Twelve Myths

Katherine,

You may not have heard of Underwriters Laboratories, but I am sure you have seen the UL label on many of the electric products you buy. Others can speak on this topic better than I, so I hope you don’t mind if I provide some references.

http://www.mises.org/freemarket_detail.asp?control=193&sortorder=articledate

Also, see Randall Holcombe’s book "Public Policy and the Quality of Life" to find out more about Best Western hotel and private regulations. But in the mean time you can read this interview of Dr. Holcombe:

http://www.mises.org/journals/aen/aen18_2_1.asp

Thanks for the replies. If anyone can keep going with this, I'd be grateful.

No, Tom, I haven't heard of Underwriters Laboratories. I have only heard of Best Western in relation to hotels - i.e. the run them. Restrictive covenants I know about in a real estate law sense, because I am a real estate lawyer.

Having said that, I am not sure how that feeds into the government regulation point, so if you could explain further I'd be grateful.

Mark - thank you also for your reply. No offence taken regarding my name, honest guv'nor. I had thought that the point might be that, say, the regulation by the market or even (perhaps?) regulation by morals. Is there any evidence that this works? Is there anywhere in the world that has particularly low government regulation but where standards are nevertheless high? Genuine question - I'd be interested to know.

Millions of Americans became poorer today after calculating their new per-capita income

This would/should be the headline after you do the following excercise. Calculate the per-capita income of United Statees. (Say, $25,000). Now calculate your per-capita income assuming you are also a citizen of planet earth. This would be around $2,500. This makes us all living in America poor.

If you disagree then you should also reconsider your opinion on immigration. Immigration makes us poorer in the same way- by simply calculating a new metric that includes millions of more people. It does not materially change my life or yours. Just as when a dude in California wins a $200 million lottery I don't get any richer (except in per capita), similarly I don't get any poorer when poor people move to California.

The myth of the metric should be one of the twelve myths.

Mea culpa, John P. Ditto Justin's "note to self"! :)

Mea culpa, John P. Ditto Justin's "note to self"! :)

No harm done. I've made the same mistake myself.

Thanks John, I had a kneejerk reaction when I saw "fair prices ... can be objectively determined" and it set me off.

We hear that phrase too often, and rarely is that statement rebutted.

Note to self, two eyes, one keyboard, read twice post once.

Thanks, asg. Yes, the points that JABBER and Justin object to were in fact offered as corollary or additional MYTHS.

Sorry Katherine, I misread your name and called you Kathy. Hope you don't think I'm getting too familiar.

Also, Tom's points (which were not posted when I strted writing) are good ones.

Kathy,

6 is an economic myth because society are government are different things. Thus, if you believe that government does not have a mandate to say, provide accomodation for the destitute, that does not mean you want a society where it is every man (or woman, ma'am) for himself. It is still possible to want a commpassionate society where people act for the good of others without nationalising charity.

That feeds into 7. Regulation can be self-imposed. Brand names are agood example. Some firms behave well, not out of altruism or because government tells them too, but because it gives them a good reputation and therefore increases their long term profitability. Thus, one can favour this kind of self-regulation but oppose government regulation.

Tim,

I agree whole-heartedly

Katherine,

Regarding #7, have you ever heard of Underwriters Laboratories, Best Western, or how about restrictive covenants. I think these are some of the things that exemplify #7.

Forgive my ignorance, but how is #6 an economic myth? Also, re #7 if opposing regulation by government is not to oppose regulation, then what is it?

Thanks.

I’m a little in disagreement on the technology thing as well. But that’s because I typically use a much wider definition of technology than is usual. Management practices are technology. The rule of law is. Institutions are technology. They have to be invented, constructed, just as much as a computer or a tractor does.

11 out of 12. That's 92% correct. Good enough for an "A" in my book. Dazzling list. But I believe Don may have it wrong on # 9.

Is it a myth that: "managers are driven by stock-market pressures...so that profits are maximized in the short-run at the expense of long-term productivity capacity"?

This is a difficult "myth" to dissect for Don compares short-tun profits with long-term productivity capacity. The latter measures output, not profit. Each are different units of measure. For the sake of brievity, I am going to compare short-term profits with forgone long-term profits.

We all agree companies exist to maximize profits, but the crux is do short-term profits come at the expense of long-term profits? In some cases, yes.

The reason is risk. Time is risk and in many cases time is money. Therefore risk can cost you money. Managers of public companies have increasingly drawn on stock options and/or compensation clauses that establish rewards for increases in equity valuations. Risk profiles of managers vary wildly. Some managers may be willing to record nine years of no profits for a tenth year of HUGE profits and compensation. Other managers might believe shareholders will not tolerate nine year's of mounting loses leading to the resultant dismissal of the manager before he receives his profit based compensation in year 10 and will therefore 'bat singles' until shareholders get tired of his mediocre performance.

Here's an analogy. You could have one bottle of water today and one tomorrow OR ten bottles if you wait five days. The profit is greater in the long-term, but if you're two days from escaping the desert, you'd take the two bottles b/c you might not make five more days without water. But if you are sitting next to a water fountain, you would choose differently. The difference? Risk. Were long-term profits sacrificed at the expense of short-term profits? Yes. Was it rational? Yes.

Thus, I conclude that #9 is neither a myth nor a truism.

Other ways to evaluate this myth are the discount rate which is used in calculating net present value of profits and public choice theory. I'll leave those tacks to others.

I think the idea of "fair prices and fair profits can be objectively determined" was being offered up as a myth.

"fair prices and fair profits" can be objectivley determined? How? Concensus of subjective opinions?

Any artificial construct introduces subjective definitions of "fair" price levels. Fair in and of itself is a subjective modifier.

I just went off on a rant, and rather than hi-jack this board hop on over to my place and read the rest if you care.

I think Mark's got a very good point re: technology. The printing press is a great example. I would agree, however, that pre-capitalist technological innovation was "hit or miss." With capitalism, the incentive to spend time inventing has only been reinforced a thousand-fold, and so technological innovation has become ubiquitous.

I also don't agree with #9, but I'm open to being enlightened. My time in industry sure indicated a short-term, stock driven mindset amongst management. And how else does one explain Enron, WorldCom, Tyco, ad infinitum?

Oh, and John P., what do you mean, exactly, when you write "The core claims of economics are still subject to dispute among economists." What do you consider "core"? I would say that the Law of Demand and the Law of Supply and the Law of Supply AND Demand are "core," and I don't know any decent economist who would call those disputable "theories" -- they're solid as a rock.

Coyote's addition is a good one, though it's arguably encompassed by no. 5. By the same token, I would suggest two corollaries to no. 8: First, there are fair prices and fair profits that can be objectively determined. Second, most businesses operate on wide profit margins that the government can dip into without ill effects. And I would add one: The core claims of economics are still subject to dispute among economists.

*** He attributed the other 90% to technological progress. ***

The cause must be more fundamental than "technology" -- technology is just a derivative result.

The advances, processes, and products that constitute "technology" don't just fall out of the sky unlooked for. Technology occurs as a result of people dedicating great amounts of time and resources in pursuit of satisfying some need.

Those people would not be available and have the time to do that were it not for division of labor, so I would think division of labor is a fundamental impetus for "technology".

But I'd go deeper. Division of labor isn't a random thing; it's a deliberate attempt to better satisfy needs and respond to market signals, by doing things more productively.

So poeple have an unending desire to satisfy needs (seek utility, I guess) ever better, which they often accomplish by satisfying others' needs, as communicated by market signals. But they must be permitted to do all that. There must be a societal framework to minimize friction and resistance and to establish lines of communication (I think money is the network protocol here), to the free pursuit of satisfying needs, or else human impulses are stymied in a Soviet nightmare.

So -- unceasing human pursuit of utility plus dividable labor, within a context of economic freedom with lines of communication: that's where technology AND economic growth come from.

For #4, how about "Technology is the efficient cause modern prosperity?"

Coyote is right. The fixed-pie myth has to be up there close to #1. Also, I can't believe we didn't see any mention of the BWF.

"Wealth-enhancing technology is the product of freedom, not the direct cause of wealth."

But technology is a direct cause the freedom we have.

The agricultural revolution freed people from the feudal system but it could never have happened without technological advancement.

The printing press brought mass literacy (if people can't afford books then they do learn to read). As a result demand for education increased with all the incumbent economic benefits and advantages to freedom. Moreover, subversive literature could now be disseminated, weakening the hold of the ruling classes.

Many of the freedoms we have exist because of our state of technology.

I think also that what Don may have been getting at is the role of free trade in increasing prosperity. It would make sense in the context.

However, if lower prices from countries like China are a more major component of growth than technology then it does not change the fact that technology has played a role in our being able to exploit such benefits. Improved communications (both physical and electronic) allow us to outsource more, especially in the service sector.

In fact the prosperity from trade with China would not be possible if it were not that they are no exploiting technological advances already made in the West. Moreover, the ability of the Chinese to move so quickly has a lot to do with the speed at which information can be disseminated in a modern world.

If (4) read "technology is not the main immediate cause of growth in the developed world" then I would agree. However I would argue that technology is the underlying cause of all growth in personal incomes.

Gotta add a big one, the one that is close to number one on my list:

Economics and wealth are zero-sum. If someone gets rich, someone of necesity must be getting poorer.

On #4: I agree with the comment that said better technology is a consequence of the correct institutions.

Further, what these institutions do is bring to market new ideas which in turn create progress and wealth.

New technology is one way this can happen: another example would be new/improved business processes, and yet another example (which we are seeing more of today) is bringing more perfect information to corporations and individuals.

Bringing good ideas to fruition requires the correct institutions to do so. Technology does not just "sprout up" all on its own, and neither does wealth. There are plenty of examples of inferior ideas prevaling over better ones because this process is imperfect. But overall, improved ideas are "implemented" in society by laissez-faire forces, so progress happens and we become more wealthy.

Those who espouse the "technology did it" view anthropomorphize technology in isolation of society, which allows them to deprecate free market forces and institutions. It was thought communism was compatible with technology: Soviet Russia was always a big technocracy. And it was discovered that this method of organizing society failed, because that system did not sufficiently promote good ideas due to its distinctly anti-laissez-faire structure.

Robert Solow won the nobel prize for showing that only 10% of economic growth is explained by improved allocation of resources. He attributed the other 90% to technological progress. So I disagree with Biopolitical.

As far as whether it's technological progress or the economic institutions that societies adopt, I'll say this: The way you've framed the argument is silly.

You're saying that without proper economic institutions, prosperity doesn't rise. Well, it doesn't rise without air, either. Without air, everybody suffocates. Here's myth number 13. Economic institutions like the rule of law cause prosperity. This is a myth because air is required for prosperity.

Posted by: Biopolitical | Dec 21, 2005 1:44:23 PM

"My guess for #4 is: the cause of growing prosperity is finer and more precise division of labor, which leads to people complementing each other ever more perfectly."

My guess for #4 is: the cause of growing prosperity is finer and more precise division of labor, which leads to people complementing each other ever more perfectly.

Steven,

Yes, that's what I assumed he was getting at with (4) too. But I think it's clearly wrong to call (4) a "myth." It's just an incomplete explanation, like saying "the cause of Joe's death was his being shot." Yeah, okay, but how did he end up getting shot?

Matt and Gravity:

I think Don's getting at the argument that the chief causes of modern prosperity are the social, political, and economic institutions that societies adopt (e.g., the rule of law, private property, etc), not technology per se. Technology is a *consequence* of having the right institutions; it is the institutions themselves that promote wealth. Giving technology to a society with the wrong sorts of institutions will not make them wealthy.

Wealth-enhancing technology is the product of freedom, not the direct cause of wealth. The best book on this point remains, for me, *How the West Grew Rich* by Rosenberg and Birdzell.

So, what is the chief cause of modern prosperity?

I'm with you on ten out of twelve, but could you elaborate on what's wrong with (9)? And (4) doesn't seem wrong to me at all -- it's just incomplete, in that it doesn't take inmto account the circumstances which allowed that technology to arise.