Friday, March 13, 2020

The Importance of Family in Society





Decades of anti-family policy in the United States has resulted in declining marriage rates and the breakdown of the family. This should be very concerning to us. The cause of this collapse needs to be examined, so that we can understand the effects of this policy on society and culture generally.

Over the last century and half there has been a substantial decline in marriage rates which is problematic for a number of reasons. Pope John Paul II reminds us in Apostolicam Actuositatem that the family is "the first and vital cell of society", after all, families are where children should learn to become citizens and form agency which guides them the rest of their lives. The alarming decline of women who marry is indicative of not only changing societal attitudes but misguided public policy. Decades of introducing new government assistance programs has negatively shifted incentives and public opinion on the importance of marriage, especially with the advent of the welfare state and anti-family tax laws.

This general decline has disproportionately affected Hispanic and African-American women. The largest decline of marriage rates for vulnerable groups coincides with the establishment of "The Great Society" which disincentivizes marriage through government support programs. This presents a few pressing questions such as why do politicians possess such variation in their visions regarding the role of government in society, and why do those with good intentions endorse policy with such poor results?

Regardless of geographic location, leaders and citizens of a nation have significant variations of opinions on how society should function, and in what manner. Dr. Thomas Sowell explores this variation in A Conflict of Visions; Ideological Origins of Political Struggles by dichotomizing these societal visions into two broad categories; the constrained and the unconstrained vision. He illustrates how well-meaning people arrive at largely different conclusions for policy in society even if they have similar goals.

The unconstrained vision is characterized by valuing rationality and expert knowledge above all else, in contrast to systematic knowledge and individualistic choice in the constrained vision. The unconstrained vision also believes that society can be guided to an ultimate goal, or that the human condition is perfectible. The French Revolution is often cited by Sowell as the archetype for the unconstrained vision in which those intellectuals who spoke 'on behalf of the people' were given the powers of life and death over their counterparts.

Although there are many dangers in the unconstrained vision, what is most concerning is the disregard for the family and the public policy that results from this viewpoint. William Godwin, a champion of the unconstrained vision, argued that we fundamentally restrict the effect of knowledge on future actions if we bind ourselves today.
"To those with the unconstrained vision, this means that being bound by past decision represents a loss of benefits made possible by later knowledge. Being bound by past decisions, whether in constitutional law cases or in marriage for life, is seen as costly and irrational"-A Conflict of Visions, pg. 79

Those who believe marriage is irrational largely misunderstand temporal praxeology and the relationship that families play in society as a whole. Focusing solely on remaining flexible in future actions necessarily wastes precious resources, such as time and youth, in a world of uncertainty.

People only act to remove expected uneasiness or improve their situation in the future, so all action must be directed forward as the present and past are largely irrelevant to considerations of action. It is also worth noting that all time is not homogeneous as we have a strong preference to sooner rather than later. This temporal sequencing helps to illustrate that time is scarce and people must economize their time much like any other finite resource. Ludwig von Mises in Human Action details the difference between temporal economization and economization of consumer goods;
"The economization of time has a peculiar character because of the uniqueness and irreversibility of the temporal order. The importance of these facts manifests itself in every part of the theory of action...The economization of time is independent of the economization of economic goods and services." Human Action, Part 1 pg. 101
If we continually delay action (marriage for instance) in hopes of later knowledge leading to better outcomes we inherently sacrifice time and youth. In the unconstrained vision marriage and family are nothing but weights that drag us down, although this is not the case, as families are of vital importance for a healthy society. Mises warned of socialist propaganda that promised a sexual utopia that would cause marriage to disappear along with private property as socialism pledged not only wealth for all but universal happiness in love.

Both Mises and his similarly prolific protege Friedrich Hayek saw families as having a vital role in a market economy and a flourishing society. Hayek in his work The Fatal Conceit expresses his belief that we live in two worlds simultaneously; small intimate groups or firms and then larger markets in 'the great society' (not to be confused with government policy of the same name mentioned earlier). In the small groups there is highly localized knowledge and decentralized decision-making between familiar individuals, whereas in the great society large markets allow for anonymity. In smaller groups Hayek, along the same lines as Adam Smith, believed that self interests could be extended to those immediately surrounding us. These small groups allow for altruism that is not possible in larger markets, largely due to the higher costs of acquiring knowledge on other actors. Hayek echoes this in Individualism: True or False where he suggests that we can't know more than a small fraction of society and that we act on the knowledge of those that are immediately surrounding us. This is important as families bridge the gap between the two 'different worlds'. Families are the most efficient way to allow for both tacit and explicit learning that is required to be an actor in larger market places. Families are where we learn social cues and develop heuristics to help us succeed. Granted, this learning can take place outside the family, but who has a stronger incentive than a parent to instruct a child? What bureaucrat has more relevant knowledge to transform you into a productive member of the community in which you are born? This combination of regional experiences and highly decentralized systematic knowledge is critical and the former should be cautious not to crowd out the latter. A healthy balance of student, state, and family is essential for a highly diverse population to coordinate action and allow for individual autonomy.

Many who hold the unconstrained vision of the world do so with all the best intentions. Problematically no mix of experts can lead us to a societal goal. It is extremely difficult to identify and pursue such a goal while simultaneously allowing individuals the freedom to pursue their own ends. Many with the unconstrained vision seem to fundamentally misunderstand the need to prioritize the immediate future and families rather than delaying decisions until we feel we have all the knowledge, as ultimately we fail to economize time in an efficient manner. Lastly, the impact of the family is largely ignored in regard to its role in social cohesion. This disregard and disintegration of such an important institution is nothing but a stepping stone to socialism, as well as government paternalism, and should not be tolerated any longer.

Wednesday, February 5, 2020

Are Economists Basically Immoral? Lessons from Paul Heyne

Are Economists Basically Immoral? Lessons from Paul Heyne
By Dr. Russ McCullough
Originally published by Liberty Fund: https://www.econlib.org/library/Columns/y2020/McCulloughimmoral.html
Questions are not scarce in economics, and the title of this book poses a whopper: “Are Economists Basically Immoral?”1
Spoiler alert, the answer is “no”. However, it is easy to see how economists get a bad rap when the public thinks economics is all about greed and maximizing profit. A book that uses this question for its title was on a Liberty Fund table at a conference I went to during my first year of teaching. It is a collection of papers that Paul Heyne wrote before he died much too young. The title caught my attention.
In graduate school, I often sat in church wondering what God’s objective function is—one of the burdens of being naturally curious and trained in The Economic Way of Thinking2 (another book of Paul Heyne’s). The collection of Heyne’s essays in this book resonated with me in multiple ways and influenced my outlook on the overlap of faith and economics. It changed the way I deliver some content in my principles of economics lectures in a positive way—for example, opening students to the idea that the endowment of resources came from God. In 2018, my colleague and I started a podcast called Faith and Economics3 where each week we dive into the type of content Paul Heyne did. Like Heyne, my passion since teaching my first principles class is to bring economics to the masses. Being a graduate of Concordia Lutheran Seminary, Heyne’s depth of knowledge in biblical doctrine was vast, and therefore he was a unique man to engage both college students and fellow economists alike. Many of Heyne’s works contained in this collection are completely secular, too. I think he exercised prudent judgement in knowing when to bring in faith and when it was better left to another time. Together, these papers touch on issues I hope all students and professors of economics are mindful of as they explore how they can flourish better in the economy they live in.

Economics and Ethics

“Morality has more to do with intentions than with results; so the person who tried to run you down with his car is morally more culpable than the person who actually ran you down but while trying to get to church.” What a great comment! You can almost imagine sitting in a class with Heyne debating an example like this. It clearly sets the stage for how people can get confused by morality and outcomes.
  1. Heyne illustrates this further with another example about hunger. He pushes back on a statement like, “Hunger is an injustice.” As he explains, generally speaking, “no one intends the hunger of other people” and therefore there is no injustice. An individual who goes hungry is the result of a complicated mess of choices that people have made, some of those made by the individual and others external to the hungry person. That outcome is not immoral. A bad outcome could be changed with a change in “the whole web of incentives people face”. This is where economics can help. Economists are trained to think about incentives and unintended consequences. Heyne has a wonderful way of articulating these fuzzy topics throughout his writing.

Paul Heyne was also a pioneer in helping people understand Adam Smith, who is too often misunderstood as a purveyor of capitalist greed. He is one of the earliest writers to highlight the distinction between economic systems and the morality of people participating in those systems. His analogy to a traffic system is great:
  • An economic system that successfully coordinates the efforts of millions of people will necessarily work like an urban traffic system: Individuals will pursue their own goals, obeying general rules of the game, in response to the net advantages they perceive in their immediate environment, and adjusting those net advantages in the process so that they more adequately accommodate the diverse wants and abilities of the participants.
Since the outcomes of the impersonal commercial society are from a “complex interplay of mostly impersonal decisions” and are a “varied and unpredictable product of effort and luck”, we are left confused to what degree a different system would have been better. Some people continue to hold out hope that better planning could lead to better outcomes, despite the terrible track record central planning has. Heyne helps people better understand Smith’s insight that the public interest is best served when people have freedom to follow their own self-interests.
While it would appear that we are sacrificing “society” for gains from trade, Paul is quick to emphasize that it is impossible for the government to “extract just outcomes from the economic system” and that efficiency gains from the market system can allow individuals to better foster personal relationships, community, and family. People who attribute materialism, consumerism, and selfishness to capitalism are confusing personal morality with impersonal markets.

Economics and Theology

“Heyne unpacks the self-interest paradigm in Christian Theology as elegantly as he unpacks it for Adam Smith.”
Before reading this book, I sometimes struggled reconciling my faith and economics. Using reason, I have come to appreciate Christian apologetics, and I think Paul Heyne would have, too. People of all faiths and secular historians agree that there was a man named Jesus who lived on earth. Was this guy a Liar, Lunatic, Legend, or Lord? Christians, of course, support that Jesus Christ was Lord. How then does the Lord, who committed the most unselfish act in human history, reconcile himself with self-interested people? Heyne unpacks the self-interest paradigm in Christian Theology as elegantly as he unpacks it for Adam Smith. He spends time identifying the tension that exists between the New Testament and Homo economicus—the rational, self-interested, economic man of neo-classical economic models.
The Beatitudes of Luke and Matthew, revealing “Blessed are the Poor” (Luke 6:20), certainly seem to contradict the prudent nature of Homo economicus. “Do not lay up for yourselves treasures on earth” (Matthew 6:19) does not appear consistent with a consumption smoothing model and 401K plans. In Acts 2:45, early Christians “sold their possessions and goods and distributed them to all, as any had need”—this certainly sounds like Jesus has a socialist agenda. Heyne tackles all these Biblical truths, arguing that Homo economicus and capitalism are consistent with Biblical principles. At the heart of the matter is the “sweetness of Homo economicus”—he must be a persuasive character because capitalism demands voluntary behavior of people engaged in exchange, while socialism is coercive through government making more choices for individuals and forcing payment through taxes.
The Roman Catholic Church, more specifically the popes who penned the social encyclicals beginning in the late 19th century, is another target of Paul’s writing. I find this educational and entertaining as I was raised Catholic but married a Missouri Synod Lutheran and subsequently became a member of the church and a supporter of the Lutheran Confessions of faith. In several of Heyne’s writings, he critically analyzes the social encyclicals and defends capitalism. Furthermore, he reminds the reader that Homo economicus is alive in all of us—those in the pulpit, those in government, those in elite colleges. His writing about theological topics goes the way of Public Choice Theory in economics. He closes out one paper as follows:
  • Impartiality and omniscience have not been granted to any of us, not even to government officials and bishops. We are only human. And the same is true, I think, of Homo economicus. When properly understood, he is merely human.

Teaching Economics

For more on economics and ethics, see Ethics and Economics, by Stephen R. C. Hicks in the Concise Encyclopedia of Economics. See also the EconTalk episode Larry Iannaccone on the Economics of Religion, and “How We Failed Our Economics Students and Caused Low Government Approval Ratings” by Russell S. Sobel, Library of Economics and Liberty, Nov. 4, 2019.
Heyne’s vocation was teaching economics. Like me, he took personally the comments from people who took economics in college and said, “It was the most boring course I ever had,” or just gave a sigh and a roll of the eyes that told it all. Looking back on my last twenty-five years of teaching, I think we have made some progress on these responses, and I think professors like Paul Heyne were influential in bringing economics to life. He believed in teaching economics through telling stories. He criticized mainstream methods that focused on optimization and problem solving as if the solver had omniscience. His approach was consistent with the Austrian school of thought, focusing more on the process of discovery than the solution. He would agree with Thomas Sowell that there are no solutions for problems, only trade-offs. He highlighted the complexity of economic problems, stating that the focus should be on the “plausible stories” rather than on specific solutions to mathematical problems. Treat every principles class “as if this were the last one” that the student will ever take—because it likely is!

Economic Method and Policy Commentary

As a fan of F. A. Hayek, Paul would lean toward limited government—not based so much on allowing maximum individual freedom, but rather on the claim that the government has no chance of having enough knowledge to make centralized decisions in an effective way. Moving toward market-based solutions like school vouchers that, based on ethical arguments rooted in individual freedom, allow choice for options that best fit a dynamic and “unmanageably complex” economy is the best direction to take economic policy from the status quo. That said, Heyne was not afraid to challenge heavyweights he respected like Milton Friedman and Lionel Robbins on their attitudes towards the “positive only” science of economics. They argued that economists should stick to efficiency and let others debate equity. I think Heyne successfully up-ends an argument of theirs by concluding, “A defense of efficiency is, in any particular case, a defense of some particular distribution of rights.”
Don’t overlook the Policy Commentary section near the end of the book! Here Heyne masterfully works through an explanation of how an economy that is unmanageably complex can “still work quite satisfactorily.” “Not everything that works is managed and our economy is just such a system.” Hayekian and Smithian thought is woven into his words on policy recommendations. It would be fun to see Heyne debate some of the conscious capital scholars and practitioners today. His depth of knowledge in morality, ethics, faith, and economics really makes him one of the best scholars to defend profit maximization as a social good. He shows how Adam Smith’s arguments always relied on:
  • … not being misled into supposing that profit maximization is an alternative to such objectives as obeying the law or pursuing humane personnel policies. Business executives will usually find that profit maximization requires law-abiding behavior and diligent attention to the interests of employees. Those who attack the profit maximization criterion by assuming that its acceptance entails disregard for legality or for people are attacking a straw man.
He continues his argument into the standard criticisms of international trade and profit maximization. Should a company be forced or encouraged “to pull out of a racist country?” The unintended consequences may do more harm than good to the oppressed people of that country. “Is that social responsibility or elitism?” Should workplace conditions be the same for Malaysia as they are in the United States? The truth is that people in “desperate poverty do not assign as high a value to occupational safety as do people in the United States.” When firms do not enter a country where expected profits are higher, the people who live there in poverty continue without a job that would greatly help their current condition. As long as the labor exchange is voluntary and transparent about the workplace hazards, global profit maximization fights poverty—it does not create it. Heyne turns out to be quite a prophet in this regard; since Heyne wrote in 1982, the research and data using the Economic Freedom Index of the World by the Fraser Institute strongly supports the argument that global capitalism has reduced global poverty much more than any altruistic aid programs.
Public choice theory is another area that Paul articulated well through his continued support of the often-misunderstood Adam Smith. He contends “that the pursuit of private interest for Smith had to be within the bounds of justice” defined by this qualification. While our institutions currently incentivize a profit-maximizing firm to expend considerable resources on lobbying, it is not “just” for the system to be designed that way. Therefore is not within the bounds of pure capitalism according to Heyne. The claim that profit maximization is socially responsible rests on the assumption that the actions taken are just and legal. However, if business executives wield a great deal of power through special interests, the system created will not create social responsibility but rather laws that favor the few. Rationally ignorant voters will not find participation in political markets in their best interest and will cause democracy to eventually overturn the potential that capitalism offers to create socially desirable outcomes. Heyne writes,
  • … a political system is democratic if its laws result from competition between legislators for citizen votes. The basic problem with democracy is that special interests have an enormous advantage in this competition. We are not governed by the will of the majority but by the wills of innumerable minorities.
His clarification of private property within the social system of capitalism is helpful because of his insight that “property rights are rights with respect to other people, and are therefore inescapably social, not private.” These rights combined with rules that state that only voluntary exchange is allowed create a fabulous social phenomenon where individual success “depends on your ability to persuade other people to cooperate” with you. Ultimately, efforts to curb or change the virtue of profit maximization are misplaced. Those efforts should instead be made to create better rules of the game so that the rent seeking benefits of lobbyists and other special interests are reduced, and political markets are made more competitive.
To conclude, Heyne’s collection of essays is provocative and will enlighten the reader with regard to not only what free markets can do for wealth accumulation for the average citizen, but also how Christianity is consistent with free market principles. Heyne’s writing is for both secular and Christian audiences alike. Economic history, theology, teaching economics, the morality and ethics of markets, and the foundations of free market principles to guide policy are all wrapped up in this wonderful collection of papers. Heyne’s intellectual dabbling in both kingdoms helped me become a better economist and will enlighten anyone’s thinking on today’s biggest issues.

Footnotes
[1] “Are Economists Basically Immoral?” And Other Essays on Economics, Ethics, and Religion, by Paul Heyne. Edited by Edited and with an Introduction by Geoffrey Brennan and A.M.C. Waterman.
[2] Paul L. Heyne, Peter J. Boettke, and David Prychitko, The Economic Way of Thinking. Pearson Series in Economics. Available at Amazon.com.

*Russ McCullough is the Wayne D. Angell Distinguished Chair of Economics at Ottawa University.

Tuesday, January 21, 2020

Chile, Is Income Inequality a Problem?


Income inequality has been a hot topic for some time and it is a driving factor in the desire for economic policy reform across the globe. An uneven distribution of income seems to justify a top down solution if it redistributes unfair allocations of wealth. This, however, is not a clever strategy as the focus should instead be on what type of economic policies increase the well-being and individual freedoms of all, not just the elite. Increasing economic freedom and encouraging laissez-faire market policies are the only ways to lift the poorest among us from abject poverty and enjoy a significantly better quality of life relative to those who suffer from the plagues of planned economies.

Economic Freedom

Economic freedom, which is measured globally by both the Fraser Institute and Heritage Foundation, shows how free private individuals and businesses are in a country's economy. The Fraser Institute determines economic freedom based on 5 factors; size of government, legal systems and property rights, sound money, freedom to trade internationally, and regulation. To put things into context, Hong Kong is 1st, the United States is 5th, and Venezuela is the least free country measured. While this data is important, what actually matters is how economic freedom translates to a better life for those who enjoy it.

First and foremost, unhampered markets allow for resources to meet the needs of consumers in a very personal way. The Fraser Institute describes the cornerstones of economic freedom as
“...personal choice, voluntary exchange, open markets, and clearly defined and enforced property rights. Individuals are economically free when they are permitted to choose for themselves and engage in voluntary transactions as long as they do not harm the person or property of others. When economic freedom is present, the choices of individuals will decide what and how goods and services are produced.”

Imagining an economic system in which the consumer is king should entice and excite us. You and I decide which producers will flourish and which entrepreneurs will become household names based on their merits, not their noble lineage or some other arbitrary designation of power. With our consumption preferences everybody has the freedom to pursue their own ends by whatever purposive action they see most fit.


Economic Freedom and Income Inequality

Economic freedom and income inequality do not have a clear relationship. Research by Bergh and Nilsson (2010) found that 80 countries from 1970-2005 who experienced increasing economic freedom also realized a higher level of income inequality. Is this an unfair byproduct of capitalism or is it an illustration of consumers rewarding producers who meet their needs the best? While it appears to be the latter, many are still blind to this fact and ultimately disregard that each consumer was made better off through voluntary transactions. Wealth is not a zero-sum game and the rich don’t get rich by taking from the poor, instead they create more wealth and value for society as a whole.

Chilean Social Unrest

One important consequence of income inequality is the social unrest it has been known to cause, particularly of late in South America. Chile offers an opportunity to examine the impact of economic freedom on income inequality. The country has been devastated by riots and protests that have been occurring since October 18, 2019 in response to a multitude of social injustices. While Chileans may have every right to be upset, demanding immature economic policy is sure to exacerbate the problems. Political scandal and corruption is rampant all throughout South America indicating many of these problems are not unique to Chile, but what was special about Chile is the last four decades of pro market policy.

Allowing the market to operate with minimal government intervention has helped them become one of the freest and wealthiest countries in South America, especially when compared to their direct neighbors. Chile has significantly higher average wages measured in $USD (adjusted for Purchasing Power Parity). Chile's closest neighbor's wages are almost 44% lower than domestic levels, and Chilean wages will only continue to grow if capital continues to accumulate and human capital is allowed to develop further.

Another phenomenon that both protesters and media appear to ignore is the historic decrease in income inequality that has occurred in the same time frame discussed above. This is illustrated by the country’s GINI coefficient, a statistical measure of the distribution of wealth in a country, where a 0 is completely equal distribution and 1 (100) would be all the wealth residing with one person. In 1990 Chile’s GINI was 57.20 compared to 46.6 in 2017.
 

Whether this reduction in income inequality was the direct result of economic freedom is difficult to determine. More equal distribution can also occur through coercive policies such as high marginal tax rates, yet this damages the country’s overall long-term wealth. Instead, if that money were to be reinvested or saved, capital accumulation would generate positive spillovers for the poorest of citizens. Over time this creates downward pressure on prices as businesses are able to operate with more efficient tools and the population increasingly develops human capital, creating a more productive workforce. While in some cases economic freedom may lower income inequality, in others it may increase it, but that is acceptable as long as everybody (including the bottom 10%) can enjoy the benefits of a wealthier society.

While the GINI coefficient and average wages may indicate that the median conditions are better than neighboring countries, these measurements tell us nothing about those who are worse off. World Bank estimates that Chile’s poorest 10% of the population has 1.9% share of the country's income, higher than all border countries. Even though Chile does not have the largest GDP in the region, the poorest Chileans still have higher incomes than their immediate counterparts.

Country
Total GDP in $USD
Bottom 10% Share of GDP
Bottom 10% Share of GDP  in $USD
10% Of Total Population
Average Individual Share of Income For Poorest 10% Of Country
Chile
$277,746,000,000.00
1.90%
$5,277,174,000.00
1,847,043.90
$2,857.09
Argentina
$624,696,000,000.00
1.80%
$11,244,528,000.00
4,404,481.10
$2,552.97
Peru
$211,007,000,000.00
1.20%
$3,587,119,000.00
3,144,429.70
$1,140.79
Bolivia
$37,509,000,000.00
1.7%
$450,108,000.00
1,119,285.40
$402.14

*All Figures from 2017

https://data.worldbank.org/indicator/SI.DST.FRST.10?locations=CL-AR-PE-BO&name_desc=false
https://data.worldbank.org/?locations=CL-AR-PE-BO



In short, protesters have every right to bring to light atrocities committed by their government. It is wrong, however, to assume that the same government, or any other mix of bureaucrats, can deliver financial freedom through interventionist policy and coercive action. Instead, the focus should be on empowering individuals to pursue their own ends through free exercise in the market. Admittedly this could distort the distribution of income but at the expense of no individual --voluntary exchange is not a zero-sum game. Granting consumers the power to reward the producers who best serve their interests allows for concentration of income, but everybody, regardless of their share of that income, is made better off.
"Only because inequality of wealth is possible in our social order, only because it stimulates everyone to produce as much as he can and at the lowest cost, does mankind today have at its disposal the total annual wealth now available for consumption. Were this incentive to be destroyed, productivity would be so greatly reduced that the portion that an equal distribution would allot to each individual would be far less than what even the poorest receives today.”- Ludwig von Mises, Liberalism, 1927.

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University

Bergh, Andreas, and Therese Nilsson. 2010. “Do Liberations and Globalization Increase Income Inequality?” European Journal of Political Economy, 26(4):488-505.

Friday, November 15, 2019

Why Capital Accumulation is Key to Raising Wages

By Jacob C. Maichel
"There are no other means by which the general standard of living can be raised other than by accelerating the increase of capital as compared with population" -Ludwig von Mises

It is clear that arbitrary minimum wage laws are not only ineffective, but actually detrimental to real wage growth. So what type of action results in increasing wages in the United States, or any country for that matter? The only way to raise real wages is to increase the per head quota of capital invested by increasing capital accumulation. To accomplish this it is first important to understand what is meant by capital accumulation.

Capital accumulation, as explained by Austrian Economist Ludwig von Mises, is wealth that is created and owned by businesses and individuals. This wealth is both saved and reinvested to create further profit. The capital which is accumulated is encompassed in everything that businesses utilize from tools to finished goods, and everything in between. Both individuals and businesses create further profit by loaning out excess wealth (either through direct investment or holding money in traditional savings accounts). It is important to note this accumulation can only occur when more wealth is created and saved than that which is consumed.

With the understanding of how capital accumulation works we can now examine how it will increase real wages. It is critical in this discussion to break down the commonly held belief that wealth and the creation of wealth is zero-sum. It is fallacious to assume the wealthy getting richer makes the poor worse off. Instead this wealth creation makes everybody better off! The standard of living in the United Sates is higher than anywhere else in the world not because our politicians are superior to their foreign counterparts, but instead because of the high per head quota of capital that is invested. This high level of investment has allowed businesses to use the most efficient tools available through capital investments, and this is why United States workers are so productive. Other countries do not lack the intelligence to grow but suffer from inadequate capital needed to drive higher efficiencies which lead to increasing production yields. As the accumulation of capital becomes larger wages will raise as businesses compete for the most skilled workers. Only through the free market can wages increase for everyone, rather than the lucky few who benefit from minimum wage laws. 

The best way for government to encourage capital accumulation is to leave the market alone. Manipulating interest rates and the money supply through the federal funds rate or monetary policy sends the wrong signals to businesses. As the interest rate artificially drops and encourages borrowing individuals will save less and business will take on projects they would have not pursued otherwise. These malinvestments, as Mises calls them, are the direct cause of government intervention and detrimental to the accumulation of capital. Examples of malinvestment are present all over the world, from the United States housing bubble to unfinished sky scrapers such as the Nakheel Tower in Dubai. 

Another strong way to encourage capital accumulation is through lowering tax rates, particularly for corporations and wealthy individuals. Although this may be counter-intuitive for some who think that it is the governments role to redistribute excess wealth to help the common man, this is not the case. In Planning for Freedom: Let the Market System Work Mises states the following:
"United States were in the last decades directed toward confiscating ever-increasing portions of the wealth and income of the higher brackets. The greater part of the funds thus collected would have been employed by the tax-payers for saving and additional capital accumulation. Their investment would have increased productivity per man-hour and would in this way have provided more goods for consumption. It would have raised the average standard of living of common man. If the government spends them for current expenditure, they are dissipated and capital accumulation is concomitantly slowed down."  
The tax payers or businesses are able to save and invest more if they are taxed less, or not at all. Although this does make them more wealthy, it does not make the common man more poor. Instead from a material perspective everybody prospers. By allowing wealth accumulation resources are enabled to flow into their most efficient use, dictated by consumer demand, instead of bureaucrats deciding how money is transferred. The following graphic from Tax Foundation is a perfect illustration of Mises' argument, lower taxes results in increased production and wages.
 Anti-growth policy and propaganda has been incredibly strong in attempting to destroy Austrian Economic ideals, particularly in the recent years. We are continually told that wealth is a bad thing when clearly that is not the case. The most effective way to increase production and the standard of living to promote wealth creation and saving by leaving the free market to it's own devices, unfettered by interventionist policy. A laissez-faire approach does not strictly favor the wealthy capitalist, but rather the interests of the common man.

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University

Monday, November 4, 2019

Why Minimum Wage Laws Are Not the Answer

By Jacob C. Maichel
"Minimum wage laws [are] one of the most effective tools in the arsenals of racists everywhere"
-Economist Walter Williams

Minimum wage laws are likely some of the most misguided public policies that exist in the United States. I am incredibly sympathetic to the plight of the poor, but supporting a government mandated price fixing scheme not only creates distinct winners and losers but promotes very perverse outcomes for many vulnerable groups. Furthermore, the idea that a minimum wage is the key to lifting people of out poverty is clearly a logical fallacy. Why not make it law that everyone must be paid no less than $2,000 an hour? Then everyone would make over $4,000,000 annually and poverty would be abolished, right? Well no, instead the only people who would remain employed are those who create at least $2,000 of value an hour for their employer, a small fraction of the workforce. For businesses to be able to support this ludicrous minimum wage they would have to significantly reduce the workforce, likely with large increases in automation. Although the U.S. federal minimum wage is not $2,000, but instead $7.25, these artificially inflated wages do raise the incomes of some low skilled workers at the expense of eliminating the income for all who can not find work as a result. 

Generally I think people who advocate for minimum wage laws mean well but likely have a fundamental misunderstanding of the topic. Pleas for a living wage are not new by any means. Saint Thomas Aquinas believed that commodities (farm products) should demand a fair price and workers should be paid a sufficient income to support themselves. In this time period, however, this was unachievable as the majority of people lived very minimally and often survived off of their own food production. The idea of a "just wage" or "living wage" really gained a resurgence of popularity during the industrial revolution. Social reformers of the time believed that it would be more beneficial for children to be in school, rather than working for low wages in dangerous conditions. This belief led to the creation of the first minimum wage laws in the country. 

In 1912 Massachusetts passed the first minimum wage laws the U.S. had ever seen, although they were only pertinent to women and children. This was largely in response to a fear that unskilled workers who were payed low wages were taking the jobs of adult men. The idea behind the law was that by forcing employers to pay unskilled workers similar wages to skilled workers employers would opt for the latter, protecting the working man from competition. Many states followed Massachusetts' example, but these laws were shortly lived as the United States Supreme Court ruled them unconstitutional for violating the principle of freedom of contract.  The repeal of these laws was largely ignored as the country prospered in the 1920s. High demand for workers coupled with tightened immigration allowed for competition within the market to allow wages and working conditions to naturally improve with no coercion from outside forces. 

In 1929 the unemployment rate in the U.S. was roughly 3.14% compared 24.75% in 1933. As wages across the nation began to decrease the desire for a guaranteed minimum wage again resurged. Unfortunately, the underlying ideology for the justification of the laws seemed to shift from getting children out of the workforce to instead guaranteeing a "living wage" to those who were employed. What is misunderstood about this situation is that even though many with jobs were making less, if wages remained where they had been in the 1920s many more people would have been without a job. In 1933 the New Deal's National Industrial Recovery Act (NIRA) promised a minimum wage. This was largely a failure as it only increased the wages of unskilled workers, who already struggled to find gainful employment, not the wages of skilled workers who already were paid above the minimum wage. Rather than stimulating recovery, it appears to have made it harder for unskilled laborers to find work. The NIRA lasted only two years before it was deemed unconstitutional as well in 1935. It was replaced by the Fair Labor Standards Act in 1938 and since then the U.S. has had a minimum wage. 

The Fair Labor Standards Act did not impact the labor market in a significant manner. Once the U.S. began to militarize in the 1940s the wartime economy increased wages far above the minimum wage. It remained this way until 1956 when Congress significantly increased the minimum wage and authorized the U.S. Department of Labor to conduct surveys to increase compliance amongst employers. Teenagers have always had higher unemployment than adults but after 1956 there was an incredible proliferation in teen unemployment, illustrated in the graph below. 

Teenagers typically have the least amount of marketable skills other than the unique value they possess of being able to work for low wages. Without this advantage many lost their jobs to more skilled laborers in the short term and the long term impact of automation is starting to be realized more and more. 

Perhaps more alarming is the power these minimum wage laws grant employers to discriminate in hiring. As wages increase and businesses reduce their workforce, this creates a surplus of individuals looking for employment. Economist Thomas Hall in Aftermath: The Unintended Consequences of Public Policies explains very clearly that discrimination is very difficult when the amount of applicants is similar to the amount of job vacancies determined by the market. As this surplus increases it empowers employers to increasingly choose employees based on personal preferences, including race. Historically, black teens have had a higher unemployment than their white counterparts but after the 1956 wage increases it became exceedingly worse. This can be seen in the following graph depicting the difference in unemployment rates in black and white teenagers before and after the 1956 wage increases. 

It is hard to deny that minimum wage laws are clearly government-mandated price fixing schemes that create distinct winners and losers. It's ironic that labor unions and politicians that call for higher minimum wage laws forget why they were enacted in the first place; to force unskilled laborers (largely children) out of the workplace. This has greatly impacted the most vulnerable groups of workers, namely teenagers, and steals valuable experience they need to be successful in gaining future work. Although many people who support these laws have good motives, the road to hell is surely paved with good intentions. Supporting these laws seem good in theory but in practice they not only promote a slew of dangerous outcomes, but can explicitly allow racist hiring behavior. 

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University

Thursday, October 17, 2019

Trucker Labor Shortage


by Jacyn Dawes, Graduate Assistant with the Gwartney Institute



Trucks have fascinated kids for many years.  Their size, noise, and colors probably play an important role.  The creation of Transformers in the 1980s, with Optimus Prime as the leader, only enhanced the fun.  Optimus Prime brought a cool new spin on a Class 8 truck, which might have inspired some kids to grow up and be truck drivers themselves.  Truck driving was a skyrocketing profession during the 1900s.


Unfortunately, in recent years the bulk of those drivers are reaching retirement age with few to fill their shoes.  The average age of a truck driver is currently 49, putting this industry seven years above the average worker in the U.S.  Aside from the strain truck driving can cause mentally and physically, there are a few recent factors that are affecting the truck driver work pool, including regulations and money.

The trucking industry remains one of the most heavily regulated industries in the world.  In the United States, the government has added a mandate recently that has to do with the electronic logging device, also known as an ELD.  This mandate moves from an open platform of hour of service recording, such as paper, to a strictly electronic form.  This keeps companies more accountable for the hours that their drivers are working to minimize the fatigue and stress while on the road.  The ELD mandate does come with difficult restrictions that drivers must meet or be forced to turn off their trucks.

Along with the recently added ELD mandate, 2019 has been a particularly rough year for the trucking industry and many experts are concluding that the industry is currently in a recession.  The rates that trucking companies are paid to haul freight have dropped significantly, but costs have not.  This market is making it hard for trucking companies to pay drivers fair wages.

HVH Transportation was one of many examples of this when they shut down their business including fuel cards, leaving 324 truck drivers stranded.  This has caused many to look more into the possibility of autonomous trucks, but the fact remains that this industry is far from making it without drivers in the trucks.  Freight like liquid in totes or hazardous materials require special endorsements and certifications, paperwork that needs to be completed and check at locations, and the inevitable truck breakdowns are just a few examples of this.

This new mandate combined with the decreasing prices, stable costs, and ever-changing labor demographic all play a role in the truck driver shortage.  In years to come, it will be interesting to see if the trucking industry can make the jobs seem more attractive to a younger labor force.  There is a chance that autonomous trucks will be able to make the job of a truck driver easier, giving them time to look for their next haul and keeping their fatigue low.  After the difficulty Optimus Prime faced on his home planet Cybertron, he might agree that while autonomous driving is a possibility in the near future, there will still be a need for human presence. 

Black, T. (2019, Jul 23).  U.S. Truck Driver Shortage is On Course to Double in a Decade.  Bloomberg.  Retrieved from https://www.bloomberg.com/news/articles/2019-07-24/u-s-truck-driver-shortage-is-on-course-to-double-in-a-decade
Freight Waves (2019, Aug 28).  344 Unit Truckload Carrier Suddenly Shuts Down, Leaving Drivers Stranded.  Retrieved from https://www.benzinga.com/news/19/08/14339776/344-unit-truckload-carrier-suddenly-shuts-down-leaving-drivers-stranded#/targetText=344%20Unit%20Truckload%20Carrier%20Suddenly%20Shuts%20Down,%20Leaving%20Drivers%20Stranded&targetText=HVH%20transportation,%20a%20344%20unit,their%20fuel-cards%20shut%20off.
Kar, S. (2019, Jul).  Truck Drivers are Aging… Or Are We Entering a Golden Age in Trucking?  Freight Waves.  Retrieved from https://www.freightwaves.com/news/commentary-truck-drivers-are-aging-or-are-we-entering-a-golden-age-in-trucking
Kilcarr, S. (2017, Sep 20).  Demographics are Changing Truck Driver Management.  Fleet Owner.  Retrieved from https://www.fleetowner.com/driver-management/demographics-are-changing-truck-driver-management
Strickland, Z. (2019, Jun).  Trucking Rates Have Fallen Back to 2017 Levels, But Costs Have Not.  Freight Waves.  Retrieved from https://www.freightwaves.com/news/trucking-rates-have-fallen-back-to-2017-but-costs-have-not
TCI (n.d.).  Driving Regulations.  Retrieved from https://www.tcicapital.com/tci-insights/driving-regulations-trucking-companies/