Tag: free markets

In the Lake Wobegon Fantasy World, All Investments Make Money

I sometimes wonder whether journalists have the slightest idea of how capitalism works.

In recent weeks, we’ve seen breathless reporting on the $2 billion loss at JP Morgan Chase, and now there’s a big kerfuffle about the falling value of Facebook stock.

In response to these supposed scandals, there are all sorts of articles being written (see here, here, here, and here, for just a few examples) about the need for more regulation to protect the economy.

Underlying these stories seems to be a Lake Wobegon view of financial markets. But instead of Garrison Keillor’s imaginary town where “all children are above average,” we have a fantasy economy where “all investments make money.”

I don’t want to burst anyone’s bubble or shatter any childhood illusions, but losses are an inherent part of the free market movement. As the saying goes, “capitalism without bankruptcy is like religion without hell.”

Moreover, losses (just like gains) play an important role in that they signal to investors and entrepreneurs that resources should be reallocated in ways that are more productive for the economy.

Legend tells us that King Canute commanded the tides not to advance and learned there are limits to the power of a king when his orders had no effect.

Sadly, modern journalists, regulators, and politicians lack the same wisdom and think that government somehow can prevent losses.

But perhaps that’s unfair. They probably understand that losses sometimes happen, but they want to provide bailouts so that nobody ever learns a lesson about what happens when you touch a hot stove.

Government-subsidized risk, though, is just as foolish as government-subsidized success.

Joe Barton, Meet Alessandro Acquisti

We were all very excited about the Facebook IPO last week (I guess), and Washington, D.C. wants to have its part in the action. This Politico article, “Facebook IPO Pits Privacy vs. Profits,” is a good illustration. It is the organs of government saying we are relevant, you know.

I was particularly intrigued by the comment of Rep. Joe Barton (R-TX). He’s playing against type—if we’re still to believe that Republicans stand for limited government—where he’s quoted saying: “I believe in free market principles, but there are some things the market can’t put a price on because they lack a monetary value. Privacy is one of those things.”

Aha! Washington does have a role the market can’t provide.

Except that the observation isn’t valid. There are lots of things in markets that “lack a monetary value.” You don’t think that every dimension of every good and service has a price tag on it, do you? Markets still deliver these things through the decision-making of their participants.

Alessandro Acquisti at Carnegie Mellon University has been studying how consumers value privacy for years. Crucially, he’s been studying how they value privacy when confronted with real and simulated trade-offs. (What consumers and politicians say isn’t very informative.) He sometimes puts a price tag on privacy in his studies.

It’s often a low price. Consumers don’t value privacy as much as many of us would like. But markets do implicitly price privacy. You make a little bit more—not a lot—if you deliver privacy. You stand to lose—sometimes a lot—if you don’t protect privacy.

Stand down, Mr. Barton. Stand down, Washington, D.C. You are not relevant to the Facebook IPO. Free market principles suggest leaving markets free to serve consumers’ actual preferences as determined by market processes. This is the case whether you think of privacy as having a “monetary value” or not.

You Do Know What Makes It a ‘Free’ Market, Right?

Here’s a poor, unsuccessful letter I sent to the editor of the Washington Post:

Health-care provision at center of Supreme Court debate was a Republican idea” [Mar. 27, A7] describes the health care law Mitt Romney signed while governor of Massachusetts as comprised of “free-market ideas.” Really?

RomneyCare’s individual mandate, now mirrored in ObamaCare, uses the power of the state to compel people to health insurance. What could be more un-free than that?

New Video Has Important Message: Freedom and Prosperity vs. Big Government and Stagnation

The folks from the Koch Institute put together a great video a couple of months ago looking at why some nations are rich and others are poor.

That video looked at the relationship between economic freedom and various indices that measure quality of life. Not surprisingly, free markets and small government lead to better results.

Now they have a new video that looks at recent developments in the United States. Unfortunately, you will learn that the U.S. is slipping in the wrong direction.

The entire video is superb, but there are two things that merit special praise, one because of intellectual honesty and the other because of intellectual effectiveness.

1. The refreshingly honest aspect of the video is its non-partisan tone. It explains, in a neutral fashion, that Bush undermined prosperity by making government bigger and that Obama is undermining prosperity by increasing the burden of government.

2. The most important and effective argument in the video, at least from my perspective, is that it shows clearly that a larger government necessarily comes at the expense of the productive sector of the economy. Pay extra-close attention around the 2:00 mark.

It’s also worth pointing out that there are several policies that impact on economic performance. The Koch Institute video focuses primarily on the key issues of fiscal policy and regulation, but trade, monetary policy, property rights, and rule of law are examples of other policies that also are very important.

This video, narrated by yours truly, looks at economic growth from this more comprehensive perspective.

The moral of the story from both videos is very straightforward. If the answer is bigger government, you’ve asked a very strange question.

Rich People Should Help the Poor by…Making Smart Investments and Earning Big Profits

There’s a very provocative article on the New York Times website that criticizes Steve Jobs for his supposed lack of charitable giving:

Surprisingly, there is one thing that Mr. Jobs is not, at least not yet: a prominent philanthropist. Despite accumulating an estimated $8.3 billion fortune through his holdings in Apple and a 7.4 percent stake in Disney (through the sale of Pixar), there is no public record of Mr. Jobs giving money to charity. He is not a member of the Giving Pledge, the organization founded by Warren E. Buffett and Bill Gates to persuade the nation’s wealthiest families to pledge to give away at least half their fortunes. (He declined to participate, according to people briefed on the matter.) Nor is there a hospital wing or an academic building with his name on it. …the lack of public philanthropy by Mr. Jobs — long whispered about, but rarely said aloud — raises some important questions about the way the public views business and business people at a time when some “millionaires and billionaires” are criticized for not giving back enough… In 2006, in a scathing column in Wired, Leander Kahney, author of “Inside Steve’s Brain,” wrote: “Yes, he has great charisma and his presentations are good theater. But his absence from public discourse makes him a cipher. People project their values onto him, and he skates away from the responsibilities that come with great wealth and power.”

But why, to address Leander Kahney’s criticism, should we assume that Mr. Jobs has done nothing for the poor? He’s built a $360 billion company. That presumably means at least $352 billion of wealth in the hands of people other than himself. And that doesn’t even begin to count how consumers have benefited from his products, the jobs he has created, and the indirect positive impact of his company on suppliers and retailers.

To give credit where credit is due, the article does present this counterargument. It reports that Mr. Jobs told friends, “that he could do more good focusing his energy on continuing to expand Apple than on philanthropy.”

This is a critical point. Do we want highly talented entrepreneurs and investors dropping out of the private sector and giving their money away after they’ve reached a certain point, say $5 billion? Or do we want them to focus on creating more wealth and prosperity?

Interestingly, Warren Buffett used to understand this point (before he started arguing that politicians could more effectively spend his money). And Carlos Slim Helu still does:

Mr. Jobs, 56 years old, is not alone in his single-minded focus on work over philanthropy. It wasn’t until Mr. Buffett turned 75 that he turned his attention to charity, saying that he was better off spending his time allocating capital at Berkshire Hathaway — where he believed he could create even greater wealth to give away — than he would ever be at devoting his energies toward running a foundation. And last year, Carlos Slim Helú, the Mexican telecommunications billionaire, defended his lack of charity and his refusal to sign the Giving Pledge. “What we need to do as businessmen is to help to solve the problems, the social problems,” he said in an interview on CNBC. “To fight poverty, but not by charity.”

None of this is to say that charitable giving is wrong. I’m proud to say that my employer, the Cato Institute, refuses to accept money from government. This means we are completely dependent on private philanthropy.

But those of us who work at Cato understand that creating wealth—maximizing the size of the economic pie—is the most important priority. And if the pie is big, generous people then have more ability to make contributions to worthy causes such as school choice scholarship funds, the Salvation Army, or (ahem) America’s best think tank.

Free or Equal on PBS

In 1980 Milton Friedman made a splash with his 10-part PBS documentary, Free to Choose, which also became a bestselling book. Thirty years later Cato senior fellow Johan Norberg travels in Friedman’s footsteps to see what has actually happened in those places Friedman’s ideas helped transform. From Stockholm to Estonia to India, from New York to Hong Kong to Chile and Washington, D.C., Norberg examines the contemporary relevance of Friedman’s ideas in the 2011 world of globalization and financial crisis. The result is a one-hour documentary, Free or Equal: A Personal View, which is now running on PBS stations across the country.

Visit the Free to Choose Network page to find out more about the documentary. Click on “Carriage Grid” to find showings in your area. Note that it’s arranged by size of media market, so New York is first, then Los Angeles, and so on down through 210 media markets. It’s searchable.

I missed the first Washington showing on Sunday, so check it out today. But note that showings will run into mid-September, so your friends will have many chances to catch the show.

And for a book by Norberg on related issues, check out In Defense of Global Capitalism.