Some concepts in political economy operate like a Rorschach test. When someone defines them, you often learn more about them than about the concept. Democracy, fascism, capitalism, liberalism, conservatism, neo-anything, and socialism often mean different things to different people. I make no claim to being exceptional in this sense. Nonetheless, in this essay I want to offer a functional definition of socialism. This definition definitely reflects my own intellectual interests. But it also illuminates some central features of socialist systems and how they operate. Since I tell my students not to write mystery novels when presenting an argument, here is my proposed definition: socialism is the prohibition of free entry into markets. This definition is functional in that it focuses on what socialism does. Many define socialism according to its aims, motives, or goals. But individuals can act selfishly or altruistically in the context of any political or economic system. Some socialists promise material abundance, while others extoll the virtues of asceticism. And socialists seek to implement their ideal system through a variety of means, from authoritarian central planning to anarchic communes. By stressing what socialism does, I hope to identify a common thread across these visions. If it walks like socialism and it breaks eggs like socialism, it is socialism. Why not stick with the tried and true “common ownership of the means of production?” I in no way reject the usefulness of this definition and consider mine complementary to it. But ownership can be understood in a wide variety of ways. Were Soviet factories really owned in common, or were they effectively under the control of party elites? And by focusing on the immediate effects of socialism, I hope to provide a diagnostic tool for various policies and institutional arrangements that de facto operate in a similar way. To arrive at this functional definition of socialism, I revisit the socialist calculation debate. Not because it is my favorite thing to talk about—though that may be true—but because it concerned a variety of ways in which socialism might be implemented. In what sense do these very different systems all lay claim to the title? Mises: No Calculation in natura Though a number of texts predate it, the beginning of the socialist calculation debate is typically attributed to Ludwig von Mises’s 1920 “Economic Calculation in the Socialist Commonwealth.”1 The core of his argument is quite simple. Under socialism, because there is no private ownership of the means of production, there will be no markets for those means. In the absence of markets there will be no prices for these capital goods. And in the absence of prices, it is impossible to determine what how to most economically produce goods and services. In particular, Mises identifies three advantages of market prices for economic calculation (p. 97-98): 1. A market price “renders it possible to base the calculation upon the valuations of all participants in trade.” 2. Profit and loss calculations allow anyone who engages in production to determine “whether he has worked more economically than others.” 3. Lastly, such calculation “makes it possible to refer values back to a unit.” In a world of scarcity, any act of production involves an opportunity cost. What else could these resources have been used for? As the complexity of production processes increases in deploying a diverse array of capital goods, it becomes impossible to reckon such cost without a common denominator. Should we build the train tracks around the mountain and use up more steel, or through the mountain and use up more drilling equipment? Market prices do not represent some external standard of the truth about opportunity cost, but they do provide an indication of what other individuals think are the best alternative uses of resources. The process of buying and selling aggregates these judgments into an individually usable measure of what we forego and what we gain from production processes. Mises discusses several alternatives to market prices, arguing that they cannot solve the problem of economic calculation. His primary targets are Marxists and Otto Neurath. Both of these approaches to socialism posit in natura (“in nature”) calculation. Such theories argue that socialist regimes could calculate based on something intrinsic to the nature of economic goods, rather than the extrinsic exchange value assigned from market prices. For instance, Marxists [see Karl Marx] often posited that labor inputs should and could serve as the ultimate unit of economic calculation and distribution. Mises points out the fundamental problem that just as there are a great diversity of capital goods, there is great diversity in labor. In natura approaches contrast most sharply with Mises’s insistence on exchange value and thus prices as the only way to reckon opportunity cost in a complex economy. I am not concerned here with the substance of Mises’s critique, but only that it took aim at these in natura arguments. A Lange-Winded Response In 1935, F.A. Hayek published an edited collection Collectivist Economic Planning, which includes an English-language translation of Mises’s 1920 article. In response, Oskar Lange tries to rehabilitate socialism in a two-part essay the Review of Economic Studies.2 Lange’s opening move is bold: he admits that Mises is right. Economic calculation is vital to the success of a socialist economy, and it does require money prices. No money prices, no calculation of opportunity cost, no material abundance. Where Lange disagrees with Mises is in the necessity of market institutions. Lange argues that prices for the various factors of production could be set by socialist central planners. In a perfectly competitive market equilibrium, he points out, we know that two conditions obtain (pp. 58-59). First, the average cost to produce a given unit of a good will be minimized. That is, when considering the cost of production of all cars, the cost per unit will be as low as humanly possible. Second, the marginal cost of producing the last unit of a good will equal the price of that good. If it takes ₽5,000 to make the last car produced, it will sell for ₽5,000. Producers will have squeezed every last bit of consumer surplus out of the market. These twin relations are shown in Figure 1, which haunts the nightmares of many Econ 101 students. (If you think economists get excited when two curves intersect, just imagine how happy they are when it’s three curves.) Figure 1. After reviewing these conditions, Lange offers a fairly straightforward proposal (pp. 60-66). Free markets in consumer goods and labor would remain. A Central Planning Board would set accounting prices for capital goods. Production plant managers—the equivalent of entrepreneurs, but government officials instead of private owners—would use those accounting prices to calculate the least cost method of production (minimizing average cost). Directors of industries, such as the car czar, would expand or contract the number of production plants so that marginal cost equals the price. In essence, Lange proposed to use the theory of how markets work as a substitute for actual markets. Hence, market socialism. The calculation problem: solved. How would the Central Planning Board set prices? Don’t even worry about it, says Lange. They definitely wouldn’t need a complex set of simultaneous equations (pp. 66-67).3 They could even pick prices arbitrarily. If those prices turned out to not be equilibrium prices, they would be able to observe surpluses and shortages of goods. Just like markets do, they would approach equilibrium through a process of trial and error. The system might even approach equilibrium faster since the planners would be adjusting multiple prices at once instead of just one. Hayek’s Rejoinder There are many potential objections to Lange’s proposal. I want to focus on one in particular. Several of Hayek’s most famous articles—”Economics and Knowledge,” “The Use of Knowledge in Society,” and “The Meaning of Competition”—can best be understood against the backdrop of the calculation debate.4 In these articles, Hayek articulates a view of how a competitive process makes use of widely dispersed knowledge about economic conditions. “Mises sought to answer the question: what can socialism use to calculate, if not prices? Hayek had to answer the question: what makes market capitalist prices different from market socialist prices?” A lot of ink has been spilled about the extent to which Hayek’s rejoinders to the market socialists are similar to or different from the argument put forward by Mises. Some insist that Mises’s calculation argument has nothing to do with knowledge.5 When considering this possibility, is important to keep in mind that Mises and Hayek were taking aim at two very different proposals for implementing socialism. Mises sought to answer the question: what can socialism use to calculate, if not prices? Hayek had to answer the question: what makes market capitalist prices different from market socialist prices? One answer is to retreat to incentives. Socialist plant managers, industry czars, and central planners simply will not have the incentives that private owners of capital would have in a market system. This rejoinder is true, but I have never found it satisfying. This is the “socialism is great in theory, but not in practice” response. It is a retreat from the original Mises-Hayek view, which is that socialism is, in fact, bad in theory. Hayek’s tack is different. Echoing Mises’s 1920 claim that there is an “intellectual division of labor” (p. 102) at play in market societies, Hayek insists on the importance of the division of knowledge (p. 50). Knowledge about the relative scarcity of factors of production is not given to any one mind in its entirety. This often idiosyncratic or even tacit knowledge is dispersed throughout society. Market capitalist prices reflect—however imperfectly—this broadly dispersed knowledge. Market socialist prices reflect only the knowledge of the Central Planning Board. Don Lavoie would later come to call this the knowledge problem.6 Market socialism can introduce a common denominator for economic calculation, but the prices expressed in that denominator do not reflect economic reality to nearly the extent that free market prices do. Kirzner’s Synthesis Decades later, Israel Kirzner offers a helpful clarification of the difference between market socialism and market capitalism. In an article building on Don Lavoie’s Rivalry and Central Planning, Kirzner argues that it is no accident that Mises’s post-debate work placed entrepreneurship at the center of the market process.7 The entrepreneur, for Mises, is “the first to understand that there is a discrepancy between is done and what could be done” (p. 336).8 Entrepreneurship drives the market towards increased levels of coordination, driving the prices of production goods to more accurately reflect their relative scarcities.9 In a second article, arguing for the essential continuity between Mises and Hayek’s views, Kirzner draws these threads together.10 Misesian entrepreneurs solve Hayekian knowledge problems. Real, existing prices are never equilibrium prices that would result in perfect coordination between market participants. They need not even be “proximate” or “close” to their equilibrium values. Nonetheless, they reflect “the best available entrepreneurial knowledge concerning market conditions” (p. 223). Because entrepreneurship wins profits or incurs losses, those entrepreneurs most attuned to the conditions of the market will typically have more resources at their disposal than those who are less alert. Market prices are not perfect but they do reflect knowledge that is dispersed and judgment that has passed a selection test. The key condition for this “marvel” is freedom of entry. “It is only the possibility of unrestricted entrepreneurial entry which permits more alert entrepreneurs to deploy their superior vision of the future in order to correct the misallocations of resources reflected in the false prices which characterize disequilibrium” (p. 216). Prices do not move by magic. They move when entrepreneurs bid them up or mark them down. It is only prices that are subject to such revision that can effectively guide economic calculation. Entrepreneurship, for Mises and Kirzner, is not the province of an elite class of businessmen. It is a part of human action. “In any real and living economy every actor is always an entrepreneur and speculator” (Mises 2007, p. 252). The more expansive freedom of entry is, the more likely is it that errors will be detected and corrected. We do not know ex ante whose knowledge will prove relevant to producing what we want at least cost. Freedom of entry means that anyone can have a go, tapping maximally into the dispersed knowledge of a modern society. Following Kirzner, then, an essential component of a free economy is freedom of entry. By contrast, as Murray Rothbard notes, “a centrally planned economy is a centrally prohibited economy (p. 831).11 In order for there to be a central plan at all, private entrepreneurs must be prohibited from driving production decisions. A Central Planning Board may still act entrepreneurially in changing The Plan. But they will act without prices shaped by other entrepreneurs’ knowledge, alertness, and judgment. It is precisely the prohibition on exercising the entrepreneurial function that makes calculation in a socialist economy arbitrary. De Facto and De Jure Socialism Having made my argument as to why socialism can be understood as a prohibition of free entry, I now turn to why such a definition might be useful. Political economists are wont to distinguish between de jure edicts—what official law or policy declares to be the case—and de facto realities—what in fact is the case. By focusing on what socialism does rather than how it is constituted, the prohibition view allows us to distinguish between socialism in name and socialism in practice. This definition does confront an important ambiguity that must be noted. Prohibitions are rarely, if ever, complete. As with all definitions of socialism, the prohibition view admits of degrees and of variation. Governments try to prohibit drugs, but they often remain available. Black markets also thrive in socialist countries. Some level of private enterprise is usually tolerated while the “commanding heights” remain under government control. Likewise, there are variations in the degree of prohibition. The most socialist states ban many forms of private enterprise outright, though even there a private individual might gain the ear of a high official and be allowed to proceed. Less stringent implementations make entrepreneurs go through a lengthy and costly process of introducing a new enterprise. The prohibition view of socialism is thus congenial with Gary Anderson and Peter Boettke’s observation that Soviet socialism was not, for most of its existence, central planning per se.12 Rather, it was a decentralized but heavily interventionist system of extraction by elites of wealth that was largely produced in black and gray markets. Elite party members had de facto control of large and visible productive resources (contra the common ownership view) and prohibited entry into those markets. There was a formally socialist economy that existed parasitically on top of informal economic activity. What about fascism? Contemporary socialists get quite agitated when proponents of economic liberalism identify national socialists as socialists. In a fascist economy, productive resources are privately owned, but their decisions are coordinated with one another and the central government. Rather than focusing on ownership and coordination, the prohibition view asks a different question: was someone who thought they had a better idea of how to organize production free to have a go? Were they permitted to buy productive resources and deploy them according to their own vision of the future? If not, then fascism counts as socialism. Finally, let’s turn back to Lange. One might object that market socialism doesn’t really count as socialism, since consumer and labor preferences and quasi-market forces still shape production decisions. But it still shares the same functional limitations as cruder forms of central planning. The central planning board promulgates commands to industry czars and plant managers about how to combine resources in a way that is supposed to substitute for how freedom of entry shapes the size of industries (pp 58-60). In this formulation, Lange ignores the most important feature of freedom of entry, that it brings new ideas into an industry. Even the managers in Lange’s scheme lack much capacity for entrepreneurship. Those who make production decisions are not to treat prices as Misesian entrepreneurs do. In the Mises-Kirzner view, entrepreneurs treat prices as inputs into decision making but not determinants of decision making. Indeed, a key function of entrepreneurship is to identify where current prices are sending incorrect signals. By contrast, for Lange “the parametric function of prices must be imposed on [managers] by the Central Planning Board as an accounting rule” (p. 63). Lange’s managers are prohibited from making use of their idiosyncratic knowledge, alertness, and judgment. For more on these topics, see “Ludwig von Mises’s Socialism: A Still Timely Case Against Marx,” by Steven Horwitz. Library of Economics and Liberty, Oct. 1, 2018. Fascism, by Sheldon Richman. Concise Encyclopedia of Economics. Socialism, by Robert Heilbroner. Concise Encyclopedia of Economics. Larry White on the Clash of Economic Ideas. EconTalk. Not all socialists ascribe to the ideal of central planning. Common ownership can be understood in a wide variety of ways, and implemented in more or less decentralized fashions. Some stress ballot democracy, others deliberation, and still others are just fine with an elite vanguard shepherding the people. What all these alternatives share, however, is the idea that individuals are either outright prohibited from or must seek permission to act on their imaginative views of how to serve others. Socialism is as socialism does, and what it does is outlaw the creativity that enables economic adaptation and progress. Footnotes [1] Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth,” in Hayek, ed. Collectivist Economic Planning. George Routledge and Sons, 1935. [2] Oskar Lange, “On the Economic Theory of Socialism,” The Review of Economic Studies, Volume 4, Issue 1, October 1936 [3] It is hard to see how central planners could avoid the use of some formulas. A key insight of price theory is that markets are interdependent. The price of beef is affected by the prices of pork and of hamburger buns. Without appeal to some mathematical tools, the Central Planning Board really would be blindly groping. [4] Collected in F.A. Hayek, Individualism and Economic Order, University of Chicago 1948. [5] Mises might be surprised by the claim that knowledge was not central to his original argument. Economic calculation “affords us a guide through the oppressive plenitude of economic potentialities” (p. 101). “The human mind cannot orientate itself properly among the bewildering mass of intermediate products and potentialities of production without such aid [of calculation]” (p. 103). “Every graded system of pricing proceeds from the fact that men always and ever harmonize their own requirements with their estimation of economic facts” (p. 107). “We cannot act economically if we are not in a position to understand economizing” (p. 120). [6] Don Lavoie, National Economic Planning: What is Left? Cato 1985. [7] Israel Kirzner, “The Economic Calculation Debate: Lessons for Austrians,” in Peter Boettke and Fred Sautet, eds., Competition, Economic Planning, and the Knowledge Problem, Liberty Fund 2018. [8] Ludwig von Mises, Human Action: A Treatise on Economics, Vol. 2, Liberty Fund 2007. [9] This is not to say that this is all that entrepreneurship does. Calm down, Schumpeterians. Joseph Alois Schumpeter, 1883-1950. [10] Israel Kirzner, “Reflections on the Misesian Legacy in Economics,” in Peter Boettke and Fred Sautet, eds., Ludwig von Mises: The Man and His Economics. Liberty Fund 2019. [11] Murray Rothbard, Man, Economy and State. D. van Nostrand, 1962. [12] Gary Anderson and Peter Boettke, “Soviet Venality: A Rent-Seeking Model of the Communist State,” Public Choice Vol. 93, 1997.) *Adam Martin is Political Economy Research Fellow at the Free Market Institute and an assistant professor of agricultural and applied economics in the College of Agricultural Sciences and Natural Resources at Texas Tech University. For more articles by Adam Martin, see the Archive. (0 COMMENTS)

At every opportunity, President Joe Biden has pressed a central tenet of his social agenda: “Extremely wealthy Americans don’t pay their fair share of federal income taxes” (emphasis added). By Internal Revenue Service definitions of income, top income earners generally pay a far greater federal income-tax share than do lower income groups. Without saying so, the President has greatly expanded wealthy Americans’ income to include their considerable unrealized capital gains, dramatically lowering their income-tax rate, which he uses to advance his wealth-tax case. To initiate wealth taxation, Biden proposes a “minimum billionaires tax,” under which wealthy Americans will pay at least 20% of their “total income”—including unrealized capital gains—in federal income taxes.1 A sizable majority (59%) of diverse Americans2 also favored a wealth tax in 2022. Political support for a wealth tax appears to be built on two incorrect presumptions: First, wealthy Americans pay precious little income taxes (conventionally defined). Second, workers’ “income” and the wealthy’s “capital gains” are conceptually the same. As explained, given the economics of wealth accumulation, the wealthy (especially those self-made) should be celebrated, not denigrated, because of the resulting far greater gains provided non-wealthy Americans. The Wealthy’s “Low” Tax Rates? President Biden stresses that extremely wealthy Americans pay a meager 8% income-tax rate, giving the impression that he’s using IRS definitions. However, the Tax Foundation3 found that in 2020 (the latest year of data), the top 1% of taxpayers received 22.2% of taxable income and paid an average tax rate of 26.0%. The top half of taxpayers, who received almost 90% of taxable income, paid an average tax rate of 14.8%. The bottom half received 10.2% of taxable income and paid an average tax rate of 3.1% (with many paying nothing). In short, the top 1% of taxpayers received 2.2 times the income share of the bottom half but paid an average income-tax rate 8.4 times the tax rate of the bottom half. The Tax Foundation also found that the top 1% in 2020 paid 42.3% of all federal income taxes, or 18 times the share of the bottom half, which was 2.3%. The top 10% of taxpayers received almost half the total income but paid almost three-quarters of all income taxes. Moreover, the income-tax share paid by the top income groups has risen substantially since 1980, while the share of the bottom half of taxpayers was more than halved (findings dramatized in a National Taxpayers Union Foundation4 chart). Did the wealthy pay their “fair share” of income taxes? The tax-share statistics surely leave more room for debate than Mr. Biden suggests. Biden’s Income Definition In the press for a wealth tax, Biden’s economic advisors5 have expanded substantially the definition of taxable income (but only for the extremely wealthy), arguing that When an American earns a dollar of wages, that dollar is taxed immediately at ordinary income tax rates. But when they gain a dollar because their stocks increase in value, that dollar is taxed at a low preferred rate, or never at all. Investment gains are a primary source of income for the wealthy… Because many non-wealthy Americans have little to no investments (so claimed), the President’s advisors have declared that the tax system favors the wealthy by lowering their tax payments (and undercutting funding for social programs). Because worker earnings and capital gains are measured in dollars, Biden’s advisors see them as conceptually equivalent, but are they? Not really—and treating them the same is a political sleight-of-hand. The advisors have defined taxable income for wealthy Americans to include their annual capital gains and certain “consumption” expenditures, mainly their now legally tax-deductible charitable contributions.6 The advisors’ redefined income-tax rate for extremely wealthy Americans—meaning Forbes’ top 400 wealthiest families—is an imputed 8.2% for 2014-2018 (one-third the conventionally computed tax rate for the top 1% above). The advisors have estimated that during 2014-2018, Forbes 400 paid $149 billion in total income taxes on their newly defined taxable income of $1.82 trillion, making for the 8.2% rate. Biden’s advisors make no effort to impute similar tax rates for lower wealth groups, on the claim that only the extremely wealthy have significant capital gains (even though 58% percent of Americans owned stocks in 2022 and their retirement accounts were valued at $40 trillion in 2021). The Income/Wealth Conceptual Divide “Presidential advisors assert that the wealthy’s capital gains are conceptually the same as worker earnings, except they escape taxation. But that’s not the case.” Presidential advisors assert that the wealthy’s capital gains are conceptually the same as worker earnings, except they escape taxation. But that’s not the case. The most prominent difference? The extent to which the two forms of “income” are realized. Workers’ annual earnings are realized in their paychecks—and are spendable and savable, and not subject to future losses! By contrast, the market value of wealth holdings—say, corporate stocks—is best approximated by the present value of market estimates of companies’ ever-changing future and yet unrealized profit streams, appropriately discounted for time and risks that expected future profits will not be realized. And those unrealized gains can’t be realized until… well, the future arrives. With the future always unrealizable today, shareholders will unavoidably carry risks of their unrealized capital gains evaporating or morphing into losses. And unrealized future profit streams can vary with errant government (say, tax and regulatory) policies and a multitude of ever-changing economic, social, geopolitical, and environmental forces (among others) over which wealth holders have no control. Risk costs may only be expected and seem ephemeral, but they can become real as products and firms fail. Remember Sears? When Sears was the world’s top retailer in 1969, many shareholders likely had unrealized capital gains, subject to unrealized (and unrecognized) risks. Then, many Sears executives had probably not heard of Walmart expanding in small Southern markets. Walmart was, surely, a force in the emergence of Sears’ losses in the 21st century, with its last store closing in 2021. Wealth-tax proponents need a reality check: Most firms’ anticipated future profits are never realized, partially because most new firms fail (half in their first five years). Remember Kmart, Radio Shack, and Blockbuster? Their stockholders once had unrealized capital gains. Bed, Bath & and Beyond’s stock price doubled to $35 in 2021, which left some stockholders flush with capital gains—but also with considerable risk that the company’s future was in jeopardy. Its future would have been further jeopardized had the IRS then drawn off some of the shareholders’ capital gains, taking a portion of the failing company’s desperately needed capital. As it was, BBB’s stock plunged after 2021, dipping below a dime at this writing (April 2023). Wealth-tax advocates seem to imagine the extremely wealthy’s wealth as granite, readily quarried. Well, Forbes 400 lost a half-trillion of their $4.5 trillion total wealth in 2022. Jeff Bezos alone lost $57 billion7. If the Forbes 400 had paid unrealized capital gains taxes in 2020, would wealth-tax proponents have refunded their taxes (or covered their realized losses) in 2022? Do advocates want American taxpayers to assume market risks, or are they proposing only to share in the wealthy’s gains, but not their pains? Errant Fiscal and Monetary Policies Because stock prices today are founded on discounted future profit streams, they are sensitive to interest-rate movements. And stock prices do move counter to interest rates. This means Federal Reserve rate cuts can, and do, lead to unrealized capital gains, as experienced in the run-up to the 2007-2009 Great Recession. As bankers (and economists) began re-learning in 2022, unrealized capital gains can be bolstered but then undercut by prolonged easy monetary policy meant to hold interest rates down to near zero, partially to monetize the string of trillion-dollar federal deficits. The Fed and wealthy and non-wealthy shareholders also re-learned in 2022 how unrealized capital gains can evaporate with monetary-induced jumps in the inflation rate that feed into higher interest rates and lower equity prices. To properly evaluate the “fairness” of an unrealized capital gains tax, wealth-tax advocates need to understand that the extremely wealthy will be twice hit by a wealth tax. First, they will pay taxes on their current capital gains. Second, market investors will see taxes on future profits become capitalized today into lower stock prices. Fearing today’s narrowly applied wealth tax will be broadened, investors will be more inclined to sell and more resistant to buying stocks. Thus, a capital gains tax can put downward pressure on today’s stock prices and impair firms’ investment in innovative products, leading to slower growth in workers’ real incomes and retirement accounts. Non-wealthy stockholders will, of course, share lost capital gains from any market downturn. Biden and company are unlikely to concede on the fairness of wealth taxation, especially since they see capital gains as income, and untaxed at that. If fairness is their banner, might they not understand that any wealth-tax proposals should be accompanied by an allowance for risk costs? Without such an allowance, investors will shift toward safer assets, to avoid paying a tax on risk costs embedded in higher returns on riskier investments. Granted, a risk-cost allowance would likely throttle enthusiasm for a wealth tax for a practical reason: How can risk costs possibly be computed with reasonable accuracy across all ever-changing portfolios, especially when such costs can be imputed (to varying extents) into stock prices? Wealth as a Fixed-Pie Progressives have often pressed for wealth taxes based on modern versions of the fixed pie theory of income and wealth that both Adam Smith (1723-1790) and Karl Marx (1818-1883) adopted. Given wealth’s presumed fixity, many of today’s wealth-tax proponents imagine that the national wealth pie can only be divvied up among people (or groups). Capitalists, presumably, can’t grow the pie (because labor, not capital, is considered the sole source of value). If a billionaire’s wealth increases, others must suffer smaller slices, a point that a progressive New York Times columnist8 has crystalized: “[W]e have spent the last 30 or so years transferring trillions of dollars from the middle class to the people at the very top” [my added emphasis], implying that the wealthy have largely taken their wealth from others, not by increasing the wealth pie. Thieves are infamous for forcibly taking what others have. But is (zero-sum) thievery the way wealthy people build their fortunes? Amazon’s Jeff Bezos, Microsoft’s Bill Gates, and Tesla’s Elon Musk have largely accumulated fortunes in an old-fashioned way: by offering their buyers added value for their dollars (a prerequisite for inducing buyers’ voluntary purchases). In treating wealth accumulation as zero-sum, wealth-tax advocates exploit an asymmetry in the measurement of gains from purchases. They point to the exact dollar wealth of billionaires: “Jeff Bezos has $123.7 billion in wealth today, up four-fold from 2014.” Advocates don’t consider the economic gains of Amazon’s buyers—because their gains aren’t measured—and can’t be! Buyers’ gains are subjective, which are realized in enhanced product quality, beauty, convenience, faster delivery, and so forth. If asked to monetize their added gains, many Amazon buyers might assess them on individual purchases as no more than nickels and dimes. Across the company’s 200 million-plus global buyers, however, those small gains, when totaled, can be far larger than Bezos’ wealth. Given the measurement asymmetry, however, buyers as voters can be forgiven if they (wrongly) deduce that Bezos’ gains are far greater. Can that be, other than in, say, car jackings? If Amazon buyers didn’t gain from their purchases, how could the company have so many (eager) repeat buyers? An obvious uncomfortable implication for the wealthy’s critics: Absent force, growth in the wealth of the wealthy will, generally, be accompanied by growth in the economic gains of others, including the non-wealthy. The Added Profits Extracted from Firms Added Value Streams? Extremely wealthy people—like Bezos—build their fortunes partially by drawing down their firms’ profits, which wealth-tax advocates seem to imagine represent a sizable percentage of revenues. Are their impressions on target? Across industries, corporate net profit margins (revenues minus cost of goods and operating expenses) averaged 8.9% in 2022 (with wide variation). And the average profit margin isn’t net of a nontrivial business cost, risk. Being in retail, Amazon has an expected low net profit margin. In 2022, its net margin was only 1.42% (highly variable but consistently low). Bezos must have built his fortune by developing a huge value stream for his customers. And he did, with annual sales reaching $514 billion in 2022.9 Developing a more credible assessment of founders’ wealth takes is fraught with estimation problems. However, MIT economist William Nordhaus10 has taken up the challenge. He has estimated the extra (above-competitive) profits technology firm founders received in 1948-2001. Nordhaus estimated that company founders appropriated only 2.2% in extra profits from their firms’ added-value streams (suppressed mainly by rapid entry of imitators). Overall, Nordhaus estimated that of the $6 trillion in their total added value, tech entrepreneurs were able to capture only $400 billion, leaving $5.6 trillion of added value for others, mainly buyers. In addition, Nordhaus estimated that innovators’ added profits covered annually only .19% of their capital replacement cost. Conclusion Wealth, especially great wealth, is a tempting tax target. It is easily attacked as unearned, undeserved, unfair, as well as unneeded, and an economic drain on others (with base drives of envy and covetousness coloring policy advocacy). The wealthy’s riches can be seen solely as enabling the wealthy to acquire, say, expensive cars and wardrobes. In truth, the wealthy wouldn’t be wealthy for long if they didn’t put much of their wealth to work productively. President Biden and other wealth-tax proponents should reconsider how the wealth-tax debate has lacked balance. The wealthy pay more income taxes (conventionally defined) than widely presumed. The asymmetry in measuring sellers’ and buyers’ gains from trades has left the impression that only the wealthy have gained from trades, a mockery of how wealth accumulation works. Buyers’ gains have generally been far greater than sellers’ gains. Also, it has been all too easy for wealth-tax advocates to overlook and forget the untold uncompensated hours, sleepless nights, and risks many of today’s wealthy endured in their pasts with only a glimmer of hope that they would be wealthy today. Wealth-tax proponents don’t seem to appreciate critical points: Foremost, people’s wealth today is founded on sequences of future evolving and interacting events that are unavoidably fraught with risks. Second, wealth taxes today may yield substantial current government revenues, because of much wealth’s short-term immobility. However, wealth’s long-term mobility is likely to be far greater than imagined, given that wealth taxes imposed today can lower firms’ expected future profit streams (apart from the taxes extracted) and undercut future investments—and the country’s taxable future wealth. For more on these topics, see Capital Gains Taxes, by Stephen Moore. Concise Encyclopedia of Economics. Present Value, by David R. Henderson. Concise Encyclopedia of Economics. Why a wealth tax was abandoned in Britain, by John Phelan. EconLog, Jul. 17, 2022. Afterthoughts on Piketty, by Russ Roberts. EconTalk Extra, Sep. 24, 2014. Policy makers must remember that while much wealth takes the historical form, buildings and heavy machinery, considerable contemporary wealth comes in digitized ideas, which can be sent across the globe at the touch of a few computer keystrokes and at the speed of light. In short, added taxes on “extreme wealthy” Americans can unavoidably impair the economic futures of non-wealthy Americans. Footnotes [1] Under President Biden’s “Billionaire Minimum Income Tax,” American households with a net worth of more than $100 million—”the top one-one hundredth of one percent (0.01%)”—would be required to pay in federal taxes a minimum of 20% of their “full income,” including unrealized capital gains. [2] Zhang, Sharon. “Majority of Voters Support Biden’s Billionaire Income Tax, Poll Finds” in Truthout. Available online at https://truthout.org/articles/majority-of-voters-support-bidens-billionaires-income-tax-poll-finds/ [3] York, Erica. “Summary of the Latest Federal Income Tax Data,” 2023 Update, January 26, 2023. Available online at https://taxfoundation.org/summary-latest-federal-income-tax-data-2023-update/ [4] Brady, Demian. Table 1. “Who Pays Income Taxes: Tax Year 2020.” Who Pays Income Taxes? National Taxpayers Union, December 13, 2022. [5] Leiserson, Greg and Danny Yagan. “What Is the Average Federal Individual Income Tax Rate on the Wealthiest Americans?” The White House, September 23, 2021. Available online at https://www.whitehouse.gov/cea/written-materials/2021/09/23/what-is-the-average-federal-individual-income-tax-rate-on-the-wealthiest-americans/ [6] Making the wealthy’s charitable contributions taxable can be expected, of course, to draw opposition from the country’s multitude of charities that now benefit from the wealthy’s efforts to lower their income-tax payments. [7] The 2022 Forbes 400 List of Richest Americans: Facts And Figures, Forbes, September 27, 2022. Available online at https://www.forbes.com/sites/chasewithorn/2022/09/27/the-2022-forbes-400-list-of-richest-americans-facts-and-figures/?sh=155fb02318e4 [8] Tomasky, Michael. “Bill Gates, I Implore You to Connect Some Dots,” The New York Times, November 11, 2019. Available online at https://www.nytimes.com/2019/11/11/opinion/billionaires-warren-wealth-tax.html [9] A very rough (hardly satisfying and likely exaggerated) measure of Bezos’ extracted wealth from Amazon’s “added value stream” is the ratio of his wealth to Amazon’s annual revenues. In 2022, Amazon had a market cap of about $1 trillion. Bezos’ wealth was judged by Forbes to be $114 billion (down by $57 billion in March 2022). This means his wealth was then about one-seventh of Amazon’s annual sales, which greatly exaggerates his take. He built his wealth in multiple years of prior Amazon sales, and he likely invested his extracted profits in a diversified investment portfolio. Moreover, his wealth is the current discounted value of Amazon’s entire future profit stream, covering multiple annual sales with adjustments for unrealized risks. [10] Nordhaus, William D. “Schumpeterian Profits in the American Economy: Theory and Measurement,” NBER Working Paper No. 10433, April 2004. Available online as PDF at https://www.nber.org/system/files/working_papers/w10433/w10433.pdf *Richard B. McKenzie is the Walter Gerken Professor Emeritus in the Merage School of Business at the University of California, Irvine. His latest book is Reality Is Tricky: Contrarian Takes on Contested Economic Issues (2023). For more articles by Richard McKenzie, see the Archive. (0 COMMENTS)

Jonathan Swift Healthcare in the United States is in the midst of a massive wave of consolidation. For example, fifty years ago, virtually all non-academic, non-government U.S. physicians had an ownership interest in their practices. Today, approximately 70% of U.S. physicians are employed by hospitals or other corporate entities. Likewise, mergers and acquisitions have landed more than 70% of hospitals and 90% of hospital beds in multi-hospital health systems. As such, health care organizations have increased in size and their complexity has multiplied. For example, between 1975 and 2010, the number of U.S. physicians roughly doubled, but the number of healthcare administrators—employees of medical practices, hospitals, and health systems who do not directly care for patients—increased about thirty-six times. These sea changes have produced vigorous and ongoing debates over the effects of consolidation on quality and costs of care, but there are deeper issues at stake that cannot be adequately understood through healthcare statistics alone. Is consolidation, on balance, a good thing? What are its effects on patients and those who care for them? Where can we turn for a deeper understanding of the effects of changing size on healthcare organizations? Jonathan Swift’s Gulliver’s Travels offers one of the most penetrating and sustained explorations of the idea that size really matters. Published in 1726 after Swift’s political ambitions had largely foundered, during a period in which he was serving in a kind of exile in the land of his birth as Dean of St. Patrick’s Cathedral in Dublin, the novel was inspired in part by the success of Daniel Defoe’s 1719 Robinson Crusoe. Both novels present tales of shipwreck and castaway but differ in other key respects. Defoe presents a largely hopeful account of the resilience, creativity, and dedication of a single person, suggesting that human beings can not only survive but also thrive in isolation. By contrast, Swift offers a portrait of a man who is always transformed by the social circumstances in which he finds himself, implying that human beings are largely defined by the society of which we are part. One of the most dramatic changes in social context Gulliver experiences during his voyages to strange lands concerns size—in the Land of Lilliput, the inhabitants are one-twelfth the height of Gulliver, while in the Land of Brobdingnag, Gulliver is one-twelfth the height of the natives. Among the miniscule Lilliputians, Gulliver’s relatively immense size transforms his sense of his own identity. At first, he is seen as a great threat and shackled, and the inhabitants never completely get over their fear of him. Eventually convincing them that he intends them no injury, he is given the run of the land, on the condition that he avoid harming anyone. He soon becomes a favorite of the royals, although it is clear that he is prized above all for utilitarian reasons. The king persuades him to subdue a rival people, the Blefuscudians, by stealing their fleet. However, Gulliver refuses to make vassals of them, provoking royal displeasure. Soon thereafter, when he extinguishes a potentially disastrous conflagration by urinating on it, he is charged with treason. Convicted and sentenced to be blinded—a punishment that would largely deprive him of the ability to act independently yet preserve his immense potential as a power tool—he escapes the island. In a land of miniaturized human beings, where the king inspires awe because he is taller by the breadth of Gulliver’s fingernail than others in his court, otherwise ordinary Gulliver stands out as a Colossus. In Brobdingnag, the tables are turned, and tiny Gulliver is regarded as little more than a curiosity. The farmer who finds him first gives him to his daughter as a pet, but then realizes that he can exhibit him for money. Soon sick of being shown as a freak, Gulliver is purchased by the queen of the land, who arranges for a special tiny house to be built for him. He is the butt of numerous indignities, including an attack by wasps and a near-death experience at the hands of a monkey who carries him to the rooftop. Just as in Lilliput Gulliver’s relative size meant that even the most trivial and routine aspects of his daily life, such as feeding and excretions, were transformed into matters of great moment, so among giants, everything about Gulliver seems trivial, mean, and subject to ridicule. How could such a small creature, the Brobdingnagians ask, possibly amount to anything worthy of more than trifling consideration? Such insults to Gulliver’s human dignity are compounded when he discusses history and politics with the king, who concludes that Europeans are “the most pernicious race of little odious vermin that nature ever suffered to crawl upon the surface of the earth.” In Swift’s account, seemingly defining human traits such as reason and virtue amount to very little indeed in the face of mere miniaturization and magnification. In the spirit of Swift, consider the effect of size on health care organizations, from medical practices to multi-hospital health systems. On the one hand, increasing size can offer some readily apparent advantages. For example, larger organizations can take advantage of economies of scale in purchasing, marketing, and overheads. Medical supplies, equipment, and drugs often cost less per unit when purchased in large quantities. A larger organization can afford to mount larger and more sophisticated marketing campaigns, taking advantage of a wider range of media. Governance, documentation, billing, and information technology are among the overhead costs that may be relatively reduced as an organization grows. Moreover, larger organizations typically wield greater bargaining power, offer a greater variety of resources (such as different medical specialties and diagnostic and treatment options), exert greater influence in a healthcare market, and provide greater compensation to their executive staff, based at least in part on the rationale that they are overseeing a larger organization and therefore doing more work. I do not think anyone would contest that we need some large healthcare organizations. A solo-practice physician cannot offer the same around-the-clock care as a group of physicians staffing different shifts. Likewise, a family physician cannot offer the same level of subspecialty expertise as a multi-specialty group practice that includes specialists in fields such as neurology, cardiology, and gastroenterology. Moreover, as a medical practice grows in size, it is able to reduce duplication and per-physician administrative costs such as record keeping, coding, and billing, a consideration that also applies to hospitals. A small hospital of a few dozen beds or less cannot afford to offer the same diagnostic and therapeutic equipment and services, including PET/MRI scanners, robotic surgery devices, and highly advanced service lines such as cutting-edge neurosurgery and cancer care, as can a hospital of hundreds of beds. Some also argue that larger healthcare organizations can also improve quality of care and reduce costs, although this is hotly debated. If bigger is not necessarily better, it does at least open up multiple opportunities for enhancement. Yet there are also numerous downsides to consolidation, one of which is the inevitable rise of bureaucracy, or “the rule of desks.” In a small organization, everyone can know everyone else, and many decisions can be made on the basis of personal relationships, based on respect and trust. As organizations grow, not everyone can know everyone else, and decisions must be made on the basis of impersonal factors, such as job descriptions, organization charts, and policy and procedure manuals. In an industry such as manufacturing, this might not pose a problem, but medicine is founded on relationships between individual patients and physicians. As bureaucratization progresses, organizations such as medical practices and hospitals tend to become more and more rigid and less and less creative. People are hired, promoted, and fired less on the basis of the personal relationships they build than on whether they do what those above them on the organization chart expect. Everything must be done according to the chain of command, and if someone steps outside that chain, even though their idea is first rate, they are likely to be reprimanded. “Just as Gulliver soon longs to be treated as a human being, so no physician wants to be treated as little more than a member of the class of internists, pediatricians, or surgeons.” In Lilliput and Brobdingnag, the royals do not really care about Gulliver as a person. Instead, their interest in him is based on what he can be made to do—in the land of the small, to function as a weapon of war, and in the land of giants, as a sort of parlor trick. His functions are fixed according to the advantages of his relative size, and if he were the same size as the inhabitants, they might take no interest in him at all. Gulliver becomes nothing more than a member of a size-based class, and any other European would be treated in the same way, as a tool of war or amusement. It is no wonder that Gulliver does not wish to linger in either land, where genuine companionship is rendered essentially impossible. Just as Gulliver soon longs to be treated as a human being, so no physician wants to be treated as little more than a member of the class of internists, pediatricians, or surgeons. Every physician wants to be seen as making distinctive contributions, but a heavily bureaucratized organization finds it difficult or impossible to treat the occupants of the boxes on its organization chart as anything else. What matters most is not the initiative of physicians but whether they are obeying the rules and performing their jobs as prescribed. Physicians in a small-group practice or a single hospital may function day to day by putting relationships first. They are likely to know their patients and colleagues as individual human beings, with distinctive personalities, life stories, and aptitudes and interests. Such relationships help to get things done, precisely because people know and trust one another. By contrast, as organizations grow, they begin functioning more and more like inhabitants of what sociologist Max Weber called an “iron cage.” To those working within it, the organization feels less and less like a network of personal relationships—a community—and more and more like a machine. What seems most real in a small organization is often people and interpersonal relationships, but what seems most real in a bureaucracy is the design and operation of the machine, in comparison to which personnel such as physicians are often made to feel like interchangeable cogs. For people whose professional identity is bound up with caring for individual human beings, this machine-like—even prison-like—environment can prove profoundly disheartening and even positively disabling. Gulliver quickly grows weary of being treated as a mere tool. Of course, the pernicious effects of consolidation are not confined to physician practices or hospitals. They are also readily apparent in other industries, where just as growing hospitals and health systems can begin to think of themselves as businesses whose service line happens to be healthcare, so other industries can think of themselves in terms of little more than market share, profits, and market capitalization, gradually devoting less and less attention to the quality of the products and services they were originally founded to provide. In other words, money can become such an overarching consideration that some businesses will forsake quality, reputation, and trust in order to make more of it. As Plato wrote 2,500 years ago, when this happens, a physician ceases to be a physician, a craftsman ceases to be a craftsman, and a politician ceases to be a politician, as all three are transformed into little more than money makers. Such metamorphoses are especially common when finance seems to rule the economy, business school graduates are presumed to be ready to lead in any field, and companies are bought and sold, located and relocated, and staffed and downsized based strictly on financial considerations. For more on these topics, see “Gulliver’s Travels: Adam Smith’s Favorite Novel,” by Shannon Chamberlain. AdamSmithWorks, October 30, 2019. “Re-Imagining Medicine,” by Richard Gunderman. Library of Economics and Liberty, Jul. 4, 2022. “Inside Leviathan: Lessons from Gordon Tullock’s Bureaucracy,” by Stefanie Haeffele and Anne Hobson. Library of Economics and Liberty, Nov. 4, 2019. It is just at this point, when our pride gets the better of us, that we are most vulnerable. Medical practices, hospitals, and health systems exist not to expand their markets, to boost their profits, or to fatten the wallets of their executives. They exist to care for patients, and even though remaining small may run counter to every instinct of the contemporary business school graduate, there are many things in healthcare that tend to be better done at a smaller scale. First and foremost is caring. Just as Gulliver can find no intimacy with the Lilliputians, and the Brobdingnagians can find no intimacy with him, so a large and necessarily bureaucratic healthcare organization cannot care for its employees or the people for whom its employees care. Why? Because it does not operate at their scale. It is simply too big to operate on personal relationships because it is too big to see individual human beings. And any organization that cannot operate on personal relationships, with a steady focus on individual human beings, cannot, by its very nature, foster the human excellences on which good medicine depends. *Richard Gunderman is Chancellor’s Professor of Radiology, Pediatrics, Medical Education, Philosophy, Liberal Arts, Philanthropy, and Medical Humanities and Health Studies at Indiana University. He is also John A Campbell Professor of Radiology and in 2019-21 serves as Bicentennial Professor. He received his AB Summa Cum Laude from Wabash College; MD and PhD (Committee on Social Thought) with honors from the University of Chicago; and MPH from Indiana University. (0 COMMENTS)

Under a gold standard, government bonds are nearly free of inflation risk but not of default risk. Under a fiat standard, the reverse is true. ——White, Lawrence H. Better Money: Gold Fiat or Bitcoin? (pp. 214-215).1 In his new book, Lawrence H. White compares three possible monetary systems: a gold standard, a fiat money standard, and a Bitcoin standard. He interprets history to provide evidence for how these standards operate. It would seem that the best monetary standard is one in which the purchasing power of the monetary unit is stable. An unreliable money imposes large costs on households and businesses. They have to spend resources understanding the meaning of price movements (is this a relative price change or part of general inflation?), forecasting the rate of inflation, and trying to protect purchasing power of savings. The search for the best monetary standard is therefore a search for stable money. White analyzes gold, fiat money, and Bitcoin from that perspective. A gold standard is one in which a dollar is defined as a certain weight of gold. This means that all dollar exchanges can be ultimately settled in gold. But it does not mean that all payments must be made in gold. Suppose that all of the gold in the world sits in a single vault. Title to the gold is tracked on a computer. What circulates are abstract representations of title to gold. These could be dollar bills, bank checks, or other media. When I pay for groceries, the amount of gold to which I have title goes down, and the amount to which the grocer has title goes up. White points out that one reason that banking emerged is that payment using physical gold was cumbersome. Coins were not uniform: Out of the coin-changing business, modern banking arose to provide a way for merchants to cope with the confusing welter of coins. p. 51 A bank can over-issue notes. It can profit by lending out more than the value of its reserves (which would be gold under a gold standard). The bank is counting on not all depositors redeeming their notes at once. This is called fractional-reserve banking. If fractional-reserve banking were outlawed, then profitable opportunities to the economy would be lost. But if banks do over-issue, they are potentially subject to runs. White suggests that some fractional-reserve banking is natural, and I agree that its advantages outweigh its pitfalls. However, these advantages and pitfalls prevail under any monetary standard. In a fiat money standard, the government issues money, and people accept money as payment. As White points out: No country we know of switched to a fiat standard following an open public discussion of its benefits and costs. p. 194 Instead, fiat currency arises from a bait-and-switch. A government will start with a well-defined currency, with its value tied to gold or some established foreign currency. Then the public becomes accustomed to using that currency. At some point—typically during a crisis—the government will let the currency float, dropping its promise to exchange currency for gold or other valuable assets. Europeans switched to fiat currencies during World War I in order to be able to print more money to pay for the war. America did it in 1971, because it could no longer sustain redeeming paper dollars for gold at the parity established at Bretton Woods in 1944. “Network effects and lock-in effects enable the bait-and-switch to fiat currency.” Network effects and lock-in effects enable the bait-and-switch to fiat currency. The network effect is that when other people are using a medium as money, it pays for me to accept that medium as money. Because other people are using it, I know that I will be able to use it. In this way, people are, to a large extent, locked in to using currency even after the government withdraws its promise to maintain the value of the currency. Network and lock-in effects: … habituate people to accept redeemable paper money, with the result that, when redemption ends, they continue accepting it so long as it works, and it works (given moderate supply growth) so long as others follow the same strategy. (p. 195) This means that a society is not necessarily using the optimal money. There might be a better monetary standard available, but no one will switch because they are waiting for others to switch. An argument against fiat money is that it makes it tempting for governments to run deficits, print money, and inflate away its debts. An argument for fiat money is that it gives the government more freedom to engage in counter-cyclical fiscal and monetary policy, creating better macroeconomic stability. White argues that in practice, fiat money has made macroeconomic instability worse, not better. He compares macroeconomic performance in the United States in three eras: prior to the establishment of the Federal Reserve in 1913; under a Fed-managed gold standard from 1913 to 1971; and under pure fiat money standard from 1971 to present. He indicts the fiat money regime as having high inflation and volatility, particularly compared with the gold standard as it operated prior to 1913. A large section of Better Money discusses a Bitcoin standard. White argues that in theory Bitcoin could offer the benefits of a gold standard, but because of network and lock-in effects it will be difficult for the economy to shift to a Bitcoin standard. One issue with Bitcoin is that some people want to use Bitcoin through intermediaries for convenience and efficiency, but other people want to avoid intermediaries in order to preserve privacy. These two different modes of use do not reinforce one another. They do not create a single network effect for Bitcoin. Under our existing fiat currency regime, gold and Bitcoin are speculative assets. One motivation for speculating in gold or Bitcoin is to protect against a complete collapse of the fiat dollar. If government deficits continue to be mismanaged, it could transpire that hyperinflation breaks out, driving the value of the dollar to zero. In this (unlikely) event, Bitcoin and/or gold would be very valuable. The dollar prices of gold and Bitcoin are volatile, but White points out that this actually represents uncertainty about the value of the fiat dollar. If the fiat dollar were certain to remain stable, then speculative demand for gold and Bitcoin would disappear. On the other hand, if gold were adopted as a monetary standard (a dollar = x ounces of gold), that also would eliminate speculative demand. Under a gold standard, the purchasing power of gold would be stable. It is unstable today because we are in a fiat money standard that seems fragile. White notes that Bitcoin’s price is more volatile than the price of gold. He repeatedly blames this on the fact that Bitcoin’s supply is inelastic: it is fixed by an algorithm and cannot respond to price changes. I did not find this argument persuasive. Gold supply is highly inelastic, also. That is because the stock of gold is large relative to what can be extracted from mines or jewelry in a year. Indeed, a highly variable supply is not desirable for a monetary standard. I think that Bitcoin’s price is more volatile than gold because its speculative demand is more volatile. The participants in Bitcoin speculation are relatively few in number, so that the market is thinner. Third-party exchanges are much less well established. Speculators have little historical experience to go on, so that their expectations can change suddenly. Bitcoin’s potential to serve as a store of value in case of a fiat money collapse are much less certain than the potential for gold. For more on these topics, see Gold Standard, by Michael D. Bordo. Concise Encyclopedia of Economics. Competing Money Supplies, by Lawrence H. White. Concise Encyclopedia of Economics. “Can Cryptocurrencies Become Money?” by Nicolas Cachanosky. Library of Economics and Liberty, Nov. 1, 2021. Lawrence H. White on Monetary Constitutions. EconTalk. As an individual, I find the present situation regarding fiat money to be challenging and disturbing. I am one of those who view present fiscal policy in the United States to be on an unsustainable course. To me, it looks as though at least some significant inflation is inevitable. To speculate in gold or Bitcoin, I would have to be confident that my outlook for inflation is higher than that of other speculators in those assets. If their outlook for inflation is more dire than mine, then they have already bid prices above the “right” level. So my own search for a stable source of value in an environment of fiscal recklessness is a never-ending challenge. Footnotes [1] Lawrence H. White. Better Money: Gold Fiat or Bitcoin?. *Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012. Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

After nearly 12 years as general manager for the L.A. Rams, Les Snead has learned the power of humility when it comes to making big decisions–who to draft, who to hire as head coach, and how to create a shared vision for his team. Listen as he and EconTalk’s Russ Roberts discuss what it’s like […] The post Les Snead on Risk, Decisions, and Football appeared first on Econlib.

A year ago, I wrote about twin examples offered by one of Minnesota’s Twin Cities, St. Paul, of the principles of Econ 101 in action. The Saint Paul City Council passed a minimum wage ordinance in 2018 which, from January 2020, would raise the city’s minimum wage by stages to $15 an hour for all firms by 2028. Research found that: …even just the anticipation of the minimum wage hike appears to have driven declines in jobs, hours, and overall earnings for restaurant workers in St. Paul, just as Econ 101 would predict. A nice illustration of a price floor in action. St. Paulites had also voted to enact one of the strictest rent control measures in the United States, capping annual rent increases at 3% with no allowance for inflation or exemption for new built properties. And: Data compiled by the U.S. Department of Housing and Urban Development shows that, since the measure was passed, the number of building permits issued in St. Paul is down over 80% compared to the same period during the previous year. An equally nice illustration of a price ceiling in action. But St. Paul’s Twin, Minneapolis, is also offering itself as an economic policy laboratory and it is also providing examples of price floors and ceilings at work with minimum wage hikes and rent controls. The Federal Reserve Bank of Minneapolis recently released its latest reports on the consequences of the Twin Cities’ minimum wage hikes. For St. Paul, it found that, by 2021Q4, the hike led to: …an average decline in jobs of 2.2 percent, an average decline in total hours worked of 2.3 percent, and an average decline in wage earnings of 2.1 percent. The largest effects are found in the restaurant and the retail industries, in lower-paying establishments, and for lower-paid workers. In the retail industry, the hike reduced jobs by 23%. Across the Mississippi in Minneapolis, the study found that, by 2021Q4, the minimum wage hike led to: …an average decline in jobs of 1.7 percent, an average decline in hours worked of 1.3 percent, and an average decline in wage earnings of 1 percent. The largest effects are found in the restaurant and the retail industries, in lower-paying establishments, and for lower-paid workers. In the retail industry specifically, the hike reduced jobs by 28%, hours worked by 20%, and earnings by 13%. In both cases, hikes in the minimum wage, a price floor, made labor more expensive and employers responded by buying less of it, just as Econ 101 would suggest. Minneapolitans also voted for rent control measures in November 2021, but the city has dragged its feet implementing it. A new report, commissioned by the city itself, indicates why. It found that: A rent stabilization policy would not effectively address the problem of renter cost-burden. It does not target relief to renters whose incomes are insufficient to afford rent in the housing market. A rent stabilization policy would also impede growth of the city’s housing stock, which is counter to numerous existing City policies designed to promote the production of new housing to ensure existing and new residents have access to a range of options to meet their needs. It warned that: If a rent stabilization policy was adopted in Minneapolis: Some existing renters could benefit from increased housing stability due to the certainty of the limit on future rent increases. Renters may in fact face greater housing instability due to higher rent increases than they otherwise would have experienced, as property owners could begin raising rents to the maximum amount allowed. Renters may experience diminished housing quality, as a rent stabilization policy could disincentivize property maintenance and improvements. There could be a significant decline in the creation and preservation of rental housing units in Minneapolis. Ultimately, “The costs and detrimental impacts of a rent stabilization policy would outweigh any potential benefits in addressing renter cost-burden.” All of this is as you’d expect from Econ 101. A price ceiling increases demand and reduces supply exacerbating the very shortages it is often intended to fix. Minnesota is setting itself up as an experiment in expanded government: “Minnesota Democrats plan to grow state government to historic size,” the Pioneer Press reported recently. Its government is proposing to hike spending and, even with a forecast budget surplus of $18 billion dollars, raise taxes too. NBC News recently labelled the state “a laboratory for how to effectively use that power to achieve progressive policy priorities.” Nowhere is that truer than in the Twin Cities of Minneapolis and St Paul. The results speak for themselves.   John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

Beware of “foolproof” recession indicators. For years, people have been telling me that an inversion of the 2-year and 10-year yield spread on Treasury securities indicates that a recession will occur within 12 months. I’ve warned them that while the indicator has a good track record, it’s far from perfect. This yield spread inverted on April 1st, 2022. In retrospect this inversion seems to have been an April fool’s joke, as yesterday’s jobs figures were extremely strong, showing payroll employment rising by 339,000 in May 2023. You don’t see those sorts of big job gains when the economy is in a recession.  It looks like the “infallible” yield curve indicator has failed us.    In fairness, the 3-month/10-year spread didn’t invert until October of 2022, so that one might yet prove accurate. This inversion may have contributed to Bloomberg’s panel of forecasters telling us last October that a recession was 100% certain to occur by October 2023.  But there’s another problem with forecasts of an imminent recession.  Bloomberg reports that a labor market showing this sort of very widespread strength almost never occurs within 6 months of the next recession: Meanwhile, the so-called diffusion index showed that 60.2% of industries added jobs, a proportion that’s historically inconsistent with a recession starting in the next six months. That means that the majority of economists projecting economic contractions in the third and forth quarters of this year may have to reconsider. The labor market is often considered a “lagging indicator,” but it’s rare — outside of the highly unusual Covid-19 experience — for it to abruptly stop with no forewarning. I don’t know what will happen between now and October, but I do know one thing for certain; one of these reliable recession indicators will be wrong.  Either the yield curve inversion will predict a recession that didn’t happen, or the diffusion index will fail to give its normal advanced warning. This is one more example of why you should always maintain a healthy skepticism when someone shows you a supposedly sure fire indicator of future economic trends.  As they say in the investment industry, past performance is no guarantee of future success.  PS.  It’s true that the yield spread accurately predicted a US recession in 2020.  But in my view it just got lucky.  Without Covid, I doubt whether a recession would have occurred during 2020. (0 COMMENTS)

Who asked Nikki Haley to run for president? Can somebody introduce us to the gentlepersons who convinced Tim Scott to enter the contest? Is anybody outside of his family and his congregation urging Mike Pence to join the Republican field? The same applies to the other long shots — Vivek Ramaswamy, Doug Burgum, Chris Sununu and Chris Christie — who have been flashing their presidential dance cards at voters. Have any of them stopped to consider the deleterious effect that having a swarm of candidates in the race might have on the outcome? This is from Jack Shafer, “Return of the Republican Clown Car,” Politico, June 1, 2023. Shafer goes on to point out, correctly, in my view, that the large number of candidates will likely give a plurality of votes to Donald Trump and that, therefore, he will likely be the 2024 presidential candidate. In answer to Shafer’s last question, my guess is that some of them stopped and asked that question but some of them, at least, thought they could be “the one.” Others are probably doing it for the publicity and the related other things that publicity might lead to. What this illustrates is the tragedy of the commons. Each knows that his or her probability of winning is small and would like the others to exit so that he/she will have a much probability. None of them has a strong incentive to care about the big picture that, I’m guessing, they all would like to avoid: the nomination of Donald Trump. That’s the way the commons works. For more on that, see the article that I commissioned the late Garrett Hardin to write for The Concise Encyclopedia of Economics, “The Tragedy of the Commons.” (0 COMMENTS)

A recent oped in the Financial Times bears a strange title: “On America’s Ramshackle Railroads, Republicans Concede the Limits of the Market.” Although this sentence does not appear in the piece itself, it does reflect its author’s opinion. Oren Cass, president of American Compass and a proponent of industrial policy and protectionism, argues that the frequent derailments of private freight trains in America justify more regulation of railroads. He congratulates Republicans like J.D. Vance, Marco Rubio, Josh Haley, Donald Trump, and Mitt Romney for supporting more regulation. Conservatives like them, Cass argues, have fortunately “become increasingly cognisant in recent years that regulation can be far from perfect and yet still far better than the status quo.” He does not mention the accidents of passenger trains of Amtrak, a heavily subsidized and money-losing corporation established by Congress in 1971, and whose major shareholder is the federal government. In fact, it can probably be said that American railroads have been a major part of federal industrial policy, without the name, for a century and a half, not to mention heavy regulation by state governments (including, in the South, to oblige railroads to discriminate against Black passengers).  This industrial policy has had ups and downs, and random walks, as is typical of industrial policies. The Council of Foreign Relations writes: The mid-to-late nineteenth century saw thousands of miles of track laid across the United States, spawning an era of economic integration that connected the East and West Coasts for the first time. By the turn of the twentieth century, rail companies—which offered both passenger and freight rail services at the time—provided one of the cheapest and most efficient modes of transport. But in the first half of the 20th century, demand shifted to new forms of transportation, especially cars and planes. Meanwhile, a suite of laws that expanded the federal government’s power to set freight prices and enforce other stringent rail regulations increasingly challenged the system. The second half of the century saw a rail revival. Congress established Amtrak in 1971, ushering in the present era of publicly owned and subsidized passenger rail. Among the major agents of the federal regulation of railroads figure the Interstate Commerce Commission, created in 1887, and the Federal Railroad Administration in 1966. There was some deregulation with the Stagers Rail Act of 1980, but I think nobody would argue that it negated the “limits of the market.” The Moving Ahead for Progress in the 21st Century Act of 2012 and the Fixing America’s Surface Transportation Act of 2015 continued to fit well in a rail industrial policy—I mean an industrial policy as it exists on earth, not as it should be in the minds of nirvana ideologues. The idea that Republicans have just now decided to concede the limits of the market is at the very least misleading. If we take a more general look at all federal regulations, it appears that the GOP has continuously added to the stock of regulations, just like the Democrats did. The chart below shows the evolution of federal regulation as measured by the number of prohibitions and mandates in the Code of Federal Regulations, which is the stock of total net regulations at the end of each year. Over the whole period for which this database is available, it is not easy to see a clear difference between the times when the Democrats and the Republicans held power in DC. The only two instances when a significant but temporary drop in total regulations are found in the first half of the 1980s under Ronald Regan and in the mid-2000s under Bill Clinton. It is unlikely that the modest drop toward the end of Donald Trump’s administration in 2019 would have continued. (Older data, a bit more favorable to the Trump administration on that score, can be found in my Regulation article “The Trump Economy: Three Years of Volatile Continuity.”) Most Republicans and Democrats have long enforced limits of the market more than understood its benefits. It is true that libertarians and classical liberals have, since the mid-20th century, found more compagnons de route in the GOP than in the Democratic Party, but it is a matter of degree. And the degree of differentiation has been rapidly shriking. Source: QuantGov, https://www.quantgov.org/federal-regulatory-growth (0 COMMENTS)

In my recent summary and review of Randall Holcombe’s book Following Their Leaders: Political Preferences and Public Policy, one of the ideas I found most interesting was Holcombe’s distinction between anchor and derivative preferences. Holcombe attempts to explain something many people have noticed before – why is there such a strong correlation among political views that seemingly have nothing to do with each other? For example, consider the question of whether the rich have a moral obligation to pay taxes at a higher rate. If I know someone’s answer to this question, I can confidently predict whether or not they believe stricter gun control laws will effectively reduce violent crime. These are not merely different topics; they are fundamentally different kinds of questions. Whether or not there is a moral obligation for the rich to pay higher taxes is a normative question, while the effectiveness of gun control legislation is an empirical question. Why should one’s normative beliefs about tax policy predict their factual beliefs about the effectiveness of gun control? Some writers have made attempts to create a sort of Grand Unifying Theory tying together all these seemingly unrelated positions into a consistent worldview. Thomas Sowell’s A Conflict of Visions: Ideological Origins of Political Struggles describes a “constrained vision” and “unconstrained vision” (which in later works he also refers to as the “tragic vision” and “utopian vision”) and argues that beliefs about these seemingly different issues cluster together because of these underlying differences of vision. George Lakoff has argued that the clustering of unrelated views is due to unconscious beliefs about family structure, with conservatives taking a “strict father” worldview and liberals taking a “nurturing parent” worldview. Arnold Kling has offered a model with three divisions rather than two, arguing that conservatives view the world through a barbarism versus civilization divide, progressives through an oppressor versus oppressed divide, and libertarians through a lens of liberty versus coercion. Johnathan Haidt, in The Righteous Mind, suggests a six axis model consisting of care and harm, fairness and cheating, loyalty and betrayal, authority and subversion, sanctity and degradation, and liberty and oppression. In Haidt’s telling, progressives place great value on care and fairness but little value on the others, libertarians put almost all their eggs in the liberty/oppression basket, and conservatives treat all six axes as equally important. In contrast to these theories, Holcombe’s explanation seems startlingly simple – people anchor on a party, movement, or leader, and then just adopt whatever bundle of beliefs happens to come with that anchor. But simple does not mean simplistic, and Holcombe’s theory has a notable advantage over these other explanations. According to these other theories, major changes in a party’s platform should be followed by a significant shift in the people who support it. However, as Holcombe notes, in practice party leaders can drastically alter the party platform, even swapping positions with the opposing party, while the party’s supporters and opponents remain largely unchanged. This is easily explained by Holcombe’s account, but much harder to explain by these other theories. However, there is a key caveat to make. The supporters or opponents of a party can remain largely unchanged, but not completely so. When Trump came along on a platform that was in many ways the exact opposite of everything the Republican party had been advocating for decades, most Republicans simply changed their views to match Trump’s, but not all. Some left the party and denounced the direction it was moving in, George Will being a high-profile example. What should we make of this? I think the explanation is found in an idea put forth by Tim Urban in his recent (and excellent) book What’s Our Problem: A Self-Help Book for Societies. Urban argues that the usual depiction of views as a spectrum from left wing to moderate to right wing is unhelpful, in part because it seems to imply that people in the middle are intrinsically more reasonable. This isn’t true, as Urban correctly notes. Lots of so-called “moderates” are dogmatic and close minded, and many people who are far left or right are intelligent, reasonable, and open-minded. To account for this, Urban proposes a new model that doesn’t just go left to right, but also up and down. He distinguishes thinkers as being on higher or lower rungs of a ladder, corresponding to the quality of their thought. The highest rung is for what he calls “scientists.” This is rung is for the Platonic Ideal of how thinkers should operate. Scientists are open-minded, willing to consider all the evidence, will freely admit when their interlocutor makes a good point, follow the evidence wherever it may lead, aren’t committed to a pre-existing view, and so forth. Of course, nobody is perfect in this regard, but some people approximate it more than others. The next rung down is for what he calls “sports fans.” Sports fans have a preferred outcome and are rooting for a side, but they are also fundamentally driven by respect for the game. If a referee makes an ambiguous call, a sports fan will instinctively interpret it in whatever way is more favorable to their team. But if the slow-motion replay makes it clear they were mistaken, they will freely admit the referee should call in favor of the other team. They want their team to win, but only if they win fair and square. The next rung down is for the “attorney.” These are people who are committed to arguing for a specific side, just like lawyers in a court of law. If the prosecution presents a particularly damning bit of evidence, no defense attorney will ever say “wow, that’s a great point, my client probably is guilty then!” They will always seek out some grounds to argue against any evidence contradicting their established position. Still, they are attempting to persuade and make arguments, tendentious as their arguments will be. The lowest rung is for “zealots.” Zealots don’t bother with arguments and aren’t interested in the evidence. They operate on pure tribalism and are convinced members of the other tribe are necessarily stupid, evil, or otherwise corrupt. In this model, Urban says, we can see that “moderate” doesn’t imply “reasonable.” You can be a low-rung moderate, or a high-rung extremist. I think we can use this ladder to connect Holcombe’s model with the others. Models like the conflict of visions or the three languages of politics better describe high-rung thinkers, while lower-rung thinkers are probably better described by the anchor and derivative preference model. Still, the implications for democracy are not good. As Diane Mutz has documented in her book Hearing The Other Side: Deliberative versus Participatory Democracy, the more politically engaged a voter is, the more likely they are to be a low-rung thinker, and the more high-rung a thinker someone is, the less likely they are to be politically engaged or to vote. It’s easy to feel motivated to action when one is a zealot who is convinced their side is obviously right about everything, and the opposition is motivated entirely by vile intentions or sheer stupidity. It’s difficult to conjure that same motivation when you think issues are complicated, evidence is frequently ambiguous, and reasonable people can disagree. (0 COMMENTS)