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

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

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/

Personality and Efficiency in Business

by Jacyn Dawes, Gwartney Institute Graduate Assistant 

When working in a work group or school group, there are often many personalities that come into play.  It can be hard when someone has a very different personality than yourself, but it can often improve the group’s overall work.  This can be seen in one of our favorite childhood stories, Winnie the Pooh, which is full of characters who are strikingly different.  It is easy to point out the flaws in our own coworkers, but it is possible to see the good each person can bring to the project, even by examining their flaws from a different perspective.  Let’s take this idea and apply it to some of the main characters from Winnie the Pooh. 

We shall start with the character that the stories are named after, Winnie the Pooh himself.  Winnie the Pooh comes off as naïve, complacent, and unaware of consequences.  But with enough motivation and a couple of reexplanations, Pooh maintains an upbeat attitude and has great people skills. 
Piglet is quite the contrast to the other big personalities in the story.  Piglet is timid, agreeable, and quite anxious.  If you provide Piglet with enough positive reinforcement, however, you will find that they are intelligent and can use that to be a great planner and problem solver. 

Tigger is the classic example of an extrovert, literally bouncing off the walls with energy.  This can make him a little too overconfident, impatient, and he finds it difficult to learn from past mistakes.  With someone to help Tigger color in the lines, he can be very resilient and resourceful, giving him an entrepreneurial mindset in a group. 

Rabbit brings an extraordinary amount of organization to the table with an eye for detail.  Situations can begin to be difficult if things are not going according to plan or if Rabbit feels someone is invading their space.  Keeping Rabbit in projects that require structure is a great idea and helping them delegate work to others can relieve some of their stress. 

Eeyore is probably the most underrated team member.  Their gloom and doom attitude can bring down the group moral, and they often feel like an isolated member.  But Eeyore can be very observant of other members in the group and they are willing to challenge group ideas, which has the potential to make that idea even better.  The devil’s advocate approach can balance out the risky optimists in a room. 

Christopher Robin is the character that brings this all together, he is the one whose imagination started these stories!  Often in the leadership position, Christopher Robin is well rounded in intelligence, modestly, compassion, and courage.  As long as Christopher Robin is okay handling disagreements with and amongst other members, and can acknowledge that they will happen no matter how hard you try not to let them, he will continue to be a great addition to any team.

This is just a brief synopsis of a few of the main characters.  There are many different personality types, and all bring both positive and negatives to the table.  Gaining a better understanding of each person in your group, whether it be in school or at work, will allow you to use those positives to your advantage and mitigate the negatives.  “A little consideration, a little thought for others, makes all the difference.” – Winnie the Pooh

Dodd, G. (2015, Jul 16).  How Winnie the Pooh Can Help You Understand Your Colleagues.  Retrieved from https://www.careeraddict.com/how-winnie-the-pooh-can-help-you-understand-your-colleagues
Eichner, B. (2014, Oct 19).  Understanding Your Team: Who’s Who in Your Hundred Acre Wood.  Retrieved from https://recruitloop.com/blog/understanding-your-team-whos-who-in-your-hundred-acre-wood/
List of Winnie the Pooh Characters (n.d.).  Fandom.  Retrieved from https://pooh.fandom.com/wiki/List_of_Winnie_the_Pooh_characters

A Catholic Perspective on Development

By Jacob C. Maichel

Development is a word that gets thrown around a lot and seems to get conflated with progress, or at least reduced to a strictly economic initiative. While there is an economic aspect, development needs to occur on many more areas to allow humans to flourish. Such areas include religious freedoms, the right to share in building society, the organizing and forming of unions, and the ability to take economic actions. These other aspects are just as, and likely more, important than meeting our material needs and wants. Without the ability to enjoy these privileges we are deprived of fulfillment. Pope John Paul II was very clear in Sollicitudo Rei Socialis that underdevelopment in any of these areas is detrimental to the human condition, as is over development that leads to consumerism and unfulfilling desires.

Four decades ago Pope John Paul II urged us to consider our relationship with goods, and perhaps we should have listened better. I think we have come to a point where goods are meant to simplify our lives and make things as easy and mindless as possible, whereas they should be tools to not only enrich our lives but further us along in our vocations. Pope Paul VI in Populorum Progressio offered us a new framework with which to view development, calling for the economies of the world to serve all mankind rather then the few. What Paul VI and John Paul II refer to as "authentic development" puts humanity at the center of development, serving as a morally preferable guide to growth. Seeing growth as purely economic, focusing only on GNP or GDP, completely ignores the spiritual dimensions of human existence. This disregard for the human can only be overcome with solidarity, not only between communities, but nations themselves.

Relationships among nations is a chief concern in achieving authentic development. Development is something that we must work together on, a common goal for all of humanity. The status quo of giving massive loans by multi-government organizations is actually hampering the growth of developing nations. Countries take on massive loans to fund all types of economic development, but then soon are bogged down by interest payments. To continue to improve or even maintain the quality of life more loans continually are taken out as countries struggle to service existing debt. For example, in 2017 $1.3 trillion was given in the form of loans or investments to developing nations while $3.3 trillion came back out to repay debts. Perhaps rather than just dumping money into countries we should allow them to create their own micro-financing institutions that support local small- to medium-sized businesses. Many entrepreneurs in developing countries lack access to important capital and are not large enough to attract foreign investment or traditional bank loans. Giving people in developing countries the tools to grow and support their own communities shows much more solidarity than usurious lending.

In addition to concerns about the human person, the largest concern for authentic development is environmental impact. Sollicitudo Rei Socialis reminds us that God has called on us to use the resources that have been gifted to us in this life. In Genesis we are called to live with creation and are granted dominion over the creatures Earth. In the parable of the talents we are again reminded to use our abilities and be fruitful with the limited resources God has given us. John Paul II gives us 3 important considerations regarding alteration of the environment:

• Awareness that creation is not to be used however one wishes. Purely economic justifications are not sufficient to destroy creation.
• Understanding that resources are limited. Not everything we have been given on this Earth is renewable and acting as such endangers future generations. Although we have been able to stay ahead of catastrophe with technological advancement everything has a natural limit.
• Realization of the impact of development on the quality of life in developed zones. A great example of this is pollution that harms the health of entire populations.

This understanding of our relationship with the environment goes much further than trying to internalize negative externalities through regulation. Only when we comprehend that we are failing to act as good stewards of creation can we grasp the true severity of environmental abuse.

The solution to achieving authentic development is beginning to think of it as a human problem, rather than a technical problem. Seeing development as purely a technical problem that we can, through our own social, political, and technological means, solve removes the human from the equation, leading to very shortsighted and damaging pseudo-solutions. Traditional Church teaching offers knowledge that is not rooted in liberal capitalism or Marxist collectivism, but rather a response based on thousands of years of human history and divine revelation. By respecting cultures and putting the well-being of the human first we can overcome the detriments of purely economic development and instead see development as the new word for peace, just as Pope Paul VI called for back in 1967.

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

Economic Understanding of Prison Gangs

By Jacob C. Maichel

To the average person prison gangs seem like the epitome of chaos. Prison customs and beliefs appear completely irrational to the average person, however when understood through the rational choice paradigm we can begin to understand this robust illicit economy. There are two components to rational choice theory that help us interpret inmate actions. First people are self centered and pursue what they value. This does not mean that people do not help others as some pursue altruistic ends they find valuable. The second point is that individuals respond to changes in costs and benefits. If an action gets more costly people will do less of it, and vice versa. Subjective preferences help people decide how to weigh costs and benefits, and can not be ignored when looking at peoples decisions. It is not helpful to ignore inmates preferences just because we do not share them. Economics sheds light on how people satisfy their unlimited desires with limited resources without naively assuming only money matters. Prison gangs have not always been present in the American penal system so understanding the factors that give rise to their growth is key to seeing prisoners as rational actors. 

One explanation for prison gangs is the demand for services that they provide. Governments exist to provide many vital services to the people. Three of these services allow our markets to operate; defining private property rights, promoting voluntary exchange, and encouraging collective action. Those in prison lack formal access to the governance mechanisms that we enjoy. The absence of a  legitimate government allows for organizations or norm based systems to fulfill these needs. Historically decentralized norms have been sufficient to self govern prisoners prior to the rise of prison gangs. 

Norms help to identify what is socially permissible behavior, such as holding the door open for others. There is no official law to decide on these informal rules but instead they develop over time, an inexpensive way to govern. This style of governance works until populations get too large and it becomes too costly to remember all the information of what is and isn't acceptable. Organization can then arise to solve many of the problems norms address, but through centralized processes. 

Prior to the 1970's the set of norms that existed in the US prison system is generally referred to the "convict code", based on the ideals of never helping officials while respecting other inmates. These norms arose as prisoners had to find ways to engage in mutually beneficial behaviors with strangers, without this contraband markets would be nonexistent. Prior to prison populations proliferation in the 1960's decentralized punishment was easy and served as a powerful way to discourage dishonesty. While populations got larger they also became younger and more violent, breaking down the effectiveness of the convict code.

These shifting prison cultures derailed the convict code and paved the way for the rise of prison gangs. Gangs do not randomly form and instead fill power voids by creating mutually beneficial bonds between gang members. When normal governance does not work to protect private property rights organizations can instead offer protection and this happens outside of prison as well (historically the Italian Mafia is a strong example). David Skarbek in Social Order of the Underworld identifies The Mexican Mafia as the first prison gang, comprised of Hispanics largely from California street gangs. As they moved among prisons in California their influence spread and other gangs formed for protection and competition in illicit prison markets. 

Another factor leading to the formation of gangs is the increasing demand for contraband. According to the California Department of Corrections and Rehabilitation in 1959 26% of inmates reported a drug addiction compared to 82% in 1978. This large increase was caused in part by president Nixon's war on drugs which restructured many sentencing practices. These inmate consumers offer a massive profit motive for prison drug dealers who must be able to deter opportunistic behavior and ensure quality. Due to the inherent dangers of dealing contraband in prisons gangs have a comparative advantage in selling drugs over the individual. Gangs are very successful at making credible threats of violence to deter opportunistic behavior while enjoying extensive trafficking networks, benefiting from underworld economies of scale. 

Prison gangs have many trading problems and solve them in a similar fashion to medieval towns. Medieval merchants typically were unsure of the trustworthiness of other traders, unaware of future transactions, and had no way to tarnish the reputation of dishonest traders. This was overcome with the community system where individual reputations were based on the reputation of their respective communities. This encouraged impersonal exchange and monitoring the behavior of your peers. Prison gangs serve the same purpose by facilitating trade with unknown partners based on gang reputations. The free rider problem arises in this situation where people will try to falsely claim membership for benefits. For this many different signals exist to distinguish members from non members, handshakes and tattoos being strong examples. 

With the large prison populations and competing factions it should maybe come at no surprise that gangs have a strong foundation in race. Race is something that is very easy to identify and incredibly difficult to change. In a place where everyone is dressed the same 24 hours a day race offers a cheap method of identification. Groups could have formed around other similarities, such as religions. Alternative methods are much more difficult to learn and identify, making race one of the strongest ways to distinguish communities. Inmates with no previous racist behaviors are thrown into a segregated world and have to adapt or suffer. Skarbek, again in Social Order of the Underworld, suggests that new inmates are often approached within days of their arrival to inform them of the rules. 

Prison gangs today play an important role in penal life. Gangs allocate valuable resources, such as recreational space. Some areas are preferred over others for quality of equipment or strategic reasons. Gangs often see violence as an effective way to resolve conflict over the use of such common areas. This further incentivizes gang membership for individuals to help time pass more comfortably. Prison gangs are also in charge of their members behavior, and it is in their best interest to maintain a healthy collective reputation- even if that means being feared.  Punishment has internal mechanisms inside of gangs to resolve conflicts and disputes between individuals as well as in illicit markets. Due to the existence of these markets and the profitability of trade gangs have an incentive to actually minimize violence. Violence attracts attention and hinders ability to carry on normal operations, making nonviolent solutions the most profitable. 

While gangs do provide many of the same functions as mutual aid societies they undeniably engage in a number of predatory acts as well. Rising populations and changing demographics have eroded the effectiveness of the convict code and gave rise the status quo. Gangs did not just come about, but rather met the demand for governance while also increasing the efficiency of the contraband market. Understanding supply and demand factors helps us understand why prisons gangs exist and why rational actors will engage in seemingly senseless acts. Afterall, it is not from the benevolence of the gang member that inmates expect their contraband, but from their regard to their own self interest. 

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

Opportunity Cost of Thought

By Jacob C. Maichel

Opportunity cost is one of the most fundamental concepts in economics. Opportunity cost can be thought of the next best alternative to a given choice. Resources such as money, production inputs, and time are scarce. So when we decide to spend our time and money to go a movie instead of staying home and enjoying a book, our opportunity cost is the book we have foregone reading. Once that time and money is gone it cannot be spent again. 

So why is opportunity cost so important in economics and life? Limited by scarcity of resources we have to find ways to satiate our unlimited desires. Opportunity cost not only helps allocate resources but also can give insight into peoples values. The choices we make reveal our preferences. Recently, I have begun to fully understand how encompassing opportunity cost truly is. Every second we make decisions with our time and our thoughts. While reflecting on my relationship with technology (check out my post about limbic capitalism) I have began to really question my relationship with my phone. This brings me to the point of this blog; the opportunity cost of thought.

We in the United States and beyond have become attached to our phones. This attachment is so deeply ingrained that 44% of people sleep with their phone, and unfortunately I am one of them. Not surprisingly younger people (ages 18-24) are typically the most attached to their phone.

What is even more alarming to me is the fact that 81% of those ages18-24 check their phones even if they do not hear an alert. When we sit and constantly think about the next update, what are giving up? Could we think about a new business? Some deep question that has been troubling us? Perhaps we would be able to engage with the stranger next to us rather than standing awkwardly scrolling through forgettable posts. 

Phones help to dull our mind and remove us from the real world. Books were not only a source of knowledge; they were a form of escape from the daily grind. With this in mind I don't think it's a stretch to say that reading books is more mentally productive than social media. Over seventy-five percent of internet users are social media users - all of whom may be sacrificing productive thoughts. While not all social media consumption is negative, is it still more beneficial than the real world?

Another concern is whether social media itself is a disincentive to conversations. Major social media platforms have become a crutch for getting to know people, which is not a bad thing in and of itself. The danger comes when these platforms create incentives to predominately socialize virtually. Personally, I find myself checking on my friends less and less as I see their continual updates on social media. I think I know how people are doing and what they have been up to, but the truth is we have a tendency to present only the good parts of our lives on social media. This can give our friends a false confidence in our well-being. It is ironic that statuses are meant to create conversations but could be doing the exact opposite. It appears the more connected we get, the more alone we feel.

The most troubling thing to me, however, is what we give up in our meaningful relationships with other people. People use their phones during conversations in real life, hide texting during class, complain about their phone being dead or not around every day. These new norms have transformed interactions with not only strangers but the most familiar people in our lives. An example of this is the family who all sit on their phone during dinner, or perhaps the parent who watches their phone throughout their child's soccer game. These actions would have been not only unthinkable but socially odd in the not-too-distant past.

Actions speak louder than words. Many people wouldn't say that they value their phone over other people close to them, but it happens everyday. It is hard to completely remove yourself from someone you care about but marginally distancing yourself from others in social settings can have real world impacts. Why is it so easy to pay so much attention to our phone and make us struggle to forget it in daily conversations? Even car rides with family and friends are precious moments that mean more with undivided attention. If actions highlight our individual preferences we should start to realize what it means when we snap chat and text through our real world conversations. 

We have to allocate our scarce time on this Earth with the people we are blessed to share it with and I think we take it for granted. Delusions caused by technology have hampered our ability to analyze the costs of neglecting our relationships, promoted by technology that preys on our attention. While this doesn't mean that we all need to ditch our phones, maybe forgetting it at home is a good thing. Time truly is the most non-renewable resource that there is and we need to consider the trade offs of devoting our precious moments to technology.

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

Regulation's Impact on Rationality

By Jacob C. Maichel

Economists have a tendency to throw together models and talk about the decisions of rational actors inside of market places- but is that even possible? It is clear to some that aggregations of decisions reflect the best available knowledge, but is that actually true? Are there perhaps ways to allow for more rational decisions with government help?

Behavioral economics argues that people rarely make theoretically optimal decisions. In fact, they assert that individuals react more based on heuristics (shortcuts) than rational processes. Experiences aggregate to form heuristics, or biases according to behavioral economists; these heuristics, not economic signals, explain behavior in the marketplace.

 Some of the most important biases I want to point out are:

Hindsight bias- A situation in which people put unrealistic belief in an event occurring because it has happened before. A classic example is seeing a shark attack on the news and fearing a similar situation when you travel to the beach (despite the statistical basis of that fear).

Overconfidence bias- The overconfidence bias is not only dangerous, but likely the most common. Those who suffer from this often think they know the markets better than most. They believe they have some system or knowledge that makes them immune to market forces. They highly overestimate their ability and/or knowledge.

Confirmation bias- This bias asserts that individuals collect, or recognize, only information which confirms their initial position; it causes a discounting of true information.

Optimism bias- The belief that everything will always have a good outcome.

Status Quo bias- Individuals have a preference for their present state, despite a change which would improve their state.

We experience these biases everyday in our lives without realizing it. It gets increasingly more dangerous when these biases begin to affect us in our investing strategies. I do not think it would be a stretch to argue that many of these biases are related to a lack of information available to the individual. 

For example, regulation tends to impose transaction costs on industries which prevents the open entry and exit we would see in a free market. However, history argues that opinions of regulation should be approached with more nuance. For example, particular  regulations in finance, which has an incredible amount of existing regulation, may actually benefit the consumers.

Let's look first to the Great Depression to help shed some light on the topic. Before the stock market crash of 1929, almost any investor was allowed to engage in margin trading. This meant that investors started to purchase very overpriced stocks at the advice of trusted "financial advisers". The average investor did not have the ability, or likely the desire, to monitor his investments. When things started going south in financial markets, the lack of knowledge became apparent.

I think particular banking and corporate disclosure regulations probably help us to overcome some of these biases by increasing the information available, or at minimum make better decisions. Admittedly there is a significant amount of regulations that are not needed, but some are undeniably beneficial. The Securities Act of 1933 and 1934 made the marketplace significantly more transparent. Investors got access to better information on the markets they were trading in and the companies they were investing in. With both of these Securities Acts came the creation of the Securities and Exchange Commission (SEC) which functioned as an authority in financial markets. The SEC also gave people the ability to file injunctions through them to prosecute negligent companies.

The overconfidence bias tricks us into thinking that with all this information, we can make the best decision. But, I think that it is better than the environment we had 90 years ago. Without reporting and transparency, it would be a result of luck to find any success in the market. Companies now must be even more particular with reporting and it is easier than ever to see how leveraged companies are. Leverage helps to indicate how much of the business is funded through debt rather than equity. Highly leveraged companies have to deal with large interest payments leading to decreased financial stability, possibly insolvency. While the overconfidence bias is not removed, investors are more likely to draw on relevant information as opposed to assuming it.

Banks are also safer than they have been historically, and more profitable since the repeal of Glass-Steagall. With the creation of reserve requirements and FDIC insurance, everyone was able to put more faith into the banking system. Even small town banks now can meet FDIC requirements and guarantee whole communities safety. I think this is vital for two reasons. First it encourages economic strength in rural areas by promoting savings within the community. Second, and perhaps more important, it offers a source of capital that is absent otherwise. Large branch banks have moved away from small business loans and instead opt for more attractive larger investments. You can see this phenomenon in the figure below from the FDIC:

The size of the average lender caused the massive consolidation of banks that we experienced in the past 15 years. Rural banks have loan officers that are part of the community, changing the social and economic incentives behind granting loans.

While these changes shifted the incentives within the banking system, some economists would argue it perverted the incentives. Their concerns are not without grounds, but I do believe that the additional regulations improved the existing environment. Good economics is comparative economics.

Once again, I admit, that I am not a fan of most regulation. I do, however, believe that there are some regulations that directly address behavioral flaws in investors. When viewing regulation maybe we should quit thinking about people as rational actors in economic models and perhaps rather think about what type of regulations may enhance our lives.

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

Limbic Capitalism: Article Review

By Jacob C. Maichel

I have been reflecting a lot on technology and it's role in our lives, as well as how our consumption of the internet and its impact on our social relationships. I recently came a across an article by David Courtwright, How 'Limbic Capitalism' Preys on Our Addicted Brains, which was a thought provoking read and I suggest you check it out. If you do not however I plan to discuss it and share some thoughts.

The first thing I found interesting was the concept of "limbic capitalism," a fresh use of capitalism to explain pyscological consumption. I do not want to discuss the traditional idea of capitalism in this review, strictly this specific nuanced interpretation provided by Courtwright. These same advances which provide an abundance of conveniences also pervert previous business models by promoting excess consumption, often leading to addictions. Such societies are run by governments or underground organizations whose products are focused on consumer's biological limbic system. The limbic system influences behaviors such as motivation and emotional responses and, yes you guessed it, addiction.

Courtwright next takes a step back to examine historical examples of simplified understandings of vices, exemplified by Victorian-era reformers. These reformers are said to have thought vices were dependent on the local culture, as well as noticing that all vices seemed to have a few things in common. The first was monetizing vices is often big money, the second is that vices are often linked. Rarely is a brothel without booze or an opium den far from a casino, Courtwright claims.

Contemporary neurologists now confirm the Victorian beliefs on vices through our understanding of how dopamine promotes pain and pleasure. These subconscious responses condition people’s reactions to similar stimulation in the future. What this means is that people tend to do what their brain tells them is rewarding even if they know it is bad for them. This is why addicts continue to crave something even after they do not want to do it anymore, in a sense, your brain is stuck
So what does all of this have to do with technology? It is undeniable the amount of luxury and conveniences brought by technology, however, understanding it in the context of limbic capitalism is an interesting thought (the irony of this being typed on a computer is not missed on me). Courtwright states:

The more rapid and intense the brain reward they [the product] imparted, the likelier they [the consumer] were to foster pathological learning and craving, particularly among socially and genetically vulnerable consumers.

Internet technology and products that evolved based on its existence were developed at unprecedented rates since its inception. This greater accessibility and affordability of the internet has made new products available, good and bad, bringing with them new vices and addictions. Think of the gamer who now sits down slurpin' Mountain Dews all day, or the average person who scrolls through thousands of tweets. Not only can entrepreneurs exploit new vices that come by chance but rather create and market products by playing into addictive behavior to increase demand. While I am not sure if he is right or wrong on this question I can't think of a video game that is made to be played for 15 minutes a day.

I do highly recommend giving the entire article a read. The discussion on both the monetization of addiction and how technology fits in is very thought provoking to say the least. My concern is how these psychologically damaging practices which target our limbic system are omnipresent in our daily life. It is without question that technology has brought tremendous advances in many aspects of our lives, such as communication and the spread of information. The unanswered question is this: although we are reaping the benefits at what cost to our personal relationships and psycologial wellbeing?

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

Who Holds the Trump Card: Federal or State Goverments?

by Jacyn Dawes

Since the 1940s, Spades has been one of the most popular card games.  The premise of the game is to estimate how many hands you are going to win before the round begins.  The highest card wins, with the ace being the highest card, unless someone trumps it.

As the name suggests, spades are the trump cards.  Even if everyone plays a diamond, including the ace of diamonds, someone could swoop in with the two of spades and win the hand.  Whether it be card games or the classic “Go ask you mom” line, this idea of the trump card exists in our everyday lives.  One of the large-scaled examples of this is state versus federal laws.  Often, individual states can make decisions in their laws that contradict existing federal laws.  When this happens, who holds the ‘trump card?’

Some laws that the federal government handles include civil rights, immigration law, and social security.  Letting states implement their own laws is a way for the people to have laws that better represent their rights, especially since there are fewer people those laws represent.  Some state-decided topics include criminal issues, family matters, real estate, and business matters.  Local laws take this one step farther.  This does mean that there are many instances where the states implement a law that contradicts the government.  The big topic that comes to mind is marijuana.

More states are choosing to legalize marijuana, while the federal government has yet to make that step.  When situations like this happen, the federal government does have the king of spades card, called the Supremacy Clause.  As a part of the U.S. Constitution, the goal of the Supremacy Clause is not to tell states what laws to make, but rather give the federal government the ability to have the deciding vote when laws contradict.  This raises the question: why, then, are states allowed to pass these laws in the first place?

A lot of this can be directed back to enforcement.  Enforcement can cause a lot of gray area with the Supremacy Clause because that enforcement falls back on the federal government.  While states do not have to enforce the laws, they are also not allowed to stop federal authorities that are.  There is, however, one card that can trump the king of spades.  If the laws contradict, those under prosecution could take matters to the courts and attempt to declare the law unconstitutional.  The rights listed in the constitution hold the ultimate trump card, the ace of spades.  Overall, states have the ability to give their people rights that better represent them.  But at the end of the day, we are one nation.  As long as those laws remain constitutional, the federal government does have the deciding vote.

If you want to research federal and state laws, regulations, and court decisions, please visit https://www.usa.gov/how-laws-are-made.  On their website, they have links to many different resources such as the Code of Federal Regulations and the Law Library of Congress.

Bicycle (n.d.). How to Play: Spades.  Retrieved from https://bicyclecards.com/how-to-play/spades/

Daunt, L. (2014, Mar 30). State vs. Federal Law: Who Really Holds the Trump Card? Huffington Post. Retrieved from https://www.huffpost.com/entry/state-vs-federal-law-who_b_4676579

Diffen (n.d.). Federal vs. State Law. Retrieved from https://www.diffen.com/difference/Federal_Law_vs_State_Law

Levy, R. (2013, Mar 18). Yes, States Can Nullify Some Federal Laws, Not All. Cato Institute. Retrieved from https://www.cato.org/publications/commentary/yes-states-can-nullify-some-federal-laws-not-all

Roberts, C. & Martin, R. (2018, Mar 15). What Happens When States Defy Federal Laws. NPR.  Retrieved from https://www.npr.org/2018/03/14/593398902/what-happens-when-states-defy-federal-laws

Striepe, B. (n.d.). What Happens When a State Law Contradicts a U.S. Federal Law? Retrieved from https://people.howstuffworks.com/state-law-contradicts-federal-law.htm

USA Gov (n.d.).  How Laws are Made and How to Research Them.  Retrieved from https://www.usa.gov/how-laws-are-made

Jacyn Dawes is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University

Where Did We Get Time Zones?

By Jacob C. Maichel

In the 1800s time was very loose to say the least. People could not move faster than the speed of horses so schedules were pretty tentative, which wasn’t a big deal in their relatively slow moving lives. As the United States began to industrialize and develop factories, steamboats, mail, etc time needed to be more uniform inside of towns. Each town decided on its own official town time creating thousands of unique time zones across the United States. Michigan, for example, had 38 different times alone! 

 With the invention of the railroad everything changed as the country opened up. A trip from New York to Chicago that had taken a month by horse could now be completely in two days on a train. Variations in times was not only a scheduling nightmare but ultimately a safety hazard as trains sometimes hit each other due to timing confusions. The railroad’s solution was to make each train its own traveling “time zone”, so that no matter where it went it was based on the time where the line was based out of.

During this period William F. Allen was the secretary general of the time convention and had no shortage of people reaching out to him pleading to change the outdated time system. By the 1870s trains were common across the country as the United States shifted from a collection of towns to one uniform country. In the 1980s the scientific community struggled with meteorologists not being able to collaborate on anything, such as times of shooting star sightings. Allen decided to take on the task of standardizing time as we know it by splitting the country into zones.

Allen begins by going to the Boston Railroads with the idea. They promptly deny him stating they only set time via the Harvard observatory. Rather than admit defeat Allen simply convinces the Harvard observatory to adopt his plan and soon after the city of Boston follows. Allen next approaches the city of New York arguing time may become known as Boston Time if they reject him, which was all the convincing needed to get New York to agree.

As more cities began to adopt the plan there was push back. One preacher was so against it he was quoted saying “we follow God’s time not railroad time” and then smashed his watch on the pulpit. Another notable objection came from the attorney general who stated that government buildings go off of D.C. time. However, enough States adopted Allen’s plan that his objection was ignored. The plan continued and Allen’s team mapped out 4 different time zones that we are familiar with today.

At 12 noon on November 18, 1883 all time is set to become standardized. They used telegraph lines to notify balls across the country of the exact moment to drop and start counting time. These dropping balls eventually give way to the traditional ball dropping in New York every new year. Though there was still some disagreements in 1918 standardized time was officially adopted by the U.S. Federal Government, and in 1966 they abolished all local times. 


References

Helm, Sally, Host. Episode 918 “The Day Of Two Noons”. Planet Money, NPR, 7 June, 2019. https://www.npr.org/2019/06/07/730727038/episode-918-the-day-of-two-noons

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

USDA move to KC could benefit Franklin County

by Levi A. Russell
Originally published by the Ottawa Herald on June 26, 2019

Big changes are coming to the USDA and to the Kansas City metro area. Last week, Secretary of Agriculture Perdue announced that two major arms of the U.S. Department of Agriculture, the Economic Research Service (ERS) and the National Institute for Food and Agriculture (NIFA), would be moving to the Kansas City area this summer. What does this mean for the KC metro’s economy? What about Franklin County farmers?

To answer the first question, we have to look at what we know about the move. Roughly 600 employees will be relocating from Washington D.C. to the Kansas City area, though we don’t know which side of the state line they will call their new home. The General Services Administration has put out a call for proposals for buildings in the area and, of the 6 buildings that fit their specifications, the closest to Ottawa is the Sprint office building in Overland Park.

Certainly the broader Kansas City area will benefit from the additional jobs, larger tax base, and economic activity from support services provided to these new-to-Kansas-City federal workers. Additionally, the federal government estimates that there will be a $300 million in federal government budget savings over the next 15 years due to lower building rent and other advantages from the relocation.

NIFA allocates grant funding for the bulk of the grant programs the USDA provides each year. Due primarily to our world-class Land Grant University in Manhattan, Kansas receives tens of millions of dollars each year in research funds from NIFA for a range of research efforts including crop and animal agriculture, agricultural economics, natural resources, food science, health, and education. I don’t think NIFA’s location change will mean much for Franklin County agriculture; grant funds will flow into and out of NIFA just as they did when the employees were housed in D.C.

However, I think there’s a possibility that Franklin County agriculture will benefit from ERS’s move to Kansas City. ERS is an in-house research division within the USDA. It houses a gaggle of economists who are trained in analysis of markets, rural economies, farm management, food and nutrition assistance, food safety, international trade, and other issues related to agriculture.

What I’m about to say is not intended to be a jab at ERS employees. I’m sure all of them are fine people, and the ones I’ve met over my short career as an agricultural economist were sharp, knowledgeable people who really want to help U.S. agriculture succeed. However, I think it’s possible that living and working in D.C. has a stifling effect on one’s broader perspective of agriculture. There’s nothing wrong with boutique organic stores and high-overhead-cost hydroponics operations, but these niche businesses don’t represent the backbone of agriculture.

I’ve written in this column before about Franklin County agriculture. We have a lot of cattle, corn, and beans around here. I think it will be good for the economists at ERS to be a little bit closer to the agricultural producers who feed our nation and the world. It just might broaden their perspective and increase their focus. If it does, Franklin County producers will benefit from more effective government policy driven by the analysis of the fine folks at ERS. I hope all our new neighbors working at the USDA will feel welcome in northeast Kansas.

Dr. Levi A. Russell is the Gwartney Institute Professor of Economic Education and Research at Ottawa University

A Theatrical Marvel

by Jacyn Dawes

Marvel hit a home run with their newest release of Avengers: Endgame.  It made nearly one million dollars more than their previous highest-grossing movie, Avengers: Infinity War, in the opening weekend.  This is impressive considering speculation about Disney increasing their movie releases from one or two a year to a whopping three a year since 2017.  While it is too soon to suggest that the law of diminishing marginal returns is taking effect on solo character movies, where the first is valued highly but that value decreases with each additional movie, it is clear that the collaboration movies like Avengers: Endgame, are seeing huge successes from this risk.

Now that Disney has bought out Fox, hopefully they will be able to work some of their magic on the X-Men series.  Dark Phoenix came to theaters on June 6th, with a disappointing opening weekend.  Fox released the first X-Men movie back in July of 2000.  Since then, they have released twelve movies.  Fox definitely had the jump on the superhero scene compared to the Avenger series which began in 2008 with The Incredible Hulk and Iron Man.  Yet Disney has now released twenty-two movies and has had more consistent success.  Many of our favorite heroes and actors are from X-Men, like Hugh Jackman playing Wolverine.  And the storylines all originated with Marvel.  It raises the question, why was Disney able to do consistently better than Fox?

One idea is the use of story lines on solo character movies.  Disney released five solo character movies before the first collaboration movie, Avengers, came out in 2012.  They had built up the characters in their own movies before bringing them together, causing people to already know and like (or in some cases dislike) those characters beforehand.  Disney also dropped key pieces of information into each movie in preparation for a larger storyline.  This caused a lot of binge watching for movie fans before big releases like Avengers: Endgame.  Alamo Drafthouse and AMC were just a few of many theaters who put on a sixty-hour movie marathon featuring all 22 movies. These marathons started on Tuesday afternoon and finished with the release of Avengers: Endgame on Thursday night.  Their ability to fill seats despite taking place during the week shows the true marvel of this franchise.


Fox, it seems, went in the opposite direction of Disney.  They released five collaboration movies before they released their first solo character movie in 2013.  The idea may have been that X-Men is a team-based series, but when you look at the top five movies in the franchise, you would notice that three of them are character solo movies including Logan, Deadpool and Deadpool 2.  There are many fans who do enjoy the characters, hopefully Disney will be able to make them each shine before giving it another go around.

Fox has not been able to pull off an overarching storyline for the series.  For Avengers: Endgame, each of the previous movies (we will let Incredible Hulk off the hook a bit for this one) came to play an important role in the finale.  It seems like Fox chose to stick with a consistent Professor Xavier versus Magento story line, and the solo character movies did not come into play at all.  Disney has a long way to go with bringing X-Men back into the light, but it seems like they have learned a lot from their successes, and yes, some failures, during their run with the Avengers franchise. 

Jacyn Dawes is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University 

What's wrong with economic freedom in Guatemala?

by Russ McCullough

I am excited to be traveling to Guatemala with my wife and son in August! My wife helps run a non-profit called Education and More there where the organization contracts with local indigenous women to produce products that use the hand-woven fabric that has been made for centuries there. Generational poverty is an issue there where subsistence living is the norm. The proceeds from sales in the United States and donations fund a fair wage to the women in addition to private schooling for their children through high school and even college for those who go. It is a fabulous organization and please visit https://www.educationandmore.org/ to learn more and donate if you want to support what they do.

The Gwartney Institute investigates reasons why some countries are poor and others are rich. It turns out that Economic Freedom is highly negatively correlated with poverty. Countries with a high degree of economic freedom have less poverty. The Fraser Institute publishes the Economic Freedom of the World (EFW) Index each year, its lead author is Dr. Jim Gwartney for which our Institute was named. I was shocked to learn that the most recent ranking of Guatemala was 23rd in the world for economic freedom, tied with Finland! Income per person adjusted for purchasing power parity in Finland was $43,700 in Finland during this time while it was only $8,000 in Guatemala (it was $57,900 in the USA). The average income for countries in the top 25% of the EFW index is $42,500 and the average for the bottom 25% was $6,500.
 
This did not make sense to me, so I began to investigate why Guatemala is so poor relative to its high EFW ranking. I found a plausible reason for the discrepancy by diving deeper into the way the EFW index value is calculated and then reconciling it with Guatemala’s area scores. There are five primary areas of the EFW index; 1) size of government, 2) legal system and property rights, 3) sound money, 4) freedom to trade internationally, and 5) regulation. Within each of these five areas, data is collected from many objective external sources and then each area receives a score out of 10. A simple average is used to compute the overall score (click here for details). The beauty of this formula is that a single number now objectively reflects the compilation of 42 variables for every country with data available. However, this is precisely what causes some countries to be ranked higher than what seems they should.

A country that is weak in ‘Area 2 -legal system and property rights’ may not be very free at all. Is anarchy true freedom? No, freedom is not the absence of government. Individual freedom can only be achieved with proper constraints on other people’s behavior to do no harm to others. Indeed, “do whatever you want as long as you don’t hurt someone else” is a philosophy that contributes to individual freedom. While the simple average of the areas gives us a transparent way to calculate the overall EFW, I would argue that Guatemala presents a case that shows how important Area 2 is for low income countries. It shows how the EFW index can be used to determine policy recommendations to raise people out of poverty.

The other area of the index that makes Guatemala rank higher than it should is ‘Area 1 -size of government’. The index suggests to me that the government sector is too small, specifically the sub-areas of Government Consumption and Transfers and Subsidies are too low relative to other countries in the top 25%. As a free-market economist, I find this a bit difficult to write.

However, I think it makes sense given that Guatemala has the best score for both of those sub-areas of all countries in the top 25% which means they spend the least amount of money relative to country income. Those sub-areas simply look at the fraction of government spending to Gross Domestic Product. It looks to me that Guatemalan government needs to do more work on ‘legal system and property rights’ and this likely means more government spending in that area. There is an optimal level of government spending to maintain a healthy rule of law. If spending is too low, vital functions of the government are underfunded. By looking at the outcomes in Guatemala, they are apparently not doing enough to get the wealth-creating engine of capitalism going strongly.

I did a little modification to the sub-areas to see where Guatemala would rank if it was doing the average level of government spending done by countries in the top 25%. By replacing just these two numbers, Guatemala’s EFW overall score falls to 7.28 which drops its ranking to 54 (the 2nd quartile) which is sandwiched between the Slovak Republic and Italy. Since the average income in the 2nd quartile is $20,200, I am not sure it has dropped enough. The average income in the 3rd quartile is $14,300! 

That’s enough of the numbers, I don’t want your head to spin. The measurement of economic freedom is a complex topic but the general results we find from research using the EFW index paints a clear picture that economic freedom is key to getting the social outcomes we all desire. Where economic freedom is strongest, there is less poverty, better access to drinking water, longer life expectancy, lower infant mortality, better gender equity –the list goes on and on and is compelling. I hope that my visit to Guatemala will further inform me of other policy recommendations that can lead to more human flourishing there.

Dr. Russ McCullough is the Founder & Director of the Gwartney Institute and the Wayne Angell Chair in Economics at Ottawa University