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OpenMarket: Business and Government

  • Market Dominance Doesn't Last; Regulation Shouldn't Either

    January 22, 2016 10:51 AM

    One of the justifications for heavy regulation of large companies is that they use market power to crush competition and maintain market dominance. Yet the history of America’s most successful companies—those that make it on to the Dow Jones Industrial Average (DJIA)—doesn’t support that theory. Sustainable competitive advantage is very hard to achieve, even for these titans of industry.

    If we look at the history of the DJIA, we can immediately identify several significant changes in its sectoral composition over the years.

    The DIJA was first published in 1884. It consisted of 11 companies, eight of which were railroad companies. The index was later expanded to 12 companies, before being expanded to 20 in 1916. The present Dow Jones Industrial Average began in 1928, when the list was lengthened once more from 20 to 30, consisting mostly of manufacturing companies and resource extraction companies such as Bethlehem Steel and Atlantic Petroleum (who?).

  • Three Economists Had the Answer to the President's Questions

    January 13, 2016 4:58 PM

    Last night at the State of the Union, the President asked three questions regarding domestic policy (I’ll leave the foreign policy question to others). They were:

    First, how do we give everyone a fair shot at opportunity and security in this new economy?

    Second, how do we make technology work for us, and not against us – especially when it comes to solving urgent challenges like climate change?

    And finally, how can we make our politics reflect what’s best in us, and not what’s worst?

    These three questions are best answered by three great economists, Joseph Schumpeter, Ronald Coase, and Friedrich Hayek.

  • Much to Be Thankful For

    November 25, 2015 12:00 PM

    Thanksgiving is tomorrow, and all of us have much to be thankful for. Over at Inside Sources, I have a Julian Simon-inspired take on the holiday:

    This Thursday is an opportunity to give thanks for a wonderful fact: In all of human history, there has never been a better time to be alive than right now. This might seem an odd thing to say at the moment. War, terrorism, poverty, political repression and hunger still plague many countries. The most recent wounds, inflicted in Paris, Syria, and elsewhere, are still fresh.

    But life is improving in unprecedented ways.

    Over the last century or so, the typical American’s income has grown sixfold. Life expectancy increased 30 years during the 20th century, from 47 years in 1900 to 77 in 2000. Infant mortality went down by more than 90 percent over that period, from roughly one in 10 to less than one in 100. Just think of all the broken hearts avoided. Nutrition and health care improved so rapidly that the typical American in 1950 was three inches taller than in 1900. Today’s Americans are taller still.

    Read the whole thing here.

  • Thanksgiving: Massachusetts Discovers Property Rights

    November 25, 2015 11:18 AM

    Thanksgiving is a day layered in tradition and myth. The standard story makes much of the creative efforts of our ancestors, the assistance provided by the friendly Indians (aka Native Americans) and the richness of the land and seas. That view is romantic, but obscures the fact that over half the original settlers died in the first year, bloody wars between the settlers and the Indians soon dominated the frontier, and that for the first three years, the “bountiful” earth provided little food to the starving colonials.

    The Pilgrims were a highly religious group seeking to live as an extended family in a communal order. Initially they placed all farm lands into a “commons” which all would farm and harvest from collectively. That system goes back to tribal societies with strong cultural rules. Protestant culture, it turned out, did not suffice to discipline the work effort of their individualistic members.

  • A Fundamental Misunderstanding of Free Enterprise

    November 23, 2015 4:06 PM

    Today, in The Guardian, columnist Zoe Williams repeats an idea often advanced by progressives, that entrepreneurial activity is dependent on the action of others, especially “government,” and that therefore socialism built the iPad. This is contrasted with the idea of human innovation being the result of individual inspiration, which she describes variously as the credo of Thatcher, Reagan, McCloskey, or free markets in general. In doing so, Williams fails the ideological Turing Test; she has fundamentally misunderstood free enterprise economics.

    Williams sum up the “free market” view this way: “Society prospers not through cooperation, but when it allows its stars to get on and shine, bringing light to the rest of us troglodytes (who, by the way, could all use a little more gratitude).”

  • Anti-Capitalism on Campus

    November 20, 2015 5:35 PM

    Prof. Brad Thompson of Clemson University writes this week in Minding the Campus on the impact of corporate donations to institutions of higher education. In particular, he describes some of the controversy we’ve seen in recent years about donations from unabashedly pro-capitalist sources like BB&T and the Charles Koch Foundation. The allegedly insidious influence of such funding has even inspired the creation of the activist group “UnKoch My Campus.” Of course, as Casey Given of Students for Liberty has recently pointed out, George Soros has been spending far more on higher education programs than Charles and David Koch put together, but that hasn’t kept the campus left from crying foul.

  • Calling All Public Choice Scholars

    November 18, 2015 3:11 PM

    Earlier this month the Cato Institute generously hosted a small roundtable discussion of CEI’s recent study “Virtuous Capitalism: Why there Is Less Corruption in Business than You Think” by Fred Smith and Ryan Young. Our goal was to solicit comments on and criticisms of the paper’s arguments, and to expose more people to the work of CEI’s Center for Advancing Capitalism.

    The questions that arose during that session were helpful, but we are eager to open the discussion to as wide an audience as possible. Thus, we invite scholars (and students) to submit written responses to the arguments presented in the paper. Economists who work in the realm of public choice theory might be especially interested in engaging with Smith and Young. As they write:

    Most—but not all!—businessmen, we argue, have a sense of decency or an implicit code of honor that causes them to refrain from rent-seeking behavior, or at least do less of it than one would expect. This virtue defies quantification, which may be why many economists defy incorporating it into their analysis. We seek to encourage public choice economists and other social scientists to gain a fuller picture of humanity than they do now.

    What issues must be resolved if this perspective is to be more widely accepted? Why do you think the cronyist story seems so much more plausible, even to pro-market thinkers? What data or surveys might be useful in clarifying the conditions under which individuals see rent-seeking as moral or, at least, morally neutral?

  • Virtuous Capitalism in Theory and Practice

    November 17, 2015 12:56 PM

    Government is responsible for billions and billions of dollars of corruption and corporate welfare. Considering the potential returns on investment compared to honest entrepreneurship, it is a minor miracle the vice-to-virtue ratio in the economy isn’t even worse than it already is. Why is that? CEI founder Fred Smith and I wrote a recent paper, “Virtuous Capitalism,” which explores several possible answers to the question.

    If you don’t have time to read the whole thing, Fred summarizes it in his most recent Forbes column, to which I contributed:

    Capitalism has a bad reputation. Many people see it as corrupt, uncaring, and in bed with politicians. And popular wisdom isn’t always wrong. For example, take the Export-Import Bank’s pending renewal. How dare large, healthy businesses such as Boeing and General Electric receive billions of dollars-worth of special privileges?

    Has Big Business thought through the political and social costs of such self-aggrandizement? Is sacrificing long-term moral standing for short-term dollars really wise?

    Read the whole column here. The paper is here.

  • Sell a Kidney, Save a Life

    November 2, 2015 4:14 PM

    Last week I blogged about the idea that some things should not be part of a market economy, and highlighted one rather silly example of a particular item being outlawed: in that case, futures contracts in onions. But there are far more serious examples of policymakers forbidding commerce in specific goods with disastrous results, in particular human organs like kidneys.

    The same day I wrote about onions, Shmuly Yanklowitz wrote in The Atlantic about the advantages we could see from allowing a market in “compensated donation” of kidneys. Yanklowitz has an unusual perspective, being the founder of a social welfare nonprofit organization as well as someone who has recently given an undirected kidney donation. Most of us will never possess the selflessness that is required to donate a major organ to someone we’ve never met, but, as he and others have pointed out, thanks to market incentives, we don’t have to.

    Thousands of people die every year waiting for kidneys to become available, and the usual treatment for people on the list, dialysis, is expensive and inconvenient. And, as journalist Tina Rosenberg wrote earlier this year in the New York Times, it’s not that money isn’t already a big part of the transplant process.

  • Virtuous Capitalism, or, Why So Little Rent-Seeking?

    October 20, 2015 8:21 AM

    The venerable Fred Smith and I have a new paper out today. Click here to read it. In the paper, we try to solve the Tullock Paradox, named for the late, great economist Gordon Tullock (my remembrance of him is here).

    What is the Tullock Paradox? It involves rent-seeking, or seeking special favors from the government. Bailouts, subsidies, and regulations that prevent competition are all examples of rent-seeking. To provide some context, lobbying is roughly a $3.5 billion industry, and the federal government doles out more than $100 billion in corporate welfare—meaning rent-seeking is potentially a 30-fold investment. Not 30 percent, 30-fold. Meanwhile, the Dow Jones averages an 8 percent return. With such outlandish returns on investment, the Tullock Paradox is: why so little rent-seeking?

    Tullock had his answers, rooted in economic reasoning, which we summarize in the paper. But while Tullock’s theories are valid, they’re missing something: ethics, virtue, and a full picture of humanity. Most economists stick to analyzing a Homo economicus character who is unfailingly rational and utility-maximizing. This is a useful and interesting species to study, but Fred’s and my goal is to encourage economists to study Homo sapiens as well. We are capable of pride and shame, we want to love and be loved, we aren’t always 100 percent consistent, and we make mistakes all the time.

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