The Drug Trade

In 1776, Adam Smith famously noted the human "propensity to truck, barter, and exchange one thing for another."

But why do humans trade at all?

Another way to ask the question is, what is the survival value of trade?

To put the answer in its simplest terms, trade must deliver what humans want, and deliver it more reliably and with less effort than violence, fraud, or self-sufficiency.

Ah, you may ask, but what do humans want? For most of the history of our species, the answer was simple: food and sex. Today, in a world that offers most people food and sex in abundance, surely human desires have grown more sophisticated.

Or have they?

The Washington Post reports that the CIA is trading Viagra for information about the movement of the Taliban in Afghanistan. Traditional inducements for information like weapons and cash aren't working as well as they used to.

One 60-year-old Afghan chieftain had extensive knowledge of the region but would not cooperate with the Americans. He changed his mind after a CIA operative gave him some Viagra. The next time the operative visited, the chieftain "came up to us beaming. He said, 'You are a great man.' And after that we could do whatever we wanted in his area."

The more things change...

Seven New Books for the New Year

Barron's Economics Editor Gene Epstein recommends seven economics-related books for the New Year, including the two volume edition of The Bastiat Collection.

Here's what Epstein says about Bastiat:

"Over the years, I have seen many references to the work of Frédéric Bastiat, a French economist who lived and wrote during the first half of the 19th century. (Caplan describes him in The Myth of the Rational Voter as "the original one-handed economist" -- a reference to the type of economic seer that Harry Truman vainly sought.)

This year, I finally read the two volumes of The Bastiat Collection (2007). The only depressing part about these funny and satirical essays that assault economic myths is that they all seem so current.

Nothing much seems to have changed in the more than century-and-a-half since they were published. Just read Bastiat's "Petition of the Manufacturers of Candles...and...Everything Connected with Lighting," (volume 1, pages 227-232), in which the French parliament is exhorted to protect the lighting industry from "the intolerable competition of a foreign rival" -- the sun."

Here is Gene Epstein discussing his selections:

Evolutionary Economics

"The economy is a product of human action, not of human design"

Michael Shermer, The Mind of the Market

Organizations and Markets

It is a sad truth that most academic writing about business is indecipherable, pointless, or openly hostile towards its subject. Business people wisely ignore it. Their time is better spent making money by serving the lives of their customers.

But there are exceptions. For that rare treasure, really useful academic musings about business and economics, I highly recommend spending some time at the blog Organizations and Markets. It's creators describe the blog as follows:

Organizations and Markets was created in April 2006 by Nicolai J. Foss and Peter G. Klein, professors with research interests spanning organizational economics, strategic management, entrepreneurship, innovation, the economics of institutions, and the history, philosophy, and sociology of science. Foss teaches management at the Copenhagen Business School and Klein teaches economics at the University of Missouri, giving the blog an international and interdisciplinary orientation.

Don't be turned off by the PhD-speak. That's just the necessary academic code that identifies them as serious members of their profession. For business people, the primary attraction of the authors is their scholarly appreciation for market forces and the role of the entrepreneur in society.

Consider Peter Klein's comments on the popularity of business guru books like Jim Collins' Good to Great. I read Collins' book, and went away with a nagging doubt. Klein not only puts that doubt into words, he backs it up with research:

I’m not a fan of “guru” books like "In Search of Excellence," "Built to Last," and "Good to Great," for reasons well documented by Phil Rosenzweig in his excellent "Halo Effect." These books suffer from ad hoc generalization, sampling on the dependent variable, and a host of related methodological and expository flaws. If Rosenszweig’s critique is startling, then two articles from the November 2008 Academy of Management Perspectives on Jim Collins’s" Good to Great" — perhaps the leading guru book of our time — are devastating.

Organizations and Markets is a valuable stop for the time-starved but intellectually curious business person who would like to spend a little time in the company of important and perhaps even profitable ideas.

All those in search of excellence should start there.

A Pirate's Life

Every business is the expression of the human will to survive.

Where there are no legal businesses, illegal ones will have to do. Consider the success of Somali pirates.

"While their countrymen face the threat of famine, pirates in northern Somalia are building houses, buying cell phones and SUVs, giving relatives hundreds of dollars and winning the attention of beautiful women, who seem to be flocking to the area from miles around."

Healthy societies make it possible for men to support themselves and their families without violating the rights of others. The best way to reduce crime is to make behaving well more rewarding than behaving badly. That happy state of affairs begins with legally enforceable property rights. Where there are no property rights, only the most violent will dare own property. Violence offers the only reward.

When behaving well equals starvation, it comes as no surprise that desperate humans are drawn to violence, especially when it pays so well.  As one Somali taxi driver said, "The pirates are the hottest men in town," he said. "Girls from all over Somalia moved here to marry pirates. But if the girl isn't cute, she's out of luck, because the pirates only go with beautiful girls."

Back in the USSR

Back in the USSR, General Secretary Brezhnev stood on a crowded reviewing stand in Red Square as the mighty Red Army paraded by.

"You see those men?" Brezhnev asked the official standing next to him, "those men are snipers. They can light a match at two hundred yards."

Next came the tanks. "You see those tanks? They can go 50 miles per hour and fire a shell two miles."

Next came the missiles. "You see those missiles? They can reach a target anywhere on the globe in fifteen minutes."

Finally came three men absent-mindedly walking, wearing thick glasses and bad suits. "Who are they?" the official asked.

"Oh, they are our finest economists. You have no idea how much damage they can do."

Adapted from The Age of Turbulence by Alan Greenspan

A Work of Science Fiction

In the January 2009 special issue of Scientific American, Steve Mirsky makes fun of Republican politicians who dared to criticized some taxpayer-supported scientific research:

"On October 24 vice presidential candidate Governor Sarah Palin took on what looked through her designer eyeglasses like silly pork-barrel spending by the U.S.: “Some of these pet projects, they really don’t make a whole lot of sense, and sometimes, these dollars, they go to projects having little or nothing to do with the public good. Things like fruit-fly research in Paris, France. I kid you not.” Never mind that fruit-fly research has brought us modern genetics and molecular biology. The particular earmark in question was some $211,000 to a laboratory in Montpelier, France, with long experience studying ways to protect olive trees from fruit flies. And the little pests are threatening California’s olive crop—with a retail value estimated in 2005 at $85 million. So this money might be looked at by anybody with business savvy as an investment."

The question Mr. Mirsky fails to answer is why an industry with a retail value of $85 million deserves a $211,000 transfer payment from taxpayers. The beneficiaries of such money often dress it up as an "investment." Anyone with business savy knows that such "investments" are, in reality, examples of the truth of Bastiat's observation: "The state is that great fiction through which everyone tries to live at the expense of everyone else."

That would make Mr. Mirsky's "Humorous Case of the Olive Trees and the Fruit Flies" a work of science fiction.

A More Statist World Economy

“We’re seeing a more statist world economy,” says Ken Rogoff, former chief economist at the International Monetary Fund and now a professor at Harvard University in Cambridge, Massachusetts. “That’s not good for growth in the longer run.”

It’s not good for stocks either, says Paola Sapienza, associate professor of finance at Northwestern University’s Kellogg School of Management. Slower economic growth means lower profits. Shares might also be hurt by investor uncertainty about the scope and timing of government intervention in the corporate sector.

“If the rules of the game are changing, people are reluctant to invest in the stock market,” Sapienza says.

From Bloomberg, "Saving Capitalism No Sure Thing as Statism Undermines Economy"

Do Something!

"The whole country is with him, just so he does something. If he burned down the Capitol, we would all cheer and say, well, we at least got a fire started anyhow."

Humorist Will Rogers, referring to President Roosevelt in 1933; quoted in "Great Myths of the Great Depression" by Lawrence W. Reed

A Confused Mess

Bill Sandberg, Associate Professor of Management at the Moore School of Business University of South Carolina, sent this email concerning my post "A Crime By Any Other Name."

"What a confused mess Professors Fisman and Khurana have offered in place of a reasoned critique. They attribute the corrupt, self-enriching deeds of some corporate executives to what they claim is business schools' emphasis on a selfish doctrine of shareholder wealth maximization. The professors assert that this pernicious doctrine drove out the b-schools' former teaching that management is a profession that bears fiduciary responsibilities. In the current climate of financial upheaval and widespread fear, the professors' arguments will find a receptive audience. That's unfortunate, because their reasoning is either sloppy or slippery, but it's a mess either way.

If business schools have taught a doctrine of maximizing shareholder wealth, the execs in the professors' crosshairs are poor practitioners of that doctrine. The professors accuse execs of plundering "organizational resources"--which means the assets belonging to shareholders. Some maximizers of shareholder wealth those execs are!

Ben Rast zeroed in on the professors' greater offense: while purporting to stand up for the organizations that have lost resources to the rapacious execs, the professors actually employ a sleight-of-hand to shift the focus to "society's resources". But those resources never belonged to society; they were the property of the corporation, and therefore belonged to its shareholders.

The fiduciary responsibilities inherent in the profession of management are essentially those of an agent. An agent is empowered to act in behalf of a principal but not against the principal's interests. The doctrine that managers are agents of shareholders does not diminish managers' fiduciary responsibilities, and the law certainly allows different degrees of risk-taking within the bounds of fiduciary responsibility, depending on the goals or needs of the person on whose behalf the fiduciary acts. A trustee has a fiduciary responsibility to the trust's beneficiaries, for example, and not to society at large. Depending on the terms of the trust, he or she may manage its assets aggressively or conservatively, and may take single or multiple objectives into consideration. To society the trustee owes compliance with the law but not the subordination of the trust's interests to the claimed interests of society. 

From the vantage point of a b-school that's far less exalted than Columbia or Harvard, I'd say the professors' argumentation falls short of professional standards."

Got Inflation?

No one can deny that Hollywood produces a steady stream of cinematic reinforcement for a particular point of view: corporations are bad;  government is good (unless it protects corporations); humans are destroying the planet; white men are either evil or buffoons; and wisdom is best spoken by women, children, and the oppressed. But Hollywood propaganda is nothing new. 

In 1933, Hollywood produced propaganda to sell the idea of inflation to the masses. Think of it as Keynesian Economics for Dummies.

Henry Hazlitt described Keynesian economics as “one of the great intellectual scandals of our age." 

Read more here.

A Crime by Any Other Name

In Forbes, Professors Fisman and Khurana criticize the view that managers are agents for shareholders. They say that managers are agents for society.

In other words, mangers don’t work for the owners, they work for society.

This is a startling metaphysical leap, little different from the claim that an individual’s will to live is secondary to the will of society. The purpose of any business is an individual concern. The consequences of business are a social concern. Society does have a role to play in dealing with some of those consequences; preventing violence, theft and fraud, for example.

But it is a mistake to use businesses as a means to dreamy social ends. So long as a business is peaceful, does not commit fraud, or violate the property rights of others, society has no right to insist on different social ends.

We all agree that a manager who enriches himself at the expense of the owner is guilty of an injustice. Such a thing is not "free market capitalism." It is more correctly described as theft. Calling it free market capitalism is a symptom of confused morality. Capitalism does not equal looting the shareholders. That is hardly the way to maximize shareholder value.

Why should a social program that enriches itself at the expense of the owners be viewed any differently? Such a program is not "stewardship." It is another form of theft. Social justice does not equal looting the shareholders, either.

In his great novel Crime and Punishment, Dostoevsky made a point the professors miss: a crime committed in the name of society is morally indistinguishable from a crime committed for individual gain.

Government Intervention

The difference between just and unjust government intervention is simple.

If your house catches fire and the fire department comes when called, puts out the fire, and then leaves, that's justice. If your house catches fire and the fire department comes when called, puts out the fire, and then claims ownership of your house, that's injustice.

There are times when even the most ardent believer in markets relies on government intervention; even times when it is his right to expect it.

Liberating Commerce

Via Econ Lib, one of the world's most unique dedicatory plaques, one that actually celebrates free trade:

Why Flatter is Better

We often hear about businesses with flat organizational charts, by which is meant the business has comparatively few layers of decision-making between its top management and its front line.

Flatter is better, according to most people. But why?

There are at least two reasons. First, flat organizations are less likely to distort or destroy vital information as it moves up, down, and throughout the organization. Better information means better decision making.

Second, individuals in flat organizations don't have as much incentive or opportunity to behave bureaucratically by seeking more power and pay at the expense of organizational goals. Reduced bureaucratic behavior increases the chances that individual and organizational goals will overlap to a useful degree.

Considering the advantages of flat organizations, it's remarkable that we ever tried anything else. Yet, the unsettling and unavoidable truth is that for most of human history, flat organizations were simply unthinkable, as unthinkable as a man without a king or king without a church. 

In a sense, you could say that all of human history is the messy and sometimes bloody process of flattening out our social organizational chart. Flatter is better in business because flatter is better in society. Societies with stronger horizontal social bonds -- i.e. more individual autonomy -- have proven better at interpreting dispersed information and at adapting to new situations than societies held together by predominantly vertical bonds. 

The unpleasant truth of business is also the unpleasant truth of history: power destroys more creativity than it rewards.

The Curious Task of Economics

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

Friedrich Hayek in The Fatal Conceit, quoted by Russ Roberts at Cafe Hayek.

Buy or Else

Via Tom Palmer...

The Anti-Capitalist Intellectual

A September article in the New York Sun describes the mission of the Clemson Institute for the Study of Capitalism, and also illustrates the primary problem: most of the intellectual elite in America are deeply opposed to capitalism.

"Capitalism is thoroughly immoral and has no moral foundation," said Kirkpatrick Sale, the director of the Middlebury Institute, a think tank that studies separatism and self-determination. "In fact, it celebrates all of what we know of as the seven deadly sins except for sloth."

"All fundamental human rights have material and institutional conditions," a professor of law and ethics at the University of Chicago, Martha Nussbaum, said. "There would be no such thing as private property, for example, without government protection of property from trespass and other damages. There would be no freedom of travel if government did not maintain the highways in a safe condition, enforce traffic regulations, and so forth."

She added, "Early capitalists thought parents should be free to use their children for labor; we now think that government must require all children to go to school, no matter what the parents want. The story of the 20th century has been the story of the gradual rejection of the idea of minimal government in favor of a capitalism that protects 'human capabilities,' meaning the ability of people to live a decent life and enjoy their rights on a basis of equality with others."

The Dreams of Unknown Men

All eyes are focused on Washington these days. That is just the way the folks in Washington like it. Washington is The Greatest Show on Earth, the World's Largest, Grandest, Best Amusement Institution. Barnum & Bailey has finally met its match.

But there is a far more important and impressive show happening somewhere else. You can find it wherever individuals labor to discover new and useful knowledge: in garages and office cubicles; in buses, trains and commuting cars; in living rooms and across kitchen tables; in easy chairs and taxi cabs. Here, in places like these, wealth is truly created, not just moved around. Here, in places like these, the economic life of the nation rises and falls. Here, millions of individuals satisfy their basic need for security and status through a process of mutually beneficial trading, independent of what happens in the circus tents of Congress

Our economic salvation does not lie in the glitter and pomp of Washington; it lies with the dreams of unknown men.

Tax Haven Myths vs Facts

Part Three of the Center for Freedom and Prosperity's series on tax havens...

The Moral Basis for Tax Havens

This is Part Two of the Center for Freedom and Prosperity's series on tax havens. 

As you listen to Dan Mitchell, keep in mind the words of Sen. Carl Levin (D-MI), “Tax havens are engaged in economic warfare against the United States and honest, hardworking American taxpayers."

Why Tax Havens are a Good Thing

I've added a new link to the Center for Freedom and Prosperity. Based in Alexandria, VA, the Center is a non-profit created to lobby lawmakers in favor of market liberalization. The top project at the Center is the Coalition for Tax Competition, which fights to preserve jurisdictional competition and taxpayer privacy. 

Here is part one of a three part series on why tax havens are a good thing, unless you're a grasping tax collector.

When Markets Need Help

Over at the Cato Daily Podcast, economist Russell Roberts explains why he is not an anarchist. Markets work, but they don't work perfectly. Sometimes, they need help from the public sector.

Listen to it here.

Education "Investments"

"I believe that not only should government not increase its spending on higher education, but also that the case for subsidizing it at all is very weak."

George Leef, in the featured article at the Library of Economics and Liberty