Tag: public choice

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

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.

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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.

Three Types of Racism

  1. Scientific Racism: “Some races are biologically inferior and should therefore be treated differently.”
  2. Cultural Racism: “Some races are culturally inferior and should therefore be made to adapt to the superior culture.”
  3. Institutional Racism: “Some institutions have bad incentives that attract scientific and cultural racists and enable them to act on their racism without fear of bad consequences.”

All three forms of racism exist.  I think the first two statements above are false, while the third is true.

Those who believe in either of the first two are not likely to change easily, and almost never through direct argument.  A steady drip of experience could potentially affect them, and more likely a generational change.

The third type of racism is the kind that can be meaningfully alleviated by ignoring, defying, or innovating around the bad institutions.  When the bad institutions are undermined the first two forms of racism tend to shrivel and go into hiding.  The existence of bad institutions protects and perpetuates racist beliefs and actions.

In the long term, markets do not reward racism.  Free association does not perpetuate it.  It is for this reason that racists everywhere are always forced to go to violent state institutions to codify racism in the face of market pressure in the opposite direction.  When the market isn’t racist enough, the law is invoked.

You can justifiably scream about people’s horrible beliefs, but until you alter the incentives they face the outcomes are unlikely to change.

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.

A Tale of Two Cities: Civil vs. Political Society

In one city it seems the innovation never ceases.  Bright and talented dreamers from across the globe flock there to build amazing things.  They create solutions to problems both commonplace and incomprehensible.  You can find entrepreneurs and investors working round the clock on everything from entertaining apps to asteroid mining to life extension.  In the past few decades alone the denizens of this city have revolutionized the planet, put massive computing power in everyone’s pocket and all the libraries of the world at the fingertips of the majority of earth’s population.

This city is always looking forward, upward, onward.  It is relentlessly focused on solving problems and improving quality of life.  It is driven by curiosity, new frontiers, and prosperity.  From this city have come simple yet revolutionary technologies that unlock billions in dormant assets like extra bedrooms, apartments, and cars.  Customers love them.  Investors love them.  And the city can be proud of the world-changing impact made by the companies headquartered there.

There is another city much different.  This city puts up barriers and blockades to keep bright and talented people out.  It proposes solutions to problems that don’t exist.  You can find demagogues and petty tyrants working 9-5 on everything from grocery bag taxes to restrictions on tree branches.  In the past few decades alone the figureheads of this city have managed to take record amounts of money from citizens and demand record levels of compliance with confusing rules and regulations.  They’ve taken untold creative power out of every citizen’s efforts and resources out of their pockets.

This city is always looking backward and downward.  It is relentlessly focused on creating new conflicts and categorizing everyone’s relative quality of life.  It is driven by fear, doubt, and preservation of the past.  From this city have come complex and confounding ordinances that strangle active assets and reduce quality of life.  Customers have no choice.  Investors can’t divest.  And the city can take credit for world-changing companies that have relocated to other cities to escape the Leviathan.

Both cities are the same place.  In this case, San Francisco.  But many cities share the same fate.  The citizens are the same.  Yet they live in two spheres simultaneously and the institutions and incentives in those spheres are so drastically different you can barely recognize the actors in each as the same people.

Make no mistake, they are the same people.  It’s not that some people are peaceful, productive producers and consumers and some people are meddling petty tyrants.  It’s that the same person behaves in both ways, depending upon the incentives and institutions.  The political man (as in mankind) is a barbarous, tribalistic busybody.  The market man is an inventive, curious soul.

I’ll be sharing a specific recent example of this split-personality disorder and what leads to the contrasting behaviors in the two spheres in an upcoming piece for The Freeman.  Stay tuned.

Update: Here’s Part 2.

The Futility of Reform

Don’t run for class president.  Don’t go to HOA meetings.  Don’t join a committee.  Don’t get involved in political campaigns.

All of these activities are about reform.  Get into the institution, play by its rules, and try to make it behave differently than it wants to.

Forget this approach.  It sucks.  Here are four reasons why.

It makes you less happy

Have you ever been to a town hall meeting?  Life’s too short to endure such horrors.  The worst life to live is a boring one.  The machinations of every political institution are stale and boring and full of self-serious processes, procedures, and practitioners.  Your every moment is too valuable to suffer through it.  It’s inhumane.  If Roberts Rules of Order are relevant to any effort you’re involved in, get out and go build something new.

You can’t change the game by playing

Political institutions do one thing best: restrict individual fun and freedom.  It’s natural to want to reduce the role of these rule-happy entities.  But you can’t win playing by their rules.  You can’t vote your way to a system where votes no longer curtail progress.

Trying to reduce the role of the state by engaging in politics is like trying to put a casino out of business by playing blackjack there.  “Oh, I have it figured out.  I’ll beat the house!”  No.  You won’t.  They want you to think that.  They want you to keep playing.  Abiding by house rules is no way to protest or change them.  Especially when the house gets a little richer every time you do.

If you don’t want the casino to keep luring people in don’t go in yourself.  Build something better that people want to go to instead.

Progress always comes from without

Political institutions are reactive.  They wait until the world forces them and then they change.  If humanity is a car these institutions are the brakes, able to stop progress but never create it.  If you want to get to a new destination you need the accelerator.

Accelerators are new ideas and products and services that forge ahead, paying no mind to the consensus-seeking bureaucrats nested in the status quo.  Accelerators don’t care about argument, nor protest.  They care about creation.  They build the world they want to live in instead of hoping to prevent its decay.

There is no permanence

The great thing about innovation is that it only needs to happen once.  That painful, gruelling, child-birth like experience of the creative act or eureka moment is born out of imagination, hard work, and courage.  If the result is of any value to the world it lasts forever and serves as the stepping stone to still greater innovations.

The wheel was invented once.  No one has to re-invent it.  It’s world-improving powers are permanent and irreversible.

Any apparent victory within a political structure is fleeting by definition and design.  You align all the powers and elites and interests just so after years of butt-numbing meetings and pompous proclamations from people you’d never want to have a beer with but now you must woo and coddle.  You have your mandate or constituency or whatever other serious sounding label you slap on the gaggle of interests vying for a win within the house rules.  You get your way.  Hooray!

Until the next month or year or election cycle when the new interests group outmaneuvers you and the tables turn in an instant.  Everything you created in your coalition vanishes, along with all the money you convinced people to throw at it.  The same tiny sliver of ground must be re-won, each time as if from scratch.  Only then do you realize that broader social forces created by the outsiders accelerating humanity are the master, not the servant, to these stale political institutions that apply their rusty brakes against all odds.

Go out and build something

Build something instead.  Exit.  Go your own way.  Forget the suits and speeches and posturing and canvassing and internal climbing and deal-making.  Go build your wildest dream.  Imagine and create things that excite you.  Move to a place that doesn’t suck.  Create a job that’s not boring.  Live a life you want to live.

Don’t wait for the world to change or beg for permission to let it evolve.  Go change your own world.  The rest will follow.

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:

Four Ideas I Don’t Think Are Crazy (but you probably do)

I think these ideas are so straightforward and unscary that the world wouldn’t even look that different tomorrow if we did this today.  Shortly after tomorrow, the world would look significantly better.

  • Stop funding the Post Office and replace it with nothing.
  • End the TSA and let airlines do security however they wish.
  • End the FDA and replace it with nothing.
  • Scrap criminal law and let civil law handle everything.

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.

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.

How Information Destroys Dictators (Are Demagogues Next?)

I recently saw a presentation by economist Antony Davies on the basics of Public Choice Theory and the predictable problems with democratic systems.  Ant laid out the median voter theorem, then observed that national elections continue to get tighter and tighter as candidates become more and more similar in an effort to win the median voter.

This process is accelerated by the information age.  Candidates don’t have to determine a platform and then go try to sell it, hoping a large chunk of people already agree.  They don’t even have to study opinion research and craft a platform most likely to win.  They can A/B test in real time.  Campaigns can go to Twitter and try out some slogans or positions, they can react immediately and pivot their posture.  The old saw that politicians put their finger in the wind is true as ever, but fingers are no longer necessary when you have a digital weather vane plus anemometer streaming real-time measurements to your smartphone.

In other words, power hungry politicians are more accountable to the shifting moods of the public than ever.  Don’t get too excited.  This is far worse than a free and open market society in terms of decision-making and individual and public good.  People behave differently when voting or tweeting than they do when their own skin is in the game, and a system that caters to the costless whims of the majority is far scarier than a truly free society.

Still, it might be better than a pure dictatorship.  I suspect the days of a charismatic, strong leader who wins over throngs of people with good speeches are numbered.  Absent a better means of communication, societies rally around symbols because they can convey quickly a complex set of feelings and ideas.  They can also be more easily exploited.  Simplistic urges like nationalism, shared hatred of perceived enemies, moral crusades, and other dumbed down tales of us vs. them are the stuff of dreams for power-hungry tyrants.  Whip them up into a sense of unity around a common (often violent, envy-based) cause, and you can own the country.  This is harder than it’s ever been.

More and more citizens around the world can jump online and see pictures of their supposed enemies.  They can see the other side.  Humans seem to have limited compassion, and proximity is one of the rationing mechanisms.  The information age brings the world closer, and therefore makes compassion able to span the globe.  A fine speech about barbarians at the gate can create a wave of support for a hawkish autocrat, but when you can see those ‘barbarians’ with your own eyes, read their stories, and talk with them, it’s harder to get behind.

The ease with which information flows – what economists would call a reduction in transaction costs – is dramatically reshaping the way we do business, culture, life, and politics.  At first we’ll see political figures that appear more like focus-group generated spokespersons, as they get better at following the trends.  The switch from forceful dictator to savvy demagogue is perhaps a small improvement.  But I don’t think it will stop there.

This reduction in transaction costs also means all the things previously thought to be collective action problems solvable only through the clumsy and corrupt mechanisms of voting and politics can be tackled through voluntary markets.  Imagine your neighborhood HOA, instead of voting on higher fees for a new park, letting residents access a Kickstarter-like app where they can pledge an amount they’re willing to pay and the project only goes forward when it hits its goal?  The political figureheads and representatives can be eliminated just as Bitcoin eliminates financial gatekeepers.

The easier it is for individuals to connect and share ideas and goods with each other, the less powerful political gatekeepers trying to take their cut and regulate our relationships become.  Ultimately, information will beat oppression.

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.

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.