Tag: markets

Gains From a Radically Different Daily Structure

The other day I was in line at a Chipotle in Chicago.  It was around noon on a weekday, so the line was almost out the door.  It took 30 minutes.  It dawned on me just how wasteful and unhappy the whole situation was.  Why should we all wait so long to get food when an hour or two later the cooks and servers would be waiting around with few customers?

The same is true for traffic during rush hour, parking on the weekends, and prices during vacation.  The absurdity of the suffering we all endure and the economic and psychic cost of all this waiting, planning, and crowding is hard to measure.  But it’s real.

It all stems from the same source: the regimentation of life.  Every kid goes to school at the exact same time every day, stays for the same number of hours, leaves at the same time, and has the same days off.  More variation exists in the working world, but not much.  The bulk of producers clock in at roughly the same time every morning, eat lunch in unison, and head home en mass.

The odd thing is none of this is necessary for a growing number, possibly even most of us.  How many jobs require someone to actually be physically present between the hours of 9 and 5?  Why the heck do kids need to sit in clumps of same aged children for identical hours to be forced to study the same things in the same way?  We can work from almost anywhere.  We can learn from almost anywhere.  Most of us have the tools, the freedom of movement, and the resources.  Why don’t we see a diversity of daily schedules?  Why don’t more people treat Tuesday as the weekend?  Why don’t more people do all their errands during the day and their work at night?  Why don’t more people abandon regular offices or classrooms altogether?

There are some benefits the the regimen, but not enough to justify the costs we endure.  These practices continue primarily because of a mindset.  We have status quo bias.  We feel guilt or confusion at the idea of not being present 9-5 at work or 8-3 at school.  It’s an obsession with externally defined roles and goals at the expense of outcomes and value created.  What do we want and need to learn or create or earn?  How and when can we best do it?  Those are the important questions and the answers, if we are honest, would vary widely and look little like the routines most of us subject ourselves to.

Imagine a world where kids freely explored, worked, played, and learned on their own terms and timelines.  Imagine a world where people of all ages worked when and how they worked best.  Imagine a week not punctuated by any regular rush hour or weekend or meal time.  Certainly patterns would emerge and some schedules would be more common than others, but absent our rigid adherence to an outdated schedule, supply and demand would be regulated by the money, time, and headache of peaks and troughs, and the market would smooth out and have smaller ups and downs.

The value of such a shift would be immense.  Think of how many hours people would not be sitting in traffic if few had to show up at the same time to the office or school in the morning.  Think about the hours and money that would not be spent during peak times for flights, hotels, parking lots, and Disney World tickets.  Think of the immense subjective value enhancement by not enduring the throngs.  Little if any of these major gains would show up in GDP measurements.  In fact, it may hurt GDP.  Less spending on the same goods.  Less need for parking structures, etc.

We are seeing a slow but steady move in this direction, which is part of the reason I’ve argued that GDP is a dated and increasingly useless measure of anything valuable.  Let’s speed up the process by asking “Why not?” instead of “Why?” about radical new structures that make us happier.  You let your kids unschool?  Why not.  You work remotely?  Why not.  You take the day off to go to the beach in the middle of the day?  Why not.

It might not be doable for you in any big ways, but I bet there are some stressful patterns in your life that are relics of a bygone era and can be shed with little difficulty.

The Final Enforcer of Contracts?

Think about construction projects.  Which projects have the highest likelihood of being over budget, under expectation, and past schedule?  If you’ve ever built or remodeled a house you might say all of them, but there is one organization that consistently sees cost overruns, quality problems, and time delays more than any other.  Government.

Government projects are notorious for shady contracts in the first place, broken promises during the project, and lackluster results after, including continuous repair and maintenance far exceeding what was originally planned.  Government is a bad general contractor and project manager.

This is particularly interesting when you consider one of the major justifications given for the existence of coercive states.  We need, the argument goes, some entity with complete monopoly power to be the final arbiter and enforcer of contracts.  Yet we have this entity right now and it is consistently worse at making and enforcing contracts for its own projects than almost any private company or individual.

When will we stop believing that the incentives magically improve in the absence of competitive pressure?  When will we look around and notice that all the order we see and experience every day is being maintained by a complex web of emergent beliefs, norms, and institutions within a constant give and take marketplace?

Why Pool Attendants Are Better Than Bureaucrats

Originally published in the Freeman, and there is also a mini podcast version below.

“We’re not checking IDs today,” the pool attendant told me.

We have a nice pool for the neighborhood, maintained with HOA dues. The homeowners association has tried different methods of monitoring who comes in to keep nonresidents from filling up the pool and squeezing out dues-paying members. A few times last summer, this was a problem. This year, a new company was hired to issue IDs and ensure that only residents use the pool. But not today.

Today the water was a bit cold and the pool wasn’t busy. The attendant realized this and didn’t hassle swimmers and sunbathers with an ID check. When he uttered those words it hit me in a flash just how profound it was. The ease with which he used common sense to bend the rules was a beautiful moment. Maybe you think I’m being dramatic, but let me offer a contrast.

A few years, ago I was in the security line at the airport with my wife. She removed her plastic baggy of size-approved liquids and gels and placed it in the container. The TSA agent picked it up and grunted, “Uh-uh.” Bewildered, I asked what the problem was. She said my wife needed to remove an item from the bag. I objected that every item was within the approved size and the bag was a recommended part of the procedure. The agent said that, according to regulations, the items are supposed to fit “comfortably” in the bag. They were pushing against the sides, ever so slightly stretching the plastic. We had to remove one. I asked her which individual item was a threat to security. She told us it didn’t matter which item was removed. The absurdity of the situation was beyond parody. There is no conceivable world in which a too-snug plastic bag of harmless toiletries could pose any possible threat to security. But it was the rule. Every bureaucrat knows rules must be followed without question.

If you’ve ever gotten a speeding ticket, as I have, for going 10 over at 3:00 a.m. on a five-lane road with no traffic, or for running a red light in a sleepy town with no cars for miles, you’ve felt the same. It’s clear that the reason for the rule — to keep drivers and pedestrians safe — is no possible explanation for its enforcement in these situations. Indeed, enforcement itself makes roads less safe due to police vehicles sticking out into the road and blocking other potential drivers. Meter maids handing out tickets for 2 minutes over in a lot surrounded by empty spaces is just as crazy. Parking meters and tickets are there to ensure spaces are available in high-demand times. What’s the point of ticketing when ample parking is available? Carding geriatrics for buying alcohol and so very many other examples of this silliness abound.

I posted a complaint to Facebook after the TSA incident. One of the commenters said, “Sure, following the letter of arbitrary laws in bad contexts is a pain, but would you rather have those agents doing whatever they want and using their own discretion on the spot?” The question becomes more poignant when you consider not just the bureaucrats armed with bad attitudes like those at the DMV but the ones armed with guns on the police force. Rule following is paramount in a bureaucracy because the alternative is also frightening.

It’s easy in the public sphere to get caught up in such debates. Is it more practical and just for government agents to use discretion in the moment when applying regulations, or for across-the-board universal application? It seems vexing: a problem without a solution. Whatever side of the debate you take feels uncomfortable. The letter of the law is oppressive and in some cases downright crazy, certainly counterproductive with respect to the law’s intended purpose; but discretion is a scary proposition as well, as many cases of selectively enforced law attest.

Outside of government, however, this is a nonproblem. When something is moved from the private, voluntary sphere to the public, coercive sphere, debates and division arise where none previously existed. The real problem is not rule following or flexibility; it’s monopoly. The absence of competition in the government sphere and all the attendant incentive problems create this unnecessary quandary.

It’s not that the police officers and TSA agents are worse people than my pool attendant; it’s that they face worse incentives. There is no metric for them to determine customer satisfaction or the value of their actions, because there is no profit-and-loss signal and no fear of losing our business. We are legally obliged to pay for and receive their service (or disservice.)

The pool attendant can be flexible with the rules when applying them strictly would annoy customers. He can become stringent when things get busy and residents complain about freeloaders. His company knows that at any time, they could lose the contract, and the only reason they are hired is to make residents happy and solve a problem. It’s the outcome that matters, and all procedures, policies, and rules are measured against that. This leaves ample room for experimentation and adaptation, with immediate feedback and accountability.

The public sector has no such flexibility because it faces no competition. The political sphere can make social and economic problems that have already been solved with incredible nuance seem unsolvable. It offers only yes-or-no, either/or, once-and-for-all-and-everywhere solutions, applied and enforced by people with almost limitless job security. It is a blunt tool, and incredibly unresponsive. It is unconcerned with outcomes and measures effectiveness only by inputs, intentions, and actions — not results.

Whether the letter of the law or individual discretion is preferable is the wrong question. Both are to be feared with state monopolized services. Neither is to be feared in competition because the choice is no longer binary but an ongoing dance of pluralistic discovery.

We’re not checking IDs today. Those five simple words reveal the beauty, complexity, and humanity of the voluntary market order.

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I recorded an audio version of this first, live on-the-spot at the pool using my iPhone.  I’m experimenting with some mini podcast episodes like this.

The Opposite of the Crowd

More than one successful investor has advised to observe what everyone believes and do the opposite.  When people are optimistic, be a pessimist.  When people are pessimistic, be an optimist.  When confidence is high and prices are rising, sell.  When confidence is low and everyone is running for the hills, buy with confidence.

I was considering this advice and trying to decide what the current sentiment is.  Are people optimistic or pessimistic?  Are they buying or selling?  I can recall a few epochs in my life where it was very clear.  In the ’90’s everyone was elated about tech investments and day-trading was everywhere.  Then the bubble popped and things cooled down as people become cynical about software companies and the internet.  In the early-mid 2000’s optimism was everywhere again.  The Dow would only ever go up.  Houses were a can’t-lose proposition.  Everyone became a real-estate speculator with pride. After ’08 there was a period of pessimism, but it didn’t seem to last all that long.

For the last several years it’s hard to identify clear optimism or pessimism.  There are a few sectors – like Silicon Valley and the VC world – that seem to be flying high, but overall there is a lot of indecision and indifference.  If you were trying to do the opposite of the crowd right now, it’d be pretty hard to discern what to do.  Everyone is cautious and confused.

Rather than thinking only in terms of pessimism and optimism we can broaden our lens and possibly identify an answer.  To behave opposite an indecisive crowd is to be decisive.  Now is the time to be definite.  Now is not the time for waffling and over-analysis.  Identify an opportunity, develop a theory, and act on it with definite purpose.  In this environment the consequences of failure are not all that bad, and there is a huge competitive advantage to decisive action because hardly anyone is taking it.

When to Take Action

I’m highly action biased.  I get the frustration of identifying a problem or having a new idea and wanting to do something about it, good and hard.  I believe jumping in with both feet as soon as possible is always preferable to lots of analysis.  Still, there are times when the best thing to do is nothing.

This is particularly true when the problem is a grand one that affects all of society.  Just because you realize that there is something wrong with X system or process doesn’t mean there is an obvious and immediate action to take.  The realization is the first, often most powerful but also most fleeting step.  It’s easy for action biased people to get antsy and want to do something quick.  Start a campaign, write an article, launch an organization, etc.  Often though there is no clear vision, understanding of causal factors involved, or strategy.

Our culture is one that provides social rewards for any kind of action.  If you say you’re doing something to alleviate poverty, people congratulate you no matter how stupid or useless or even counter-productive your efforts might be.  Volunteering is deemed noble and effective, whether or not it’s either of these things.  The obsession with nonprofits and vilification of win-win for profit activities further incentivizes blind action.  Start a club.  Host a fundraiser.  Do something!

The most profound improvements in the world are typically born out of many years of following the initial identification of a problem deep down the rabbit hole.  Those who see something they don’t like and jump to do something come and go, as do the effects of their efforts.  Those who internalize the problem – let it steep, let it alter the way they think, pursue an in-depth understanding of the problem and knowledge of tried and untried solutions, and only act when the idea they hold is one that doesn’t just suggest but demands action – are typically the ones who best solve it.

There are a lot of dysfunctional beliefs and institutions around us.  Discover them.  But when it comes to action if you feel the itch ask yourself exactly what kind of action you want to take and why.  Do your ideas demand action?  That specific action?  Will you be unable to sleep without taking that specific action?  More importantly (and much harder) ask if the solution you have in mind can be obtained within the context of a for-profit business model.  If not, the odds that it will work are incredibly low.  If a solution is real, it will create value.  Non-profits can create value, but it’s much, much harder to know if they are and far too easy for them to do the opposite.  If the solution is political it’s almost assuredly going to do more harm than good.  If the goal is good feels, launch a nonprofit effort or lobby politicians.  If the goal is effectiveness, try as hard as you can to discover a way in which your ideas can generate a profit.

Until action is clear, and clearly value-creating, let your ideas direct you to further understanding.  Channel your hunger to act towards the act of learning more.  When the time is right and the idea is ripe you’ll know.

Why I Love Las Vegas

I don’t play slots or gamble outside of house card games with a few buddies.  I don’t really enjoy the nightlife party and drinking scene.  I don’t do strip clubs.  I’m not a fan of musicals and shows.  Yet I love Vegas.

The first time I visited Las Vegas for a conference I was blown away by how much I loved the atmosphere.  Yes, it’s cheesy and ridiculous and lewd and in your face.  But it has in extreme measure that thing you find more in most American cities than just about any country in the world: customer service.  America has a deep and strong culture of entrepreneurship, hard work, and (partially) free-markets.  This results in a relentless drive and competition to please customers.  “The customer is always right” is a powerful adage that drives business, whether the owners like it or not.

Ludwig von Mises described the situation of producers in a capitalist economy well:

“Descriptive terms which people use are often quite misleading. In talking about modern captains of industry and leaders of big business, for instance, they call a man a “chocolate king” or a “cotton king” or an “automobile king.” Their use of such terminology implies that they see practically no difference between the modern heads of industry and those feudal kings, dukes or lords of earlier days. But the difference is in fact very great, for a chocolate king does not rule at all; he serves. He does not reign over conquered territory, independent of the market, independent of his customers. The chocolate king — or the steel king or the automobile king or any other king of modern industry — depends on the industry he operates and on the customers he serves. This “king” must stay in the good graces of his subjects, the consumers; he loses his “kingdom” as soon as he is no longer in a position to give his customers better service and provide it at lower cost than others with whom he must compete.”

In other words, the customer is not only right, the customer is king.  The businesses are the subjects, always vying the for approval and happiness of their Kings and Queens.  The truth, of course, is that the producers are also themselves consumers.  Those who work in the hotel, or mall, or diner, or factory are also consumers who patronize businesses.  We’re all serving each other.

In the case of Vegas, the notion of customer service reaches new heights.  It borders on customer worship.  From the minute you step out of the concourse your eyes are dazzled with light, sound, and a flurry of activity intended to delight and amaze.  Every square inch of the famous strip is covered with people and signs and sights begging to make you happy.  The chubby middle-aged guy from the Midwest wearing a cheap Wisconsin Badgers sweatshirt is courted and complimented by beauty and talent all around.  The question that seems to be always on the mind of the businesses there is, “What can we do to make you happy?  How can we exhilarate you?”

You may call it tacky, but there are few places in the world where the commonest of people are treated like royalty 24/7.  There is something magical about it.  That’s what I love about Vegas.

It’s Not About GDP

I’ve been thinking lately about GDP, and common ideas of economic progress more generally.

I just attended an event about the causes of and cures for poverty in the poorest countries.  So much of the discussion utilized comparisons between countries based on measures of GDP, GDP growth, and the like.  The more I thought about it, the less sense this made.  Not that GDP doesn’t decently correlate to overall wealth, opportunity, and progress – it does – but that it does less and less as technology and markets change.  GDP charts would fail to show, for example, the tremendous progress made in many poor countries by the fact that nearly everyone now has access to cell phones.  In fact, GDP does a bad job at measuring the progress of information/communication/data in general.

Consider MOOC’s and the abundance of free online learning.  Since the education industry is a chunk of GDP, putting it all out there for free can actually bring GDP numbers down, even as human well-being and human capital increase.

Think about other areas of misleading measures.  What you can do with a computer or smart phone in terms of sending data across the globe means fewer freight ships, the things easily measured in GDP calculations, but not less progress and opportunity.

Automation, information technology, decentralized networks, open-source…these make the world better and increase human flourishing, though they don’t do much for old-school metrics like employment and GDP.  Being listed as on the payroll of a company doesn’t always equal being better off (depending upon what else you might be doing of course), and having a larger number of physical objects to count doesn’t either.

For this reason, I don’t take much stock in those who lament slowed economic growth and fear it will bring an end to the complex market systems in countries like the US.  We used to consider farming the only thing that really mattered for economic well-being.  Then manufacturing.  As machines can do more of both of these, we humans can be redeployed in myriad ways previously unimagined.  Think about all the micro entrepreneurship going on today.  Think of crowdfunding for one-off projects.  I know authors who probably aren’t technically “employed” most of the time, if at all, and don’t produce GDP enhancing widgets, but they live wonderful lives by pitching book ideas on kickstarter, raising the money, travelling the world, doing the writing, and selling ebooks.  They may make aggregate data appear we’re economically worse off, but they’d rather not trade their life for one hoeing rows or assembling buggies.

The fact that no one quite knows how to calculate the value of the internet and other information age technologies probably causes us all to underestimate just how well-off we are today, and how bright the future is.  It’s the perfect time to seize the opportunity and do something new.  Carpe diem.

Why I Don’t Care About Income Inequality

AbundanceSmartPhone

In the 1980’s if I told you for only a few hundred dollars anyone could have a $1 million asset in their pocket you’d call me crazy.  But here we are.

The chart above (actually a picture of a chart taken with my iPhone and uploaded to this blog with an app to further emphasize the point) is from the book Bold: How to Go Big, Create Wealth and Impact the World by Peter Diamandis and Steven Kotler.  It illustrates why I think worry about and policy efforts aimed at changing differences in income between rich and poor are dumb, destructive, and miss the point by being stuck in a dead paradigm.

The above chart only scratches the surface.  It’s hard to comprehend just how much wealth (not income) we have today compared to 20, 30, or 50 years ago, let alone a century or two ago.  Anyone who complains that income gaps are growing misses the miracle under their nose of wealth exploding, and more accessible to individuals at any income level than ever before in human history.  50 years ago, it could take a hefty sum to launch and run a basic advocacy organization, for example.  You would need a secretary, long-distance phone line, office space, filing cabinets, a travel agent, a print shop that you’d have to visit to approve runs of literature (at least several thousand at a time), space to store them, shipping cost, etc. ad nauseum.  Today you can setup a WordPress website, bid out for design work on Fiverr or 99 Designs, get VistaPrint to run a few hundred after proofing a digital copy, book your own travel, store your own files, run email campaigns with MailChimp, etc. ad nauseum for a few hundred bucks.

Anyone can write and record songs, publish books, start businesses, sell goods and services, learn anything in the world, or meet people across the globe for free or close to it with a phone and some WiFi.  These things are equally accessible to rich and poor.  Wealth – as measured in opportunities and fulfilled desires, the real end of money – is greater than ever and flatter than ever.

The biggest obstacles are those erected by the wealthy to stymie competition from upstarts taking advantage of all this accessible capital.  Licensing requirements, regulations, wage laws, tax laws, immigration restrictions, intellectual monopoly status on non-scarce resources, and subsidized education and idleness are the biggest hurdles to the poor seizing the newly available wealth and creating a better life.  It’s not about income or even net worth.  It’s about what you can do and the value you can create and consume.  The chart above and the world around us indicate that there has never been a more broad and deep spread of wealth.

GDP doesn’t matter.  Neither does income.  Opportunity matters.  Value matters.  Times have never been better across the board, which is exactly what most threatens those precariously perched at the perceived top.  Don’t worry about them.  Let the doomsayers and wannabe warriors of equality clamber for an illusive goal that doesn’t make anyone better off.  Take advantage of the exponential growth in opportunity all around you.

If You Don’t Like Profit, Advocate Free Markets

I don’t find anything at all distasteful about profit.  Profit seeking behavior is as natural and inescapable in humans as breathing, and deserves no moral censure.  When placed in an open and voluntary institutional setting profit is an indicator of value created for others.  Still, a great many people find profit disturbing and wish to curb it.  If that is you, you have no practical choice but the full-fledged support of free-markets.

Competition exerts a relentless downward pressure on profit.  Open markets invite competition and power positions in the market are never secure.  It is for this reason that those in the temporary position of high profit-earners are most likely to be the ones lobbying for new rules and regulations.  They don’t want to compete, they want to monopolize.

The only true monopoly is government monopoly.  All other applications of the term are illusory and not to be feared.  Peter Thiel has famously advocated for monopoly, but he uses the word to represent a business that creates a product so unique it is all but impossible to be replicated by competitors for a long period of time.  That is not the same as the textbook description of monopoly with all of its attendant dangers.  The only true and dangerous form is government monopoly.  It eliminates not only present competition, but potential competition.

Unlike competition, monopoly exerts no downward pressure on profit.  Indeed, its sole purpose is to suppress competition so that profit can balloon, without any corresponding increase in value creation.  In this sense, the critique that, “There is too much profit in X industry”, or, “The profit motive corrupts Y good or service”, is correct.  In a truly monopolized industry, the profit motive is terrible.  Again, not because of the motive itself, which is ever-present in all humans, but because of the institutional setting which prevents all of the incentives to curb and corral profit motive towards value creation and away from plunder.

In monopolized industries the profit motive is very destructive.  Do not be fooled by tax designations or accounting terminology.  Governments and “non-profits” are also profit driven.  It is here where profit is the most dangerous and often deadly.  The justice and law enforcement industry is all-but entirely monopolized by the state.  Because it faces no real competition there is no downward pressure on profits.  It is therefore one of the most profit-driven enterprise imaginable, only it needn’t create value to profit.

An ever growing number of laws and regulations ensure that more and more people are guilty of crimes.  This is a highly profitable state of affairs for the justice system.  Law enforcement routinely harass and abuse and give out tickets for violations of no practical importance.  They find or plant illegal substances for the sole purpose of seizing assets of the accused.  Prosecutors, medical examiners, judges and law enforcement regularly lie, exaggerate, and falsely convict.  The profit motive is what drives them.  They have a monopoly on the administration of justice, so they invent whatever means they can of increasing the profitability of the enterprise.  The greater the number of crimes, the greater the receipts.  Indeed, the origin of government monopolized police and courts attest to the revenue-enhancing motive at their core.

We cannot wish away the profit motive, or hope to elect or appoint people who magically do not possess it. (How would they win an election or appointment without it?)  We can, however, realize the danger of granting monopoly status to any profit-seeking enterprise, including governments.  If it is profit that is driving the corruption and abuse among police, courts, and other sectors, the surest way to suppress the ability to generate more profit is to open it up to competition.

Science Doesn’t Exist

I sometimes hear people say things like, “If science supports X policy, it should be enacted.”  Hiding behind the word science for your moral or political beliefs is a bad idea, because science doesn’t exist as something that can be accountable or take responsibility.

Of course there is a method of inquiry called the scientific method.  It is particularly useful in the study of physical objects, forces, and relationships – what we call the physical sciences.  But science doesn’t say anything, and it certainly can’t do or enforce anything.  Science isn’t a person with positions on issues or an ability to clearly articulate and act on them.  It’s a tool and a way of thinking.  It’s a process that helps people test and falsify and eliminate possibilities and make better theories.

Even if smart people using the scientific process arrive at a theory about the physical world and say they believe certain policies should be enacted, it’s not a trump card to then say that science demands legal action.  Science can’t demand anything.  Scientists can demand legal action, but they almost always do so based on a romanticized view of the political process.

Putting aside the fact that there is no such thing as “settled” science – indeed, it is an open and ongoing process, not a body of accumulating, unchanging facts – even when research reveals certain relationships it does not follow that policies imagined by scientists should be enacted.  Political-made law is not like the laws of science.  People with incentives having nothing to do with the facts or the outcome must posture and pontificate and make deals before passage.  The end result only passes if it sates the appetites of enough rent-seeking interests, regardless of whether it resembles what high-minded scientists imagined.  Enforcement is even worse.  Carried out by unaccountable armies of bureaucrats (some armed, all dangerous), laws are a cudgel used selectively by those in power to further cement it.

When you hear people loudly demanding political action based on ‘settled science’ don’t give them a pass.  If a theory about the physical world is really sound, there’s a built-in incentive to adapt to it without resorting to force.  It may happen imperfectly and slower than some experts would like, but ten times out of ten I’d trust the market process more than the political one to discover the best trade-offs.

Markets in Everything and not Just in Theory

The main arguments for government intervention center around public goods and collective action problems.  These arguments are weakening.  Far from being the sole domain of bureaucracies, these are the areas with the most opportunity for innovation.  We see more of it every day, and there is more to come.

Scholars in the classical liberal tradition have argued on ethical and efficiency grounds for markets in everything.  Odd as it may at first strike us the commodification of everything from vital organs to votes allows for freer, fairer allocation and coordination and reduces waste.  Many people will debate the desirability and possibility of markets in everything.  These are interesting discussions but the great thing is no one needs to win them.  We can create markets in everything right now.

Consider AirBnB or Uber as a first step.  People have unused resources like a spare room or a car.  Technology reduces transaction costs associated with simultaneous coordination among thousands of people.  We can turn our unused resources into valuable commodities to buy and sell.  Take it a step further and consider what else we could do.  Why not solve collective action problems that plague community projects with Kickstarter or Groupon like mechanisms?  Want a new park in the neighborhood, setup the campaign and don’t break ground until enough people have voluntarily pledged.  Those who don’t will be easily seen and neighbors can try to convince them to join.  No one’s taxes or HOA dues go up across the board or against their will.  No simple majority can force everyone to their preferred allocation of resources.

There is nothing inherently noble about the political means of allocating resources and addressing collective action problems.  In fact, it comes with a whole heap of unique problems.  Opportunity exists all around us to move more and more processes out of arbitrary first-come-first-serve and political machinations and into the dynamic, voluntary marketplace.

In fact, the less of a market you see in a good, service, or industry, the greater the opportunity.  I launched Praxis because higher education had become more and more cartelized.  There’s not enough of a market.  I want to bring higher ed back into a more competitive market.  Health care, transportation, and finance are top candidates for major disruption.  They’ve become stagnant and further and further removed from the open market process.  That creates wedges of opportunity.  From the major to the mundane, technology allows us instant, decentralized communication and reduces transaction costs associated with large groups with diverse desires.  These means we can bring just about anything into the world of free exchange and enjoy all the advantages and flexibility of the price mechanism.

What can you bring to the market?  I’m excited to see what’s next.

The Education Calculation Problem

In the last century a minority of great economists, led by Ludwig von Mises, clearly and forcefully pointed out the impossibility of calculation and planning under a socialist economy.  History bore them out, and the Soviet Union collapsed under the crushing weight of its own absurdly uncoordinated production patterns.  Absent a price system, planners grasped for anything they could measure in order to get the right mix of goods.  They judged the success of the nail factory by the total weight of all the nails it produced, which naturally led to factories producing giant nails of no use to anyone.  Then they switched to the number of nails produced, which led to tiny nails, equally useless.  It may seem like a silly case of some rascally producers, but regardless of the intentions or skills of the workers or planners, how were they to know what type, size, quantity and quality of nail to make?  They had no connection or effective communication channel to the consumer.

The insights about the impossibility of planning under total socialism apply equally to so-called “mixed” economies, except that whatever remnants of a market are in operation will stave off total collapse at least for a time, acting as a kind of safety valve.  In other words, the same top-down disorder that resulted in a surplus of mustard and a shortage of bread can be expected in the “planned” segments of any economy.

Education is “mixed” in the US, but more top-down than market based in almost every case.  There is almost no relationship between the end users of education – students and their parents – and the producers and planners in the system.  It is no wonder the education system focuses on compliance, obedience, respect for authority, behaving exactly like other people your age, memorizing things whether or not they’re valuable, and a lot of other characteristics inimical to a free society and entrepreneurship, production, and innovation.  They focus on these things because they can be measured absent a market.  Something like student satisfaction is far more important, but only the nuanced, complex, adaptive market order can cater to such individualized, subjective vagaries.  Top-down orders don’t know what to do with it so they endlessly tweak and argue over Common Core and other arbitrary outputs that can be measured.

Are teachers paid too much?  Too little?  Are facilities too big and costly?  Too small and dated?  Are class sizes too big or too small?  Do students need more tech, or less?  Longer school days and years, or shorter?  More extra-curriculars or fewer?  More or less homework?  More STEM or more arts?  No one knows, and no one ever can know absent a market.

Imagine markets for other goods and services if they were managed in this way.  Does your local grocery store need more of fewer types of refried beans?  Do you think a town hall meeting and a few bean board elections would come to a better solution than the market process?  Does “society” need more trucks and fewer sedans?  The absurdity of these questions ought to give pause before we enter ridiculous debates about whether schools or universities need more of this, or less of that.  Good intentions and good people can’t make sense out of the chaos.  Only markets can.

The more managed a system, the more it relies on what can be easily measured, and will therefore tend to produce those things rather than what is of value to consumers.  If this goes on long enough, consumers may forget that they even have an opinion, or that they could even value things other than the low-quality product they’re given.  If you’d never lived in a world with a flourishing, diverse market, you may not even know that you wanted low-sodium extra smooth refried beans, because you didn’t even know canned beans existed.

The solution in socialist countries was private property.  Even at its peak, those who went outside the system and operated in black markets kept some semblance of quality of life possible.  Once people were formally allowed to take ownership over their own lives and resources, markets and a functioning price system emerged and quickly began the ongoing coordination and creative destruction of a beautiful spontaneous order.  Consumers were once again king, and their wants and needs (sometimes unknown until entrepreneurs offered it to them) were the ultimate driving force.  Production patterns became flexible yet highly efficient at moving resources from lower value to higher value uses, as determined by the preferences of the end user, not some board or commission.

Unless private property (the ownership of ones own learning) in education reigns, educators will continue to grasp in the dark for what to produce.  They’ll tend toward uniformity, authoritarianism, and clumsy, blunt approaches that lend themselves to easy measurement.  Once consumers seize ownership of their own learning and seek products and services outside the grip of the state, the education market will reach full bloom and a cornucopia of methods and means will emerge.  Until then, the question, “What should education look like?” is as unanswerable as, “What should an economy produce?”.

No Home Should Sell for Less Than $100,000

I am appalled by the fact that some people live in homes that cost less than $100,000.  It is truly tragic, and something my conscience can hardly bear.  That is why I support laws that require all homes sold to sell for no less than $100,000.

That is the same argument made by those who support minimum wages, “Sweatshop” bans, and other workplace and compensation regulations.

Every exchange has two sides.  Both parties give something to get something.  When acquiring a home, you give money to get whatever value the home will provide you.  When acquiring a job, you give your productive capacity for money.  If a home costs more money than you have, you simply can’t buy it.  If a wage costs more productive capacity than you have, you simply cannot “buy” it, or exchange your labor for that wage.

Demanding that all homes be sold for at least $100,000 does not magically put money in the pockets of those who have less than that with which to purchase a home.  Demanding work be compensated at a certain price (whether by wage floors, forced offering of benefits, work hour restrictions, etc.) does not magically enhance the productive capacity of the worker.  In both cases, the least well off have simply been priced out of the market.

You may feel sad in your quarter million dollar home when you realize many people have $60,000 houses, but only a fool would respond by demanding homes be sold at a higher price to ease the plight of the less well off.  When you feel bad about people only earning a few dollars an hour, it would be just as foolish to demand that the jobs they wish to purchase only be sold for a higher price than they can afford.

It Goes Both Ways

People have a tendency to put themselves into one role in the market, and vilify the other.  They think of themselves as consumers, and producers are nasty.  They think of themselves as employees, and employers are greedy.  They think of themselves as sellers, and buyers are stingy.  They think of themselves as borrowers, and lenders are predatory.  To condemn any of these roles in the market is to condemn oneself.  We all play every role at one time or another.

Why is it wrong for the price of gas or groceries to go up, but right for the price of your home or the value of your 401(k) to go up?  You’re the “greedy” seller when you post on Craigslist.  You’re the “stingy” capitalist when you shop for the bank with the highest interest rate.  You’re the one “taking advantage of others” when you take a few extra minutes on lunch break or treat customers rudely.

There needn’t be any bad guy.  The point is, in a market we’re all at once buyers and sellers, producers and consumers, borrowers and lenders.  These are functions, not people, and all market participants play these roles at various times.  None of these roles are more or less noble than the other.  They’re all wonderful, so long as they’re all voluntary.  If they’re voluntary, they only come into being when another person, playing the counterpart, agrees to the exchange.  There are no sellers without buyers, there are just people with stuff they can’t get rid of.

Go easy on the one-sided category judgments.  Next time you’re tempted to condemn a company for taking advantage of employees, for example, consider all the employees that take advantage of the company as well.  Consider that both parties have to agree to work together, and both are aware of the ways in which the  other will try to get the most for the least in the deal.

Milton Friedman on Risk, Choice, and Regulation

A while back I came across one of many video clips in which Milton Friedman insightfully responds to a tough question.  The question is about Ford making a car with a part that saved 13 dollars, when studies showed that using the more expensive part could reduce harm in the case of collision and potentially save 200 lives.  The questioner feels this is a clear example of the callous, money-grubbing nature of the free market, the implication being that some regulatory body should prevent Ford from making such calculations.

Friedman asks how much Ford should be willing to spend to reduce the risk of a single death.  The student refuses to answer.  Friedman’s point is that the question was not over any principle, but over what amount of money Ford should be willing to pay for a single life.  It’s about costs, benefits, and trade-offs.  The student doesn’t seem to follow, but Friedman is dead-on.

Let’s say Ford decides to install the more expensive part.  Their profit margin goes down, maybe some shareholders start selling shares.  How do they make-up the difference?  Maybe they lay off a few low-wage workers.  Maybe they raise the price of their cars, putting them out of the reach of a few low-wage consumers.  Is it worth it?  Maybe these consumers would have been happy to buy the cheaper car, even if it was less safe.  Aye, there’s the rub.

Friedman mentioned this, but in the short Q&A there wasn’t sufficient time to really hammer it home. This real discussion is not about what Ford should make and sell, or how much risk is too much. It’s about who should decide how much risk is acceptable.  That’s the principle worth debating.

Advocates of free-markets like Friedman believe that each individual is in the best position to decide how much risk they are willing to incur.  In every action, every purchase, and every sale, there are costs, benefits and risk involved.  You are the best person to decide whether you should buy a motorcycle, or not buy the most expensive dead-bolt, or produce and sell an extremely sharp cooking knife.  The principle Friedman was referring to is that of freedom to choose what decisions to make and what is in your own interest.

Those who favor regulatory intervention want such choices made once for all by bureaucratic bodies.  They want a set standard of tolerable risk to apply to every human in every situation, no matter how costly abiding by it may be, or how much poverty or even death may be the unintended result.  These regulatory bodies are in the perfect situation to be captured by the largest, most connected businesses who will get them to pass regulations that help them and hinder smaller competitors, with no concern for what it does to consumers.  These bureaucracies are also most attractive to the very kind of unscrupulous, greedy sociopaths that interventionists worry about in the marketplace.

If Ford sells a risky product it may be a bad move on a variety of counts, but no one has to buy it.  Government decisions are the only ones that every single person is forced to abide by, no matter how bad they may be.  Regulatory intervention not only falls far short of free-markets on moral grounds – coercing everyone to make choices set by elites – it dramatically reduces the benefits to all.  It destroys wealth and the incentive and space to innovate.  It rewards political gamesmanship over consumer service.  It interferes with valuable signals sent by and to all market participants about what level of risk people want, and what makes them happy.

There are trade-offs all around us.  The question is not which decisions are correct for other people – we have a hard enough time figuring out which are correct for ourselves.  The question is, where should these decisions be made, and by whom?