Setting maximum healthcare prices doesn't really help consumers (price controls never do)

You're applying for a dream job at a particular organization. You “just know” that this occupation is right for you – or, at least, that it will lead you to a great career. But then you are told that the position doesn't actually pay you. You have to work for free if you work there, and you won't get compensated with anything else, either. Are you likely to stick around by working for this organization? If you're particularly altruistic, you might stick around just for the rewarding feeling of “helping people.” But most people would quickly abandon the job, and move to something that actually pays – particularly when they've got kids or other obligations to take care of.

Why do we give patent-holders monopolies on the production of their product?

“[The Congress shall have the power] To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries … ”

– Article 1, Section 8, Paragraph 8 of the United States Constitution

Some say that it is “obscene” or “outrageous” to have life-saving technologies at our fingertips, which are expensive by reason of a patent monopoly. Patents involve monopolies which (admittedly) have some drawbacks to them, at least in the short term. Why, then, does society allow them? I will try to explain in this post.

The minimum wage doesn't really help the poor …

One day, a man named Bob goes to the store to buy some milk for his family. Since the price is only $2.00 per gallon that day, he decides to buy 2 cartons of it for a grand total of $4.00. But when he goes to the store again a week later, he finds that the price has risen to $4.00 per gallon. Consequently, he decides to buy just 1 carton this time around for the same price, and wait until the price goes down to buy more. Some people would cut back more than that, and others would cut back less than that. But the demand for the product is not decided by just one customer's purchases. You have to add up the purchases of all of the consumers in that economy to get an accurate demand number. This is known as an “aggregate” figure, and represents the total demand for a given product in a given place at a given time. When you look at these “aggregate” numbers, we can say that the quantity demanded still goes down as the price goes up. Even if some people are still purchasing the same amount of milk as before, the total demand for that milk still goes down. (Applied to your own pocketbook, that logic will probably make sense, at least for some products.)

David Hume and “The Wealth of Nations”

"Commerce and manufactures gradually introduced order and good government, and with them the liberty and security of individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbors, and of servile dependency upon their superiors. This, though it has been the least observed, is by far the most important of all their effects. Mr. Hume is the only writer who, so far as I know, has hitherto taken notice of it."

- Adam Smith's "The Wealth of Nations," Book III, Chapter IV

Most people today have never heard of the Scottish philosopher David Hume, a great figure of the Scottish Enlightenment. But many people today have heard of the man who was probably his best friend - a man who was greatly influenced by his philosophy (political, economic, and otherwise), and influenced him in his turn. That man was his fellow Scotsman Adam Smith.

Statues of David Hume and Adam Smith

This is not to say that Mr. Hume's accomplishments were just in economics, or that Adam Smith was the only person that he influenced - he influenced many people, in the natural sciences and elsewhere. However, I shall focus this post on economics, and his influence on Adam Smith; and leave the coverage of his empiricism - and his other contributions to the philosophy of science - to others.

Adam Smith

In defense of John Locke: The need for private property

"The distinguishing feature of Communism is not the abolition of property generally, but the abolition of bourgeois property. But modern bourgeois private property is the final and most complete expression of the system of producing and appropriating products, that is based on class antagonisms, on the exploitation of the many by the few. In this sense, the theory of the Communists may be summed up in the single sentence: Abolition of private property."

- Karl Marx, in "The Communist Manifesto," Chapter II

Communists believe in "abolition of private property," and Locke debunked this claim ...

Karl Marx once wrote that "the theory of the Communists may be summed up in the single sentence: Abolition of private property." (Source: The Communist Manifesto, Chapter II) Much has been said for and against this theory, some of it interesting and some of it rather dull. But one of the most interesting things - for me, at least - was written by the English philosopher John Locke, over a century and a half before.

What history can tell us about economics

I've had a number of people tell me over the years that with my interest in history, I should have been a history teacher. Thus, it's often surprising for them to hear that I majored in business instead. I also got a certificate in economics, which might likewise seem very different from history. And it's quite true that economics and history are two very different majors. But there is actually some overlap between the subjects - more than you might think - and so your average economics class has more history content than one might suppose.

What is the overlap between history and economics?

What is the overlap between these things? In short, there are two main areas where they intersect: the history of economics, and the economics of history. The history of economics is the history of economic thought - or the history of the social science of economics, and how people have attempted to find answers to important questions about economics. It has roots going back far before Adam Smith, but the modern social science of economics began with this great individual's magnum opus in 1776 - a book called "The Wealth of Nations." It is one of the great books of history (up there with Isaac Newton's Principia), and it has had an enormous influence on the way that people think about economics. (Here's my blog post about it, if you're interested.)

Adam Smith

The economics of history is about historical case studies in economic policy

The economics of history, on the other hand, is about the various economic problems that societies have faced; and their various attempts to find solutions to these problems. History is rife with economic case studies that show us which policies work and which ones don't. A good economist tries to learn from these lessons of economic history. I have talked about the history of economics in a number of posts, so I will instead focus this post on the economics of history - about the economic case studies that my classes have talked about, and about what history has to offer us in the way of practical experience with economic policy.

A review of “The Forgotten Man: A New History of the Great Depression”

We've all heard stories about how bad things were during the Great Depression, with extensive poverty and massive unemployment - perhaps the only economic crisis worse than our current one. But the history classes don't often go into the question of why; leaving the complicated subject of causation to economists, rather than the historians of the subject. When history classes do comment on the "why" of the Depression, they often paint a glowing picture of big government, with some economics classes not being much better in this regard.

Poor mother and children - Oklahoma, 1936

Some thoughts about business education

"In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has a direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom."

– Milton Friedman, economist

I have both a practical side and an impractical side. My Facebook friends probably see the impractical side of me more, as I post about things like history and languages, and stay away from the more mundane topics of everyday life. (Maybe having Ramen noodles for dinner is interesting to someone, but I never found it that fascinating; and generally speaking, I don't post about practical things - most people would probably find it boring if I did.)

I was a business major with a concentration in marketing, and a certificate in economics

Nonetheless, I have a strong practical side, which manifested itself in my choice of college majors. I actually majored in Business Administration with a concentration in Marketing. It might seem strange that a guy who spends his time learning Ancient Greek would major in business, but it's true - I even got a certificate in Business Economics to boot. (I never took any business classes in high school, although I did take some computers classes that ended up being helpful for my business degree, since that degree required some classes in computer information systems.) Thus, I have some firsthand experience with vocational education in my academic career, and thought that I would write a post about it - thus commenting on the one subject I actually have a degree in, and the educational issues in that field.

Karl Marx and the “labor theory of value”

One of the central tenets of Marxism is the "labor theory of value," which is the idea that the economic value of something is determined by the number of hours that it took to make it. It should be acknowledged that labor really is (at least partially) relevant in determining the value of something. Nonetheless, it seems safe to say that Karl Marx takes this theory far beyond the evidence. It is his extreme form of this theory that will receive a response here. He introduces this theory early in his work, in the very first section of the very first chapter of "Das Kapital" (his longest book):

Karl Marx

Quote from Marx about "labor theory of value"

"A use value, or useful article, therefore, has value only because human labour in the abstract has been embodied or materialised in it. How, then, is the magnitude of this value to be measured? Plainly, by the quantity of the value-creating substance, the labour, contained in the article. The quantity of labour, however, is measured by its duration, and labour time in its turn finds it standard in weeks, days, and hours." (Source: Karl Marx's "Das Kapital," Part 1, Chapter 1, Section 1, as translated into English at Marxists.org)

Marx and Engels

Even Marx presented some qualifications to his theory ...

There are several problems with this theory, and much has been written describing the many flaws of using it to describe value. I will not touch on all of these problems, but only on one of them - the one that I find the most interesting. It can be demonstrated with a qualification that Marx himself made to this theory. Even Karl Marx, the greatest proponent of the labor theory of value, qualified his theory with the idea that only those labor hours that were "socially necessary" should be counted as adding value. Marx's concept of "socia[l] necess[ity]" is not very well-defined, but his definition's meaning is clear enough to show that it contradicts his labor theory of value, attacking its very basis as an explanation.

Iron and Coal, painting from 1855-1860 (during Marx's lifetime) about the Industrial Revolution

Are monopolies really as dangerous as Marx said they were?

"Competition engenders misery, it foments civil war, it 'changes natural zones,' mixes up nationalities, causes trouble in families, corrupts the public conscience, 'subverts the notion of equity, of justice,' of morality, and what is worse, it destroys free, honest trade, and does not even give in exchange synthetic value, fixed, honest price. It disillusions everyone, even economists. It pushes things so far as to destroy its very self."

- Karl Marx, in "The Poverty of Philosophy," Chapter 2, Part 3 (as translated into English at Marxists.org)

Most people today know Karl Marx was an opponent of free markets, and that he gave all kinds of objections to them in his writings. But lesser-known is an objection he gave to free competition: that competition inevitably destroys itself - through monopoly.

Karl Marx

Quote from Marx about competition "destroy[ing] its very self"

In the words of Marx himself:

"Competition engenders misery, it foments civil war, it 'changes natural zones,' mixes up nationalities, causes trouble in families, corrupts the public conscience, 'subverts the notion of equity, of justice,' of morality, and what is worse, it destroys free, honest trade, and does not even give in exchange synthetic value, fixed, honest price. It disillusions everyone, even economists. It pushes things so far as to destroy its very self." (Source: "The Poverty of Philosophy," Chapter 2, Part 3, as translated into English at Marxists.org)

Is it true that competition inevitably destroys itself through monopoly?

The idea that competition needs to be watched - that monopolies need to be guarded against - is held by many today, who are otherwise in favor of free markets. Competition is a good thing, many say; but it needs to be monitored. But ... is it true that competition inevitably destroys itself through monopoly?

Capitol Dome

My own history with this idea

I once believed that this was true, and that there was a needful function for anti-monopoly laws, such as the Sherman Antitrust Law of 1890. This was one of the arguments that fascinated me; because if it was true, then that meant that competition could be dangerous if unfettered, which would undermine my faith in the free market if true. Thus, I had to know whether or not this argument held water; and whether competition was something to be celebrated or feared.

Senator John Sherman, the principal author of the Sherman Antitrust Act

My change of heart in this matter

But I have since come to the conclusion that monopolies are not something to be feared - that there are many forces in place to prevent their rise; and which ensure that if they do appear, that they will not have much power. This might seem to be a strange argument, and I acknowledge that I once saw it as strange myself. But I have come to the conclusion that competition doesn't really destroy itself through monopoly - that free-market forces prevent this from happening, and that Mr. Marx exaggerates their dangers and effects.

Pleas for an open mind in the reader

I will present arguments in this blog post to support this point of view, and challenge Mr. Marx's objection to free-market competition. If this seems counter-intuitive to you, I ask only that you entertain my arguments with an open mind; and refrain from judging them until after you've heard them. So with that in mind, I will now turn to my arguments about free-market competition, and use some quotes from Dr. Thomas Sowell to support them. These will show why competition being destroyed through monopoly is not something that we should worry about.

Thomas Sowell

Actually, communism HAS been tried (and it doesn't work)

Tiananmen Square, China 1989

"China isn't all that bad," some say ...

The critics of communism have long pointed out the failure of states like China and the Soviet Union, which all attempted to implement Marxist doctrine. The variety of liberal responses to this is rather interesting, and the shaky nature of the premises used is rather telling. Some contend that China isn't all that bad, and make grand proclamations about how "developed" it is, and how wonderful things supposedly are there. (Obama has made this argument before - see below.) Even the most cursory examination of the actual evidence shows how wrong this is - China is extremely poor, and their standard of living lags far behind anything in the industrialized West. There is economic development in China, it is true; but it seems to do little to raise the standard of living there; and it's not all that it's cracked up to be.

"China is bad," others say, "but that's because it's 'capitalist' ... "

Others admit that China is poor and miserable, but say that it is capitalist, and thus try to put the blame for its failures on capitalism. Again, even the most cursory examination of the evidence shows that this is not the case, and that China is vastly far removed from a capitalist society, possessing no freedom of the market like that found in the West. It's hard to decide which is more lame - the attempt to find a scapegoat, or their odd choice of which one to use; but regardless of the comparison in lameness, there is plenty of lameness to go around; and their attempt to shift the blame is ultimately illegitimate.

Why is my stats class so focused on bell curves?

I would wager that many a student has taken a statistics class, and been introduced to bell curves without having the slightest idea why they're used. That was me, to some extent, when I took my first statistics class. I was told they were useful, and was willing at the time to take their word for it. But it was not until a second statistics class, many years later, that I learned why bell curves are used.

Some thoughts about economics education

"This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature, which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another."

– Adam Smith's "The Wealth of Nations" (1776), Book I, Chapter II

When I was in high school, I learned that my class would be among the first at Prescott High School to be required to take an economics class in senior year. I remember resenting the requirement, and even expressing this resentment to one of the older students who had been involved in making the decision to require it. (He took my outburst well, and we have remained friends to this day.)

My introduction to economics in high school

But when I took the economics class in senior year, I was surprised by how much I enjoyed it. The subject had a lot of things about it that I liked: politics, practical business applications, and a penchant for analytical thinking. I could see the practical arguments for having this be a subject required for seniors, because many of them would need basic economics knowledge when entering the workforce after their upcoming graduation. The class taught in high school almost seemed more like a consumer ed class - a useful one, to be sure, but more focused on business applications than political ones. Although it had some political content in it, I had not really gotten a taste for the political side of economics classes; or for the civic reasons to require some basic knowledge about it from high school graduates.

Why equalizing income conflicts with rewarding good behavior

I posted earlier that one of the most sacred tenets of liberalism is the goal of equality of condition: the idea that there should be no rich or poor, but that all should have the same amount of income and wealth, and that no one should possess any more than any other.

Bill Gates

Liberals are blind to arguments based on wealth being earned ...

In this previous post, I offered several arguments against equality of condition; but refrained from using the critical argument based on rewards. This is because too many liberals have prejudice against it to lead off with it, in a post about this subject. In liberals' minds, rewarding anyone for being productive is tasteless and vulgar; because it would mean that they would have more money than someone else. It's "vulgar" to reward Bill Gates for providing me with a nice computer, because it would mean that he would become even richer than he is now, and would thus have more money than the lazy bum on the street who refuses to work. Arguments based on people's earning the money fall on deaf ears, because liberals believe no one earns money without exploiting others, and they are thus blind to arguments based on wealth being earned.

Should we treat criminals differently?

Yet even they can see the flaws in their argument when it is applied to criminal punishment. They are perfectly okay with discriminating against criminals, for example, when they commit a violent crime like murder. The equality-of-condition argument, when taken to this extreme, would say that the criminal cannot be put in prison; because then we would be treating him worse than someone else. His treatment would be unequal to the freedom that we respect in the law-abiding members of society. Yet even liberals abandon this argument here, because even they can see clearly that the law-abiding citizens have done nothing to merit losing their freedom, while the criminal has. Equality of condition is cast aside in favor of a theory of justice based on rewards, and good citizenship is made a requirement for the otherwise-inalienable right to freedom.

Microsoft Windows

Why equalizing income is a bad goal

One of the most sacred tenets of liberalism is the goal of equality of condition: the idea that there should be no rich or poor, but that all should have the same amount of income and wealth, and that no one should possess any more than any other.

There are both practical and philosophical problems with this ...

There are several problems with this goal, and the problems include both the practical and the philosophical. I will address one example of each kind of problem, to show that this is a goal that is not only impossible to attain, but whose pursuit actually harms society; ultimately backfiring on its advocates, and making society worse off. (In doing so, I should make clear that I do not oppose equality of opportunity, as I am a fiery advocate of this kind of equality. It is equality of condition that I oppose, and it is equality of condition that I will argue against now.)

Does communism cause poverty? (The two experiments that prove it does)

Karl Marx, the chief founder of communism

Does communism cause poverty? And how can this be tested?

Karl Marx

What counts as "testing"?

The short answer is "yes": it does cause poverty. But as far as testing goes, it depends on how you define "test." When hearing the word "experiment," most people have the mental image of a laboratory; but I should acknowledge in advance that experiments are hard to do in economics and politics. Even the possible ones usually require major government actions which may be unpopular, and people generally don't like to be guinea pigs. This is true of any experiment about whether communism has negative effects on prosperity.

Karl Marx

The experiments that no one wanted ...

So is there such an experiment? It turns out that there are two on a large scale, but not ones initiated by any government or university. They are natural experiments, or ones in which "the experimental and control conditions are determined by nature, or by other factors outside the control of the investigators." (source citation) While they were set in motion by human beings rather than nature, their purpose was not experimental at all; but the result of complicated political negotiations following a major war. Both sides in these negotiations - who had been allies during this war - would have preferred that their own system of government be established in the territories of their former enemies; but neither had the military power to do so for all those territories. The result was a compromise, which began two of the most epic natural experiments in the history of economics - two experiments neither side wanted, but which both sides got; and which clearly show a causal relationship between communism and poverty.

Yalta Conference, 1945

Potsdam Conference, 1945

Adam Smith and the Pin Factory

"The greatest improvements in the productive powers of labour, and the greater part of the skill, dexterity, and judgment, with which it is anywhere directed, or applied, seem to have been the effects of the division of labour. The effects of the division of labour, in the general business of society, will be more easily understood, by considering in what manner it operates in some particular manufactures."

- Opening lines of Adam Smith's "The Wealth of Nations" (Book I, Chapter I)

If your parents have ever divided household chores among you and your siblings, then you know what the division of labor is. So-and-so mops the floor, so-and-so does the vacuuming, and so-and-so cleans the toilets. (Lucky for them, huh?) The labor gets divided among multiple people, with each person getting a certain kind of task.

The concept is not a new one, and labor has been divided among several people for centuries. But it was not until comparatively recently that its advantages were systematically explained. The Scottish economist Adam Smith explained it well more than 200 years ago, and his words about its importance still have relevance today. There are advantages to dividing the labor, and these advantages have great importance for society. So with that in mind, I will now turn to what he said about this concept.

Adam Smith

Why Adam Smith is still relevant today

" ... every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it."

- Adam Smith's "The Wealth of Nations," Book IV, Chapter II

People still talk about Adam Smith's "The Wealth of Nations" to this day

People still talk to this day about an economics book that was published in 1776. And though the year I'm talking about is rightfully associated with America, this book was actually published by someone in the mother country that we were then at war with. Adam Smith (the author of this book) was a Scotsman, which meant that he was also British.

John Trumbull's Declaration of Independence

Historical note: Adam Smith sympathized with the American Revolution

But his views about the American Revolution were actually fairly sympathetic to the Patriot side. He favored giving the American colonies either representation in Parliament, or independence from the mother country. (For evidence of this, see this blog post.) Because I discussed this subject at length in my other blog post referenced above, I will not go into it further here. Instead, I will now launch into my discussion of his political and economic ideas, and how they apply to our world today.

Adam Smith

A few problems with “The Communist Manifesto”

"A spectre is haunting Europe - the spectre of communism. All the Powers of old Europe have entered into a holy alliance to exorcise this specter ... Where is the party in opposition that has not been decried as Communistic by its opponents in power? Where is the Opposition that has not hurled back the branding reproach of Communism, against the more advanced opposition parties, as well as against its reactionary adversaries? Two things result from this fact: I. Communism is already acknowledged by all European powers to be itself a power. II. It is high time that Communists should openly, in the face of the whole world, publish their views, their aims, their tendencies, and meet this nursery tale of the Spectre of Communism with a Manifesto of the party itself."

- Opening lines of "The Communist Manifesto" (1848)

I was recently told that I should write a blog post about why Karl Marx and Friedrich Engels were wrong - arguing not on values as I did in another post (though there is a place for that as well), but on facts and theories, challenging their dubious factual and theoretical claims.

Karl Marx

Friedrich Engels

In discussing problems with Marxism, where does one start?

To someone who's read and understood their book "The Communist Manifesto," that might seem easy - and in some ways, it is. But in trying to debunk it, I had one big problem: where to start. Despite "The Communist Manifesto" being a tiny book (which I read through in a day), it sometimes seems when I'm reading the book like its two authors were having a competition to see who could cram more fallacies into a small amount of space. And they both won.

Marx and Engels

Discussion of Marxist fallacies is practically a genre in its own right ...

I intend this blog post to be a short one, so I will only be able to summarize this book's problems. But if you're after a more thorough treatment of its fallacies, this is practically a genre in its own right, so there are lots of works to choose from.

My love-hate relationship with economics

"Let's start with what economics isn't.  Economics isn't a meal ticket to make lots of money in the stock market, although economics helps you understand how stock markets and other markets work. Economics also isn't a business degree, although economics teaches important business skills. Economics, first and foremost, is a social science.  As such, economics helps to explain the mysteries of how people and society operate ... Economics is defined as the study of how people choose to use their scarce resources in an attempt to satisfy their unlimited wants."

- A webpage that influenced my decision to study some economics in college

I did not fall in love with economics, the way that I fell in love with history and politics. This is not to say that I didn't like the subject, but it didn't excite me in the same way. There are parts of it that I find quite fascinating, and others that I find quite boring. But it is definitely one of my interests, and I'll talk a little bit here about my love-hate relationship with economics.