There’s been a lot of commentary over the last several days about the madness of President Trump’s most recent tariffs, much of it well said by smarter men and women than me. Still, I thought I’d toss another perspective onto the heap. Leonard Read famously wrote I, Pencil, a story told from the first-person perspective of a pencil describing the vast arrangement of knowledge needed to lead to its creation. One of the most important lessons of that essay is that the few seemingly modest components used to make a simple pencil – the “wood, lacquer, the printed labeling, graphite lead, a bit of metal, and an eraser” – each have a family tree of their own that extends out beyond all imagination and understanding. The wood requires “cedar of straight grain that grows in Northern California and Oregon,” which must be harvested using “saws and trucks and rope and the countless other gear.” To get the tree, you need all this gear to be brought to use. But each of these tools used creates a new branch that itself has its own immensely complex family tree. For the saws and trucks and other tools, we need to consider for each of them “all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods.” Just attempting to find all the inputs needed to bring down a single tree splits into ten thousand different paths – and each of those paths splits down ten thousand paths of their own, and so on down the line. And this is just what’s required for felling trees. Once you consider that the “logs are shipped to a mill in San Leandro, California” you have new paths splitting off to account for the “individuals who make flat cars and rails and railroad engines and who construct and install the communication systems” for all this to work. And each of those inputs splits down just as much. If you had a thousand lifetimes, you could never fully track down and account for the full breadth of each and every job, resource, and form of knowledge needed all the way down this ever expanding fractal. And as I’ve mentioned in a previous post, if you get to something more complex than a pencil, such as the most basic and inexpensive toaster, things get even more complex. While the pencil is made of only  a few components, Thomas Thwaites was dismayed to “discover that inside this object I’d bought for just three pounds ninety four, there were four hundred different bits made out of a hundred plus different materials.” Don Boudreaux recently pointed to data from Mark Perry showing that over 60% of what the US imports are materials and capital goods to be used as inputs for production. And each of these materials and capital goods have their own near-infinitely complex family tree behind them, using materials, capital, and labor from numerous countries. Every time governments employ tariffs, they make each and every step where a good crosses a national border along this immeasurably complex web more expensive than it otherwise would be, and those increased costs filter down the whole chain. Of the incomprehensibly vast number of tools needed to make a cedar tree into wood suitable for a pencil, how many of those tools were imported? Of the tools that weren’t imported, how many were crafted from raw materials that were, using machines that were imported (in whole or in part), created in factories built at least in part with imported materials, and so on down the line? How many of those steps involve something crossing a national border? Is it really wise to artificially raise the cost of each and every one of these steps, in the hope that Americans can make a career working the floor in a toaster factory, or spend their days twisting screws into a phone casing? Prosperity does not come from making the things people buy more expensive. Living standards are not raised by lowering the amount people can afford to consume. When governments want to harm countries they see as hostile, do so using economic sanctions to make it more costly for those countries to engage in international trade. A tariff is just a country imposing economic sanctions on its own citizens. (0 COMMENTS)

US antitrust enforcement is likely to change in the new administration. However, it is also likely that the antitrust cases against big tech firms – and concerns about their effects on society – will continue. Over the past years, countries all around the world have passed or are considering new laws which antitrust authorities can use to prosecute what are seen as abuses by large tech platforms. Most notably the EU has passed and is now enforcing the Digital Markets Act.  Similar new laws were proposed, but failed to pass, in the United States, telling enforcers that the way to prosecute any novel harm is to do it the traditional antitrust way: bring cases ex post against conduct that agencies deem illegal under the existing antitrust laws. This method of enforcement, rather than ex ante prohibitions, does less to stifle entrepreneurship and is friendlier to an innovative economy. Indeed, the EU has long had a more interventionist approach to antitrust enforcement which has stifled the development of more innovative industries, which were the subject of Mario Draghi’s recent report on EU competitiveness. The report notes that the productivity growth gap between the US and the EU can be explained by the growth in the US tech sector alone.  Beginning with the first Trump administration, antitrust enforcers in the US have brought watershed cases against “Big Tech”.  The Biden administration continued this assault and even made antitrust policy a key pillar of its economic policy. It bought wholesale into the “Neo-Brandeisian” belief that industrial concentration is the biggest culprit for stagnating wages, income inequality, and even inflation.  Although the major US tech companies have continued to progress, as evidenced by their continued growth in market capitalization over the past four years, the sector could be hobbled by ongoing antitrust cases that seek major changes to its current makeup, as well as the proliferation of digital market regulation following the DMA that predominantly targets US firms.  Market Capitalization of the Big Tech Firms* Company 2020 Year End Market Cap (Trillion USD) 2024 Market Cap (Trillion USD) Annual Rate of Market Cap Growth: 2020-2024** Alphabet 1.185 2.354 18.72% Amazon 1.634  2.196 7.67% Apple 2.255 3.411 10.9% Meta .778 1.603 19.8% Microsoft 1.681 3.341 18.73% *Data from companiesmarketcap.com  **Author’s calculation It stands to reason that their continued growth is a testament to the value that consumers derive from their products and services. If US agencies are successful in obtaining structural (i.e., break-ups) or heavy-handed behavioral relief from courts against the practices they have been targeting, it will have an effect on the value that digital platforms bring to consumers by forcing them to change their offerings. This could in turn lower revenues, earnings, and valuations. It could also imperil the incentives for continued innovation.   A good example is the Justice Department’s case against Google search. The DOJ successfully argued before the district court that Google has monopoly power in online search and that Google’s contracts with device makers like Apple’s browser to pre-load Google as the default search engine were anticompetitive. The DOJ is asking the court to order Google to sell off Android and Chrome. While enforcers are looking for a scalp to hang on the wall, this remedy would be disproportionate to the harm that might have arisen from this business practice. This preference for deconcentration is a pernicious ideology in antitrust. Indeed, focusing on concentration – “bigness” – in antitrust is unhelpful for many reasons. One of the most salient is that it takes concentration as exogenous and indicative of inefficiency in market performance. This “structure-conduct-performance” paradigm was refuted in the work of Harold Demsetz and other economists in the mid-late 20th century.  Instead of continuing with the neo-Brandeisian policies, antitrust in the new administration should make greater use of the literature exploring how firms evolve in response to incentives, market forces, and even luck. Market concentration can increase competition and better serve consumers and address the anxieties they have about new technology by driving innovations that make them better off.   Of course, beyond complaints based on bad economics, there are other issues concerning the tech sector that make a portion of the American public uneasy. Exactly where those legitimate concerns may reside is a matter of debate. However, to the extent non-competition concerns are the problem, it is likely that antitrust enforcement is the wrong tool for addressing them: antitrust is about preventing harm to competition and consumers. For example, if consumers are concerned about greater privacy, this is an issue that should be handled with privacy and consumer protection law enforcement.     Giorgio Castiglia is an Economic Policy Analyst for the Schumpeter Project at the Information Technology and Innovation Foundation. (0 COMMENTS)

Like just about every college professor, I give my students a syllabus at the beginning of the semester.  However, I write my syllabus like a contract.  It is split into sections with clauses.  The sections detail various aspects of the class (location, topic list, etc.) but also highlight important policies (late policy, exam make-up, grading scheme, etc.).  At seven pages, the syllabus is long.  Furthermore, much of the policy parts are replicated in the course shell in Canvas (our online course management system).   Seven pages, plus replication, is a lot of digital ink to spill on course policies.  But, from my own personal experience, I find the benefits far exceed the costs.  The reason for these rules is straightforward: set expectations.  On day 1, my students know what they need to do in order to pass the class.  They know when everything is due.  They know what everything weighs.  They can (in theory) use this information to make reasoned choices about how to allocate their time (and, if they miscalculate, that’s on them). But, perhaps more importantly, this contract between me and my students known as a “syllabus” acts to bind my hands.  It sets students’ expectations of what they can expect from me.  I, like most teachers, have extraordinary power over students (at least when it comes to class).  My Principles classes are both General Education classes and major classes; if they don’t pass my class, they will have a hard time graduating.  Furthermore, there’s relatively little competition (only two other instructors teach Principles and only one other teaches the upper level economics courses).  Given this awesome power, it is my duty to my students, my employer, my profession, and to God Himself to act as fair as possible.  The syllabus binds my hands from arbitrary behavior.   One thing I know about myself is that I can and will act in an arbitrary manner.  I want to help students and my gut reaction is to grant exceptions for this or that rule if it’ll help the student.  However, I know that if I act arbitrarily, it will actually undermine my duty.  Students will see this arbitrary behavior and shift resources away from actually learning the material and toward trying to mine these loopholes.  Even students who want to learn the material will naturally question why to spend effort if it will not result in the needed grade to pass.  It will create extra work for me.  At the end of the semester, I would have to submit grades to the Registrar and the University which are based on these arbitrary whims.  The University and the public rely on my expertise to say “Yes, Students John and Jane Doe satisfied me that they know the material sufficiently well to pass.”  Arbitrary behavior undermines that credibility.   So, the reason for rules is to prevent arbitrary behavior.  Even when there may be cases where the rules hinder some desired outcome, where the temptation to break rules is highest, rules should be followed.  Once the rules are broken, once arbitrary behavior becomes the norm, it makes planning extraordinarily difficult and ends up undermining the goals of the actions.   To move out of the classroom and into economics, we are seeing exactly this now with Donald Trump’s arbitrary tariff “policy” (“policy” is in quotes here because, since there is no consistency, it’s hard to call it policy by any reasonable sense of the word).  Trump’s decrees on tariffs change day to day, sometimes even hour to hour.  It’s quite impossible to predict what’s going to happen as there is no rhyme nor reason to these changes.  Consequently, Americans and foreigners have no idea how to invest.  As I write this, the stock market is down about 15% from the beginning of Trump’s 2nd term, with all of the decline during this “will he-won’t he” tariff nonsense.  This past week, we got some hard tariff numbers, but even now there is massive uncertainty.  The numbers are arbitrary and even miscalculated using their own model.  Trump and his advisors are giving contradictory stories for the tarrifs: they’re permanent meant to eliminate trade deficits, or they’re temporary and meant to bring countries to the negotiating table, or they’re permanent and meant to raise revenue.  It’s hard to say what even is the purpose.  Not to mention legal challenges filed against the Administration over the tariffs. Forecasters have been downward revising their forecasts, with the consensus going from solid growth toward  recession.  While there isn’t much hard data yet, early indicators are of investors pulling out of the US.  Firms have been pouring more and more resources into seeking exemptions (which, in the long run, will weaken their competitiveness in the global economy).  Far from “making America great again,” Trump seems determined to single handedly cause a recession.  (As an aside, I for one am shocked, shocked!, that the market isn’t responding favorably to economic pseudoscience from the 1600s). Rules exist for a reason: they make things predictable.  They allow for planning.  When, like in the great TV show Whose Line Is It Anyway, the rules are made up and the points don’t matter, people do not know how to act, and resources become wasted.   Of course, none of this is to say that rules must be rigid and inflexible.  That which does not bend will break.  Rules can and should be altered as times change.  But there must also be a process for which to change those rules (rules about rules, if you will).  Understanding why rules are in place and what purpose they serve is vital to any reasonable reforms. (0 COMMENTS)

  And do workers have pension portfolios? I just watched an interview that Michael Shellenberger did with Batya Ungar-Sargon. (It’s on Shellenberger’s gated Substack.) They’re discussing Trump’s tariffs and Ungar-Sargon argues that Trump is waging class warfare on the rich on behalf of the working class. Her evidence gets her halfway there. Trump’s tariff announcements certainly have destroyed much of the wealth owned by the rich. But they will hurt the working class in two ways: (1) as consumers and (2) as owners of stocks. Take the second point first. Trump’s announced tariffs have destroyed wealth for virtually everyone who holds a wide portfolio of stocks. That’s not just the rich. Many American workers own stocks in their 401(k) and 403(b) retirement plans. So Trump’s announcements have hurt them too. I don’t know any worker who doesn’t buy goods. Most workers spent a large part of their after-tax income on goods. That brings me to point (2). If the tariff rates are implemented at anything close to the levels that Trump is threatening, prices on almost all imports will rise and that will cause prices on many domestically produced goods to rise. Why do many economists focus on the stock market? Because stock prices adjust for new information and they do so quickly. The price of a stock reflects investors’ expectations of the flow of income from owning that stock. So stock prices are a good early indicator of wealth destruction. Prices of consumer goods move more slowly. But they will move. I’ve seen people say that stock prices are based on short-term earnings. Not true. Imagine that Eli Lilly announced today that it would end all R&D and plow that money into earnings. Earnings would be higher and I’m very confident that Eli Lilly’s stock would fall.   Another note: About 15 years ago I gave a talk to a local Rotary Club group. In it I made my case for free trade. If you don’t know Rotary, let me explain that the median age of the members was close to my age at the time, about 59. Also, my hair had already turned grey. In Q&A, someone said that he could see how free trade benefited corporations but how did it benefit the kind of people in the room. I had already explained how it benefited consumers, but I thought I would try a new tack. I said, “I see a lot of people in the room with the same hair color as mine. Don’t you have retirement assets? And isn’t a large fraction of your retirement assets in stocks? The audience laughed and the guy laughed. I think people have this absurd view that there is no connection between corporations and them.   (0 COMMENTS)

Kenneth J. Arrow at Stanford University. Credit: LA Cicero, 11/4/1996. As a health reform discussion lengthens, the probability that someone will cite Kenneth Arrow approaches 1. Close behind is the probability that this person will cite Arrow inaccurately. Arrow showed that health care markets fail, goes the ritual invocation of the Nobel Prize-winning economist’s 1963 article “Uncertainty and the Welfare Economics of Medical Care.”1 Therefore, government should do X. As a rule, people cite Arrow’s 1963 article more than they read it, read it more than they understand it, and distort it more than they embrace it. Arrow was no libertarian. He advocated a Canadian-style health system for the United States and other types of government-run health systems elsewhere. Nevertheless, many insights from Arrow’s article would move health care in a libertarian direction. Ironically, the fact that wonks and others have so successfully invoked Arrow to achieve greater government intervention in health care means that fully applying his insights today would result in less government intervention. Arrow (1963) observes, as others had, that health care markets do not conform to the theoretical construct of a perfectly competitive market. Market actors lack perfect information, for example. We often do not know when we will need medical care, what we will need, whether a treatment will work, or even whether it has worked. At the same time, producers know vastly more, at least about the latter three, than consumers do. Those departures result in output (health, financial security) falling short of what is theoretically possible. Arrow (1963) then observes that “when the market fails to achieve an optimal state, society will, to some extent at least, recognize the gap, and nonmarket social institutions will arise attempting to bridge it.” Arrow wrote that the U.S. health sector of 1963 “exemplifies this tendency.” Examples included both government regulation (e.g., clinician licensing) and “other social institutions” (e.g., codes of professional ethics). Arrow did not argue that market failure ipso facto justifies government intervention. He didn’t even argue that existing interventions had succeeded in bridging the gap between actual and potential output. Sometimes, he wrote, nonmarket interventions cause that gap to widen. Ultimately, he argued against government intervention in health care markets as much as he argued for it. For starters, Arrow downplayed the importance of health care. He wrote that medical care contributes less to health and welfare, particularly for the poor, than public health or other commodities. He wrote (1963): The causal factors in health are many, and the provision of medical care is only one. Particularly at low levels of income, other commodities such as nutrition, shelter, clothing, and sanitation may be much more significant…. There is every reason to suppose that [the contribution of public health to welfare] is considerably more important than all other aspects of medical care. Next, Arrow acknowledged that government intervention always introduces new problems—so many, that intervening can make the underlying problem worse: It is virtually impossible to find a set of taxes and subsidies that will not have an adverse effect on the achievement of an optimal state. He argued that greed affects nonmarket interventions in ways that undermine social welfare and admitted that many of the problems present in US health care markets in 1963 were the result not of market forces but of nonmarket interventions. Nonmarket mechanisms aren’t perfect, partly because industry self-interest directs and undermines them: These compensatory institutional changes, with some reinforcement from usual profit motives, largely explain the observed noncompetitive behavior of the medical-care market, behavior which, in itself, interferes with optimality. The social adjustment towards optimality thus puts obstacles in its own path. He argued further that nonmarket efforts to solve a problem can make the problem worse. Certainly this process is not… uniformly successful in approaching more closely to optimality when the entire range of consequences is considered. It has always been a favorite activity of economists to point out that actions which on their face achieve a desirable goal may have less obvious consequences particularly over time, which more than offset the original gains. Many problems that existed in 1963 were due to nonmarket interventions: The failure of the existing market to provide a means whereby the services can be both offered and demanded upon payment of a price… may be due to social or historical controls…. Both the quality and the quantity of the supply of medical care are being strongly influenced by social nonmarket forces. One example is licensing. Arrow argued that clinician licensing increases medical prices, reduces access to care, reduces employment opportunities for non-physician clinicians, under-employs physicians, and reduces innovations in facilities and medical care delivery. Licensing also reduces non-physician clinician productivity, physician productivity, and innovation The licensing laws… exclude all others from engaging in any one of the activities known as medical practice. As a result, costly physician time may be employed at specific tasks for which only a small fraction of their training is needed, and which could be performed by others less well trained and therefore less expensive. One might expect immunization centers, privately operated, but not necessarily requiring the services of doctors. Arrow was open to preserving licensing, replacing it with voluntary certification, or replacing it with nothing. On licensing vs. certification vs. laissez-faire, he wrote: It is beyond the scope of this paper to discuss these proposals in detail. I wish simply to point out that they should be judged in terms of the ability to relieve the uncertainty of the patient in regard to the quality of the commodity he is purchasing. Arrow observed that licensing increases the price of medical education, which led government to intervene further by subsidizing medical education. The high cost of medical education in the United States is itself a reflection of the quality standards imposed by the American Medical Association [i.e., licensing]… and it is, I believe, only since then that the subsidy element in medical education has become significant. Previously, many medical schools paid their way or even yielded a profit. He argued against limits on medical school slots and firmly opposed subsidies for medical education, arguing that physicians should pay the full cost of their education themselves. The earnings of physicians rank highest among professional groups, so there would not at first blush seem to be any necessity for special inducements to enter the profession…. One might expect that the tuition of medical students would be higher than that of other students…. To achieve genuinely competitive conditions, it would be necessary not only to remove numerical restrictions on entry but also to remove the subsidy in medical education. Like any other producer, the physician should bear all the costs of production, including, in this case, education. Related to licensing, Arrow acknowledged that government has blocked health plans that reduce frictions surrounding coverage decisions—integrated, prepaid group plans like Kaiser Permanente. In prepayment plans, where the insurance and medical service are supplied by the same group, the incentive to keep medical costs to a minimum is strongest. In plans of the Blue Cross group, there has developed a conflict of interest between the insurance carrier and the medical-service supplier, in this case particularly the hospital. Government has also blocked integrated, prepaid health plans. In the past, the opposition to prepayment plans has taken distinctly coercive forms, certainly transcending market pressures, to say the least. Reading Arrow, one might conclude that dissatisfaction over prior authorization is the result not of market failure but government failure. “Were today’s health policy wonks to actually read Arrow’s views on health insurance, it would cause a scandal.” Were today’s health policy wonks to actually read Arrow’s views on health insurance, it would cause a scandal. Arrow argued that health insurance encourages higher medical prices, that charging higher premiums to the sick is necessary to maximize the benefits from health insurance, that preexisting conditions are uninsurable, and that insuring preexisting conditions is “pointless.” Insurance removes the incentive on the part of individuals, patients, and physicians to shop around for better prices for hospitalization and surgical care. Hypothetically, insurance requires for its full social benefit a maximum possible discrimination of risks. Those in groups of higher incidences of illness should pay higher premiums. Among people who already have chronic illness, or symptoms which reliably indicate it, insurance in the strict sense is probably pointless. On a more technical note, Arrow argued that consumer risk-aversion naturally tempers adverse selection in health insurance markets. From the point of view of the individual, since he has a strict preference for the actuarially fair policy over assuming the risks himself, he will still have a preference for an actuarially unfair policy, provided, of course, that it is not too unfair. Arrow also referred to government failures indirectly. He identifies three groups to whom markets were failing to provide health insurance in 1963. Uninsured groups were those whose health insurance purchases the government penalized. Insurances against the cost of medical care are far from universal. Certain groups—the unemployed, the institutionalized, and the aged—are almost completely uncovered…. The insurance mechanism is still very far from achieving the full coverage of which it is capable. A casual reader might think Arrow was identifying a market failure. Yet those just happen to be groups whose health insurance purchases the federal tax code had been penalizing for 40 years.2 Unlike his followers, Arrow described his conclusions as tentative and was reluctant to draw any policy recommendations from them. Arrow was more modest than his acolytes. This paper is an exploratory and tentative study. I have been chary about drawing policy inferences. By 1999, the health sector had overtaken every other economic sector in terms of congressional lobbying expenditures, a distinction it has held ever since, as shown in Figure 1: Figure 1. Federal lobbying expenditures by year and economic sector, 1996-2023Source: “Lobbying Ranked Sectors.” Open Secrets: “Industry Profile: Accident and Health Insurance.” Open Secrets and author’s calculations.” Two years later, U.C. Berkeley economics professor James C. Robinson hailed Arrow (1963) as “a good article by a great economist.”3 But Robinson rued the article’s ubiquitous abuse by health care’s bootleggers and Baptists: The central proposition of [Arrow’s] article, that health care information is imperfect and asymmetrically distributed, has been seized upon to justify every inefficiency, idiosyncrasy, and interest-serving institution in the health care industry…. It has served to lend the author’s unparalleled reputation to subsequent claims that advertising, optometry, and midwifery are threats to consumer well-being, that nonprofit ownership is natural for hospitals though not for physician practices, that price competition undermines product quality, that antitrust exemptions reduce costs, that consumers cannot compare insurance plans and must yield this function to politicians, that price regulation is effective for pharmaceutical products despite having failed in other applications, that cost-conscious choice is unethical while cost-unconscious choice is a basic human right, that what consumers want is not what they need, and, more generally, that the real is reasonable, the facts are functional, and the health care sector is constrained Pareto-efficient…. For the noneconomist, Arrow’s primary message should be that most sectors of the economy work reasonably well (at least compared to medicine)… and hence that the price mechanism should be accorded greater respect and its potential applicability to the health sector be pushed higher on the list of research priorities. Fast forward to 2016. By then, bootleggers and Baptists had spent half a century misappropriating Arrow to protect the world’s most expensive government health care programs and highest medical prices, as well as lots of low-quality care. For more on these topics, see Ed Dolan on Employer-Sponsored Health Insurance. EconTalk. Art Carden and Steven Horwitz, “Is Market Failure a Sufficient Condition for Government Intervention?” Econlib, April 1, 2013. Michael Cannon on Prices and Health. Great Antidote Podcast, August 2024. Even so, in that same year, Arrow said the following4 about his belief that the United States should adopt a Canadian-style single-payer system: Of course, [Nobel Prize-winning economist] George Stigler would say that there could be regulatory capture, but so far it doesn’t seem to have happened really. Whatever Arrow was doing in the 50 years since he published his article, he wasn’t paying close attention to U.S. health care. Invoke with caution. Footnotes [1] Kenneth Arrow, “Uncertainty and the Welfare Economics of Medical Care,” The American Economic Review. December 1963. [2] Michael F. Cannon, “End the Tax Exclusion for Employer-Sponsored Health Insurance.” Cato Institute, May 24, 2022. [3] James C. Robinson, “The End of Asymmetric Information.” Project Muse, October 2001. [4] See Asher Schechter’s interview of Arrow, “There Is Regulatory Capture, But It Is By No Means Complete”. ProMarket, March 15, 2016 * Michael F. Cannon (MA, JM) is director of health policy studies at the Cato Institute. (0 COMMENTS)

Note: The names of the Cuban entrepreneurs and their businesses described below have been changed to protect the identities of these individuals. “Don’t try to understand this place. We don’t understand it either.” I heard versions of this refrain repeatedly from Cuban entrepreneurs during my March 2024 visit to Havana. Along with my excellent colleague at the military college, The Citadel, William Trumbull, creator of our comparative systems course, The Cuban Economy, we brought a dozen or so student cadets to Havana over spring break. This was the culminating experience after a semester of comparing socialist and capitalist economic systems and examining the implementation of socialism in Cuba. Next, it was time to see the results for ourselves. Apart from my brief appearance as a relief pitcher in a pickup baseball game in Cuba’s Viñales Province, the greatest thrill of our trip came in hearing the stories of Cuban entrepreneurs. The entrepreneur is a relatively new type of individual in the country. Reluctant concessions made by the state for private enterprise over recent decades, in response to ongoing economic crisis, explain their presence. These entrepreneurs now comprise one-third of Cuba’s economy. Facing significant policy uncertainty and remarkably high transaction costs, they demonstrate extraordinary perseverance in creating and managing their enterprises. Each entrepreneur profiled in this article faces high opportunity costs, as any could work abroad (some already have) and earn substantially more. One even returned to Cuba after working in New York City for many years. That these entrepreneurs choose to pursue private enterprise in Cuba represents their motivation to form the vanguard of a new entrepreneurial class. Economic Transition or Socialist Band-Aids? Cuba remains fundamentally a centrally-planned economy with autocratic, top-down decision-making regarding economic activity. However, one might not get this impression while dining at one of Havana’s 1,000+ paladares (privately-owned restaurants). From the rooftop of Restaurante Yarini in Havana’s San Isidro neighborhood, you’d think you were in Miami—until peering over the ledge to see blocks of crumbling buildings stretching to the horizon. This still modest extent of privatization stems from piecemeal market-oriented reforms enacted by Cuba’s Communist Party in response to economic crises. Despite significant growth in Cuba’s private sector, the basic economic questions—what gets produced, how things get produced, who gets these things, and who gets the resulting income—remain primarily answered by the Communist Party’s central planning. Following the 1959 Cuban Revolution, the Communist Party implemented a planned socialist economy modeled after the Soviet Union. For decades, private entrepreneurship was completely absent and actively demonized as all non-labor resources (capital, land, natural) were state-owned. All factories, farms, and retail establishments received detailed instructions about what to produce or sell, how to do it, where to send outputs, where to source inputs, and what prices to charge or pay. After the Soviet Union’s collapse and ensuing economic crisis in the early 1990s, Cuba enacted reforms including legalizing self-employment (in approximately 157 specified occupations, including peculiarly specific roles like “party clown” and “cigarette lighter refiller”) along with legalizing foreign currency and investment (Morgenstern and Perez-Lopez 2019)1. Each reform came with significant provisos, suggesting the government’s readiness to backtrack at any moment. For instance, the government at one point ceased issuing business licenses in one-quarter of the legalized self-employed occupations (Henken and Vignoli 2015)2. Economist Luis Locay argues such reforms primarily aid regime survival rather than transition toward a market economy, writing, “I do not believe we are witnessing a child who is starting to crawl and will eventually, after many falls and scrapes, learn to walk.” (Locay 1995)3. This pattern of piecemeal reform continued into the 2000s, including expansion of self-employment licenses (as part of “The Guidelines” approved in April 2011) and, most notably, establishment of private “micro, small, and medium enterprises” in July 2021 (responding to anti-regime protests)(The Economist 2021)4. In 2019, the Party switched from listing allowed business types to listing forbidden activities (Torres 2024)5. The approximately 125 prohibited activities mostly involve highly educated fields like medicine, engineering, education, and media—maintaining the state’s monopoly as a central strategy of political control. That these occupations remain subject to the state’s monopoly directly impacts many of Cuba’s most talented individuals, creating the perverse incentives described below. Stories of Cuban Entrepreneurship: Business #1 “In Cuba, the Spanish verb resolver (meaning, “to resolve”) has come to mean doing what needs to be done to make ends meet, either legally or through the black market. This applies equally to street vendors selling fruit and those with Ph.Ds.” “The why doesn’t ever make sense, so we just work around it,” reflects Daniel Alvarez, a professor and now entrepreneur. “[The centralized economic model] is completely blind to identify market needs… it’s impossible to create incentives that provide signals for entrepreneurs to act.” Despite his Ph.D., Daniel’s professorial earnings amount to under fifty dollars monthly. As one of the activities forbidden to private sector actors and subject to state-controlled wages, this means that despite his Ph.D. (in a highly technical field), his earnings as a professor are minimal. In Cuba, the Spanish verb resolver (meaning, “to resolve”) has come to mean doing what needs to be done to make ends meet, either legally or through the black market. This applies equally to street vendors selling fruit and those with Ph.Ds. Daniel’s situation exemplifies what former Cuban President Raul Castro termed “the unjust inverted pyramid”—the paradoxical situation whereby Cuba’s best-educated professionals in state-controlled jobs earn considerably less than lower-skilled workers in jobs where private enterprise is permitted (Augustin and Semple 2021)6. These individuals face strong incentives to take jobs they’re significantly overqualified for or emigrate abroad. As my colleague Bill Trumbull notes, in Havana, he assumes the baristas serving his espresso are professors. Our trilingual local guide, for instance, previously worked as an international trade contracts lawyer at the Port of Havana, while our bus driver was trained as a mechanical engineer. During initial COVID confinement, Daniel and two fellow professors noticed a lack of convenient, durable, healthy foods free of chemicals and added sugars. They founded Business #1 out of this realization, Cuba’s first company producing and exporting a fruit-based product. In our interviews with Daniel, he wondered aloud, “How is it that in this country of such naturally sweet fruit that no one has pursued this before?” Their early offerings gained traction online, eventually leading to a large order from an international client for 10,000 packages (IPS Cuba 2024)7. Among their innovations was introducing a unique product for use in cocktails, demonstrating the kind of market discovery that central planning routinely misses. From concept to production took 14 months—remarkable given significant regime uncertainty. They started during early COVID, a year before small-to-medium enterprises were legal. While self-employment was permitted, hiring remained illegal except within families. Under these incentives, “family” sizes grew accordingly. As Daniel joked about hiring, “Oh, my cousin from Santiago, of course!” Recognition of private enterprise in 2021 meant unrestricted hiring, and overnight, Cuba’s economy went from zero to more than 10,000 enterprises. Today, Business #1 employs over 25 people, with their lowest level employees earning triple a university professor’s salary in Cuba. Daniel faces considerable constraints from uncertainty about state policy toward private enterprise. Piecemeal economic reforms have frequently been followed with new restrictions curtailing private enterprise, all part of the state’s effort to control the growth path of private enterprise. He maintains low visibility, operating an unmarked delivery truck: “If I see 100 private trucks with advertising, I will be the 101st.” Financing presents another major challenge, particularly for scaling the business. The inability to have a U.S. bank account or take loans from a U.S. bank is a persistent theme among Cuban entrepreneurs. Unable to access U.S. banking, Daniel bought the equipment he needed while visiting the United States, shipping it through Canada to Cuba. Initial funding came through a fortuitous relationship with a European businessperson visiting Cuba, who agreed to provide a loan after hearing Daniel’s idea. Daniel took the loan expecting an exchange rate of 60 Cuban Pesos to 1 USD, but economic crisis drove the rate above 200 Pesos to 1 USD, dramatically increasing his repayment burden. Additional funding came through creative arrangements with friends studying abroad who could access student loans, with repayment handled through covering their family remittances. Clearly, the regime’s determination to cut off capital markets is imposing real harm, as evidenced by these valiant but ultimately needless and wasteful efforts. Stories of Cuban Entrepreneurship: Business #2 Luca Marino co-founded Business #2, a software development company, after recognizing an arbitrage opportunity: selling high-skill software services to international firms for less than prevailing rates but far above Cuban state wages of $20/month. Initially operating without a company name as “autonomous workers” licensed as “computer operators,” Business #2 now employs over 200 people with monthly revenues exceeding $150,000—surpassing the annual earnings of Cuba’s largest state-owned software company employing thousands of workers. Luca shared the story of a Cuban tax official learning that $150,000 was their monthly, not yearly, revenue. “He dropped his pen,” Luca said. To handle international financial transactions, given U.S. banking restrictions, Business #2 developed a complex structure: clients pay their U.S. shell company, which subcontracts to their Spanish shell company, which then subcontracts to the Cuban company. This elaborate workaround exemplifies the high transaction costs facing Cuban entrepreneurs attempting to participate in international markets. While much of Cuba’s privatization involves lower-skilled work, Business #2 represents one of few firms specializing in higher-skilled services. They face significant challenges retaining talent, increasingly paying high salaries by Cuban standards to prevent workers from taking jobs with U.S. or European firms. Despite these efforts, they lost 20 workers in 2023 alone to emigration for better opportunities. It’s this kind of regime-induced brain drain that imposes artificial obstacles to Cuba’s naturally emerging entrepreneurship. Stories of Cuban Entrepreneurship: Business #3 Maria Fernandez co-founded Business #3 out of a desire to resurrect Cuba’s dormant fashion industry. Growing up with limited access to fashion due to restrictions on internet and outside media, Maria relied on visiting foreign friends’ fashion magazines for exposure to trends. After working in New York’s fashion industry as a producer and stylist, she returned to Havana upon noticing increasing availability of restaurants, bars, and Airbnb’s. She partnered with two college friends to explore a niche market opportunity: producing high-quality, thoughtfully designed Cuban-made attire. Their goal became making linen products that were both locally made and desirable—qualities found separately but rarely together in Havana boutiques. Initially operating under the “seamstress” designation (among permitted occupations), they searched door-to-door in Old Havana before finding an almost collapsing 1890s building. Maria explains their early workarounds: while architectural services were forbidden, individuals offered “party planning” services that actually involved building restoration. After full restoration, they opened in 2018 with Maria and her partners handling every aspect from design to marketing. Their limited initial division of labor created an unexpected benefit: customers could watch their clothes being made, adding value to the experience. As Maria noted, “It was like assembling a puzzle piece by piece, trying out different pieces to find the right fit. We had little to work with, as the business model we aspired to had no precedent in Cuba.” Ideas in Need of Institutions The entrepreneurs we met during our short time in Cuba demonstrated remarkable perseverance and spirit. They report shifting attitudes toward private enterprise in Cuba, with Daniel noting, “For generations, people were taught that the private sector is evil. But now people know entrepreneurs that they know from experience not to be evil because they’re family or longtime friends.” Fashion entrepreneur Lucía Cabrera (founder of Business #4, a boutique fashion line in Havana) echoed this: “The change of mindset is huge. We are moving away from talking about money and profits as bad and that the private sector is evil.” However, good ideas require supporting institutions. As Peter Boettke argues, “If you don’t have the three P’s, you can’t have the three I’s.” (Boettke 2013)8. Without property rights, market prices, and profit/loss signals, a society lacks the incentives, information, and innovation needed for economic development. “Institutions matter”. You can’t partially commit (and subsequently backtrack, and repeat) to institutional liberation and expect economic growth. A vivid analogy comes to us from Marshall Goldman’s entry on Perestroika9 in the Concise Encyclopedia of Economics. Transitioning from planned to market systems resembles reforestation rather than deforestation. “If enough force is used, the procedure [of transitioning to central planning] is relatively simple, even if it is destructive. Performing the reverse, however, is much more difficult. Planting a few trees does not make a forest. A forest encompasses a whole ecological system of insects, animals, and underbrush. In the same way, allowing a few private stores to open does not make a market.” (Goldman 2008) Cuba’s piecemeal reforms have amounted to planting a handful of trees every few years with little consideration of the “ecological” necessity of reforestation. To do so would permit the broad scale functioning of highly complex, interconnected, decentralized economic processes—things the Party cannot easily control. Instead, planting a few trees takes the form of permitting private market activity in limited sectors followed by actively curtailing growth once deemed “sufficient.” While this is no substitute for reforestation, the state hopes the trees will suffice for the forest as far as citizens are concerned. For more on these topics, see Entrepreneurship, by Russell S. Sobel. Concise Encyclopedia of Economics. Casey Mulligan on Cuba. EconTalk. Craig J. Richardson, “Cuba’s Dreams and Economic Reality.” Econlib, June 3, 2019. If there is one thing my trip with Bill Trumbull convinced me of, it is this. Should genuine economic liberalization occur in Cuba (a possibility that appears unlikely near-term), there exists a pool of entrepreneurial talent awaiting institutional support. The word “Entrepreneur” was not one Lucía Cabrera recalls hearing growing up, and if mentioned, certainly not positively. This is changing, as she concluded, “We are opening a lane and people will follow.” Footnotes [1] Morgenstern, S. & Perez-Lopez, J. (2019). Models of Economic Reform and Cuba’s “Updating” of its Model. University of Pittsburgh Press. PDF file. [2] Henken, T. A., & Vignoli, G. (2015). Enterprising CUBA: Citizen empowerment, state abandonment, or US Business opportunity. AU-SSRC Implications of Normalization: Scholarly Perspectives on US-Cuban Relations. [3] Locay, L. (1995). Institutional requirements for successful market reforms. ASCE Proceedings. [4] The Economist. (2021, August 12). Cuba’s government approves small and medium-sized enterprises. [5] Torres, N. (2023). Cuba’s private sector boom. Miami Herald. [6] Augustin, E., & Semple, K. (2021, February 11). Cuba expands private enterprise. The New York Times. [7] IPS Cuba. (2024). Private enterprise drives export of dehydrated foods in Cuba. [8] Boettke, P. (2013). ABCT: Providing the Missing Gap. Coordination Problem. [9] Goldman, M. (2008). Perestroika. The Concise Encyclopedia of Economics. * Greg Caskey is Assistant Professor of Economics in the Tommy & Victoria Baker School of Business at The Citadel in Charleston, SC. For more articles by Greg Caskey, see the Archive. This article was edited by Features Editor Ed Lopez. (0 COMMENTS)

The year was 1965. I was a college sophomore. My family was middle class—not wealthy, watching the budget—and yet, health care was not a problem. In fact, I never heard my parents discuss it. We had our family physician, and if we needed a specialist, we saw one. Holden Hospital was clean, efficient, and—if needed—willing to treat those who could not pay. In fact, the United States was touted as having the best medical care system in the world—for rich and poor alike. It was a tapestry of private practices, community hospitals, medical schools with teaching/research hospitals, and foundations and other charitable organizations for disease-specific research and local or national funding for a host of experiments such as HMOs (Health Maintenance Organizations).1 A significant fraction of hospital care was by nonprofit institutions affiliated with religious denominations. These hospitals often had an explicit mission to serve the indigent. While precise statistics on the volume of charitable care are scarce, it is well-documented that many hospitals maintained charity wards, and physicians frequently offered pro bono services to those in need.​ By 1910, the American Medical Association (AMA) already was large and began to improve medical education and licensure standards of physicians. My family had Blue Cross/Blue Shield. The American Hospital Association (which had taken on accreditation of hospitals) started Blue Cross in 1937 to unite the country’s networks of hospital insurance plans; physicians then started Blue Shield to prevent Blue Cross from entering the primary care field. Both were nonprofit. In a sense, they led the commercial insurance companies that soon flocked into the field. In the AMA Journal of Ethics, George Moseley writes that “… the market for [commercial] health insurance of all kinds increased dramatically during the 1940s, from a total enrollment of 20.7 million in 1940 to 142.3 million [out a total U.S. population of 151 million] in 1950.” During World War II, federal legislation cleared the way for employers to offer healthcare benefits—and employees to receive it—tax exempt. The chief federal initiatives apart from the Veterans Administration, started in 1930, were the Hill-Burton Act of 1946 and the Kerr-Mills program. Hill-Burton funded hospital construction across the country, ensuring especially that rural areas had access to modern facilities. I worked at the New York City Commonwealth Fund, which pioneered the concept of community-matching grants for hospital construction—until the federal government took over the idea with Hill-Burton. Between 1947 and 1971, more than $3.7 billion was allocated for building more than 9,000 medical facilities across the country. This was a first, early initiative of government to improve the system while soft-pedaling government control over medical decisions. In 1960, the Federal Employees Health Benefit Plan was begun to provide health insurance to federal workers. The Kerr-Mills Act was passed, which used federal funds to support state programs providing medical care to the poor and elderly (a precursor to Medicaid). Doctors treated the indigent for free or a reduced fee not because they were more charitable than today, but because of the fundamental pledge of their profession, because the need was there, and because until the 1960s charitable care was expected. In 1965, President Lyndon B. Johnson signed Medicare and Medicaid into law, transforming American healthcare. Today, those programs have become so much part of our national consciousness that imagining a world without them borders on the unthinkable. And yet, just seven decades ago, the United States had a medical and hospital care system that functioned well for most Americans largely without government. Was it a perfect system? No. But the question we should be asking is if the radical transformation that came with Medicare and Medicaid was ever an improvement or sustainable economically or systemically.​ “Today, any suggestion of return to a private medical and hospital care system is met with outright horror. The idea that healthcare existed—and functioned—before Medicare and Medicaid is treated as irrelevant, paleo conservative, and callous.” Today, any suggestion of return to a private medical and hospital care system is met with outright horror. The idea that healthcare existed—and functioned—before Medicare and Medicaid is treated as irrelevant, paleo conservative, and callous. Of course, those who paid into Medicare deserve, need, and are owed their benefits. If you are forced all your working life to contribute to Medicare, you make no other provisions for retirement and older age and can be relied upon to cry, “It is impossible to end Medicare! Are you crazy?” No argument there. But what if Medicare’s introduction was the moment that the best medical care system in the world began its slow but accelerating unraveling? Before the enactment of the legislation, vocal opposition was widespread and arguments powerful: • Once care became “free” at the “point of service,” demand would be unlimited. • The government would react by rationing care to control soaring costs. • The system would become financially unsustainable. • Doctors would be forced to accept lower reimbursements, and many would leave the system. It was all foreseen. The premises of government subsidized healthcare defied American political and economic principles. It was a first step toward socialized medicine and portended bureaucratic control of a science-based profession that daily made highly informed judgments that called for a balancing of evidence. Above all, the logic of he-who-pays-is-responsible for deciding who gets paid, for what, and how much. Now, the responsible party would be government. In 1961, then-private citizen Ronald Reagan warned that Medicare would lead to increasing government control over healthcare, ultimately limiting patient freedom: One of the traditional methods of imposing statism or socialism on a people has been by way of medicine…. If you don’t stop Medicare, one of these days you and I are going to spend our sunset years telling our children and our children’s children what it was like in America when men were free.2 Dr. Edward Annis, then-president of the AMA, argued in a speech before Congress in 1965: This program will not be voluntary. Your doctor will be told what he can do and how he can do it. The government will set the fees, and in return, they will determine the services provided. This is the first step toward the socialization of American medicine.3 When Congress was debating Medicare legislation, the government estimated that by 1990 the program would cost $12 billion annually. The actual cost was $110 billion—nearly ten times the projection. Today, combined Medicare and Medicaid spending exceeds $1.5 trillion per year, accounting for more than 25% of the federal budget. These programs are among the primary drivers of the national debt, yet politicians, fearing this “third rail” of politics, refuse to touch them, fearing voter backlash. ​ When Medicare was enacted, physicians were assured that they would simply be reimbursed for services (cost-plus like Blue Cross/Blue Shield), with no interference. Many doctors and hospitals initially welcomed Medicare and Medicaid because they promised to pay patient bills without interference. That promise was short-lived. Seven years later, in 1972, the government established Professional Standards Review Organizations (PSROs), tasking them with determining which medical treatments were “necessary” and “appropriate.” It angered physicians, many of whom had backed Medicare in good faith. PSROs were superseded in 1982 by Peer Review Organizations (PROs), later rebranded as Quality Improvement Organizations (QIOs). As the name increasingly skirted any suggestion of oversight over medical practice, the function remained the same: government-mandated oversight of medical decisions to control costs. This shift represented an unprecedented level of bureaucratic intrusion into U.S. medical practice. Gradually, full-scale rationing was introduced. Government set reimbursement rates far below private insurance payments, leading to the inevitable: doctors abandoning Medicare patients. A 2023 survey by the Medicare Payment Advisory Commission (MedPAC) found that 34% of primary care doctors and 28% of all specialists now refuse new Medicare patients due to low reimbursement rates.4 The AMA reports that since 2001, Medicare payments to doctors have increased just 9%—while the cost of running a medical practice has increased 47%. By comparison, hospital payments have risen 60% in the same period. Many of the best doctors in major cities have stopped accepting Medicare entirely. Doctors I saw for years in Manhattan told me bluntly: “Medicare doesn’t even cover my overhead.” The AMA warns that, “Without reform, fewer and fewer doctors will be willing to see Medicare patients, leading to severe access issues for seniors.” Many will spring to the defense of Medicare by claiming the government didn’t take over health care, it just pays for it. Pause here to do what is seldom done today: talk in terms of fundamental principles. In our resolutely pragmatist age of politics (and much else) to insist on consistency of principle is to be accused of “extremism”: “Well, we don’t have to go that far!” In fact, however, we must fear consistency only when we have unworkable principles—for example, altruistic self-sacrifice as a moral absolute. No, Medicare has not nationalized healthcare on the public ownership model of socialism; that is not the American approach to socialism. Yet America has placed the industry under the most fundamental government control: price setting, extensive regulation, and rationing. That is the opposite of free-market dynamics. In a market, employees share the goal of maximizing a company’s value and profit and have considerable autonomy to make decisions, experiment, innovate. Government bureaucrats must operate within the rule of law and under regulations derived from law. Areas where the bureaucratic approach works are the military, the police, and the courts, where the essence of the job is to follow orders, respect the law, and abide by strictly defined procedures. It should surprise no one that when government controls the price, it controls the supply. It is a matter of principle. Medicare cannot be “fixed.” Government cannot pay for unlimited care and also control costs. America’s aging population only makes that obvious sooner. We are left with doctors fleeing the system because they are underpaid, services rationed by bureaucratic cost controls, and budget deficits and a national debt almost ungraspable by most Americans. Medicare’s defenders now admit the system is unsustainable—but even the AMA proposes only tweaks. It is time to say that the system itself is the problem. And yet, before 1965, we had a system that worked and was on a steep upward curve of improvement. There were ways to improve access for poor and/or elderly individuals without handing control of healthcare to the government. Opponents of Medicare weren’t callous; they recognized tradeoffs and advocated incremental solutions, like expanded charitable hospital funding and private insurance pools for the elderly. Medicare and Medicaid supposedly obviated the need for charity. The huge philanthropic giving of Americans to healthcare became ancillary with the advent of government funding—until reimbursements were slashed and hospitals again are crying for help. In 2023, total U.S. charitable giving reached approximately $557 billion ($374 billion from individuals, $76 billion from foundations, $43 billion in bequests, and $21 billion from corporations). But as governments have assumed responsibility for such major charitable areas as healthcare, these dollars have been redirected to less urgent (and at times rather esoteric) causes in the arts, social and political movements, foreign aid, a welter of environmental causes, and fully one-fourth to religion. The money is there to pay for those who need charitable assistance for healthcare. We’d best start now on fundamental reform. To achieve it while honoring present commitments under Medicare and even providing better interim funding to keep the promises of the system, will take 50 years—although things will get better much sooner. The key is to maintain all services for the cohort now in Medicare, refund Medicare contributions to those not yet in the system (perhaps directing the refunds to the private insurance plan of their choice), and from those just beginning to work collect no contributions. The problem with the refund idea, of course, is that the money no longer exists. All of it is spent on current Medicare costs. Medicare is not a healthcare insurance plan; it is a welfare program supported by a deceptive tax. That tax is on our children and grandchildren who pay it to support us and in turn count on their children and grandchildren to pay the tax to support them. Since that base is shrinking, and the recipient cohort is burgeoning, and since politicians will not tax as needed, we have a $36.6 trillion dollar national debt. It will never be paid. It is being and will be inflated away. For more on these topics, see Michael Cannon on Medicare. Great Antidote Podcast, October 2022. Christy Ford Chapin on the Evolution of the American Health Care System. EconTalk. Health Insurance, by John C. Goodman. Concise Encyclopedia of Economics. I doubt that reform at the level I describe will occur before the inevitable collapse. But how many Americans will pay with their lives before that happens? And by then, will we even remember that America functioned for more than 200 years with private healthcare? That doctors and patients once were free? Footnotes [1] George B. Moseley III. “The U.S. Health Care Non-System: 1908-2008.” AMA Journal of Ethics. May 2008. [2] Ronald Reagan, Radio Address on Socialized Medicine, circa 1961. [3] Edward Annis and Jane M. Orient, “Medicare and the Destruction of Freedom in Medicine: Recollections of Dr. Edward Annis,” Journal of American Physicians and Surgeons. Winter 2008. [4] Medicare Payment Policy. Report to Congress. *Walter Donway is an author and writer with more than a dozen books available on Amazon and an editor of the e-zine Savvy Street. He was program officer or director at two leading New York City foundations in the healthcare field: The Commonwealth Fund and the Dana Foundation. He has published almost two dozen articles in the Blockchain Healthcare Review. For more articles by Walter Donway, see the Archive. (0 COMMENTS)

… the path forward will involve a reconciliation of a commitment to the free market, and its atomization and isolation of individual wants and needs, with the insatiable human desire for some form of collective experience and endeavor… the atomization of daily life in America and the broader West left a lane open for technology firms, including ours, to recruit and retain a generation of talent that wanted to do something other than tinker with financial markets or consult. —Alexander C. Karp and Nicholas W. Zamiska, The Technological Republic: Hard Power, Soft Belief, and the Future of the West1, p. 217 Alexander C. Karp and Nicholas W. Zamiska are, respectively, CEO and head of corporate affairs at Palantir Technologies, a Silicon Valley firm that provides software to businesses and governments. It uses machine intelligence to solve problems, often having to do with security. In their book, The Technological Republic, the authors recount how in 2012 the American military used Palantir software in Afghanistan to better anticipate the location of Improvised Explosive Devices (IEDs). In Afghanistan, software made by Palantir had found a committed band of supporters, particularly in the U.S. Special Forces, with teams where intelligence, and the ability to quickly navigate across databases and stitch together context in advance of missions, were critical. p. 152 Part of the book is a meditation on start-up culture. But most of the book reads like something a Professor of Classics might have written circa 1985, in the middle of the Decade of Greed, lamenting the students’ crass materialism and lack of interest in Western Civilization or the higher goals in life. In style, The Technological Republic also owes something to 20th century academic intellectual writing. In just one six-page section, the authors refer to and/or quote Thomas Hart Benton, Jackson Pollock, Jack Kerouac, Rene Girard, Ralph Waldo Emerson, Isaiah Berlin, Herbert Hoover, and John Dewey. The description of start-up culture emphasizes an organizational structure with minimal hierarchy. I myself have written, “The more titles an organization has, the more it will select for people who really care about titles.”2 The authors write, … we have, at Palantir, attempted to foster a culture in which status is seen as an instrumental, not intrinsic good… Every human institution, including the technology giants of Silicon Valley, has a means of organizing personnel, and such organizations will often require the elevation of certain individuals over others. The difference is the rigidity of those structures, that is, the speed with which they can be dismantled or rearranged, and the proportion of the creative energy of a workforce that goes into maintaining such structures and to self-promotion within them. p. 125 They point out that the engineering mindset is pragmatic: the software has to work. Employees must feel accountable. Instead of a culture of blame-shifting, bad results are studied in terms of systemic causes and solutions. Higher Motives “The authors complain that too many Silicon Valley companies are looking to make big profits from solving little problems.” The authors complain that too many Silicon Valley companies are looking to make big profits from solving little problems. They would prefer to see more focus on what they see as the important issues, such as national security and health. While the authors take many opportunities to scorn finance, consulting, and especially the development of applications for shopping and entertainment, they are not social justice activists. They take pride in the application of Palantir software to help police. The view that advanced technology and software have no place in local law enforcement is an archetypical “luxury belief,” to use the term of the author Rob Henderson. The risk is that we abandon a moral or ethical system oriented around results—the outcomes that matter most to people (less hunger, crime, and disease) in favor of a far more performative discourse…. p. 177-178 While I came away from The Technological Republic with some insights, I was also left with some important questions that I would like to have seen addressed. One question is how Palantir was able to adapt to sell to governments and large corporations. Large organizations undertake thorough evaluations of major purchases, putting would-be sellers through a long and frustrating process. You can spend months meeting with mid-level staff who are not even authorized to make a purchase decision. You have to navigate the complex internal politics and competing interests within the organization. I would have liked to see some examples illustrating how Palantir was able to do that. For more on these topics, see Marc Andressen on Why AI Will Save the World. EconTalk. Eliezer Yudkowsky on the Dangers of AI. EconTalk. Joe Lonsdale on the Rebirth of Liberty and Cultivating a Successful Future. Future of Liberty Podcast, 8-15-2024. Another question concerns the government’s culture. How concerned are the authors that the government may not be able to adapt to the pace of change, especially in the nascent field of artificial intelligence? What recommendations would they have to offer to public officials? The final question that I have concerns the nature of the “republic” that the authors have in mind. Is a partnership between the engineering elites and the political leadership really the solution? What role would it leave for the rest of us? Footnotes [1] Alexander C. Karp and Nicholas W. Zamiska, The Technological Republic: Hard Power, Soft Belief, and the Future of the West. Crown Currency, 2025. [2] “Social Media and other Status Games,” by Arnold Kling. In My Tribe, May 8, 2024. *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)

Ezra Klein and Derek Thompson have a new book entitled Abundance.  This is a part of the description at Amazon: Abundance explains that our problems today are not the results of yesteryear’s villains. Rather, one generation’s solutions have become the next gener­ation’s problems. Rules and regulations designed to solve the problems of the 1970s often prevent urban-density and green-energy projects that would help solve the problems of the 2020s. Laws meant to ensure that government considers the consequences of its actions have made it too difficult for government to act consequentially. In the last few decades, our capacity to see problems has sharpened while our ability to solve them has diminished. The authors are supporters of the “Yimby” movement, which aims to boost housing by reducing barriers to construction.  Thompson was recently interviewed on CNBC (see this link for the interview): Thompson is rightly exasperated by people that confuse lower housing prices created by increased supply with lower housing prices created by economic depression.  The former situation is good for potential homebuyers, the latter is bad.  Both more supply and less demand result in lower housing prices, but only the former results in more quantity of housing. I frequently complain about people who “reason from a price change”.  You might assume that this sort of mistake is only made by students in freshman economics classes.  In fact, many of the most powerful people on Wall Street make the same mistake.  Thompson also pushes back on the claim that falling stock prices are not something to worry about.  I often hear people claim that falling stock prices reflect the fact that tariffs hurt the economy in the short run but help the economy in the long run.  There are several problems with this claim: 1. That’s not how asset markets work.  If investors thought the tariffs would help the economy in the long run, you would probably not see a big decline in stock prices, and you would not see a weaker dollar.  The “wisdom of crowds” is suggesting that tariffs will likely hurt long run economic growth.  We don’t have a futures market for industrial production, but if we did it would very likely have shown a significant drop in recent days. 2. Proponents of mercantilism did not predict these market reactions.  So it’s not just a question of “Wall Street is not Main Street”.  That excuse might work if we had been told that stock, commodity and foreign exchange markets would react this way to tariffs, but in fact the market reactions were not at all what the mercantilists expected.  (0 COMMENTS)