Transcript Free Enterprise, Monetary Wealth, and Non-Monetary Wealth John Garen University of Kentucky April 2014

Free Enterprise, Monetary Wealth, and
Non-Monetary Wealth
John Garen
University of Kentucky
April 2014
Overview
• The growth material well being.
• The importance of free enterprise and its
supporting legal/governmental institutions.
• Are we missing something?
• What about non-material happiness? What
about fairness?
• Other free enterprise institutions regarding
these.
World Economic Growth
From Center for Economic Research and Forecasting.
Income and Population
From The Economist, June 2013.
Life Expectancy
From j-bradford-delong.net.
Introductory Macro AS/AD Analysis:
How Does AS Shift?
Price
Level
(P)
AS1
AS2
AS 3
AD
Q1
Q2
Q3
Real GDP (Q)
How Did This Happen?
Step 1: To Have More, More Must Be Produced
• “The greatest improvement in the productive
powers of labour . . . seem to have been the
effects of the division of labour.”
Adam Smith, The Wealth of Nations, Book I, Chapter I.
Smith’s “trifling” example of pin
manufacture
From no specialization to full specialization raises
output from perhaps 20 pins per worker to 4800!
Apply This to Food, Clothing, Shelter,
Cars, etc.
• “It is the great multiplication of the
productions of all the different arts, in
consequence of the division of labour, which
occasions, in a well-governed society, that
universal opulence which extends itself to the
lowest ranks of the people.”
Adam Smith, The Wealth Of Nations, Book I, Chapter I.
Data on Selected U.S. Industries,
1880-90
From T. DiLorenzo, International Review of Law and Economics, 1985.
Step 2: Exchange
“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 . . .
consequence of a certain propensity in human nature;
the propensity to truck, barter, and exchange one thing
for another.”
Adam Smith, The Wealth of Nations, Book I, Ch. 2.
The Gains From Trade
Price
S
Consumer
Surplus
PE
Producer
Surplus
D
QE
Quantity
Reliance on Self Interest, Not
Benevolence
“It is not from the benevolence of the butcher, the
brewer, or the baker, that we expect our dinner, but
from their regard to their own interest.”
The Wealth Of Nations, Book I, Chapter 2.
“Every individual... neither intends to promote the public
interest, nor knows how much he is promoting it . . . he
intends only his own gain, and he is in this . . . led by an
invisible hand to promote an end which was no part of his
intention.”
The Wealth Of Nations, Book IV, Chapter II.
The Result . . .
And . . .
But Not Everywhere in the World
Step 3: How to Enable Steps 1 and 2.
“The immediate sources of Western growth were
innovations in trade, technology, and organization .
. .”
Enabling this was the emergence of a set of
rights, including rights to: (i) form enterprises; (ii)
buy, sell, and hold goods with few restrictions; (iii)
switch activities; (iv) immunity from arbitrary
seizure by political authorities.
Rosenberg and Birdzell, How the West Grew Rich, 1986, on the historical growth in Europe 1500-1800.
Modern Measures of This: Fraser Institute’s
Economic Freedom of the World Index
1. Size of Government: Government consumption; Transfers and subsidies; Government enterprises; Top
marginal tax rate.
2. Legal System and Property Rights: Judicial independence; Impartial courts; Protection of property rights;
Military interference in rule of law and politics; Integrity of the legal system; Legal enforcement of contracts;
Regulatory restrictions on the sale of real property; Reliability of police.
3. Sound Money: Money growth; Standard deviation of inflation; Inflation; Freedom to own foreign currency
bank accounts.
4. Freedom to Trade Internationally: Tariffs; Regulatory trade barriers; Controls of the movement of capital and
people.
5. Regulation: Credit market regulations (Ownership of banks, Interest rate controls)
Labor market regulations (Hiring & firing regulations, minimum wage, Centralized
collective bargaining, Hours regulations)
Business regulations (Administrative/Bureaucracy costs, payments/bribes/favoritism,
Licensing restrictions, Cost of tax compliance)
GDP Per Capita
(ppp), 2010
Per Capita Income and Economic Freedom
Quartile
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Most Free
Quartile
2nd Quartile
3rd Quartile
Least Free
Quartile
Most Free ……………. Least Free
Sources: The Fraser Institute; The World Bank, World Development Indicators,
2013
Life Expectancy at Birth and Economic
Freedom Quartiles
85
Years
75
65
55
45
Most Free
Quartile
2nd Quartile
3rd Quartile
Least Free
Quartile
Most Free ……………. Least Free
Sources: The Fraser Institute; The World Bank, World Development Indicators,
2013.
China and Western Europe
Adam Smith Once Again
“Little else is requisite to carry a state to the
highest degree of opulence from the lowest
barbarism, but peace, easy taxes, and a
tolerable administration of justice . . .”
Lecture in 1755, quoted in Dugald Stewart, Account Of The Life And Writings Of
Adam Smith LLD, Section IV, 25.
Are We Missing Something?
What About Non-Monetary Issues,
Compassion, Sympathy, Fairness, Morality?
• Markets rely heavily on self interest. They have
greatly enhanced human well being.
• But is the reliance on self interest immoral?
• Does it promote selfishness? Does it marginalize
spiritual, emotional, non-material sides of life?
• What about fairness, justice, compassion?
• Should government play a larger role to promote
fairness and temper selfishness?
Another Side to Humans
“How selfish soever man may be supposed,
there are evidently some principles in his
nature, which interest him in the fortune of
others, and render their happiness necessary to
him, though he derives nothing from it except
the pleasure of seeing it.”
Adam Smith, The Theory of Moral Sentiments.
The Emotional Fulfillment of Charity
Nonprofit “Organizations”
• Nothing dictates that a private-sector organization
must be for-profit.
• Nonprofits are common for religious services, the arts,
hospital care, child care.
• Their goal is often to allocate goods and services to
those who are most needy, e.g., food and counseling
for the homeless; emotional support for friends who
are suffering; and nurturing of children.
• Think of the family or the feed-the-homeless shelter as
free enterprise institutions that don’t allocate via
market practices.
Allocating by “Need,” not Price
(“From each according to his ability, to each according to his need.”)
Problems
Assessing Needs
It’s not just cash. Emotional support, spiritual guidance,
advice, commiseration, being held accountable are often
needs of those in unfortunate situations. These are difficult to
assess.
Incentives and Dependence
Giving away goods and services induces more use. This:
(a) stretches the resources of the organization; and (b) may
cause an unwanted dependence on the organization.
How These Problems Are Addressed:
The “Rules” of Allocation by Need
• Close, personal knowledge of potential recipients normally
occurs. Assessment of true needs more likely; less likely to
be “gamed.”
Does the homeless man need food or counseling?
Does a friend who lost a spouse need cash or sympathy?
Does the child with poor grades need a tutor or discipline?
• An expectation of quid pro quos. Providers set conditions
and behaviors on recipients.
•
Shelter users are expected to be sober, go to religious services.
Kids are expected to behave and eat vegetables.
Friends are expected to return favors.
“Personal, relational, accountable.” From Marvin Olasky, The
Tragedy of American Compassion.
Can It Work for Large Scale,
Bureaucratic Government Programs?
• These entail interactions among strangers.
• Close assessment, quid pro quos not utilized.
• Mistakes: Wrong type of help; wrong people
helped; dependence fostered.
• Taxpayer funds not used as intended. What is
the morality of this?
Govt. Aid Programs Work Better if:
- “needs” are obvious; not subtle and complex
- incentive issues are minimal
- examples may be natural disasters and
accidents that are difficult to anticipate and
avoid
What About Large Scale Government
Planning and Allocation of:
•
•
•
•
•
•
Healthcare
Education
Savings and Retirement income
Energy
Automobile production
Homes
Misapplying the “Rules”
“Part of our present difficulty is that we must constantly
adjust our live, our thoughts and our emotions, in order
to live simultaneously within different kinds of orders
according to different rules. If we were to apply the
unmodified, uncurbed, rules of the micro-cosmos (i.e., of
the small band or troop, or of, say, our families) to the
macro-cosmos (our wider civilisation), as our instincts
and sentimental yearnings often make us wish to do, we
would destroy it. Yet if we were to always apply the rules
of the extended order to our more intimate groupings,
we would crush them.”
Friedrich Hayek, The Fatal Conceit.
Conclusion
• Market and market-supporting institutions are
fundamental in lifting people out of poverty and
to higher standards of living.
• They rely greatly on, and enable, positive
interactions among strangers.
• Other organizations foster more personal,
compassionate, emotionally-uplifting
interactions.
• Imposing the “rules” of the latter onto the former
is counterproductive.