Category Archives: Economics

The Greatest Monopoly of All

Matt Fagerstrom

Matt Fagerstrom

Matthew Fagerstrom is an economics and political science student at Villanova University. He is currently working alongside a professor on a study of wealth inequality. His favorite areas of economics are the minimum wage and monetary policy.
Matt Fagerstrom

Latest posts by Matt Fagerstrom (see all)

There is an unlimited want for goods and services. Indeed, this is part of the definition of economics, that the dismal science is the study of how individuals allocate scarce resources to resolve infinite wants, but just because a good or service is not supplied on the market does not mean that it is outside of the purview of economics or that the demand for said good or service does not obey all the traditional laws of economics. While the decision making process is often different in the political and economic sphere owing to a change in incentives, the praxeological laws of human action still apply no matter where the individual is acting.

One good that does not exist in the private sector and is usually not studied much from the point of view of mainstream (read: Keynesian) economists is the market for leadership or governance, even though governance is certainly a vital service without which there would be great difficulty in organizing human interaction. For the most part, there is very little competition in the market for leadership; it is the most monopolized market on the planet. While it may be argued that there are 196 different firms offering the service of governance, that is that there are 196 countries (depending on how lenient one is with sovereignty), the truth is that the fact that most of these are nation states makes it remarkably difficult to simply move if one finds their particular governance firm to be doing a poor job, although some do move, and within a given geographic area there is only one leadership firm to choose from (I will continue to use the terms governance and leadership interchangeably throughout the article, although I know that the words do mean two different things).

Certainly some countries are further broken down into provinces, states, or cantons, which allows some competition between the aliquot parts, but the states are still a monopoly within their state boundaries. One may move from California to Texas, but one is still in the United States, which limits the ability of one to shop around for different codes of law, so to speak. Simply put, by all conceivable metrics a country is monopoly within its geographic borders.

What is the point in defining countries as monopolies? It is to argue that whatever arguments are created to castigate monopolies on the market may also be equally applied to governments; in fact, these arguments are made all the stronger by the fact that competition in the market for governance is often rigorously outlawed by the monopoly firm. The arguments against monopolies are that they can provide an inferior good at a much higher price, that they have little to no incentive to respond to consumer complaints or demand, and that they prevent others from entering the market and satisfying consumer demands more adequately by erecting barriers to entry. This is undoubtedly true of governments. Taking the United States as an example, they provide an inferior good at a higher price in the form of only 30 cents going to those in need for every dollar of aid compared to 70 cents of every dollar going to those in need through private charity, they are immune to consumer complaints considering that congressional approval hovers at 15%, and they erect barriers to entry by preventing people from forming their own governments within the United States. I could list countless other examples, but suffice it to say that this is problematic considering that governance is the one service that enables us to have all other services. Without a system of property rights, there can be no economy, and one of the major purposes of a system of governance is to protect such rights; a monopoly firm does a poor job of it by all accounts.

One of the major complaints against capitalism is that it produces monopolies or oligopolies that harm consumer welfare. While it is not true that monopolies do not form under free market capitalism, since businesses cannot force you to buy their products at the end of a gun, governments can and do force you to pay for their services with legions of tax collectors and policemen ready to enforce the tax code, with violence if necessary.

Just to digress for a moment on the issue of free market monopolies not existing, I mean monopolies not merely in the sense of having a large market share, but in the negative sense of being a coercive monopoly that can prevent others from entering the market. All examples of a monopoly rising on the market are either from a grant of government privilege, which is certainly not a free market, or an example of an amazing entrepreneur who is aiding consumer welfare instead of hindering it, and not examples of predatory price fixing or any other anti-competitive method; antitrust laws are simply ineffective at aiding consumers and most likely only make them worse off.

Returning to the subject of governments, it is clear that they are coercive monopolies in the negative sense. Since competition is forbidden, they have absolutely no incentive to serve their consumers. Democracy and the ability to vote is not much of an incentive to aid their consumers, since reelection rates are around 90%, meaning that it is rather unlikely that any given congressman or senator will lose their job, and even if they do, they would only lose it to another a person who will be a member of the government, there is no way of voting out the entire system or switching to a different one. Allow me to illustrate with a market based example. Imagine there were two car manufacturers, A and B, but they are both owned by C, so that while they compete, they are in fact sending all their revenue to the same person at the end of the day. If one wishes to switch from A to B or vice versa, they are still using the same firm at the end of the day, and government is no different.

If competition is vitally important in oil and electronics, two of many areas where antitrust laws have been used to breakup “anti-competitive” firms, then it must be equally important in the field of lawmaking and governance, since without a good system of property rights and legal protection, there would not exist the proper circumstances to drill for oil or design electronics, yet almost no one today, and certainly no one in government, discusses the need for rigorous and real competition in governance. Almost everyone agrees that having elections is better than having a tyrant rule autocratically, since that is at least some competition of ideas, but the idea is never taken much further than that. Removing barriers to entry in the market for governance would be a great boon to not only liberty but also prosperity, by allowing people with different philosophies of law to live under different codes of law through a market mechanism that adequately protects the property rights of all involved.

One imperfect example of this would be the Italian city-states which were decentralized cities that competed with each other for taxpaying citizens; most of medieval Europe was like this, but Italy was one of the more decentralized regions at the time. It was this competition that caused Italy, with Florence being one remarkable example, to be the birthplace of the renaissance by offering a more attractive system of governance than her peers, in part due to tax breaks. This competition in government caused city-states to compete for taxpayers and thus offer the best government they could provide instead of being a monopoly service that could mulct the taxpayers for as much as they were worth since they had nowhere else to go. Moreover,  this competition bankrolled the renaissance and lifted Europe out of the middle ages into a new period of relative wealth (Cohn 457-85). To build a free and prosperous society, it is necessary that governments be allowed to compete on an open market for law.

Sources:

Armentano, Dominick T. Antitrust: The Case for Repeal. Auburn, Ala.: Mises, 1999. Print.

Cohn, Samuel. “After the Black Death: Labour Legislation and Attitudes towards Labour in Late-medieval Western Europe.” Economic History Review 60, no. 3 (2007): 457-85.

Gass, Nick. “GOP Congress Earns Low Marks from Public.” Politico.com. Politico, 12 Aug. 2015. Web. 5 Aug. 2016.

Mahtesian, Charles. “2012 Reelection Rate: 90 Percent.” Politico.com. POLITICO, 13 Dec. 12. Web. 05 Aug. 2016.

Mcgee, John S. “Predatory Price Cutting: The Standard Oil (N. J.) Case.” The Journal of Law and Economics 1 (1958): 137-69. Umich.edu. University of Michigan. Web. 5 Aug. 2016.

Ruwart, Mary. “How Effective Is Government Welfare Compared to Private Charity? – The Advocates for Self-Government.” Theadvocates.org. The Advocates for Self Government, 25 June 2013. Web. 05 Aug. 2016.

What’s Wrong with Subsidies?

Matt Fagerstrom

Matt Fagerstrom

Matthew Fagerstrom is an economics and political science student at Villanova University. He is currently working alongside a professor on a study of wealth inequality. His favorite areas of economics are the minimum wage and monetary policy.
Matt Fagerstrom

Latest posts by Matt Fagerstrom (see all)

We have already explored the troubles involved in setting up systems of tariffs, so let us now turn our attention to another form of industry support, namely subsidies. The argument in favor of subsidies is that certain industries are vital in the American (or any other) economy but not necessarily profitable on their own, or at least, not profitable enough, with one example of this being the farm industry, which receives around $20 billion in subsidies a year. Farms are subsidized because if the prices of crops fall too low, then farmers would be run out business and the ability of the American economy to feed itself would be in jeopardy.

However, the interesting thing about farm subsidies is that they are not put in place to keep agricultural prices low, and thus to make them more affordable to American consumers, but rather, they used to buy up surplus crops if the price goes too low, meaning that American tax dollars are being used to restrict the supply and thus increase the price of American agricultural products, enriching farmers at the expense of everyone else, another case of broken windows. Of course, the natural counter is that America must be able to feed itself and so it is important that farmers are well compensated for their work, but America is a net exporter of food, meaning that we currently sell a lot more food than we buy, so the prices would have to drop quite severely for us not to be able to feed itself, and that is, of course, granting the assumption that we must have autarky in agricultural, which is a debatable assertion in and of itself. One last note about farm subsidies themselves, and then I will move on to subsidies in general. Farm subsidies, by and large, are not going to small mom and pop farms, but are going to Monsanto and Con Agra, multibillion dollar industries who do not need to be assisted on the public dime.

Now, what is problematic about subsidies in general? The problem is that they are just another case of broken windows, but in a slightly different way. With a subsidy, money is taken from the taxpayer and then given to a business, either to lower their costs, that is, increasing their revenue, or to entice businesses to open that otherwise would not have existed. Prima facie, this seems like a win for the economy, since businesses are now more profitable and can run when they previously would have closed or are opening when they would have stayed mere ideas in the heads of entrepreneurs. However, there is no choice in an economy that occurs without tradeoffs. The choice to subsidize one industry or business means that this money must come from somewhere else, and this money comes from taxation or inflation, the same with all other revenue. Let us confine our examination to taxation due to length constraints. If money is taken via taxation, it is being removed from already existing businesses or, more accurately, the employees and shareholders of already existing businesses. What this means is that businesses that exist and are profitable are being used to prop up and create businesses that would not have been profitable without the subsidy. Essentially, money is being shuffled from its most efficient use to less efficient uses, with money being removed along the way to pay for the government bureaucrats who run the offices that dole out the subsidies. Ex ante, this necessarily reduces social welfare because money is being removed from its most productive and valued uses and given to uses that are valued by the political class. Under a system of subsidies, instead of rewarding those entrepreneurs who can most ably serve the consumer, those who are the most adept at lobbying the government for fund are rewarded, which is a different skill set entirely.

There is only so much wealth in a society at any given time, and while this amount of wealth can be increased through productive processes, simply taking money from Peter to pay Paul is not going to increase the economic output of a society, since resources on a free market are allocated to their most efficient uses due to the structure of the price system. Taking money from a productive enterprise and giving it to a non-productive enterprise, which is what subsidies do, lessens the total wealth in society because money is now being spent in the pursuit of less valued outputs. Society faces a tradeoff. If the choice is between having a watch factory and a car factory, one cannot see which factory the consumers wanted and then subsidize the other to get both, one will simply have a crippled watch factory and a dependent car factory instead of two healthy factories.

Allow me to illustrate with an example. Suppose we have an economy where a factory produces about 1000 computers per annum, and each computer sells for $100 of profit, giving them a total profit of $100,000 per annum, which they use to buy new parts for computers, expanding their business by 100 computers a year (we are also supposing that it costs $1000 to make a computer and they sell for $1100). In this case, the economy grows by 10% per year. Now let us suppose that a well-meaning but economically illiterate congress passes a law that taxes the computer factory 20% of profits to give to a shoe factory. Now, the shoe factory has $20,000 in taxpayer money, while the computer factory has $80,000 in profit instead of $100,000, so they can only expand production by 8% instead of 10%. Whatever the shoe company gained had to come from money that was already in circulation somewhere else in the economy, which is a loss to those who preferred the previously existing pattern of production.

The argument that subsidies should be used to lower prices runs into a similar problem. Since the subsidy represents a given sum of money being taken from taxpayers and given to a producer, the only way in which subsidies can lower prices is that the price is paid partly in tax and partly in purchase. In other words, the way that the price is lowered is that part of the price of the subsidized good is paid before even buying the good in the form of a tax used to prop up the producer of the good or service, and the rest is the lower price which is seen but does not exist in reality, since the price is not actually lower at all. Subsidies cannot create wealth at all, they can all alter the way in which wealth exists by giving it from those who are producing to those who demand a handout from the government.

One final problem with subsidies is that if the business was actually profitable and productive on the free market, the good or service would already be produced by those entrepreneurs who have seen the unfulfilled need on the market and rushed to satisfy it. If an investor hears a proposal for a business and then turns it down, or the would-be entrepreneur cannot get a loan, then and only then would he turn to the government, meaning that the businesses and industries getting subsidies are not those that would be the most productive on the free market, but would be those goods where either demand does not exist or where the business model is so unprofitable that no investor would put up his or her money for the project or no bank would loan money to the potential entrepreneur. Essentially, the taxpayer would be paying to prop up a business that would soon be in the red without government support and would not produce goods that satisfy a need that the market actually has. For these reasons among many others, subsidies should and must be opposed.

The Minimum Wage, a Critique

Matt Fagerstrom

Matt Fagerstrom

Matthew Fagerstrom is an economics and political science student at Villanova University. He is currently working alongside a professor on a study of wealth inequality. His favorite areas of economics are the minimum wage and monetary policy.
Matt Fagerstrom

Latest posts by Matt Fagerstrom (see all)

To begin, I’d like to explain what the minimum wage is. The minimum wage is the lower limit of what employees can sell their labor for, or the lower limit of the price employers to pay to buy labor; they both mean the same thing. When lower limits are imposed on the market, they create what are known as price floors. They create disequilibrium in the market, and create a surplus of unbought goods. Price floors have been damaging every time they have been tried, most notably when they were tried on agricultural products during the Great Depression (Sowell). In short, minimum wage laws are price floors, and carry all the negative aspects of them. They spur unemployment, worsen poverty, and are immoral.

Who Earns the Minimum Wage?

Before discussing the data on minimum wage, I’d like to briefly summarize the 2014 report on minimum wage workers’ characteristics by the Bureau of Labor Statistics. 56% of minimum wage workers are between the ages of 16-24, with 28.8% of those workers being teenagers. 65.3% of minimum wage workers are part time, and 23.7% are non white. Most importantly, only 3.9% of hourly wage earners made the minimum wage, or 1.3 million workers, with 2.99 million workers making at or below the minimum wage. 18.4% of minimum wage workers had a bachelor’s’ degree or higher, 34% had only a high school diploma, and 12.2% did not have a high school diploma, with the rest having a high school diploma and some college. As regards marital status, 65.8% of minimum wage workers have no spouse, and only 22% have a spouse who is present. Unless I missed it, the data does not discuss how many have dependents in this report (Haugen).

Point 1: Minimum wage laws contribute to higher unemployment Continue reading The Minimum Wage, a Critique

Tariffs and Broken Windows

Matt Fagerstrom

Matt Fagerstrom

Matthew Fagerstrom is an economics and political science student at Villanova University. He is currently working alongside a professor on a study of wealth inequality. His favorite areas of economics are the minimum wage and monetary policy.
Matt Fagerstrom

Latest posts by Matt Fagerstrom (see all)

I had originally written this piece for my own blog, which has since been shuttered in the move to this new shiny blog. This is the first in a two part series on tariffs and subsidies, of which the second part never got written. It will be written soon.

I will begin with tariffs, which are the more readily denounced of the two, but there are figures out there, such as everyone’s favorite businessman and presidential candidate, Donald Trump, who call loudly and passionately for tariffs on foreign made goods, such as those made in China or Mexico. The arguments in favor of tariffs are often rather simplistic, hinging on the natural inclinations of citizens to support domestic goods, producers, and, most importantly, workers. The theory goes that tariffs need to be put in place to protect domestic industry from overly competitive foreign goods that would put American producers out of business, and so the tariffs put a tax on foreign goods so that domestic producers can compete. Well, this seems like a good idea on paper. Foreign goods now cost more than domestic goods and consumers will patronize those same domestic firms, employing Americans and keeping the economy strong by ensuring that American industry can compete.

What’s the problem here? The issue is that it ignores opportunity costs, or what the French economist Frederic Bastiat called the broken window fallacy, or that which is seen and that which is unseen. The broken window fallacy is described by Bastiat in a parable wherein there is a baker who has his window broken by vandals, and then must spend some amount, say $100, going to a glazier and having his window repaired. So, the townspeople, when they see this, remark to themselves that this breakage of the window has been good for the economy because it means that the baker had to spend $100 repairing his window, but that is only what they see. What they do not seen is that this $100 spent on the glazier could have been spent on any number of things, such as a new suit from the tailor, or a new pair of shoes from a cordwainer. Thus, instead of being able to get this new good, he must instead spend money on repairing a broken window, so the overall economy is worse off because money had to be spent on fixing economic damage rather than pursuing new production.

This is the same thing that happens with tariffs, since the money that went to paying the tax on the foreign good, or on paying the higher cost of the domestic good cannot be spent pursuing other economic ends, and so consumers are now worse off, and only the domestic workers in the industry effected by the tariff are better off, because their goods are now competitive. To illustrate, let us say that there is a tariff on computers. If, in a purely free market, domestic computers cost $500 and foreign computers cost $400, then consumers will buy the foreign computers at the cheaper cost and be able to use the extra $100 on whatever other goods they desire, and thus will be better off, since they have a computer and $100 worth of additional goods. Then, the computer industry comes along and demands a tariff, since they cannot compete with the foreign produces, so, the government levies a $100 tariff on foreign computers to bring the price of both up to $500, which means that domestic producers can compete. Consumers now must spend $500 on computers, leaving them with $100 fewer dollars to spend on other goods, so they are clearly worse off because of this tariff. Foreign producers are worse off, since they cannot sell their goods. Domestic and foreign producers in industries not impacted by the tariff are worse off as well because consumers now have less money to spend on those goods. The only people who are better off due to tariffs are the domestic producers in the industry effected by the tariff, since their goods are now competitive. So, in the process of levying a tariff to support American jobs, all Americans not employed in the tariff impacted industry are worse off, even though the whole purpose of the tariff was to benefit American jobs. Money that was being diverted to the industries benefitting from the tariff comes from the consumers, so those Americans now have less real income, and American producers in other industries will see their income diminished because consumers have less income to spend on their goods, so these businesses are now worse off as well because of the tariff. Tariffs in no way make the American economy stronger, and in fact can only harm it because it takes money from more efficient producers of goods and gives it to less efficient producers, make literally everyone worse off except for those lucky enough to be in the domestic industry impacted by the tariff. What we see from the tariff is that domestic producers in the industry effected by the tariff are now better off, but what is unseen is the diminished income of consumers and the lower incomes of all other businesses, foreign and domestic, but just because this impact is not readily seen, does not mean it is not there, for it most certainly is.

Another argument for tariffs is the infant industries arguments, which is, as the name implies, a line of thinking that states that new industries need to be supported by tariffs because they are too new to be able to effective compete against the already established foreign industries. The industry is given a tariff until they can get on their feet and then the tariff is supposed to be removed and competition can resume its natural course. Many people are sympathetic to this line of thinking because it is temporary, and because it is encouraging domestic production. On the surface, this seems much less objectionable, because it is not permanent and because it is not giving favors to well established businesses and industries.

However, the same argument applies here, and a new one comes up as well. Simply put, nascent industries do not have the political capital to be able to get tariffs, whereas more established firms do have the political capital to get tariffs, so they are more likely to get tariffs than industries that supposedly need it. This argument against infant industries is effective because it shows that these infant industries cannot actually lobby for tariffs, so any infant industries would be suspect. Moreover, as Ludwig von Mises noted, these tariffs are also harmful economically because resources are being funneled from where they would have otherwise gone without the tariff, that is, not into these infant industries and instead going to wherever the market would have allocated those resources, to these new industries, which is not the most efficient use for them, since the government had to step in and change prices through the use of tariffs to support the new industries. Economic welfare is being reduced because the labor, land, and capital that went to secure the creation of these infant industries, which are only profitable through the tariff, and was not used to satisfy the most urgent wants of the consumer. For these reasons, tariffs must be opposed at all time and wherever possible. They cannot increase economic welfare because they are diverting resources from where they would have gone in a free market, which is, at least ex ante, their most efficient use, and is instead being funneled into an industry that is not efficient or in high enough demand to warrant its creation.