While much has been written about entrepreneurship in business and economics publications, much less has been written about entrepreneurial failure. Some writers in the popular press have interesting things to say, such as Megan McArdle’s The Up Side of Down: Why Failing Well Is the Key to Success.1 She finds that failing early on and understanding the cause of failure provides a powerful learning process that can lead to better opportunities in the future. Economists have also written numerous pieces about failure including F. A. Hayek, Israel Kirzner, Joseph Schumpeter, and, more recently, Russell Sobel in his Concise Encyclopedia of Economics entry.2 Failure removes resources from poorly performing enterprises so they can be put into more useful ones. It is often a necessary precursor to the very things we view as successes. This self-healing process that constantly moves under-valued means to more preferred ends is a prime motivator of economic growth. “When questioned more deeply, nearly all the entrepreneurs also admitted to having failed, often multiple times, before finding success. Sharing their stories of failure, rather than success, provides insight into how the real process of entrepreneurship functions, both at the individual and macro levels.” Still, there has been very little discussion about how entrepreneurs themselves feel about failure. During my career teaching economics of entrepreneurship in Silicon Valley, I have had the opportunity to question dozens of successful entrepreneurs. Asked how they became successful entrepreneurs, most initially said that they were lucky. But I would always probe further. Everyone has luck, after all. The more interesting question for economists is how entrepreneurs handle luck—how they anticipate and respond to unforeseen changes. When questioned more deeply, nearly all the entrepreneurs also admitted to having failed, often multiple times, before finding success. Sharing their stories of failure, rather than success, provides insight into how the real process of entrepreneurship functions, both at the individual and macro levels. At the individual level, failure spurs the learning process that is useful for an entrepreneur’s future endeavors. At the macro level, failure can lead to new products, processes, and knowledge that drive economic evolution. Below are two cases that illuminate the learning process and the creation of new knowledge at the heart of economic progress. While nearly all speakers admitted failure, there was one who did not. He is an informative case. We will call him Ralph. I have known Ralph for over thirty years. We were partners in several multi-tenant industrial property developments starting in the 1970s. Ralph, as the managing partner, developed good relations with his tenants over the years and maintained his properties in excellent condition. However, at the height of the recession in 1982, many of the tenants were struggling to stay in business and some failed. The partnership was unable to make its loan payments and, eventually, had to give a couple of properties back to the lender. We were not alone, as many owners found themselves in a similar position in Silicon Valley. The partnership lost the remaining equity, though,over the years it had had several distributions and the benefit of some tax shelter. The partners still considered it something of a failure. So, when I asked Ralph to talk about his failures, I was surprised when he seemed at a loss. He finally said he could not think of any. So, I brought up those properties in Santa Clara where we turned the keys back to the lender. He said, “Oh, those weren’t a failure. We had a good strategy. It is just that conditions changed so unpredictably that they could not have planned for. Our best business decision, given the circumstances, was to give the properties back.” There are several interesting elements here. First, Ralph’s conception of failure meant making a bad business decision in real time. Though the partners lost some money, he believed that he made the most reasonable decision given the circumstances. He had great faith in his ability to see the best outcome. As David Harper discusses in his book The Foundations of Entrepreneurship and Economic Development,3 Ralph demonstrated high economic self-efficacy, the sense that he had the right tools to succeed in the field of development and management. Also, failure was not a reflection on him. If things radically changed that were out of his control, blaming himself served no value. He accepted uncertainty, but still maintained the general sense that he could respond effectively using that which he could control—what entrepreneurship scholars call a strong locus of control over the environment in which he was working. There was an additional entrepreneurial recognition here. If properties were going back to lenders, Ralph asked himself how he could use this challenge as an opportunity. As he looked at his situation and that of others around him, he saw that he might use his local knowledge and reputational trust to create an option that others had not noticed. Many lenders took back property during this period. Most of those lenders were not local to the area and had little knowledge or experience leasing multi-tenant industrial space. Ralph realized that he could leverage his experience and good relations with local businesses to give him a head start when the business cycle improved. He began to reach out to lenders of other projects pointing out that, even if they foreclosed, they still had to fill their vacant spaces. He understood that many tenants who left under difficult economic conditions would be back when things improved. They would gravitate to the brokers and owners who served them well in the past and the properties those owners controlled would be the first to fill again. He set up meetings with his preferred lenders and created a set of workouts. These would allow current owners to extend their loans and keep the properties by renegotiating the terms, often more stringent, but also giving an equity position to the lender in exchange for the renegotiation so that the lender could share in the upside when conditions improved. Lenders were initially resistant. Foreclosing demonstrated to other borrowers the lenders’ serious willingness to take on the expense and risk foreclosure entailed. However, as more buildings fell into foreclosure, some lenders began to realize that actually getting tenants was the ultimate solution for any building owner. That required local, subjective knowledge and reputation. As new owners with no connection to the properties’ rental landscape, lenders would require a local broker with contacts. But those brokers were often involved in the very properties that changed hands and were unlikely to use their best efforts. Ralph was able to demonstrate to several lenders that individual workouts with favorable equity positions would incentivize both borrowers and lenders to refill the properties as quickly and efficiently as possible. This proved so successful that Ralph spent the next couple of years working with owners and lenders as a consultant to create new loans on distressed properties where both sides benefited. An important takeaway from this is that successful entrepreneurs often face what others would deem as failure. However, they view these situations, not as outcomes, but as challenges and opportunities to create something new. All the entrepreneurs I met have experienced these. Not all view them in the same way. Many are very honest about what they perceive as their own shortcomings and business blunders. However, they also viewed their experiences as learning opportunities. As one told me, there is no disgrace in making a mistake; it is only foolish if one makes the same mistake twice. It is one of the strengths of Silicon Valley that venture capitalists see this hard learning as a positive and many feel more comfortable supporting entrepreneurs who have had a “failure” as long as that person understands why they failed. Certainly, as individuals, entrepreneurs and innovators face difficult barriers. Forbes estimates that 1 in 5 small businesses fail in the first year and 50% in 5 years. Startups are prone to numerous shortcomings including lack of advertising, products that do not entice customers, lack of adequate capital, pursuit of a single product with a short lifespan, and many more challenges. Some commentators such as the editorial staff at The Economist in “Entrepreneurs Anonymous” have complained that the high rate of failure among new entrepreneurial ventures leaves behind many broken would-be innovators. Jill Lepore in “The Disruption Machine” likens start-ups to a pack of ravenous hyenas that are “ruthless and leaderless and unrestrained” and “devastatingly dangerous.”4 For those who choose to pursue an innovative venture, the road can be treacherous. Even when successful, it has been estimated that entrepreneurs often earn no more and many less than had they pursued a corporate position in an established company. This reality invites a journey through another entrepreneur’s experience that did not work out as well as Ralph’s but still demonstrates an interesting facet of failure and success. Susan was the product manager for a large software company, call them Apex. As a product manager, she got early notification of all her product glitches. After the introduction of a new software package, she received a growing number of complaints about a particular bug in the package. She had her team create a workaround, but this solution had customers jumping through several hoops. On her own, Susan investigated the problem and came up with a possible simplified and integrated solution, as well as a reasonable budget and schedule for implementation. She took it to her vice president and explained how the flaw could be fixed. He asked if customers were complaining about the work-around and she indicated that they were not. He killed the improvement saying that the potential improvement was not justified if customers were making do. In his view, the cost of the solution was too great given any potential increased revenue it might generate. Susan did not agree. Rather than fight through the organization, and since she had already done all the foundational research, she decided to create the improvement on her own. Working outside of normal hours, she hired programmers familiar with the software application and developed an efficient solution that would work with her company’s existing software as an add-on. Once her modification was beta-tested, she quit Apex, formed her own company, and began offering the new package to companies that used the Apex suite. Those who tried the new add-on were pleased and word spread about its availability. Soon, Susan was hiring more people, renting space, and setting up an office. She created a management structure that included marketing, human resources, and quality assurance and control divisions. Her company grew to over one hundred employees and most of her time was consumed by internal management. However, Apex noticed how many companies were using her software add-on and the revenue she was generating. As her company and revenue grew, Apex became more interested in solving the problem internally. With the substantial resources at its command, Apex reworked its package, removed the faulty element, and made Susan’s rival product unusable in the new software suite. Apex’s customers were encouraged to upgrade and, as they did so, Susan was so involved with her company internally, that she was slow to look outward at this competition and anticipate its ramifications. Susan’s revenue began to decline as customers moved to the new software. She cut costs but was reluctant to cut staff. As the yearend approached, revenue continued to drop and cash reserves dwindled. Susan borrowed where she could to pay bills and keep serving her remaining customers. By Christmas, the handwriting was on the wall, but she resisted laying off the rest of her people before the holiday. She was able to keep critical staff until the new year but was forced to declare bankruptcy immediately after the holiday, letting everyone go. Reflecting on this, Susan said the hardest part of this process was telling her husband that she had borrowed all the money in their 401(k) to keep the company going as long as she did. The saving grace for her was that her husband forgave her and her marriage survived. Susan has since returned to corporate life and she is the CIO for an innovative, growing company. She learned several lessons for those who wish to start their own business. First, have a clear metric about when enough is enough. She strongly subscribes to McArdle’s advice of “failing well.” Second, the entrepreneur should always spend as much effort looking outward as inward at their company. When things do not go right the temptation is to concentrate on costs and lose sight of product development. Finally, every product has a life cycle. If one gets a product up and running successfully, it is time to create a new product. While Susan no longer has her own company, as a senior executive of a successful company, she has stressed these three insights with her executive team and has helped add value to her current company. Economists have long recognized that entrepreneurial success leads to the reallocation of inefficient resources to more efficient uses, and that often these more successful ones are ones not recognized until they have been created through someone’s recognition of a profit opportunity. However, the above experiences expand our understanding of the entrepreneurial process by demonstrating how failure was critical in the above. This is true at both the individual level and the macro level. At an individual level entrepreneurs are subject to a market process that has no mercy. Competition is always there, in one form or another. Every minute of every day, someone is trying to take the entrepreneur’s best customers from them. This can be harsh. But just because it is harsh, does not mean that it is not worthwhile. Even though failure is difficult, there is the benefit of hard lessons learned and the new knowledge that comes with them. At the macro level, one should not fall prey to the fallacy of composition. While some (most) entrepreneurs fail, that does not mean the system fails. Just the opposite is true. Failure is essential to the self-healing of the economic system. In the cases above, failure did cause resources to be reallocated to more productive uses. Buildings got revalued based on their reduced income streams, releasing value for other uses until the real estate market recovered. New models like owner-lender cooperative relationships evolved and moved markets forward. New products arose, like a new suite of software applications that better served customers. The software improvement in this case was driven by failure, not success. That is only part of the story. More importantly, these entrepreneurs learned from their failures and brought their new knowledge with them to their next venture spilling the knowledge over to those around them in a virtuous circle. As in the cases above, the new knowledge was individual, subjective, and creative. Using their tacit alertness, they not only brought the knowledge of better products and processes but also products and processes no one else had imagined. It is this learning process that produces progress, better fulfilling unmet, and often unknown, wants with the limited resources we possess. They demonstrated that failure precedes success. It engenders a learning process that creates the new knowledge that is the lifeblood of economic growth. Failure removes resources from poorly performing enterprises so they can be put into more useful ones. It is often a necessary precursor to the very things we view as successes. This self-healing process that constantly moves under-valued means to more preferred ends is a prime motivator of economic growth. Still, there has been very little discussion about how entrepreneurs themselves feel about failure. During my career teaching economics of entrepreneurship in Silicon Valley, I have had the opportunity to question dozens of successful entrepreneurs. Asked how they became successful entrepreneurs, most initially said that they were lucky. But I would always probe further. Everyone has luck, after all. The more interesting question for economists is how entrepreneurs handle luck—how they anticipate and respond to unforeseen changes. When questioned more deeply, nearly all the entrepreneurs also admitted to having failed, often multiple times, before finding success. Sharing their stories of failure, rather than success, provides insight into how the real process of entrepreneurship functions, both at the individual and macro levels. At the individual level, failure spurs the learning process that is useful for an entrepreneur’s future endeavors. At the macro level, failure can lead to new products, processes, and knowledge that drive economic evolution. Below are two cases that illuminate the learning process and the creation of new knowledge at the heart of economic progress. While nearly all speakers admitted failure, there was one who did not. He is an informative case. We will call him Ralph. I have known Ralph for over thirty years. We were partners in several multi-tenant industrial property developments starting in the 1970s. Ralph, as the managing partner, developed good relations with his tenants over the years and maintained his properties in excellent condition. However, at the height of the recession in 1982, many of the tenants were struggling to stay in business and some failed. The partnership was unable to make its loan payments and, eventually, had to give a couple of properties back to the lender. We were not alone, as many owners found themselves in a similar position in Silicon Valley. The partnership lost the remaining equity, though,over the years it had had several distributions and the benefit of some tax shelter. The partners still considered it something of a failure. So, when I asked Ralph to talk about his failures, I was surprised when he seemed at a loss. He finally said he could not think of any. So, I brought up those properties in Santa Clara where we turned the keys back to the lender. He said, “Oh, those weren’t a failure. We had a good strategy. It is just that conditions changed so unpredictably that they could not have planned for. Our best business decision, given the circumstances, was to give the properties back.” There are several interesting elements here. First, Ralph’s conception of failure meant making a bad business decision in real time. Though the partners lost some money, he believed that he made the most reasonable decision given the circumstances. He had great faith in his ability to see the best outcome. As David Harper discusses in his book The Foundations of Entrepreneurship and Economic Development,3 Ralph demonstrated high economic self-efficacy, the sense that he had the right tools to succeed in the field of development and management. Also, failure was not a reflection on him. If things radically changed that were out of his control, blaming himself served no value. He accepted uncertainty, but still maintained the general sense that he could respond effectively using that which he could control—what entrepreneurship scholars call a strong locus of control over the environment in which he was working. There was an additional entrepreneurial recognition here. If properties were going back to lenders, Ralph asked himself how he could use this challenge as an opportunity. As he looked at his situation and that of others around him, he saw that he might use his local knowledge and reputational trust to create an option that others had not noticed. Many lenders took back property during this period. Most of those lenders were not local to the area and had little knowledge or experience leasing multi-tenant industrial space. Ralph realized that he could leverage his experience and good relations with local businesses to give him a head start when the business cycle improved. He began to reach out to lenders of other projects pointing out that, even if they foreclosed, they still had to fill their vacant spaces. He understood that many tenants who left under difficult economic conditions would be back when things improved. They would gravitate to the brokers and owners who served them well in the past and the properties those owners controlled would be the first to fill again. He set up meetings with his preferred lenders and created a set of workouts. These would allow current owners to extend their loans and keep the properties by renegotiating the terms, often more stringent, but also giving an equity position to the lender in exchange for the renegotiation so that the lender could share in the upside when conditions improved. Lenders were initially resistant. Foreclosing demonstrated to other borrowers the lenders’ serious willingness to take on the expense and risk foreclosure entailed. However, as more buildings fell into foreclosure, some lenders began to realize that actually getting tenants was the ultimate solution for any building owner. That required local, subjective knowledge and reputation. As new owners with no connection to the properties’ rental landscape, lenders would require a local broker with contacts. But those brokers were often involved in the very properties that changed hands and were unlikely to use their best efforts. Ralph was able to demonstrate to several lenders that individual workouts with favorable equity positions would incentivize both borrowers and lenders to refill the properties as quickly and efficiently as possible. This proved so successful that Ralph spent the next couple of years working with owners and lenders as a consultant to create new loans on distressed properties where both sides benefited. An important takeaway from this is that successful entrepreneurs often face what others would deem as failure. However, they view these situations, not as outcomes, but as challenges and opportunities to create something new. All the entrepreneurs I met have experienced these. Not all view them in the same way. Many are very honest about what they perceive as their own shortcomings and business blunders. However, they also viewed their experiences as learning opportunities. As one told me, there is no disgrace in making a mistake; it is only foolish if one makes the same mistake twice. It is one of the strengths of Silicon Valley that venture capitalists see this hard learning as a positive and many feel more comfortable supporting entrepreneurs who have had a “failure” as long as that person understands why they failed. Certainly, as individuals, entrepreneurs and innovators face difficult barriers. Forbes estimates that 1 in 5 small businesses fail in the first year and 50% in 5 years. Startups are prone to numerous shortcomings including lack of advertising, products that do not entice customers, lack of adequate capital, pursuit of a single product with a short lifespan, and many more challenges. Some commentators such as the editorial staff at The Economist in “Entrepreneurs Anonymous” have complained that the high rate of failure among new entrepreneurial ventures leaves behind many broken would-be innovators. Jill Lepore in “The Disruption Machine” likens start-ups to a pack of ravenous hyenas that are “ruthless and leaderless and unrestrained” and “devastatingly dangerous.”4 For those who choose to pursue an innovative venture, the road can be treacherous. Even when successful, it has been estimated that entrepreneurs often earn no more and many less than had they pursued a corporate position in an established company. This reality invites a journey through another entrepreneur’s experience that did not work out as well as Ralph’s but still demonstrates an interesting facet of failure and success. Susan was the product manager for a large software company, call them Apex. As a product manager, she got early notification of all her product glitches. After the introduction of a new software package, she received a growing number of complaints about a particular bug in the package. She had her team create a workaround, but this solution had customers jumping through several hoops. On her own, Susan investigated the problem and came up with a possible simplified and integrated solution, as well as a reasonable budget and schedule for implementation. She took it to her vice president and explained how the flaw could be fixed. He asked if customers were complaining about the work-around and she indicated that they were not. He killed the improvement saying that the potential improvement was not justified if customers were making do. In his view, the cost of the solution was too great given any potential increased revenue it might generate. Susan did not agree. Rather than fight through the organization, and since she had already done all the foundational research, she decided to create the improvement on her own. Working outside of normal hours, she hired programmers familiar with the software application and developed an efficient solution that would work with her company’s existing software as an add-on. Once her modification was beta-tested, she quit Apex, formed her own company, and began offering the new package to companies that used the Apex suite. Those who tried the new add-on were pleased and word spread about its availability. Soon, Susan was hiring more people, renting space, and setting up an office. She created a management structure that included marketing, human resources, and quality assurance and control divisions. Her company grew to over one hundred employees and most of her time was consumed by internal management. However, Apex noticed how many companies were using her software add-on and the revenue she was generating. As her company and revenue grew, Apex became more interested in solving the problem internally. With the substantial resources at its command, Apex reworked its package, removed the faulty element, and made Susan’s rival product unusable in the new software suite. Apex’s customers were encouraged to upgrade and, as they did so, Susan was so involved with her company internally, that she was slow to look outward at this competition and anticipate its ramifications. Susan’s revenue began to decline as customers moved to the new software. She cut costs but was reluctant to cut staff. As the yearend approached, revenue continued to drop and cash reserves dwindled. Susan borrowed where she could to pay bills and keep serving her remaining customers. By Christmas, the handwriting was on the wall, but she resisted laying off the rest of her people before the holiday. She was able to keep critical staff until the new year but was forced to declare bankruptcy immediately after the holiday, letting everyone go. Reflecting on this, Susan said the hardest part of this process was telling her husband that she had borrowed all the money in their 401(k) to keep the company going as long as she did. The saving grace for her was that her husband forgave her and her marriage survived. Susan has since returned to corporate life and she is the CIO for an innovative, growing company. She learned several lessons for those who wish to start their own business. First, have a clear metric about when enough is enough. She strongly subscribes to McArdle’s advice of “failing well.” Second, the entrepreneur should always spend as much effort looking outward as inward at their company. When things do not go right the temptation is to concentrate on costs and lose sight of product development. Finally, every product has a life cycle. If one gets a product up and running successfully, it is time to create a new product. While Susan no longer has her own company, as a senior executive of a successful company, she has stressed these three insights with her executive team and has helped add value to her current company. Economists have long recognized that entrepreneurial success leads to the reallocation of inefficient resources to more efficient uses, and that often these more successful ones are ones not recognized until they have been created through someone’s recognition of a profit opportunity. However, the above experiences expand our understanding of the entrepreneurial process by demonstrating how failure was critical in the above. This is true at both the individual level and the macro level. At an individual level entrepreneurs are subject to a market process that has no mercy. Competition is always there, in one form or another. Every minute of every day, someone is trying to take the entrepreneur’s best customers from them. This can be harsh. But just because it is harsh, does not mean that it is not worthwhile. Even though failure is difficult, there is the benefit of hard lessons learned and the new knowledge that comes with them. At the macro level, one should not fall prey to the fallacy of composition. While some (most) entrepreneurs fail, that does not mean the system fails. Just the opposite is true. Failure is essential to the self-healing of the economic system. In the cases above, failure did cause resources to be reallocated to more productive uses. Buildings got revalued based on their reduced income streams, releasing value for other uses until the real estate market recovered. New models like owner-lender cooperative relationships evolved and moved markets forward. New products arose, like a new suite of software applications that better served customers. The software improvement in this case was driven by failure, not success. For more on these topics, see “Russell Sobel on the Economics of Entrepreneurship.” Great Antidote Podcast, Apr. 26, 2024. AdamSmithWorks.org. Megan McArdle on Failure, Success, and the Up Side of Down. EconTalk. Michael Eisenberg on the Start-Up Nation, Storytelling, and the Power of Technology. EconTalk. That is only part of the story. More importantly, these entrepreneurs learned from their failures and brought their new knowledge with them to their next venture spilling the knowledge over to those around them in a virtuous circle. As in the cases above, the new knowledge was individual, subjective, and creative. Using their tacit alertness, they not only brought the knowledge of better products and processes but also products and processes no one else had imagined. It is this learning process that produces progress, better fulfilling unmet, and often unknown, wants with the limited resources we possess. They demonstrated that failure precedes success. It engenders a learning process that creates the new knowledge that is the lifeblood of economic growth. Footnotes [1] Megan McArdle. The Up Side of Down: Why Failing Well Is the Key to Success. [2] Sobel, Russell S. “Entrepreneurship”. In David Henderson (Ed.) The Concise Encyclopedia of Economics. [3] David A. Harper, Foundations of Entrepreneurship and Economic Development. Routledge Foundations of the Market Economy, 2003. [4] Lepore, Jill. “The Disruption Machine: What the Gospel of Innovation Gets Wrong.” The New Yorker, June 23, 2014. *John (Jack) Estill is a Lecturer Emeritus at San Jose State University specializing in research in entrepreneurship, regulation, and local government. This article was edited by Features Editor Ed Lopez. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Henry George A Liberty Classics Book Review of Progress and Poverty, by Henry George.1 Henry George’s Progress and Poverty (1879) was among the most important and widely read books published in the 19th century, but George’s work and the single tax movement it spawned had largely faded common knowledge by the 1930s. George’s central idea was that a single tax on land values was sufficient to fund the government, and that private appropriation of land’s value was the cause of the persistence of severe poverty even in the richest and most developed cities in the world. Today, Georgist ideas are beginning to receive renewed interest, as housing affordability has become a political issue around the world, making this a good a time to revisit this important text. Books 1 and 2—Critique of Previous Political Economy The first two books of Progress and Poverty identify the flaws of other systems of political economy George’s his day—most notably those of John Stuart Mill, Adam Smith, David Ricardo, and Thomas Malthus. The prevailing view held that there continued to be poverty despite enormous material advances, because the wages of labor were drawn from society’s stock of capital, which was being split among an ever-growing number of people as a result of population growth and international competition. The remedy would thus seem to be protectionism and population control. George’s first critique is that these authors do not use terms in a consistent and clear way. To this end, George offers definitions of terms that will be needed for the rest of the book: • Land—”the entire material universe outside man himself” (22) to include land, but also minerals, air, water, etc. • Labor—all human exertion. • Wealth—”a natural product that has been secured, moved, combined, separated, or in other ways modified by human exertion.” • Capital—the portion of wealth that is devoted to producing more wealth. Land, labor, and capital are the three factors of production for George, as for the other classical political economists. Anyone familiar with contemporary economics will know that theories today possess just two factors of production: labor and capital—lumping capital and land together. George’s system should be of interest to us, in part, because it is arguably the most well-developed system of political economy that considers land as a distinct factor of production. George also believed that there is a relation of logical priority among the factors of production. Land is prior to labor, because no labor could be exerted if there were no resources to exert it upon. Land can exist without labor, but labor cannot exist without land. Labor is prior to capital, because labor can be exerted to produce something without the aid of capital (think here of a Robinson Crusoe who must produce at first without the aid of any tools), but capital cannot produce without labor. Other political economists proceed incorrectly by examining capital first and holding that wages are drawn from capital. Instead, argued George, political economy should proceed from the ground up, as it were. Though George shares Smith’s fundamental insight that the division of labor is genesis of the overwhelming share of society’s wealth, he departs from Smith by holding that the wages of laborers derive from the productive power of labor, not from a fixed capital stock. The priority of labor over capital just discussed establishes this. Chapters 3 and 4 of Book 1 contain several further arguments for this conclusion. In chapter 2, George relentlessly attacks the prevailing theory that overpopulation is the cause of poverty. His argument boils down to this simple idea: the more people there are, the further the division of labor can advance. Since the division of labor is the fundamental cause of wealth—because it makes workers more productive—an increase in population can never, by itself, cause society to become poorer since workers’ wages are determined by their productivity. For this reason, George even speculates, contra Malthus, that the Earth could easily support a trillion people or more. Books 3 to 5—The Science of Distribution Book 3 is the most theoretical and abstract of the entire work. Its aim is to derive an entire theory of the distribution of the social surplus among the three factors of production. George derives this from the fundamental axiom of social science: people seek to gratify their desires with the least exertion. From this fundamental principle follows Ricardo’s law of rent: the rent that land commands is the difference between the productivity of that land and the productivity of the least productive land in use, the so called “margin of production.” The insight that animates this book is George’s realization that the margin of production determines not only rent, but also the rate of wages and the rate of interest on capital. Chapter 5 examines the former and chapter 6 examines the latter. Capital, according to George, is just human labor impressed upon matter. Capital is labor stored up on material form. Hence, capital’s share of the social product is just a special case of labor’s share. The law of rent holds for urban land as well as agricultural land. Two lawyers of equal skill, with identical law school transcripts, etc., go to work in Cleveland and New York. The one in New York earns three times more over the course of his career than the one in Cleveland because he is “working more productive land,” that is, he is much more productive because he works in the center of the global knowledge economy and thus has access to more connections, knowledge and opportunities than the lawyer in Cleveland. But, the owners of the land in New York are able to appropriate a significant portion of the excess value that this lawyer produces. The rent for his apartment is 5-10 times as much than a Cleveland apartment would be, and higher rent is baked into the price of all of the goods and services he buys in New York. So, even though the lawyer in New York is more productive and earns a higher wage, his wage after rent is likely much more similar to his colleague in Cleveland. Wages are determined by the margin of cultivation, even for professional jobs in the knowledge economy. Once George derives the theory of wages and interest in this static context, he moves on in Book 4 to study the laws in a dynamic context: how does the share of the social product received by landowners, workers, and capitalists evolve under conditions of material progress. The short answer is, when there is economic growth, caused by increase in population or productivity, rent will continuously increase as well. When there are more people the margin of production expands, increasing rent and decreasing wages. And when productivity increases, the difference in productivity between the best land and the margin of production increases, increasing rent and decreasing wages. So, for George, the main reason why material progress does not improve the lives of everyone is that much of the wealth created by material progress goes to landowners as rent, not to workers. Were George alive today, the fact that workers in our most productive cities often spend a majority of their incomes on rent (and even more on the indirect rent that is baked into the prices of goods and services) would likely strike him as a confirmation of his view. In Book 5, George derives his theory of the business cycle from the rest of his theory. Land speculation plays a key explanatory role. In countries with economic or population growth, land prices sometimes grow too fast out of speculative anticipation. When this happens, useful land is left idle for speculative purposes and the economy under-produces. This underproduction ripples through the rest of the economy to cause an industrial depression. George, as a newspaperman in San Francisco in the 1860s and 1870s, saw this process happen first hand. Land prices in San Francisco soared in the lead up to the completion of the transcontinental railroad in 1869. But it eventually turned out to be a bubble, and the correction in land prices caused more general economic turmoil. Rent and speculation do not play major roles in contemporary theories of the business cycle, though housing markets are undoubtedly important for understanding some downturns, as the Great Recession shows. Books 7 to 9—Land Value Taxation: Justice and Efficiency “George’s remedy to the problem of progress and poverty is to tax land and eliminate all other taxes.” George’s remedy to the problem of progress and poverty is to tax land and eliminate all other taxes. George has two arguments for the land value tax, one based on justice (Book 7) and the other based on efficiency (Book 8). Here is the simplified form of George’s argument that private property in land is unjust: • People are only entitled to the value they create through their own labor. • No individual created the value of land. • Therefore, no individual is entitled to the value of land. The first premise should be endorsed by any theorist in the liberal tradition. It embodies a liberal belief in self-ownership: no one is entitled to take what you create. The second premise is what is more difficult to see. Let’s look at urban land again. There is a very small plot of land near where I live that is for sale for $550,000. First, no person created this land itself—that is the doing of God, or nature. Second, the owner of the parcel is not responsible for the parcel’s value. The parcel is worth so much only because it is situated near other things of value, close to the center of a prosperous city. George clearly recognizes the importance of cities: Here is the heart, the brain, of the vast social organism… Here, if you have anything to sell, is the market; here, if you have anything to buy, is the largest and the choicest stock. Here intellectual activity is gathered into a focus, and here springs that stimulus which is born of the collision of mind with mind. Here are the great libraries, the storehouses and granaries of knowledge, the learned professors, the famous specialists. Here are museums and art galleries, collections of philosophical apparatus, and all things rare, and valuable, and best of their kind. Here come great actors, and orators, and singers, from all over the world. Here, in short, is a center of human life, in all its varied manifestations” (Chapter 4, Book 2). In short, the parcel in my neighborhood is worth $550,000 not because of any efforts of its owners (a hole in the ground has no intrinsic value), but rather because of the positive externalities created by the activities of the millions of people who live within a 20-mile radius of the parcel. Since people are entitled only to the product of their own labor, the owner could not be entitled to the value of the parcel. Rather, the people of the city, who collectively created its value by their productive activities, are entitled to it. George extends this argument in the next two chapters. He compares private ownership of land to slavery. He argues that private landownership leads to the (partial) enslavement of laborers: “it is the ownership of the soil that everywhere gives the ownership of the men that live upon it” (Book 7 Chapter 2). Since tenants have to pay part of their income in land rent (the portion of their overall rent that is due to the land, not the building), the landlord can appropriate part of the value that their labor creates as his own. George is attuned to this analogy because he wrote just two years after the end of Reconstruction, and he writes incisively about the failure of emancipation to truly free the formerly enslaved given emancipation was not accompanied by land reform. In the third chapter, he argues that if land value is socialized, current landowners are not entitled to compensation, for precisely the same reason that slaveowners were not entitled to compensation when their slaves were emancipated.2 Here we can see why it is so important to clearly distinguish land and capital as separate factors of production. George’s conclusion is that private property in land is unjust, and tantamount to slavery, though private ownership of capital—machines, technology, inventory, factories, intellectual property etc.—deserves the strictest protection, because capital is simply stored up labor. Karl Marx’s mistake was to analogize capital to land and to view private capital ownership as oppressive, but the mistake made by the neoclassical economists is to view land as just like capital, ignoring the fact that the owner of capital is entitled to it but the owner of land is not. Let’s consider George’s efficiency-based arguments for land value taxation, which mainly appear in Books 8 and 9. In Chapter 2 of Book 8, George finally states his main policy proposal: “To abolish all taxation save that upon land values.” In the decades after the publication of Progress and Poverty, a social movement grew up around this “single tax” idea. The efficiency-based justification of this is that land value taxes do not suffer from what economists now call deadweight loss, though other taxes do. The supply of natural resources is completely fixed independent of anything human beings do. So, when they are taxed, the supply of natural resources does not shrink. Compare this to taxes on labor, capital, or goods. When wages are taxed, people work less than they otherwise would. When capital is taxed, people save less. And when goods are taxed, in the form of tariffs or sales taxes, people produce and consume fewer goods. In technical terms, the supply of natural resources is completely inelastic, whereas the supply of everything else is elastic. This means that taxing anything other than land creates deadweight loss, economic value that is completely destroyed by the tax. By replacing taxes on wages, capital and goods with taxes on land, society would become much richer. George carefully draws out the concrete implications of a shift to land value taxation. Real wages would rise through several different channels: the elimination of taxes on wages, the reduction in the price of all goods that workers buy, and the increased productivity of the entire economy. The rates of return on capital would increase, for the same reasons. Less social spending would be required, because the main thing that drives people into poverty in industrialized countries is the high cost of living. The land value tax is also easier to collect and less susceptible to arbitrary enforcement than other taxes. Finally, George argues that the net effect of this change would be positive even for the vast majority of individuals who own land. To update his example in today’s terms: the largest proportion of the typical household’s net worth is the household’s primary residence. One might think that the proposal to socialize land value, as such, make most people worse-off. But perhaps 2/3 of the value of a typical residence is in the structure, not the land, so would be untouched by the land value tax. And for the typical household, their real income would increase much more than the amount of increased land taxes they would have to pay. Conclusion For more on these topics, see Glen Weyl on Radical Markets. EconTalk. Mike Munger on the Division of Labor. EconTalk. Economic Growth, by Paul M. Romer. Concise Encyclopedia of Economics. Bubbles, by Seiji S. C. Steimetz. Concise Encyclopedia of Economics. Population, by Ronald Demos Lee. Concise Encyclopedia of Economics. We have seen that George uses two ethical principles to argue for land value taxation: a deontological principle appealing to norms of justice and rights, and a consequentialist principle appealing to norms of efficiency and effects. George summarizes the appeal of land value taxation in these words: “Wealth would not only be enormously increased; it would be equally distributed. I do not mean that each individual would get the same amount of wealth. That would not be equal distribution, so land as different individuals have different powers and different desires. But I mean that wealth would be distributed in accordance with the degree in which the industry, skill, knowledge, or prudence of each contributed to the common stock” (Book 9, Chapter 3). Land value taxes would realize the ideal of a meritocracy, and solve the problem of progress and poverty. Footnotes [1] Henry George. Progress and Poverty. Originally published 1879, Doubleday, Page & Co. Online at the Library of Economics and Liberty. [2] In some regions of the British empire, slaveowners were compensated when their slaves were emancipated, but this was a matter of political necessity. Slave-owners did not deserve this compensation. * Paul Forrester is a fifth-year student in the philosophy Ph.D. program at Yale. Before that, he earned his BA in political science and philosophy from Duke. He specializes in ethics, political philosophy, and philosophy of social science, and he is especially interested in interdisciplinary approaches to issues such as housing, climate change and emerging technologies. (0 COMMENTS)

A Liberty Classic Book Review of Envy: A Theory of Social Behaviour by Helmut Schoeck.1 I’ve been such a fool, Vassili. Man will always be man. There is no new man. We tried so hard to create a society that is equal, where there’d be nothing to envy your neighbor. But there’s always something to envy. The smile, the friendship, something you don’t have and want to appropriate. In this world, even a Soviet one, there will always be rich and poor. Rich in gifts, poor in gifts. Rich in love, poor in love. –Commissar Danilov in Enemy at the Gates, 2001. In a few sentences in a desperate moment, Joseph Fiennes’ character in the 2001 film Enemy at the Gates gets to the heart of an intractable social problem. People will always be different, and we will always resent people who have what we don’t. In Envy: A Theory of Social Behaviour, Helmut Schoeck takes us on a historical, cultural, theoretical, and practical tour of one of humanity’s oldest sinful dispositions. It is a sin that goes back to the Garden of Eden and can never be satisfied no matter how much we capitulate to it. What is envy? Schoeck refers to a dictionary definition of envy as “To feel displeasure and ill-will at the superiority of (another person) in happiness, success, reputation, or the possession of anything desirable.” In his Summa Theologica, Thomas Aquinas refers to the definition given by St. John Damascene: “envy is sorrow for another’s good.” “[T]he foule sinne of Envye” is the vice Chaucer discusses after Pride (quoted on p. 189). The envious person does not celebrate his neighbor’s good fortune. He grieves it, like Satan in Paradise Lost, who “thought himself impaired” by Christ’s exaltation (quoted on p. 190). Schoeck quotes William L. Davidson (p. 20): “Envy is an emotion that is essentially both selfish and malevolent,” and Muhammad via Al-Kulaini (p. 28): “Envy devours faith as fire devours wood.” Readers looking for a lengthy but simple denunciation of the foule sinne will be disappointed. Even loquacious authors might struggle to get 452 pages out of “Envy is bad, and you should stop it.” Rather, Schoeck offers what is truly a theory of social behavior. He gives plenty of space to envy’s malign consequences and argues, “A society’s civilizing power of achievement is dependent on that society’s skill in domesticating and canalizing envy” (p. 279). And yet he argues that in a very particular way, envy is a precondition for civilization: “envy alone makes any kind of social co-existence possible” (p. 4). How? Private Vices and Public Prosperity: Benign Envy Envy, according to Schoeck, serves two useful functions. First, envy can spur us on to greater effort. He writes of what he calls “indignation-envy,” an attitude of “I’ll show them!” that motivates someone to achieve, innovate, or excel. Envy is still a vice, but it is a universal part of the human condition that can be “domesticated” and “canalized” with the person who envies another for his social position striving to beat or at least join him. Envy can drive someone to become So Good They Can’t Ignore You, to borrow Cal Newport’s 2012 book title. Commercial institutions–free markets–ameliorate or attenuate some of the worst excesses of the envious. Suppose people are and always will be envy-riddled status-seekers. In that case, it is far better that they compete for status in games where the best way to ensure you have a slightly bigger house or a slightly nicer car than your neighbor is to provide everyone with goods and services at attractive prices. It’s far better that someone who wishes to make his name great oversees a great grocery chain rather than a great empire. Envy “domesticated” and “canalized” in this way produces a genuinely Mandevillian outcome: private vice becomes public virtue. Schoeck argues that envy can also check political ambition; it “has a positive and constructive function as watchdog” (p. 279). To the extent that envy makes people guard their prerogatives under the rule of law, they will tend to be very stingy with special privileges. Schoeck puts it this way (p. 416): In so far as the ubiquity of envy runs counter to the unlimited monopoly of power, and hence will often lead to its dispersal, and in so far as it is only through the domestication of power that most creative innovations, and, indeed, humanity, become possible, envy cannot be regarded as a purely negative phenomenon. Envy resents financial, intellectual, and artistic superiority. That’s bad. However, it also resents political superiority and demands checks and balances. As Federalist 51 explains, “Ambition must be made to counteract ambition.”2 Envy, perhaps, can counteract ambition, too. Private Vices and Public Poverty: Malign Envy So what’s all the fuss about? Envy, Schoeck argues, has a couple of salutary effects despite itself. When not “domesticated” or “canalized,” however, and left to run amok, envy makes cooperation impossible. Imagine Salieri in Amadeus working to destroy Mozart. Salieri goes mad, Mozart dies young, and the world never hears the beautiful music they could have created. Schoeck writes (p. 5): highly developed and diversified societies from members of primitive societies–the development of civilization, in short–are the result of innumerable defeats inflicted on envy, i.e., on man as an envious being. Most people agree that envy is a sin because of what it induces. Almost all ethical systems, proverbs, fairytales, and religions condemn it because of what it leads to. … if the same citizens who keep jealous watch on the equality before the law, and from which they constantly benefit, now approach the state with the demand that it infringe the principle of equality before the law for those few citizens whom the state has enabled to become economically (or perhaps only educationally) unequal. (Schoeck, p. 279). Undomesticated envy has an unquenchable, demented thirst for another’s suffering. It involves “the destruction of pleasure in and for others, without deriving any sort of advantage from this” (p. 140). Politically, it manifests as “a malicious delight in the leveling of society” (p. 267). Schoeck explains: As people have always realized, however, the envier has little interest in the transfer of anything of value from the other’s possession to his own. He would like to see the other person robbed, dispossessed, stripped, humiliated or hurt, but he practically never conjures up a detailed mental picture of how a transfer of the other’s possession to himself might occur. The pure type of envier is no thief or swindler in his own cause. In any case, where that which is envied is another man’s personal qualities, skill or prestige, there can be no question of theft; he may quite well, however, harbour a wish for the other man to lose his voice, his virtuosity, his good looks or his integrity” (p. 8). The person who envies you doesn’t want what you have. He just doesn’t want you to have it—and he might be willing to go to considerable lengths to see that you don’t. Depressingly, evidence from experimental economics shows that people are willing to pay “in order to torment” the objects of their envy (p. 138): “The envious man is perfectly prepared to injure himself if by so doing he can injure or hurt the object of his envy” (p. 28). People, in turn, go to great lengths—far beyond the requirements of modesty and propriety—to conceal what they have from others. The “I’ll show them!” spirit of what Schoeck called “indignation-envy” can be thwarted easily by garden-variety “who do you think you are?” envy, which can thwart innovation. Skepticism reigns: why should we fix what isn’t broken? “Tradition asserts, with a fatal effect upon deliberate innovations, that what was good enough for the father is good enough for the son” (p. 55). Who, this brand of envy asks, are you to think we need a bunch of newfangled gadgets and habits like writing when mere oral transmission of wisdom and knowledge has served so tolerably well for so long? People everywhere have looked upon innovation and prosperity with deep suspicion for a long time. Did you prosper? It must be because you have devilishly taken from someone else. Did your neighbor fail? It must be because you have devilishly cursed him. Something must be amiss that the envied person has so much and the envier has so little. Writing of one African people group, Schoeck explains, “A bright child who matures early is regarded by the Lovedu as a future witch” (p. 50). “Schoeck describes a magical, zero-sum worldview. It’s the stuff of 21st-century American politics….” Here and elsewhere, Schoeck’s language grates on the modern ear. He describes, for example, “envy-ridden primitives” who do not have the material advantages conferred by extensive specialization, division of labor, and technological change (p. 363). It would be interesting to see whether his basic conclusions would change in light of the last six decades of empirical anthropology. Schoeck describes a magical, zero-sum worldview. It’s the stuff of 21st-century American politics. It should not surprise us if it is also the stuff of tribal life worldwide. Regardless, his work is ripe for a reevaluation in light of advances in the humanities and social sciences. Envy turns especially ugly when it feeds populist rhetoric and revolutionary violence against its objects: … where the revolutionaries paradoxically directed the envy of the mob against those institutions and persons which, though they may have given rise to envy, were at the same time a prerequisite for any economic development: export-import merchants, foreign concerns or compatriots in slightly better circumstances as the result of certain services rendered, etc. (p. 397) Schoeck’s analysis here resembles what Thomas Sowell has written in various places about despised “middleman minorities” like overseas Chinese merchants and moneylenders throughout Asia, Armenians in the Ottoman Empire, and Jews wherever they have gone. Intellectuals, Schoeck argues, have a stake in continuing the problem rather than solving it. Twentieth-century visions of the New Socialist Man notwithstanding, “[n]othing could be worse for the utopian intellectual than a society where there was nothing left for him to criticize” (p. 360). There has never been a “golden age, when social harmony prevailed because each man had about as little as the next one” (p. 39). Schoeck’s analysis suggests that there never will be on this side of eternity. Conclusion “The envious man thinks that if his neighbour breaks a leg, he will be able to walk better himself.” (Schoeck, p. 27.) While envy need not have wholly malign consequences, it is overwhelmingly a philosophy not of “I will” but “you won’t.” It is the conviction that two wrongs make a right: Ill fortune has visited me; therefore, justice requires you to suffer. Envy: A Theory of Social Behaviour is an important contribution that does not get the attention it deserves. Hence, it is an appropriate subject for a Liberty Classics essay explaining why we should read it carefully and take it seriously. It offers a more sophisticated theory of envy than we might think and explains how envy can be “pro-social” in two respects: first, it might spur us toward emulation, and second, it might provide a powerful check on the self-aggrandizing and politically powerful. Under the right circumstances, we can direct one of the darker angels of our nature toward the light. It becomes especially dangerous when un-domesticated and un-canalized–”sanctified,” perhaps, by the intellectuals–and allowed to run riot over the institutions of a free and prosperous society. For more on these topics, see The “Summa Theologica” of St. Thomas Aquinas. Part I. 10 vols., by St. Thomas Aquinas. Online Library of Liberty. “Wanting the Worst,” by Peter W. Wood. Law and Liberty, Oct. 16, 2019. “Let Go of the Zero-Sum Fallacy and Enjoy Others’ Good Fortune,” by Art Carden. Library of Economics and Liberty, May 1, 2023. Envy: A Theory of Social Behaviour was originally published in German in 1966, translated into English in 1969, reprinted by the Liberty Fund in 1987, and is worth paying close attention to in 2023 and beyond. It reinforces my conviction that I should bias my reading in favor of old books for two reasons. First, they have worn out the critics’ hammers and stood the test of time. Second, it seems like there is an old answer to every seemingly “new” question. Its 452 pages span history, anthropology, social science, and literature; scholars across the humanities and social sciences should read it carefully because we all have something to learn from it. Footnotes [1] Envy: A Theory of Social Behaviour, by Helmut Schoeck. Liberty Fund edition, 1987. Originally published in German in 1966, translated into English in 1969. [2] James Madison, Federalist 51. Online Library of Liberty. *I thank ChatGPT 4 and Bard for research assistance. Art Carden is Assistant Professor of Economics at Samford University in Birmingham, AL, a Senior Research Fellow with the Institute for Faith, Work, and Economics in McLean, VA, a Research Fellow with the Independent Institute in Oakland, CA, and a Senior Fellow with the Beacon Center of Tennessee. For more articles by Art Carden, see the Archive. (0 COMMENTS)

  I got in on the tail end of the discussion of Scott Sumner’s post in which he discusses global warming. I posted a comment but it was probably too late for most people to notice. I think the issue is more complicated than Scott seems to suggest. Scott writes: Theory suggests that higher levels of CO2 should raise global temperatures due to the “greenhouse effect”. True. But what that doesn’t tell us is how strong the effect is. I’m not disagreeing with Scott. I’m simply saying that the effect could be strong or could be weak. If a substantial increase in CO2 led to 0.1 degree C increase in temperature, we would have little to worry about. We can’t simply look at the fact that CO2 increased and then the temperature increased and attribute the whole increase in temperature to the increase in CO2. Take an example from the world of economics, which, of course, Scott and I are more familiar with. We posit that a substantial increase in the minimum wage will cause a substantial reduction in the number of jobs of low-skilled workers. That’s simply good economic theory. So we look at the data and see that, sure enough, a few dollar an hour increase in the minimum wage is accompanied by a substantial reduction in the number of jobs of low-skilled workers. But that doesn’t tell us how much of the reduction in jobs is due to the increase in the minimum wage. Similarly, it’s bad methodology to key in on one variable, CO2 concentration, and not look at other factors that could cause global warming. (0 COMMENTS)

When poet, lawyer, and MacArthur Fellow Dwayne Betts was imprisoned for nine years at the age of 16 for carjacking, he only wept twice. One of those times was when he read Martin Luther King Jr.’s “Letter from Birmingham Jail.” In this powerful conversation with EconTalk’s Russ Roberts, Betts explains why he cried, what he […] The post Injustice and the “Letter from Birmingham Jail” (with Dwayne Betts) appeared first on Econlib.

I am currently at a blogging conference in Berkeley. Meeting people here has pushed me to think about how I would summarize my blogging. One approach would be to list a bunch of unconventional claims that I have made in various posts over the past 15 years:1. The Great Recession is usually linked to the financial crisis, but it was actually caused by a tight money policy.2. Monetary policy is usually linked to interest rates, whereas interest rates have little or nothing to do with monetary policy, which is better described in terms of nominal GDP.3. Economists are often seen as people who predict the business cycle. In fact economists are unable to predict recessions and major moves in inflation, and shouldn’t even try.4. Asset price bubbles are widely seen as occurring in various markets, whereas in fact bubbles do not exist. BTW, none of these claims are precisely true, they are all useful approximations of reality—true in the sense that Newtonian mechanics is approximately true (albeit much less accurate than Newtonian mechanics.)I could add many more contrarian views to this list (fiscal multiplier is near zero, price gouging is good for consumers, etc., etc.), but I’ll focus on these 4. Should we think of this “market monetarist” model as being analogous to something like MMT—a heterodox model that rejects textbook economics? I don’t think so.In an essay discussing his battle with protectionists in the Clinton administration, Paul Krugman offered this piece of advice: (ii) Adopt the stance of rebel: There is nothing that plays worse in our culture than seeming to be the stodgy defender of old ideas, no matter how true those ideas may be. Luckily, at this point the orthodoxy of the academic economists is very much a minority position among intellectuals in general; one can seem to be a courageous maverick, boldly challenging the powers that be, by reciting the contents of a standard textbook. It has worked for me! That really resonated with me.  All my wildly controversial ideas are 100% built up with standard textbook economic building blocks.  In my blog posts (and in The Money Illusion book) I frequently cite popular textbooks as well as the claims made by mainstream macroeconomists that do not hold my unconventional views.  I show that although they do not agree with me, my claims are the natural implication of many of the things that they have been writing and saying over the years.  In that sense, market monetarism is nothing like MMT.  It’s also quite heterodox; but only in its conclusions, not in terms of its underlying model. Another way of thinking of my blogging is in terms of some even more basic “tools” that allowed me to reach these various controversial claims: 1.  Never reason from a price change 2.  Monetary offset 3.  Efficient markets hypothesis You could say that my blog is about applying these tools to a wide variety of problems.  For instance, all three tools played a role in my reaching the conclusion that the Fed caused the 2008 recession.  Never reason from a price change allowed me to look at the situation without being misled by low and declining interest rates.  The EMH allowed me to see that almost all of the asset markets were signaling that money was too tight.  And I understood that the central bank could have and should have used monetary policy to offset the drag to the economy (specifically NGDP) caused by other factors such as a decline in the property market. I am sometimes associated with the advocacy of NGDP targeting.  But lots of economists favor NGDP targeting (many more than when I started blogging).  It’s the controversial claims that make my blog distinctive. (0 COMMENTS)

  Here are some highlights of my reading for this week. President Donald Trump’s Manhattan Convictions are Unconstitutional by Steven Calabresi, Reason, June 1, 2024. Excerpt: President Donald Trump was convicted yesterday of allegedly altering business records to conceal his alleged payment of money to a porn star, Stormy Daniels, in order to influence the 2016 presidential election. But, altering business records under New York State law is only a crime if it is done to conceal the violation of some other law. Manhattan District Attorney Alvin Bragg alleged that the documents were allegedly falsely altered to conceal a contribution of money in violation of federal campaign finance laws or in pursuance of winning the 2016 election by defrauding the voters of information they had a right to know. Neither argument passes First Amendment scrutiny.   American Federalism Can Push Back Against Executive Overreach by Ilya Somin, The UnPopulist, May 28, 2024. Sanctuary laws are often analogized to “nullification”—the idea that states can render federal laws null and void within their territory. Nullification, of course, has a terrible reputation because of its association with southern states’ defense of slavery and (later) segregation. But there is an important distinction between sanctuary laws and nullification. Nullificationists argue that the federal laws in question are completely void, and that states have the right to actively impede their enforcement on their territory. By contrast, sanctuary jurisdictions do not necessarily claim the laws in question are void. They merely deny them the assistance of state and local governments, particularly law enforcement agencies. For example, they refuse to help enforce the relevant laws themselves, or to provide information to federal law enforcement agencies engaged in enforcement efforts. But the feds remain free to try to enforce these laws using only their own resources and personnel. Luxury Belief in Open Borders by Bryan Caplan, Bet on It, May 27, 2024. Excerpt: Do I believe that the U.S. can absorb “all the world’s poor”? It depends on the time horizon. Poland’s population grew by 6% in a few weeks, and it was fine. U.S. population grew by 1339% from 1800-1900, and that, too, was fine. There is no reason why the modern U.S. population could not grow as fast or faster. Going from 330M today to 1B tomorrow would be disastrous, but going from 330M today to 1 B in 50 years is totally doable. And thanks to diaspora dynamics, it’s the latter scenario that’s empirically relevant. Unless, I freely grant, immigrants and their descendants remain on welfare until the end of time. Fortunately, this is not what normally happens under the status quo. And the countries closest to open borders — the Gulf monarchies and Singapore — do virtually the opposite, for obvious reasons: Both geniuses and janitors are well worth welcoming, but only as long as they pull their own weight. DRH comment: Given Bryan’s statement in the last sentence of the first paragraph above, I don’t get why he advocates open borders. If the empirically relevant thing is a tripling over 50 years, why not advocate restricting immigration to 7 to 8 million per year? Why 7 to 8 million rather than what the straightforward would show, with is about 13 million? [670 million divided by 50 = 13 million.] Because immigrants have kids. And if I’m overoptimistic about the number of kids, that’s fine. We would get to, say, 800 million residents instead of 1 billion. Let’s take my lower bound of 7 million. If the government priced that at $50K per immigrant, it would bring in $350 billion per year. If it doesn’t waste that money on other spending (admittedly a big “if”), then it would come close to bringing future deficits down enough that the federal debt as a percent of GDP would actually remain stable or fall slightly. Would there be 7 million takers at $50K each? Absolutely. If anyone wants to see it, I’ll do a special blog post on this issue. (0 COMMENTS)

David Leonhardt has a NYT piece on the “new centrism”, which he calls neopopulism.  Politicians in both parties increasingly embrace ideas like protectionism and subsidies for manufacturing.  These policies are supposedly necessary because neoliberalism has failed: The new centrism is a response to these developments. It is a recognition that neoliberalism failed to deliver. The notion that the old approach would bring prosperity, as Jake Sullivan, Biden’s national security adviser, has said, “was a promise made but not kept.” In its place has risen a new worldview. Call it neopopulism. Both Democrats and Republicans have grown skeptical of free trade; on Tuesday, Biden announced increased tariffs on several Chinese-made goods, in response to Beijing’s subsidies. Democrats and a slice of Republicans have also come to support industrial policy, in which the government tries to address the market’s shortcomings. The infrastructure and semiconductor laws are examples. But is that true?  Did neoliberalism fail?  And do industrial policies lead to stronger growth in manufacturing?  Let’s look at the evidence: Over the past 10 years, there has been precisely zero increase in manufacturing output.  This is true of both the Trump and Biden administrations.  Industrial policies do not seem to work. In contrast, industrial output rose strongly during the so-called neoliberal era of the 1980s, 1990s and 2000s. So why have industrial policies failed?  Let’s begin with the most important component of neopopulism—protectionism.  Protectionist policies are based on the myth that trade deficits are caused by “unfair trade policies”.  In fact, deficits are caused by discrepancies between domestic saving and domestic investment.  Because populist policies tend to result in large budget deficits, they reduce national savings rates.  This often leads to even larger trade deficits, as the current account deficit is, by definition, equal to the gap between domestic saving and domestic investment. NX = S – I Not surprisingly, the Trump and Biden economic policies have also failed to reduce our trade deficit, even as a share of GDP. None of this should come as a surprise.  Latin America has many decades of experience with the failure of populist economic policies.  The puzzle is why so many in Washington now believe that the solution to America’s problems is to emulate the policy approach that Argentina has pursued over the past 80 years—big fiscal deficits and protectionism. PS.  Here’s a photo of Juan and Eva Peron.  Ask an Argentinian how their policies worked out for the working class.   (0 COMMENTS)

There are numerous stereotypes about economists. Two are common. The first is that all we think about and study is money. The second is that economists are more selfish than the average person. Both stereotypes are wrong. My wife, who is not herself an economist but has been married to one for almost forty-one years, has a great answer to the first claim. When people find out that I’m an economist and then say, “Oh, he must study money,” she answers, “No, he studies human behavior.” But I want to focus on the second claim because I think it’s the opposite of the truth. My observation is that the average economist is less selfish than the average person and that there’s a good reason for it: the study of economics causes us to think about consequences beyond the ones that are obvious. Moreover, the scholarly literature that some people think shows that students who learn economics become selfish doesn’t actually show that. These are the opening 3 paragraphs of my latest Hoover article, “Economics Isn’t Selfish,” Defining Ideas, May 30, 2024. Later in the piece, I discuss a controversy that broke out a few years ago about some academic work that one of the co-authors claimed, incorrectly, demonstrated that economics students are more selfish than other students. Read the whole thing.   (0 COMMENTS)

Less is more —  Ludwig Mies van der Rohe Less is a bore — Robert Venturi In a recent post, Alex Tabarrok discussed the problem of modern architecture.  Why do architects no longer produce the sort of beautiful old buildings that we see in many European cities? Alex cites an article by Samuel Hughes, which dismisses one popular explanation—the theory that rich ornamentation is increasingly costly, especially as there are fewer craftsmen trained to produce beautiful sculptural details.  Hughes shows that this explanation doesn’t hold, and that modern technology would allow for ornamentation to be produced at relatively low cost.  Instead, he makes a sort of “market failure” argument.  Ugly, boring and sterile buildings have been foisted on the public by a group of elite intellectuals back in the 1920s: to exaggerate a little, it really did happen that every government and every corporation on Earth was persuaded by the wild architectural theory of a Swiss clockmaker [Le Corbusier] and a clique of German socialists, so that they started wanting something different from what they had wanted in all previous ages. It may well be said that this is mysterious. But the mystery is real, and if we want to understand reality, it is what we must face. In this post, I’ll argue that there is no market failure.  In some sense, modernism is what the public actually desires.  And not just in architecture, but in almost all aspects of life. Hughes’s theory is not new.  Back in 1981 Tom Wolfe made a similar argument in From Bauhaus to Our House.  Unfortunately for Wolfe, the “problem” was not confined to architecture, and thus he had to write another book (The Painted Word) explaining why beautiful old styles of realistic painting were being replaced with abstract art.  Here are a couple examples from the Netherlands. In the case of architecture, tourists generally prefer the more richly ornamented old buildings of Amsterdam to the modernist edifices of Rotterdam, which replaced buildings destroyed in WWII.  But buildings are not built for tourists, they are built for residents and workers. Even two TomWolfe books are not enough to fully explain modernism, which has affected (infected?) virtually all areas of contemporary life.  A person with absolutely no education in art theory can immediately recognize the difference between more complex and ornamented traditional styles and more simple and streamlined modern styles.  Thus, consider how Coca-Cola containers have evolved over time:   Even the name has been simplified: “Coke”.  I’ll show that a similar change has occurred in almost all areas of life.  But first we need to clarify a few concepts.  People often contrast the “modern” with more “classical” styles.  Here classical means “from the past”.  But art historians are more likely to use the term classical to represent a simple, elegant and symmetrical structure, whereas romanticism represents various forms of complex, asymmetrical and highly ornamented structures. The British Houses of Parliament were built in the mid-1800s, whereas the Jefferson Memorial was built in the 1940s.  But the Jefferson Memorial is classical whereas the Houses of Parliament are a form of romanticism (specifically neo-gothic.)  Indeed Brazil’s ultra-modern government buildings (see below) are much more “classical” than Pugin’s 19th century masterpiece. Tabarrok and Hughes are correct that in at least some respects people prefer more traditional styles of architecture.  Consider San Francisco’s famous “painted ladies”: But traditionalists understate the degree to which modern styles have impacted even residential choices of consumers.  More than 100 years ago, Frank Lloyd Wright revolutionized architecture by replacing vertically oriented boxy houses full of strictly separated rooms with a more free flowing horizontal style where the public rooms seamlessly flow into each other.  Few people are rich enough to afford a masterpiece like the Martin House in Buffalo, but Wright’s approach influenced the postwar preference for “ranch houses” with big picture windows and open floor plans. The term “painted ladies” is a reminder that modernism has also affected women’s fashions.  Back around 1900, wealthy women wore extremely ornate outfits.  By the 1920s, (the era of Le Corbusier), women’s fashions had greatly simplified—become more “modern”.  In his memoir entitled “The World of Yesterday”, Stefan Zweig sees this evolution as a positive change, and links it to wholesome changes in culture that allowed young men and women to socialize in a more natural and freer fashion.  Thus, old fashioned corsets and cumbersome dresses were a sort of metaphor for painfully restrictive social mores. If it is really true that in architecture the old fashioned is beautiful and the modern is ugly, why doesn’t this also apply to women’s fashions?  Did Le Corbusier also force women to discard richly ornamented outfits and replace them with simple black dresses?  To be sure, there is a sense in which the Paris fin-de-siècle fashions were more beautiful than modern clothing.  But is this what women want today?  I don’t think so.  They want to be modern.  “That’s the style.” How about autos?  Why do people now buy simple streamlined styles, not the more ornate styles of the 1940s?  I suppose you could argue that this partly reflects government fuel economy regulations, but there are too many other such examples to explain away. I encourage people to go to an antique furniture store and look at all the richly ornamented (and often over-styled) items on display.  You’ll see things like massive oak tables with carved clawfoot legs and heavy dark wood cabinets.  Then walk out of the store and visit a furniture store with lighter Scandinavian teak wood designs.  The furniture will immediately seem more “modern”.  It will also seem more appealing to many people.  Did Le Corbusier also foist modern furniture on the public?  Was that streamlined furniture style forced by federal regulators?  Obviously not.  Why did consumers stop buying ornate silver teapots and switch to streamlined modern teapots?  The examples of our modern preference for simplicity are nearly endless. The guy that said, “Less is a bore” also wrote a book entitled Learning from Las Vegas.  But isn’t one of the lessons of Vegas that it’s not easy to fit traditional styles to modern needs.  Las Vegas is an extraordinarily ugly city.  Surprisingly, however, it is least ugly when it is at its most modern.  The ugliest parts of the strip are places where traditional styles are ineptly pasted onto monstrous hotels containing 3000 rooms, whereas the least objectionable Vegas buildings are a few minimalist streamlined modernist towers such as the Aria hotel.  That’s not to say that buildings like the Bellagio are not interesting—as a tourist I’d much rather walk through its lobby than that of a sterile modern building.  But it doesn’t really work as architecture.  It’s much too big for its neo-Italian style. This does not mean that traditional styles never work.  The headquarters for Epic Systems just outside Madison is full of fanciful buildings based on various fairy tales. In contrast, Apple headquarters in Silicon Valley is a sleek circle, much in the style of its consumer products.  In aesthetic terms, the Apple building is more successful.  But the Epic campus is probably more fun.  To each their own.  Companies have an incentive to use architecture that allows them to attract the desired workforce. Nor would I suggest that the more recent is always better.  I prefer the best paintings of 1600-1670 or 1850-1925 over the best output of the past 100 years.  I prefer midcentury modern architecture over the post-modern architecture of the 1970s and 1980s.  I prefer the pop music of 1965-72 over the music of the past 7 years.  I prefer the films of 1950-1980 over those of the past 30 years.  Tastes vary, and your choices may differ. But the fact that modernism has swept the field in such a wide range of areas suggests that it is not a market failure imposed by out of touch elite architects back in the 1920s.  It is the style that best fits the modern world.  And that’s true even if many of the older buildings are in some sense “better”.  I wouldn’t want Gerhard Richter or Anselm Kiefer to copy the style of Velazquez or Vermeer.  I wouldn’t want David Mamet to copy the style of Shakespeare.  I wouldn’t want Beyonce or Taylor Swift to copy the Beatles or Bob Dylan.  Each generation tries to find its own style.  That’s the market at work. (0 COMMENTS)