigoted behavior?  The belief that certain individuals should be violently prevented from even trying to get certain jobs or live in certain places based purely on the piece of land on which they happened to be born is no less reprehensible than Jim Crow, Apartheid, or any of the other universally condemned forms of legal economic oppression.

Leave aside the fact that immigration restrictions are bad for the economy as a whole, and that far more people in the restrictive country are harmed by being unable to hire or buy from vast swaths of humanity.  Even if it were true that immigration restrictions made native born citizens better off they would be no less disturbing and morally bankrupt.

If I paid armed agents to keep every potential competitor for jobs or customers under house arrest you wouldn’t forgive me if I could prove that the practice helped me economically.  You’d call me a cold-hearted psychopath.  Even if border patrols gave you an edge by keeping some potential competition behind barbed wire it wouldn’t make your advocacy of them honorable.  “Hey look, I can get ahead by keeping this poor person from trying!” is not the cry of an honorable person.  “People who weren’t born where I was shouldn’t be allowed to apply for jobs!” isn’t a belief to boast about.

All arguments against the free and peaceful movement of people are bad.  Arguing it’s to protect your economic interests reveals a level of moral bankruptcy that is truly unsettling.

The Beautiful Language of Prices

Prices are a language.

The beauty of this reality hit me while on a walk.  I had my phone so I recorded my thoughts in the moment of delight.  I’m often overcome by how beautiful markets are.  It’s almost a spiritual experience when you ponder long enough.

 

Four Options When Government Gets in the Way of Your Dreams

Four Options When Government Gets in the Way

Illustration by Matthew Drake

 

This article is adapted from a presentation given at FEE and SFL seminars.  Co-authored with James Walpole for The Freeman.

———————

We all want to live free, but we have a problem: governments don’t always want us to.

From seemingly mundane rules (like banning raw milk sales) to the truly horrific (like taking your house from you or throwing you in jail), the state is probably going to mess with you at some point in your life. It will throw taxes and fees and fines and rules at you and erect roadblocks and regulations inhibiting your progress — especially if you’re trying to do something new and innovative.

What can you do?

You do have options. Grave as the stakes may sometimes be, you must first accept this outlook: it’s all a game. If you treat it that way, you’re more likely to find a way forward rather than simply cowering in fear or trembling with anger.

Here, then, are four options when you’re faced with the game of government interference.

1. Play the Game

This is the strategy you’re probably most familiar with. It’s what we’re all encouraged to do. Whether through voting, lobbying, or holding office, you can try to take on the state while playing by its rules. You can try to change it from the inside. This is a strategy we cannot recommend.

In business, this strategy leads to the phenomenon economists call “regulatory capture.” Many companies become involved in lobbying and political action to prevent hostile regulations. It’s understandable. They spend hundreds of thousands of dollars on campaign donations and dinners trying to sway politicians and regulators to delay a vote, join coalitions, or carve out exceptions.

It’s a tough, slow process, one that involves endless compromise of principle and decency, and the few who succeed end up with political power and the ability to gain more. They end up using that power not just to expand their own freedom but to crush the freedom of competitors.

But any changes you make will be temporary. Laws passed in one decade are easily repealed in the next, especially if they limit state power. The bigger loss is a personal one. If you play the game long enough, the game ends up playing you. You become a part of the power structure you were trying to fight.

2. Defy the Game

When the state crushes your dreams, you can fight back. History is full of people who stopped taking oppression for granted and started resisting. Look at the civil rights movement in the United States, the Hungarian revolt against Communist rule, or even Uber’s commercial rebellion.

Today, the ridesharing company is operating illegally in dozens of cities, and it’s already paid hundreds of millions of dollars in fines for its drivers who are caught violating local laws. The company is growing fast enough to absorb the damage, and while governments don’t like Uber, customers love it. In Uber-hostile cities like New York, riders are standing up for their favorite way to get around. The “rebellion” has been a huge success.

But rebellion plays out in more desperate ways in the rest of the political world. For people and companies without the money and reputation of Uber, successfully defying the game is hard. While you can get tremendous satisfaction from sticking it to the man, you might end up in jail. You might be killed. In other words, playing this way means you might run into the real power of the state in its rawest form.

3. Change the Game

Changing the game is about recognizing the incentive structures and putting external pressure on the government to bend. Often, all you need to do to win is to hold the state to its own rules.

But it’s not as easy as it sounds, and the people who try to change the game in this way have to be heroic, if not martyrs. They’re taking the longest route. Game-changers lower the cost of information to the public while raising the cost for government to break its own rules or be thuggish. This group includes lawyers, journalists, public intellectuals, and everyday citizens.

Look at the case of occupational licensing. Municipal and state governments throughout the United States require entrepreneurs to give up money and time to comply with regulations. Many would-be entrepreneurs are stopped dead in their tracks by competition-killing regulations.

Before the Institute for Justice (IJ) challenged the regulation, eyebrow threaders in Texas were required to train for 750 hours before they could set up shop. Before another IJ case in 2011, Texas required bakers wanting to sell cookies to the public to rent commercial kitchen space and obtain food-handling permits.

Changing the game isn’t limited to the courtroom. Governments will break their own rules if they can get away with it. Both IJ cases included concerted efforts to raise public awareness about the unfair consequences of the regulations while simultaneously challenging them in court. These efforts raised the stakes for any judge who wanted to rule for the status quo. It also resulted in politicians jockeying to change the law before the court case was even settled so that they could take credit and benefit from the positive PR. Think about the state lawmakers who jumped at the chance to restrict eminent domain after theKelo outrage.

This is one of the biggest pros of changing the game: if you’re successful, you’ve kept your own integrity, and you’ve helped to protect others from the dream crushers in government.

The problem is that you may not win. You can spend years of your life fighting the battle to change the game and lose — plenty of people have, from the Dred Scott case to the Kelo decision. Even if you do win, the victory is too often short-lived: as soon as public awareness and scrutiny abate, courts will “reinterpret” hard-fought constitutional changes put in place to restrict government.

4. Ignore the Game

Entrepreneurs in the last decade have made international-trade and immigration restrictions less and less important. Today, anyone can telecommute to work in the United States from a call center in India, an Internet cafe in Bangladesh, or a personal laptop in Mexico. These innovations allow labor to move freely, and the inventors never needed to lobby politicians.

You can quit, exit, and opt out of the games government uses to stop you. You can move. You can pull your kids out of school. You can alter your business plan. You can quietly sidestep the obstacles placed before you.

There are major benefits to ignoring the game. For one thing, you don’t have to think about politics. Psychologists and philosophers have long told us to not worry about things not under our control. By ignoring the game, you can be politically ignorant and much happier. You don’t have to fight court battles or Internet comment threads. You can focus on creating, not protesting.

Ignoring the game isn’t always as satisfying as defying it, but ignoring the game offers an immediate sense of personal freedom. It allows you to create a freer life for yourself while providing an example that others can learn from. Over time, if enough people ignore the game, it begins to wane in importance and power.

How Will You Respond?

If your goal is to live free, first understand the game and know the rules. The way you respond to the game is then up to you. The strategy you choose will have more influence over your quality of life than any near-term victory or defeat will.

You may respond to the government in many different ways throughout your life, but if you treat it like a game, it will be less likely to ruin you.

A Tale of Two Cities Part 2: Why People are Dumb at the Ballot Box

This is the sequel to a post about the two spheres we all dwell in – the political and the civil – and how each affect our behavior.

Originally published in The Freeman.

Why do so many San Franciscans want to curb Airbnb’s innovative business model?

Proposition F would have restricted the number of nights owners could list their homes and which types of rooms could be listed; it would also have required a litany of paperwork and reporting to a city department. Listings that did not meet city standards would have incurred fines of up to $1,000 per day. The details are many, but the thrust is obvious: this proposal was to make Airbnb far less successful at creating value for customers and investors.

The proposal ultimately failed, but it wasn’t a landslide. Forty-four percent of voters supported it. Nearly half of the voters in a city that owes its recent prosperity and identity to this kind of innovative company wanted to strangle one of the geese on whose eggs they are feasting.

Most political action is signaling.

The simplest explanation is that proponents of this proposal were the minority of businesses and individuals who are in direct competition with Airbnb — hotels and those working or investing with them. True, but something deeper is at work. A surprising number of investors, entrepreneurs, and everyday residents of the city who are not involved with competing businesses voiced their support for the proposal. Some supporters were even Airbnb investors.

How could this be?

Here are five reasons (by no means an exhaustive list) why people behave so badly in the political realm.

1. Other People’s Problems

Milton Friedman famously described the four ways to spend money. You can spend your own money on yourself, your own money on someone else, someone else’s money on yourself, or someone else’s money on someone else. It’s clear that you’ll be most judicious in the first scenario, and less so in each that follows.

All political issues are a case of the fourth scenario, even when money is not directly involved. You’re voting on the use of resources that aren’t yours — the pool of taxpayer dollars that fund government bureaucracy — to solve someone else’s problem, in this case hoteliers threatened by competition and San Francisco residents supposedly being pushed out of affordable housing.

Ballot initiatives tell us that some people, somewhere, are having some kind of problem — and that we can vote to make it better. It’ll cost you nothing (at least nothing you can see at the moment), so why not?

Not only voters, but also the regulators, enforcers, and drafters of such propositions are so far removed from the issue at hand and have no personal stake in the outcome that it is impossible for them to make decisions or draft policies without unintended consequences.

2. Information Issues

Proposition F is ridiculously complex. To cast a fully informed vote on the Prop F, one would need to begin by reading all 21 pages of legal text. What’s more, the costs of obtaining the information far exceed the probability that your informed vote will be decisive. The result is what economists call “rational ignorance.”

Customers, employees, managers, and investors of Airbnb are best suited to optimize the service. Even the company’s competitors are in an excellent position to curb it or force it to improve if they channel their efforts where the information matters, namely in the markets where they stand to lose or gain.

3. Signaling for Survival

Most political action is signaling. It’s not so much that people want to buy American or recycle everything — we know this because when their own money is on the line in the real world of trade-offs, they mostly don’t. But people want to be seen as the kind of person who buys American or supports recycling. There is tremendous pressure in the political sphere to prove to everyone that you support all the right things — especially things that come at a direct personal cost to you. This proves you care about that abstraction called “society.”

Once control by force is an option, a great deal of otherwise productive energy and otherwise creative people are drawn into the crooked craft of politics.

The best thing a rich person can do in the political sphere is vote for higher taxes on the rich. The best thing an Airbnb investor can do is claim to support regulations that restrict Airbnb. You’ll get lots of cheap signal points, even if what you support would actually be bad for everyone.

4. Binary Choices

Voting is a yes or no affair. The political sphere is incapable of genuine pluralism. Imagine if markets worked the same way. What if your local grocery store sent out a survey asking you to vote on which kind of wine you wanted them to stock, or how much, or at what price (with any losses to be made up by adjusting other prices)?

Can Airbnb be improved? Of course. Can a bunch of people with no control over the outcome and little skin in the game be given an up or down vote on a single policy proposal and make it better? Don’t be silly.

The adaptability, nuance, and diversity of options, offerings, and solutions in a market are the greatest strength and the very stuff on which the startup scene was built. Cramming broad society-wide solutions into binary choices is absurd.

5. The Problem of Power

The infamous Stanford prison experiment didn’t go horribly wrong because the wrong batch of subjects was chosen: it was a case of dangerous institutions and incentives. When rules are enforced by raw power, the person who wields that power has more control than any human being can responsibly handle.

Contrary to Thomas Hobbes, it is not the “state of nature” that is a war of all against all; it is Leviathan that rewards force over cooperation and cultivates the worst traits. Once control by force is an option, a great deal of otherwise productive energy and otherwise creative people are drawn into the crooked craft of politics.

F.A. Hayek wrote at length in The Road to Serfdom about why, in the political sphere, the worst get on top. It’s a predictable outcome of a powerful state.

Democracy doesn’t keep this tendency in check so much as it directs the power toward those who are best able to appeal to the desire of rationally ignorant voters to signal the trendy positions on the latest issues.

Focus on Freedom

The innovative startup founders on the San Francisco scene are an amazing force for good when they are pursuing their own interests within the incentive structure of civil society. Not one of them would remain a positive influence if they were granted monopoly power through the ballot box. Nor would their customers: even the most forward-thinking minds in the most innovative city in the world become petty and stagnant when operating within the confines of the political sphere.

When you act as a consumer and choose which kind of vacation housing to purchase, your action sends information and incentives rippling through the market price system, helping entrepreneurs guide resources to their highest valued use. When you act as a voter to support or reject a policy, you create losers and enemies, and your vote generates a host of destructive effects.

If you want a freer, better world, you’ve got to build it in the private sphere.

What You Build, not What You Believe

Originally posted here.

“By their fruits you will recognize them.”
– Jesus

Not what you say, or who you like, or how you vote, or what Facebook groups you belong to.  Your fruit.  The tangible outcomes your life creates.  What you build.

It’s easy to place the locus of control with external forces.  It’s easy to feel like the government is in control, hampering you, reducing the prosperity and progress of society.  It’s easy to enter reaction/response mode and spend time complaining about or trying to reform these flawed institutions.  I think there’s a better way.

We can be co-creators.  We can build alternatives.

There are two ways to do things in society: Peacefully or by force. Crime and government operate by force and threat.  Businesses, churches, social groups, and all other institutions operate by peace (unless corrupted or coopted).

Those of us who realize this can quickly and easily describe what’s wrong with the use of force. We can decry it and protest it.  But even criticism of the status quo is a backward looking act.  It is playing within the rules of the game. What if instead we directed that energy outward, creatively, not to tearing down what we dislike but building what we do?

The tools of violence are immoral and inefficient.  They are less desirable and less effective. Instead of trying to convince more people of this, why not show them?  Why not create a better alternative and let it win out?

It took me a while, but I decided to do just that.  For me it was education.

Though not as completely coopted as other areas, higher education is by no means a free-market.  It’s a yucky web of subsidies, grants, regulations, and laws that make degrees artificially valuable.  The system cajoles young people into four years and six figures of a process many dislike and don’t gain value from, walking away with debt, a sweatshirt, and no clue what to do next.  I saw it bringing more and more young people down.  I took a leap and decided not to merely criticize but to create.

I launched my company Praxis two years ago to provide an alternative path for entrepreneurial young people who want more than college.  We’re still new, we’re still small, but we’re growing and the lives that have changed through the program already are enough to tell me this was the right move – the best move I could have made.

I don’t want to fight with people about my views on higher ed, government, or society.  I want to offer people something that is attractive to them, something valuable.  That’s what markets do best – reward endeavors that create value and let die out those that don’t.  I wanted to show, not tell, the world about a better way to approach education, career, and life.

When freedom expands it tends to do so in the realm of lived experience prior to conscious argument.  Once people have tasted freedom in a tangible way – the fruit – they embrace it and reject the status quo.

Rather than looking for political solutions or arguments, can you build and demonstrate a better way?  Can you show the fruit of your ideas?

It’s a challenging and powerful question.  Let’s ask it more often.

‘Will a Good School Accept Me?’

I answered a question on Quora (well, I guess I didn’t really answer the question, but spoke to the ideas behind it) about getting into a top university without straight A’s.  You can read the question here.

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First and foremost, don’t stress.  This won’t make or break your life.

I don’t know what those institutions require for admission but I have another idea: don’t spend your time trying to get approval and acceptance from academic institutions but instead go create value for yourself and the world.

Our world is awash in official accolades and credentials and padded resumes.  You’ll realize when you get into the world outside the education bubble none of that matters much for value creation and personal fulfillment.

Identify what you want in life, identify the obstacles to getting it, and create challenges and habits to help you overcome those obstacles.  All of this can be done without the official sanction of formal institutions.

If what you want is to be a professor or to work within academia, then of course that’s the way to go.  Or if you simply wish to enjoy college as a very costly consumption good, go for it.  But the notion that you must jump through the right hoops to earn the approval of X or Y university is backwards.  You want skills and experiences and knowledge and a network.  You’re the customer.  See if you can think of the best, most effective, quickest, least expensive, and most enjoyable way to get them.  The question isn’t whether those universities will take you, the question is whether you’ll deem them worthy of your time and money.

Whatever path you take, good luck!

The Education System Isn’t Broken, It Just Sucks

Some people say the education system is broken.  It’s not.  It’s doing exactly what it’s designed to do.  The problem is that what it’s designed to do isn’t good, and it’s less valuable than ever.

I’m not one of those people who thinks it used to be a good system.  It’s not obsolete, it was wrong from the get-go.  It’s always produced undesirable outcomes.  I don’t think obedience, the ability to follow rules, falling in line with authority, uniformity of belief and process, and deferring to experts and standard explanations are desirable traits in individuals and societies.  I think they are dangers to be avoided.

To the extent that part of the result of this will-crushing process is some uniform skills that can be plugged into various business roles, there is some potential market value.  Though even these skills can be gained far better, faster, cheaper, and in more exciting and effective ways.

But today even those few things that people walk away with after 15,000+ hours in a classroom are of almost no value, and the trend is a further decline.

It is less valuable than ever to learn a skill.

It’s less valuable than every to learn to memorize, obey, hoop-jump, and test-take for bureaucratically approved authorities.

It is more valuable than ever to know how to think, how to learn, how to do what machines and software can’t.  Create.  Innovate.  Be entrepreneurial.

Once you realize that the education system isn’t broken you can stop trying to fix it.  It works really well based on its own principles of design.  You can’t make a hammer better at performing surgery.  You need to drop it and grab a scalpel, or invent a laser.

You’ve got to step outside of the education system altogether and build your own learning program tailored to your own goals.  It’s a challenge, but a lot easier than you might think.

Humans are naturally curious, stubborn, adaptive, knowledge-gathering, active, creative beings.  Those are all the things you need to begin, and you don’t really need to do anything to get them.  It’s harder to do what the current system does, which is snuff that out and create uniform widgets.  That’s why they need so many buildings, fences, supervisors, guards, and so much money.

All you need is an environment where natural human tendencies can flourish, bump up against the world, get feedback, and adjust.

Sometimes the system isn’t broken, it just sucks.  Get out.  Build your own thing.

Profit is a Better Goal Than ‘Social Good’

Yesterday I got an email from Kickstarter that at first I laughed off as silly PR and signalling.  Then it made me sad.  Then it made me upset.

I like Kickstarter.  I use it.  It’s a supercool platform and has opened up a whole new world of crowdfunding, the effects and possibilities of which we are only beginning to see.  So what did they send me that rubbed me so wrong?

Kickstarter is no longer a traditional corporation but a Public Benefit Corporation (PBC).  I have not looked into the legal structure of PBC’s nor am I any kind of legal expert.  The way a company chooses to structure itself doesn’t really matter to me.  The thing that got me was the description in the email:

Until recently, the idea of a for-profit company pursuing social good at the expense of shareholder value had no clear protection under U.S. corporate law, and certainly no mandate. Companies that believe there are more important goals than maximizing shareholder value have been at odds with the expectation that for-profit companies must exist ultimately for profit above all.

Benefit Corporations are different. Benefit Corporations are for-profit companies that are obligated to consider the impact of their decisions on society, not only shareholders. Radically, positive impact on society becomes part of a Benefit Corporation’s legally defined goals.

What could it mean to have legal “protection” and, far more ominous, “mandate” to pursue social good?

The most obvious questions are what is social good and who gets to define it?  Even if specific goals or outcomes are written in to a legal charter, who gets to interpret them?  If an investor puts millions in to a business with expectation of financial return and the money gets squandered on a giant made-from-recycled-shoes art project at the office, could it be argued that this was the legally correct move because it’s good for the community or some other undefinable value?

Firms are not profit driven because they are evil.  They’re not even profit driven because they care more about profit than anything else.  No one got together and decided to make firms profit driven as an evil conspiracy.  They simply ended up that way because it’s the best possible method of accountability to value creation.

They’re profit driven because profit is the only uniform, objective measure of all the diverse goals and desires of everyone involved in the enterprise.  Designers might want to make the world more beautiful, customer service people may want to help others solve little problems (except maybe at Comcast), investors may want to be a part of something new and exciting, founders may want to change the world, and customers may want a specific feeling the product provides.  To keep creating value in these myriad ways the firm needs resources.  They can’t be consuming more value than they produce.  They need to create something that is valued by the customers more than the raw inputs were valued on the market.  The only way to measure all these subjective preferences is with profit and loss.

When people decry profit they seem to treat it as a one-sided bilking affair.  Profit is really, really hard.  Loss is far more common.  And loss is just as important.  Loss is the greatest force for resource conservation the world has ever known.  It lets us know that a company is, quite literally, destroying value.  It puts the brakes on fun but destructive behavior.  They are consuming resources valued at X and are only able to sell them at X-1.  They have transformed resources into something less valued by society.

Profit and loss are the best signals humanity has ever had to make decisions about resource allocation.  Relying on warm fuzzies or good intentions is far less effective and can even be downright deadly.  If you allocate resources based on perceived need or good feels you’ll end up with big shortages and surpluses, like every planned economy ever, and the poorest will suffer from lack of access to food, health care, etc.  This is how mass starvation happens.  High minded ideals replace organically emerging prices as the means by which resources are allocated, and well-intentioned elites from on high replace self-interested individual decisions makers on the ground.

I’m not trying to get dramatic here.  For all I know PBC’s could be an improvement over current state offered options for incorporation like 501c3’s or C-Corps or what have you.  I’m also not such a fool to think technical legal jargon so powerful that it can override informal institutions or cause investors to make horrible decisions with their money.  Chances are, if you’re knowingly investing in a PBC, you trust the assumed definition of “social good” or whatever other goals enough to take the risk.

The troubling thing is the rhetoric and the built-in assumption that profit and loss provide worse information about how to improve the world than vague things like a “commitment to the arts”.  Being committed to a high ideal without really knowing enough to bring it about in the everyday lives or real people (hint: none of us do) is a great way to waste a lot of resources and do a lot of damage while feeling good about yourself.  Being committed to accounting profit and loss is a great way to create value for the world, whether you intended to or not.

*BONUS

I was discussing this with a friend on Voxer, and added this very important point about what prices really are.  They’re not only about incentivising people to do things.  Even in a world where people were able to rise above self-interest, prices would still be crucial for the information they convey.  It’s an incentive wrapped in information.  Here’s an excerpt from our conversation:

Entrepreneurship Needs the Right Context

Entrepreneurship is really sexy right now.  Startup founders are like rock stars and you can’t go a day without seeing articles about them.  As far as it goes, I welcome this trend.  Entrepreneurship, as J.B. Say might define it, is the act of moving resources from lower to higher valued uses, or more concretely, creating a new process or product to solve old problems in innovative ways.  This seems a pretty good thing to glorify, at least compared with some other superficial traits that get a lot of attention.

Still, if entrepreneurship is praised across the board, regardless of the context, bad things can happen.

Absent competition and markets, being entrepreneurial has no value.  In fact, it can destroy value if channeled into the political process.  Political entrepreneurs find new ways to access resources first taken from others by force (taxation), and therefore do not create wealth.  They shift existing wealth around with no value-add, because the profit/loss signals are short-circuited.  Furthermore, they divert resources from productive activity to lobbying, currying favor, or massive projects with populist appeal but no market value.

Just about any entrepreneurial endeavor with the words “green” or “sustainable” has a high likelihood of being a fraudulent political game rather than genuine value creation.  The web of grants and subsidies and tax incentives and price supports and mandates in this industry make it all but impossible to identify real value creation as distinct from political shenanigans.  There are a great many media friendly entrepreneurs who chase government dollars instead of private investor or customer dollars, which are the real indicator of value creation.

Furthermore, all the buzz about entrepreneurship has given tech founders a huge platform from which to weigh in on a great many other issues.  Many people assume anyone smart enough to build a great app or billion dollar company could improve public policy.  The problem is that policy doesn’t get debated and implemented in a startup environment, but a monopolized, violence-backed, and fundamentally warped institution with all the wrong incentives.  The technocratic desire many startup types have to make gov’t more like a Silicon Valley company is what Hayek might call the fatal conceit.  It won’t work.  “If only smart people would control all the resources (and the guns that seize them) we’d make public infrastructure flawless!”  This kind of thinking is more dangerous, even if more noble on its face, than political actors openly seeking their own enrichment and not trying to solve grand problems with central plans.

The same thing happened in the industrial era.  Titans like Vanderbilt, Rockefeller, Morgan, and Carnegie were heroes because of their amazing success at improving the world through entrepreneurial action in the market.  When they turned their attention to politics, Gilded Age entrepreneurs built up a horrific behemoth of graft and monopoly that only slowed progress.

In a free or mostly free market entrepreneurs are the greatest force for good the world has ever known.  More than any amount of philanthropy or good intentions.  Outside the market context there is nothing inherently noble about entrepreneurship, and when directed to the political process it can be downright destructive.

What is College Really All About?

I’ve always found it amusing when someone makes the case that a college degree is not needed for material and career success and a professor responds that college is not about getting a better job or earning more money.  They are offended at such a base standard by which to judge the service they provide, and remind of the wonderful and fulfilling aspects of a liberal education.

The reason it’s amusing is because, whether profs like it or not, the myth that college guarantees a better job is the thing paying the bills at just about every school.  It’s also the thing colleges explicitly, repeatedly market and sell customers.  The belief in the degree as a ticket to a better job is the number one driver of demand for college.  After that probably access to artificially cheap money and overall wealth increases which allow many kids to purchase college as a consumption good; a four year fun time courtesy of other people’s money.  A distant reason for a small number of people is the actual learning they can get from college.  It’s not that the learning isn’t valuable, it’s just that an intellectually curious person has so very many ways to dive in to philosophy or history that it’s a tough case to convince them the only way is to spend tens of thousands and four years.

A lot of people in higher education are so confused about the actual product they sell and so blinded by the trappings of the university that they assume it is a robust, competitive market.  Perhaps compared to government K-12 schools it’s a cornucopia of choice, but it hardly resembles a free market.  Not only is the demand artificially high due to taxpayer grants, subsidies, scholarships, and loans, but a great many careers legally mandate degrees before an individual can even enter.  Law, accounting, just about anything related to health, the growing range of bureaucratic government jobs, and more can get you fined or jailed if you dare practice without a degree.  Laws prohibit employers in other fields from using other measures of ability like IQ tests in hiring.  Add to this the pervasive belief that one simply cannot live a decent life without a degree – a belief more akin to religion than regulation for non-mandated fields – and you’ve got the current higher ed marketplace.

It’s competitive in a sense.  Imagine if every city had a handful of DMV offices, and the offices had budgets partly determined by how many customers came to their particular office to get a license.  This would incentivize marketing and enhancements to the experience as competition between offices emerged.  You might have entertainment while waiting in line, or nicer lobbies to sit in, or food and drink (the price of which would just get added on to your license fee, which could be deferred and paid out over 20 years with subsidies from taxpayers), etc.  Over time, the nicer buildings and other in-line offerings might distract from the actual reason customers were there in the first place.  They had to get the legally mandated license to drive.  Or, to make a closer comparison, maybe only half the people in line legally needed a license, and the other half could drive legally without one but their parents and friends would be ashamed of them and constantly tell them that they’d be better drivers if they got one.

To understand anything about higher education today we have to understand what the actual product is in this distorted, unfree market.  Aside from those purchasing college as a consumption good and some small number purchasing college purely for the learning or “human capital” enhancements, the customer is buying the credential because it is legally or socially mandated.  Object all you want, but it’s not hard to prove.  Colleges themselves sell the degree-as-job-catcher angle harder than any other, and that’s the number one reason given by students for attending.  Besides, even the consumption good and human capital aspects of the product could be easily had for free if you just moved to a college town and took classes without registering.  The reason people don’t is because of the belief – sometimes true due to legal strictures – that they can’t make a decent living without a degree.

The discussion about problems in higher ed is not a discussion about learning or ideas or a liberal education.  It’s phony to respond to a criticism of college with a defense of philosophy.  It’s missing the point to respond to critiques of college with defenses of classroom style learning or other educational methods.  To do so implies that learning valuable ideas is only possible through the arbitrary four year debt-fueled system.  That is an intellectual arrogance of the highest order and a conflation of education and school that is dangerous for the former.

Good ideas are too important to be anchored to the current university system and its jobs focused mythos.  Good careers need a lot more than a prefabricated four-year bureaucratically managed prep process.  Separate the classroom from the credential and both will improve.

How Change Happens – Higher Ed. Edition

The current higher education model is flawed.  If we’re serious about changing it, first we need to get serious about understanding how social change happens.  Intentions and action are not enough to bring about desired ends.  We need an understanding of the causal relationships involved in order to effectively bring about change.

The great truth that flies in the face of civics textbooks and popular myth is that politics is not the source of social change.  It’s more like the last in a line of indicators of cultural shifts that have already occurred.  Politicians and the policies they create only change after the new approach is sufficiently beneficial to the right interests, and sufficiently tolerable to the public at large to help, or at least not harm, political careers.  Of course some politicians guess wrong and suffer accordingly, but by and large the political marketplace tends toward preservation of the status quo until a new direction is imperative for survival.

An entire, and entirely fascinating, branch of political economy called Public Choice Theory examines the incentives at work in the political marketplace in depth, and I highly encourage anyone attracted to political action to gain a working knowledge of this field.  It reveals, in short, that incentives baked into the democratic system create and perpetuate policies that are bad for the public at large, and good for particular concentrated interests.  What Public Choice has a difficult time accounting for is the role of changing beliefs.  There are countless policies that, based purely on the incentives of various interests, ought to be in place but are not, or vice versa.  Some things are simply out of bounds, no matter how much a particular group might benefit and be willing to lobby, because the general public finds them unacceptable.

Contrary to the seemingly ironclad rule of interest driven politics, public beliefs can and do change, and dramatically sometimes, putting parameters around the area within which political actors can ply their trade.  Slavery is a striking example.  At one point, it would’ve been hard to get elected, at least in some areas, if you publicly supported abolition.  Not too many decades later, it’s unthinkable to get elected anywhere if you’ve ever even joked about supporting slavery.  There is certainly a complex relationship between changing economic incentives and public beliefs, but it is undeniable that the about-face on the ethics of slavery was more than a mere shift in power among competing interests.  What most of the public found tolerable they now find reprehensible.

Our institutions are formed by incentives, and incentives are constrained by beliefs.  That makes the beliefs of the public the ultimate key to change.  Smaller changes might occur within the window of things already publicly acceptable, but major change requires a shift in that window.  How to change those beliefs?  There are two primary drivers, both of which feed each other; ideas and experiences.

Ideas are the raw data that form beliefs.  If you accept the idea that minimum wage laws make lower skilled individuals less employable, and you accept the idea that a society with fewer unemployed persons is desirable, then you will have the belief that minimum wage laws are bad.  If, on the other hand, you’ve never really thought about the economics behind minimum wage at all, but your low skilled neighbor lost his job when minimum wage increased, that experience might also cause you to believe minimum wage laws are bad.

I spent a good part of my life focusing entirely on disseminating ideas as a way of changing belief.  It was fulfilling and, I think, valuable work.  But it wasn’t until relatively recently that I began to understand the immense value of experience as a vital second prong when it comes to changing beliefs and the world.

Consider the difficulty of convincing your mother that the New York City taxi cartel is inefficient or immoral.  It requires a great deal of economic theory or philosophizing about rights and coercion.  Your mom might have other things she enjoys more than reading books on these subjects.  Even if you convince her, her newfound belief will probably barely register among things she cares about.  Sure, taxis aren’t the greatest.  So what?  She’s never had that bad an experience.  Even if a policy change to end the cartel were possible, your mom mighn’t pay any attention, or she may be concerned about what the new world without cartels would look like in practice.

Now consider recommending your mom use Uber on her next trip in to Manhattan.  She uses it, likes it, and becomes a regular customer.  She may be completely ignorant of the current cab cartel and the problems with it, but she’s now a believer in an alternative system.  If Uber comes under attack from vested interests, she’ll defend it.  If the chance to end the cartel comes up, she won’t fear because she already knows what the world looks like without it.  She can’t easily be convinced out of her experience.

It is for this reason that dictatorial countries not only ban literature that propagates new ideas, but also goods and services that compete with government monopolies and let people experience something better.  The Soviet Union feared blue jeans, jazz, and Marlboro cigarettes as much as free market textbooks.

If we want to break out of the educational rut it requires new ideas and new experiences.  We mustn’t only talk about new approaches, we must build alternatives.  The best part is, you don’t have to wait on anyone.  You can take your own path right now, and by so doing not only improve your life, but serve as an example to others of what’s possible outside the status quo.  Educational entrepreneurs, not just intellectuals, will change the hidebound approach to education.  It’s already happening.

While policymakers, pundits, professors, and provosts squabble about the future of higher education and jockey to secure their position, entrepreneurs are busy creating and delivering alternatives across the globe.  The educational consumer is enjoying new experiences and getting new ideas about education in the process.  The old guard can argue any which way they like, but at the end of the day they’ll have to prove more valuable to the learner than the myriad new options.  All the protections and advantages in the world can’t stop competition now.  Technology has helped break it wide open.

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Excerpted from The Future of School.