Marx Was Mistaken About the Power of Capitalists In Markets

From Don Boudreaux.

"In “The Middle-Class Squeeze” (Sept. 26) Charles Moore mixes genuine insight with hackneyed myths.  Among the myths is his claim that “[t]he owner of capital decides where money goes, whereas the people who sell only their labor lack that power.  This makes it hard for society to be shaped in their interests.”

First, in free markets, owners of capital remain owners of capital only if they use their capital to serve others.  And the greater the number of others they serve, the greater the amount of capital they own.  The Walton family’s enormous capital was created – and its value maintained – only by that family’s continuing success at serving hundreds of millions of consumers.  Consumers’ voluntary spending choices play at least as large a role in determining “where money goes” as do the investment and managerial decisions of capitalists.  (Were the Waltons to put all of their money into factories that manufacture caramel-covered anchovies, they would quickly lose all of their capital.)

Second, as my colleague Alex Tabarrok explains, “[f]irms buy labor and they are competing primarily not against workers but against other firms.  When firms are thinking about wages what they are thinking about is the threat from other firms.  When a firm is hiring it knows it must pay the worker at least as much as other firms are willing to pay.”  In short, capital competes for labor and, in doing so, empowers it.  So the greater the supply of capital, and the freer it is to compete (yet without special privileges) in both output and input markets, the greater the power of even the poorest consumers and workers to determine “where money goes.”

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030"

The $4,000 Suit and the Benefits of Exchange

By Chelsea German of Cato.

"Last week, I wrote about a man who spent 6 months of his life and $1,500 to make a sandwich entirely from scratch, without the benefits of market exchange. The story illustrates how exchange and trade enrich our lives.

After making his incredibly costly sandwich, the same man embarked on an even costlier endeavor: making a suit from scratch. He picked cotton from a field, spun the cotton into thread, wove the thread into cloth, sheared wool from a sheep, harvested hemp, raised silkworms for their silk, killed a deer and tanned its hide to make leather. This process cost him 10 months of work and $4,000.

At the end of the video documenting how he made the “suit,” he stands in a bizarre-looking outfit with pants that end at his knees and says with regret, “OK, even with all that work, I might have run a little short on material.” Even after 10 months of intense labor, he was unable to come close to matching the quality and price of a product that he could procure through the free market.

Thanks to market exchange and the division of labor, obtaining new clothes is simple and increasingly affordable. For example, increasing cotton yields have lowered the price of a staple fabric material.

The real price of a suit, measured in the number of hours it takes an average worker to earn enough to buy one, has declined: a two-piece wool suit cost the average American 12.4 fewer hours of work in 2012 than it did in 1956. (Check out Professor Don Boudreaux’s analysis for further details).

Critics sometimes decry increasingly affordable clothing, viewing falling prices as a sign of worker exploitation. In 1891, U.S. President Benjamin Harrison summed up this viewpoint when he said, “I pity the man who wants a coat so cheap that the man or woman who produces the cloth or shapes it into a garment will starve in the process.” However, as Johan Norberg pointed out yesterday in the U.K. Huffington Post, far from making people poorer, the garment industry has actually helped to decrease poverty. As he eloquently puts it:

Western activists rail against “sweatshops,” but among researchers and economists from left to right there is a consensus that these jobs are the stepping stones out of poverty.

Take a moment to consider what you are wearing right now, and how much work went into its creation, from the harvesting of its raw materials to the finishing touches. No one person created it—it is the fruit of a complex family tree of mutually beneficial human cooperation through the market."

The Inexorable Logic of the Sharing Economy

By Nobel Prize Winning Economist Michael Spence. Excerpts:

"The insight (obvious in retrospect) underlying Airbnb’s model – and the burgeoning sharing economy in general – is that the world is replete with under-utilized assets and resources. How much time do we spend actually using the things – whether cars, bicycles, apartments, vacation homes, tools, or yachts – that we own? What value do office buildings or classrooms generate at night? 

Answers vary by asset, individual, household, or organization, but the utilization numbers tend to be astonishingly low. One recent answer for cars was 8%, and even that may seem high to someone not burdened by long commutes. 

But those numbers are changing, as the Internet enables creative new business models that increase not only a market’s efficiency but also the utilization of our various assets. Hundreds of experiments are being conducted. Clearly, not all of them will experience the astonishing growth of Airbnb and Uber. Some, like Rent the Runway for designer clothes and accessories, may find profitable niches; others will simply fail. 

The digital platforms that act as the basis of all this e-commerce need to meet two related challenges. The first is to produce a network effect, so that buyers and sellers find one another often enough and rapidly enough to make a business sustainable. Second, the platform must create trust – in the product or the service – on both sides of the transaction."

"The power of these platforms derives from overcoming informational asymmetries, by dramatically increasing the signal density of the market. 

Indeed, in order to encourage infrequent e-commerce users, innovators and investors are exploring ways to combine the evaluation databases of separate, even rival, platforms."

"the Internet is lowering the costs of dispersion that once compelled the concentration of work in factories and offices."

"the Internet-led process of exploiting under-utilized resources – be they physical and financial capital or human capital and talent – is both unstoppable and accelerating. The long-term benefits consist not just in efficiency and productivity gains (large enough to show up in macro data), but also in much-needed new jobs requiring a broad range of skills. Indeed, those who fear the job-destroying and job-shifting power of automation should look upon the sharing economy and breathe a bit of a sigh of relief. "

Why the Pope is wrong about climate

A close look at Francis's major encyclical finds some awfully strange views, even for people who care about the environment

By Michael Grunwald of Politico. Excerpts:

"There are asides about “the feeling of asphyxiation brought on by densely populated residential areas” and the inability of the individual to “prescind from humanity”"

"Conservatives who are already annoyed by the pope’s climate advocacy might not be too happy to hear him link laissez-faire economics to slavery, pedophilia, organized crime and the abandonment of the elderly in paragraph 123. Liberals who are fawning over the pope might not want to read paragraph 117, where he compares neglect of the environment to support for abortion."

"Pope Francis makes an excellent case in paragraphs 23 through 25 that climate change is the eco-challenge of our time—and it’s great that he’s making that case to the world—but he fails to recognize that it’s a different kind of eco-challenge than the others he mentions in his encyclical, like toxic dumping and endangered species. The pope understandably puts great faith in the healing power of more moral and less selfish individual behavior, but that won’t save the climate. And while the pope doesn’t think much of capitalism or technology, those things are already helping to save the climate."

"The main theme of Laudato Si, repeated constantly, is that everything is connected, that “we cannot presume to heal our relationship with the environment without healing all fundamental human relationships.”"

"Thanks to our love of money, our obsession with technology, and our insatiable demand for stuff, “the earth, our home, is beginning to look more and more like an immense pile of filth.” We mistreat nature as we mistreat the poor, the sick and yes, the unborn. With our excessive consumption and “throwaway culture,” promoted by venal profiteers through soulless advertising, we abuse the resources God gave us."

"The pope’s primary example of our insensitive efforts to take dominion over nature with out-of-control consumption is, incredibly, “the increasing use and power of air conditioning.”"

""The markets, which immediately benefit from sales, stimulate ever greater demand,” the pope writes about the relentless worldwide expansion of A/C. “An outsider looking at our world would be amazed by such behavior, which at times appears self-destructive.”"

" And while the pope is certainly right to push for more Third World debt relief and less inequality, that could actually make emissions even worse; promoting long-overdue economic growth in the developing world would help it afford to burn more coal, gas and oil."

"The U.S. is already moving toward cleaner energy, thanks to supportive public policy as well as the entrepreneurial and technological innovation the pope finds so suspicious. President Obama’s clean-air regulations have made coal plants more expensive to operate, while strict fuel-efficiency standards have made our cars and trucks guzzle less gasoline. Meanwhile, a combination of government policies (for clean energy research and deployment) and technical advances (more efficient solar panels and wind turbines, better batteries for electric vehicles and renewable energy storage) are making green energy cheaper. The cost of solar power has dropped 80 percent since 2009, the cost of wind power 60 percent, the cost of advanced batteries 50 percent. In California, a market-based cap-and-trade system is also helping to ratchet down emissions, even though the pope, in his otherwise sensible overview of the climate issue, offers the leftist conspiracy theory that carbon trading schemes “may simply be a ploy which permits maintaining the excessive consumption of some countries and sectors.”

The pope isn’t a big fan of the profit motive, but it’s the best hope for bringing clean-tech products to the masses. It’s what inspired firms like Solar City and SunRun to offer no-money-down leases for rooftop solar panels. It’s what’s inspiring Wall Street to securitize those leases for investors, which will pour more money into the solar industry and further drive down costs. Elon Musk hopes to change the world, but Tesla wouldn’t have a prayer of reinventing transportation (and now grid storage as well) without investors who hope to make a buck."

Oil prices have dropped 60%, but a gallon of gas is down only 25%. Why? Regulation isn’t cheap

See Gas Prices Ought to Be Lower by Jacob Borden. Mr. Borden is an assistant professor of chemical engineering at McNeese State University and formerly principal engineer for BP Biofuels. Excerpts:

"Multiple and overlapping regulatory barriers prevent refiners from moving to alternative sources of crude and from entering markets to fill supply shortages. The result: a regulatory price premium in every gallon of gas."

"the price you pay at the pump for a gallon reflects local constraints, not merely the price of oil. No two refineries are designed identically, and no new world-scale refinery has been built in the U.S. since 1976."

"Some refineries are limited by the amount of asphalt they can accept in their crude, while others are limited by their capacity to remove sulfur. Only a handful of U.S. refiners have so far elected for the extensive upgrades and regulatory approvals needed to process large amounts of unconventional crude. Thus the regulatory burdens are leaving the American refinery fleet largely inflexible. That’s why crude-oil processing has become specific to the design details of each refinery."

"On Aug. 9 the BP refinery in Whiting, Ind., was forced to run at 40% of capacity for more than two weeks due to an unplanned outage in one of three crude-distillation units. Already among the most expensive in the country, gasoline prices in nearby Chicago jumped almost $0.70, to $3.37 a gallon.

Meanwhile, 60 miles south in Kankakee, Ill., the price at the pump held steady at $2.65. Kankakee County sits right outside a zone that the Environmental Protection Agency deems “nonattainment,” which means that retail gasoline must be “reformulated” to minimize the potential for smog emissions. But not every gallon of gasoline is equally amenable to reformulation, which shrinks the pool of fuel available. These areas end up with higher prices as the remaining reformulated fuel is rationed among nonattainment zones.

This is exacerbated by the renewable-fuels mandate, which requires blending nearly all gasoline with ethanol. Ethanol, when mixed with gasoline, increases the tendency for the lightest molecules to evaporate and contribute to urban smog. Gasoline therefore has to be stripped of so-called light-ends, increasing refining costs while reducing the yield of marketable fuel."

"And so this regulatory patchwork builds a price premium into every gallon, essentially to compensate refiners for providing fuels that meet ever-increasing regulatory and production demands. The result: When oil prices rise, the rise is reflected in retail fuel prices. But when oil prices fall, the relief you feel at the pump is limited.

In the mid-1980s and ’90s, the cost of crude oil accounted for about 45% of the retail price of gasoline. By August 2004, when a barrel of oil first touched $40, only 40% of the cost of retail gasoline was attributable to oil. Today, oil accounts for a mere 35% of the retail price of gasoline. Simply breaking down such regulatory barriers would reduce gas prices by about $0.60 a gallon"

Study: Wealthy Claim Most Energy Credits

Federal government offers up to $7,500 in tax credits to purchase an electric vehicle

By Jeffrey Sparshott of the WSJ. Excerpts:

"The federal government offers up to $7,500 in tax credits to purchase an electric vehicle, part of a broader national policy to encourage efficient use of energy and curb carbon emissions.

Almost all of those benefits are going to the wealthiest U.S. households, according to an analysis by University of California, Berkeley, professors Severin Borenstein and Lucas Davis."

"“We find that the top income quintile has received about 90% of all credits,” they said."

The pattern is similar, though not as extreme, for other clean-energy tax incentives"

"From 2006 to 2012... tax credits totaled $18.1 billion. In that time, taxpayers with an adjusted gross income greater than $75,000 received about 60% of those credit dollars for energy efficiency, residential solar and hybrid vehicles, and about 90% for electric cars."

Sweden is a relatively wealthy country despite being a welfare state, not because of it

See Earth To Bernie Sanders: Sweden—Welfare Statism Fact and Fiction by Anders Ingemarson. Excerpts: 

"How morally good or bad a country is should be measured one way only: by how well it protects the individual rights of its inhabitants. The gold standard is a country with total separation of state and the economy and with a government limited to my ‘Government 1, 2, 3’:

‘A government’s one legitimate function is to protect our individual rights from two potential sources of rights violations, foreign enemies and our fellow men at home, using three institutions: the military, the police and the courts.’"

"“1. Sweden is a relatively wealthy country despite being a welfare state, not because of it.

“Sweden is not a Soviet style socialist country. It is a mixed economy with significant free market elements—private property, private businesses, a functioning banking system, free trade, etc. It is the free market elements that are responsible for the country’s wealth and health. Most of the wealth in real terms was created before and in the early stages of the welfare state, between 1870 and 1960. Since then Sweden has fallen from the top of the list of wealthiest countries to the middle of the pack. Sweden has higher taxes, higher government spending, and probably more regulations than we [U.S.A.] do, although we’re catching up fast. With lower taxes, lower government spending and less regulations Sweden, and the U.S., would be a much wealthier and healthier country.

“2. Sweden has benefitted tremendously from progress made in more free countries, especially the United States.

“The past 30-40 years has seen enormous progress in primarily the IT field with spillover effects on every other industry. This has enabled Sweden’s private sector to increase its productivity and continue to pay the taxes that finance the system. Most fundamental IT discoveries and inventions originated in the U.S—try to think of one that didn’t. The success of our IT sector is directly correlated with the fact that IT is the most free, least regulated sector of our economy. The success of our free market IT sector has given Sweden’s welfare state a new lease on life, if only for a while.

“3. Better literacy rates are explained by one word: phonics.

“Swedes never bought into Progressive education with look-say ‘reading’, whole language, new math, etc. as Americans did. The three R’s are taught better over there. Learning to read using the phonics method explains the higher literacy rates, period. But make no mistake. Apart from the three R’s, Swedish education is as much in a mess as ours, although they may be a fraction behind us on the road to ignorance. Slow deterioration is an inherent and inescapable trait of any government education system. Return control and rights of educating children to the parents, educators and businessmen of this country and we’ll see phonics back in the driver’s seat and our literacy rates go through the roof in no time.

“4. Welfare statism slowly suffocates the individualist spirit.

“I don’t put much trust in ‘research’ showing who is the most fulfilled, most informed, healthiest and happiest people, etc. The organizations performing such research for the most part find the answers they are looking for.

“However, a Swede will most likely tell you that he’s happy and that Sweden is a good, if cold, country. He may grudgingly comment on waiting lines for medical care, and that his kids don’t get as good an education as he did. But in the same breath he will tell you it’s the price you have to pay for the ‘safety net’ the welfare state provides.

“If welfare statism is the immoral big brother creation I claim it is, how do I explain this attitude? When from grandparent to parent to child your individual freedoms are gradually taken away and you become more and more dependent on the state, and when you’re taught in the government schools from Preschool and up that this is how it should be, your outlook on life changes. You gradually lose your independent mind and your self-reliance—you lose the individualist spirit. You start to look to the state as the guarantor of your welfare, despite it being the aggressor taking away your rights. It is ironically but sadly an expression of Stockholm syndrome on a national scale: ‘a psychological phenomenon in which hostages express empathy, sympathy and have positive feelings towards their captors, sometimes to the point of defending them.’”

“Sweden has much to teach us, but not in the sense our big government advocates think. No, Swedes can primarily teach us what not to do. It is their mistakes we should learn from, welfare statism being the biggest, costliest and most immoral mistake.”"

Capitalism Makes You Cleaner

The underrated environmental qualities of the Kuznets Curve

From Matt Welch of Reaons. Excerpts:

"In the 1950s, the Belarussian-born American economist Simon Kuznets hypothesized that income inequality as a nation industrializes can be shaped like an inverted U—it increases in the early stages of growth, reaches an apex, and then starts tapering down as the economy matures. The switch begins to happen after a critical mass of people abandon farm life for the big cities, where they obtain better education, benefit from economies of scale, and start agitating for policy changes.

Ironically, at a time when Kuznets' original concept has come under intensified attack in the inequality-obsessed developed world, its application to the environment has gained considerable purchase both academically and observationally. As Science Correspondent Ronald Bailey traces in "The End of Doom" (page 20), many of the woes that people still assume are getting worse are actually improving in the most advanced countries.

The richest nations are reforesting, not deforesting; cleaning up rivers and skies instead of making them dirtier; beating back cancer instead of contributing to its increase. As women get wealthier they gobble up educational opportunities and gain control over their own reproduction, to the point where the fertility rate of Mexican women will soon plummet to replacement level. Some nostalgiacs may lament the disappearance of the family farm, but the swapping out of subsistence agriculture for city life is a net plus for the environment and a net boon for the participating migrants.

Some of the virtuous Kuznets action in the rich world can be attributed to sheer technological progress. Cutting-edge technology, from agribusiness to apps, always seeks to produce more output with less input. Other advancements can come from the types of regulations that an increasingly wealthy populace demands—a desire to see the mountains in Southern California leads to the prohibition of leaded gasoline, for example.

But arguably the most important change is the one hardest to measure: that which occurs first within the human heart, then in behavior. If you look around at the world, and even at your own life, you will see examples of the Kuznets Curve all around you.

The most widespread practice of self-pollution—cigarette smoking—is down all over the developed world (while rising in industrializing countries such as China and India). A quarter-century ago, being in a bar almost anywhere on the globe meant stinging eyeballs and reeking clothes; now you can't even smoke in a bar in Paris or Prague."

"But moving the periscope back reveals a long-term trend toward environmental cleanliness everywhere that capitalism has been allowed to flourish at length, whether it be in democratic socialist France or the allegedly laissez faire United States. We all get there, as long as we don't totally murder the goose that laid these golden eggs."

The Pill Whose Price Went Up 5000%? It Costs 5 Cents in India

Another case of government distorting the market

From Alex Tabarrok at FEE. 

"The drug Daraprim was increased in price from $13.60 to $750, creating social outrage. I’ve been busy, but a few points are worth mentioning.

The drug is a generic and not under patent so this isn’t a case of IP protectionism. The story as I read it is that Martin Shkreli, the controversial CEO of Turing pharmaceuticals, noticed that there was only one producer of Daraprim in the United States and, knowing that it’s costly to obtain even an abbreviated FDA approval to sell a generic drug, saw that he could greatly increase the price.

It’s easy to see that this issue is almost entirely about the difficulty of obtaining generic drug approval in the United States because there are many suppliers in India, and prices are incredibly cheap.

 


The prices in this list (right) are in India rupees. 7 rupees is about 10 cents so the list is telling us that a single pill costs about 5 cents in India compared to $750 in the United States!

It is true that there are real issues with the quality of Indian generics. But Pyrimethamine is also widely available in Europe. I’ve long argued for reciprocity: if a drug is approved in Europe it ought to be approved here. In this case, the logic is absurdly strong. The drug is already approved here!

All that we would be doing is allowing import of any generic approved as such in Europe to be sold in the United States.

Note that this in not a case of reimportation of a patented pharmaceutical for which there are real questions about the effect on innovation.

Allowing importation of any generic approved for sale in Europe would also solve the issue of so-called closed distribution.

There is no reason why the United States cannot have as vigorous a market in generic pharmaceuticals as does India."