Fletcher’s Zero-Sum Presumptions Shove Him Into Unmistakable Error

by Don Boudreaux on July 17, 2011

in Balance of Payments, Growth, Myths and Fallacies, Trade

In the unreported parts of his e-conversation with the protectionist Ian Fletcher, David Henderson very likely made the following point.  But because David didn’t quote that part of his e-debate with Fletcher, I take the opportunity here to highlight another critical way in which Fletcher is just plain wrong.  Fletcher writes:

First, you [Henderson] seem to contend that FDI [foreign direct investment] is an exception to the basic rule in economics that, in Milton Friedman’s words, “there is no free lunch.” That is, you ignore the fact that when foreigners make an investment in the U.S., they own the investment. That the investment took place may be a good thing, but this doesn’t change that fact that when foreigners, rather than Americans, own an investment, this increases the net worth of foreigners and reduces the net worth of Americans by the same amount.

Wrong.  There is no reason to conclude that the net worth of Americans is reduced by any amount.  It is not a “fact” that an increase in FDI in the U.S. increases the net wealth of the foreign investor by some $$ amount and decreases that of some American (or Americans as a group) by the same $$ amount.  Any number of examples might suffice to show why Fletcher is utterly off-base to make such an assertion.  Here’s a straightforward one:

Suppose my neighbor Smith sells his vacant lot in Virginia for $100,000 to Mr. Lee from China.  Mr. Lee then grows corn on that lot and earns profits from doing so.  Mr. Lee’s net worth rises.  Has my neighbor’s net worth declined?  Possibly – if he spends the $100,000 on consumption goods (which, as David ably argues, is not necessarily a bad thing; what, after all, is the ultimate goal of economic activity if not to be able to consume more?).

But “possibly” is not “necessarily,” or even “probably.”  If Smith spends the $100,000 to pay his way through medical school or to invest in his sister-in-law’s new business venture that turns out to be quite successful, Smith’s net worth increases.  It might increase by more (or by less – it doesn’t really matter) than the increase in the net wealth of Mr. Lee.

Mr. Lee is richer. Smith is richer.  No American is poorer.  No foreigner is poorer.  And Lee’s customers are richer (they get more or better or less costly corn as a result of Lee’s efforts), as are Dr. Smith’s patients or the customers of Sister Smith’s booming new business.

Fletcher’s mind seems so stuck in a zero-sum gear that he misses this not-at-all far-fetched possibility.

Or look at the matter from a different perspective by asking what would happen to Americans’ net wealth if foreigners were to completely remove themselves – or be completely removed by Congress – from the pool of potential investors in dollar-denominated assets.  Would the value of publicly traded corporate shares currently owned by Americans rise?  Would the value of real estate currently owned by Americans rise?  Would the value of successful American start-up companies rise?

I gather that Ian Fletcher believes that the answer to these questions is an unambiguous “yes.”  Do you?

There are ways other than the one I highlighted in my above example with Smith and Lee that FDI in America results in increases in both the net wealth of foreign investors and in the net wealth of Americans.  Take a stab in the comments section offering examples.

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{ 202 comments }

Sam Grove July 17, 2011 at 4:29 pm

Why do people thing the only value left after a trade is the dollars involved in the exchange?

Don Boudreaux July 17, 2011 at 4:56 pm

In Fletcher’s case it’s because he’s a mercantilist. I recall, if I’m not mistaken, that he admits to finding much merit in mercantilist dogmas and conjurings.

Sam Grove July 18, 2011 at 12:53 pm

edit: Why do people THINK…

Sam Grove July 18, 2011 at 12:57 pm

Perhaps it is because the dollars are not consumed.
The confusion is that they think the money IS wealth.

vikingvista July 22, 2011 at 11:26 pm

Maybe people would be less confused if they thought of money as future wealth for the holder, and consider that particular exchange incomplete until the receiver of the money later spends it.

muirgeo July 18, 2011 at 2:01 pm

So Sam if I sell $1000 dollar asset and use the money to purchase someting am I richer than if I produced something new of $1000 dollars wealth and use that to trade for something of equal value?

Don seems to be making the two comparable when they decidely are not.

Sam Grove July 18, 2011 at 3:01 pm

George, as is always the case, I have to assume that, in your judgement, you made the trade because you would be made better off by doing so. Better off = wealthier.

muirgeo July 18, 2011 at 3:35 pm

Why would you assume that? The big picture is that the trade is/was made a lot of times because people have had stagnant wages and had to dip into their home equity and find other sources of debt to support their lifestyles.

Sam Grove July 18, 2011 at 4:33 pm

Why would I assume that?
Because I believe that you have some interest in your own well being and that you engage in trade for the purpose of furthering your own well being….however YOU define it.

Do you hold otherwise?

muirgeo July 18, 2011 at 10:37 pm

Yes, I have my own interest. When trade is set up such that the profits go to the top and the difference is made by wage suppression I have less patients because they can no longer afford health insurance or don’t even have a job that provides Health insurance.

Having billionaires with so much money and no one else to buy things stagnats the economy… that’s where we are. Plan and simple.

That explaination makes sense to me with the facts. I don’t see any cogent libertarian explaination that explains the stagnant economy or any reasonable ways to improve it. We the silliness of regime uncertainty and no recommendations to improve things and that’s how I know it’s a bankrupt position.

Dan J July 19, 2011 at 3:34 am

HAD TO dip into their equity? Good God!! Your delirious.
HAD to have that new pool….. New quad runner……. New car…… New flat screen tv….. New addition to the house….. Trip to Maui…….. You sit in on the DNC meetings, assisting in fabricating stories?

Dan J July 19, 2011 at 3:45 am

Two massive pieces of legislation passed by democrats and signed by Obama that, literally, left blank pages open for adding rules as they go.
I Luv my contacts…… Are you aware that when govt passes legislation, that is complicated like Obamacare, there are people hired to explain the legislation to businesses and individuals?
One such gentleman is a contact. Off record…… It is a nightmare….. Businesses are screaming at the absolute insanity of the legislation…… We have seen this in a different manner with massive amounts of ‘waivers’ and threats from businesses to eliminate their coverage and pay the fine…. The contact can barely explain the whole thing…. So many contradictions… So many rules overlapping….. And the taxes from it……… HIDE YOUR MONEY!!!
Does anyone really think that ‘the unkown’ of legislation and the known of such hubris from govt is conducive with a prosperous marketplace?
2morrow, new rules can be written on the financial bill that costs a business tens of thousands….. How can any business operate ‘knowing’ that they could be forced into new financial obligations before the year is up?

Sam Grove July 21, 2011 at 12:58 am

That explaination makes sense to me with the facts.

That make sense to you because your comprehension of economics is superficial, thus you can only grasp a superficial interpretation.

juan carlos vera July 18, 2011 at 9:43 pm

muirgeo: Do you really read what Don wrote? Because what you’re saying has nothing to do with what Don said…

muirgeo July 18, 2011 at 10:40 pm

Yeah , I have read much of what Don’s says. He tells us consstantly how free trade and low taxes are good for us… but he ignores the reality.

I have to wonder when he teaches this stuff to his students does he end the lecture with… “just look how well free trade is doing for our economy!!!” I wonder if any of his students are bold enough to point out the inconvenient real world outside the window from which he teaches these things.

Seth July 19, 2011 at 12:16 am

Isn’t it you that continually reminds us that our economy is not based on free trade, but it’s mixed economy? Yet ‘the mix’ always seems to escape all blame from you. The problems come from free trade. Another observation you continually miss is that when you look at the parts of the economy that have less mix and more free trade you see less problems.

juan carlos vera July 19, 2011 at 12:26 am

1-I think that the totalitarianism and arbitrary government interventionism can never overcome the virtues of full exercise of free trade.
2-It seems a ridiculous idea to think that students, who freely choose to take classes with Don, are stupid. Or do you think that students can not exercise their right of free choice?

vidyohs July 17, 2011 at 4:31 pm

Another point to make is that though the foreigner, Mr. Lee, owns the lot and can take profit from it, he does so under the laws and rules of the USA, not those of China. He can not cut it up and transport it to China, nor can he declare the lot to be a colony of China.

Tim July 17, 2011 at 9:18 pm

This seems like an odd point. Basically the only way I can see this really mattering is if the US decides to not respect private property rights and simply takes the land back….which, it should go without saying, would basically throw the baby out with the bathwater.

vidyohs July 17, 2011 at 9:53 pm

Not an odd point at all. Don sees the zero sum point in Fletcher’s piece, but I also see a concern about sovereignty, which is what I addressed.

The Chinese government can’t come and claim sovereignty over that lot just because one of its people bought the land. They aren’t going to occupy it militarily. It is just a lot owned by someone who will use it to produce revenue.

In other words Smith gains, Lee, gains, and the country gains (taxes on revenue generated by the land and Lee’s activities.). The USA does not lose control of the land, or its sovereignty over the land, just because a Chinese guy bought the lot. So what difference does it make if a foreigner buys the land.

Look and listen to what people like Fletcher are saying and you see and hear real concern that somehow we Americans are losing our sovereignty over land that is purchased by a foreigner. Not so.

nailheadtom July 17, 2011 at 10:37 pm

We already went through this scene back in the ’80s when the Japanese were buying up property on the west coast and Hawaii. Nobody seems to talk about it anymore. Did they haul all those Big Island golf courses back to Tokyo?

Tim July 17, 2011 at 10:47 pm

Again. I don’t see the issue here. Granted I think you are correct that there are some pretty over-the-top claims made re: sovereignty by people of Fletcher’s ilk; still…the only way the US retaining sovereign control over the land would in any way matter is if Washington decides to disrespect Lee’s private property rights.

vidyohs July 18, 2011 at 6:09 am

You seem to be deliberately obtuse on the subject.

The USA retaining sovereignty over the land, and all that entails, actually reinforces the foreigner’s property rights, yet allows the USA, and local authorities, to view the property in exactly the same way they view the property next door that belongs to an American citizen. They can administer law, and collect revenue from any proceeds generated by the land;s use.

I simply slayed the misrepresentation and belief that some people have that when a foreigner buys property or business here in America that somehow that foreigner, and through him the nation of which he is a citizen, have gained a real foothold vis-a-vis sovereignty over that land. T’ain’t so.

Yes there are people that ignorant, you may not be, but please at least be mentally alert enough to recognize, like myself and others, that they exist.

Tim July 18, 2011 at 7:51 am

I do recognize that such people exist as I admitted. But if political boundaries don’t matter in the substance of the exchange….what does the idea of American sovereignty have to do with anything here? Isn’t American sovereignty merely a political concept? What I am saying is that the question of sovereignty is meaningless…..what matters is the respect of private property rights. You incorrectly assert that American sovereignty is the same as respect for private property rights and I do not agree this is the case.

Ron H July 18, 2011 at 3:22 pm

Tim

vidyohs is right. you seem to be deliberately obtuse on this subject.

Forget about the word ‘sovereignty’, it may be confusing you. What I believe vidyohs is addressing – and I hope he’ll correct me if I’m wrong – is the nationalistic notion, expressed by some, that foreigners owning property within US borders is somehow a bad thing. It’s not. It makes no difference who owns the property.

All of the same laws and restrictions regarding that property, whether federal, state, or local, still apply as they did before the sale. Property taxes will be assessed, zoning laws will be still be in force, licenses will be required, etc. None of that will change due to a change of ownership.

So no, it’s not an odd point, and those who fear sales to foreigners are misguided.

vidyohs July 18, 2011 at 9:13 pm

@ Ron H

Exactly so. Thank you.

Ron H July 18, 2011 at 10:16 pm

By the way, Tim, it isn’t necessarily foreigners who need to fear government disrespecting their property rights..

vikingvista July 18, 2011 at 3:05 pm

I think you make a good point. But whether I lose *my* sovereignty to thugs in Austin, thugs in DC or thugs in Beijing, is for me only a question of which thugs are the most thuggish.

Don Boudreaux July 18, 2011 at 3:09 pm

Exactly right.

Jim July 18, 2011 at 7:12 am

Good point vidyohs. Canadians own substantial chunks of Florida and are our largest trade partner and energy exporter. The Chinese talk, like the Japanese one decades ago, sounds a lot like racism to me.

It would simply never occur to me that there is a ‘foreigner’ argument to be made in trade or ownership. Someday I will tear apart the GDP calculation for the BS that it is.

Iain July 17, 2011 at 4:40 pm

Sam-
It seems to be a common mistake to equate dollars with wealth.

vikingvista July 17, 2011 at 9:55 pm

Econometric models are so much more convenient with an objective measure of value.

ArrowSmith July 17, 2011 at 4:45 pm

But just how is wealth expanded? I view it as multi-pronged in a modern economy.

* Fractional-reserve banking
* innovation
* built-up assets
* our legal system that protects private property, patent protections, ability of redress

wealth is not any one thing but the aggregate of all these things.

vikingvista July 17, 2011 at 9:56 pm

There is only one guaranteed measure of wealth creation–a voluntary exchange.

ArrowSmith July 17, 2011 at 10:28 pm

True I forgot the most important part – freedom.

Chucklehead July 18, 2011 at 1:42 am

The value of freedom is subjective. It is often traded for (false) security or fiat money.

Greg Webb July 18, 2011 at 1:38 pm

Absolutely! But even if, somehow, voluntary exchanges did not result in wealth creation, I would still be for voluntary exchanges and freedom.

vikingvista July 18, 2011 at 2:14 pm

Yes. But at its most fundamental level, the individual trade, we see that “wealth” and “freedom” refer to the same thing.

nailheadtom July 17, 2011 at 10:38 pm

Patent protections don’t expand wealth.

ArrowSmith July 18, 2011 at 2:44 am

Patents help to create wealth because it gives the incentive to inventors knowing they won’t be ripped off right away.

vikingvista July 18, 2011 at 4:53 am

The promise of government-enforced monopoly protection may be an additional incentive for some people to create, but it isn’t clear that it outweighs the disincentive (legal action) to others to compete by bringing consumers cheaper versions and new derivative products.

PrometheeFeu July 19, 2011 at 12:29 am

And let’s not forget that it distorts incentives by diverting investment from non-patent producing activities towards patent producing activities. Let say I have a patent on drug A. I now see two avenues of investment: 1) small incremental improvement on drug A which might have huge benefits for consumers, 2) inventing drug B which will have moderate benefits to consumers. Well, since nobody but me can produce drug A, there is no incentive for my to innovate on it at all. After all, nobody could potentially overtake me by doing the incremental innovation of drug A since I can just stop them with my patent. Also, that small incremental innovation might not award me a patent. On the other hand, if I develop drug B, I will surely get a patent for it and will be able to get new consumers and furthermore, I will be able to further undermine my competitors.

vikingvista July 19, 2011 at 1:52 am

PrometheeFeu,

Yep. Just one of the opportunity costs that never even cross the minds of IP cultists. What is their calculus, when they simply ignore all the costs?

Dan J July 19, 2011 at 3:27 am

Cultists? Most here share the limited govt view. But many will fall short of going as far as VV with braking down almost all govt and allowing for a new emergent order to transpire and evolve. But, VV, I think most are open to discussion and should challenge you on this. And why would many simply acquiesce to you on this issue, when it is not personally imposing and any assumed or ‘found knowledge’ of harm from the process of patents has had profound impact.
It would seem that a patent with an expiration date would be helpful for the business, who may have spent more than could be recovered in expenses without it.
When the issue plays a vital role against most and backs are against the wall over it, then a change you might find satisfactory will occur. But, until a great and easily understood argument is formulated, with a fantastic example, a majority of people may find use in a patent system.

Dan J July 19, 2011 at 3:28 am

Has ‘NOT’ had profound impact…….. Edit

vikingvista July 19, 2011 at 4:01 am

“as far as VV with braking down almost all govt”

Almost?

And “braking” may be a typo, but as it turns out fits my view better than “breaking”.

Well Dan, short of agreement, I’d be impressed if people would simply recognize two things:

1. The fact that companies and their products tend to benefit from their monopolies does not necessarily mean government monopoly protections are a good thing for everyone else.

2. Whatever benefits you presume IP laws give the monopoly (and by extension all of society), there are also costs–the same costs that conventional economics teaches us about monopoly. The fact of these costs, and the fact that values are subjective, makes it impossible to simply calculate that IP laws provide society with a net benefit.

People might still have a hunch, or faith, or wishful thinking about the net benefits of IP laws, and they may be right, but they sure as heck cannot be rationally certain. It is the inability to acknowledge the mundane economic costs that makes one an IP cultist, not a mere preference for IP law.

Dan J July 19, 2011 at 4:26 am

Often, spelling errors are just that. I-pad changes words.

I left wiggle room in ‘almost’…. And…. Hahaha…… Your response, ‘almost?’, is funny. I thought I might read something akin to that.

I notice this is one issue where you are not absolute in your resolve on the consequences or achievements from change. I like knowing this. And, I am open minded. Not easily swayed, but curious.

But use of ‘tend to benefit’, ‘not necessarily…. Good for everyone else’,'and they may be right’……. Shows you are open to possibility of something that might have value….. Just that you presume more benefit will come without the IP laws.

I can give an example of where I disagree with IP laws…. The patent on seed alterations for food products. Company X biologically engineers seeds of a food and legally prevents use of the seeds made by the plant in maturity and harvest. To the point of filing suits which eventually leads to forfeiture of property by defendant, a.k.a. Illegal seed user.
What would courts award, due to law, a claimant on a farmer who distributed the seed, internationally, and then the crop became mainstream throughout the world?

vikingvista July 19, 2011 at 4:52 am

I must, as a matter of conscience, oppose all IP laws as I oppose all initiation of force against innocents. Only voluntary agreements can be acceptable. The possibility of peaceful innocent reinvention of a protected product is example enough to show that IP cannot be actual property, and that its enforcement violates, rather than protects, property rights. There are of course other conceptual difficulties with IP that are well known in the IP debate.

But I haven’t been arguing that here. Instead I mean merely to deprogram the IP cultists from their faith in the miracle of costless monopoly. They are so certain about the societal benefit of such protections, but such certainty is not possible with an economic analysis.

PrometheeFeu July 21, 2011 at 1:32 am

@vikingvista:

I would recommend against the use of terms such as “IP cultist”. It might make those of us who oppose IP feel good, but it won’t convince anyone. In fact, I would imagine it would make convincing others harder. In the past, through careful reasoning I have often been able to convince people to at least question their pro-IP (or more generally interventionist) positions. I have found that the key thing to remember is that for someone to be convinced, they have to at some point in time accept their old position as mistaken. You can make that easy for them or you can make it hard. You won’t get anybody to after a conversation agree that yes, they were a crazy IP cultist. However, for someone to say: “You know, I used to believe those arguments in favor of IP, and they were good arguments. I just had never considered that other thing you just brought up.” is relatively easy.

vikingvista July 21, 2011 at 2:37 pm

PrometheeFeu,

Let me quote myself (see above):

“It is the inability to acknowledge the mundane economic costs that makes one an IP cultist, not a mere preference for IP law.”

Whether or not IP law is good for society, the cost side of the equation is basic economics–economics that advocates of IP law use routinely in other contexts, but deliberately ignore in this case.

Take morg, for example. He argues the fact that a monopoly benefits from its monopoly protections is evidence that the monopoly is good. He doesn’t explicitly put it that way, but that is his argument. Of course, no anti-monopolist denies that the monopoly benefits, and that removing its privilege may make its whole business model untenable.

PrometheeFeu July 21, 2011 at 11:23 am

Even if what you said was true we would still have to trust Congress to correctly select the amount of time patents and copyrights should last. How will it do that? Well, the patent is basically a price that is paid to the inventor. So another way to put this is that Congress is capable of correctly setting the correct price for invention. I seriously doubt that is something many people here would agree to be true.

morganovich July 18, 2011 at 10:22 am

sure they do.

why would anyone spend tens millions developing the next version of windows if the property were not protected?

technology companies could not exist without patent protection.

are you claiming that microsoft, apple, and cisco have never created wealth?

morganovich July 18, 2011 at 10:24 am

“but it isn’t clear that it outweighs the disincentive (legal action) to others to compete by bringing consumers cheaper versions and new derivative products.”

on what basis can you make that claim?

the products would not have existed in the first place to spawn derivatives without patent protection.

one need only look at the african music industry or the chinese software business to see how clearly the benefits of patent protection outweigh the disincentives.

vikingvista July 18, 2011 at 1:56 pm

“on what basis can you make that claim?”

On the basis that there are definite costs, but that they are not quantifiable. When I say “it isn’t clear”, I am making a weaker and more defensible statement than someone like you who says, “it is clear”.

“the products would not have existed in the first place”

See my other post. This is a common, but quite silly, argument.

“one need only look at the african music industry or the chinese software business to see how clearly the benefits of patent protection outweigh the disincentives.”

Riiiiight. Because there certainly aren’t any other important differences between the USA, Africa, and China.

ArrowSmith July 18, 2011 at 4:05 pm

LOL. That’s why China gave us the iPad right?

Justin P July 18, 2011 at 1:25 pm

So are you saying Steve Jobs never would have marketed the Iphone without patent protection?

I do agree that some IP protections encourage some innovations but I don’t think it is a necessary condition.

vikingvista July 18, 2011 at 2:51 pm

“I do agree that some IP protections encourage some innovations”

Government interventions, such as IP protections, almost always have some benefits to someone (the incentive to the interveners at the least). The problem is that the costs are so often completely ignored.

Another example is the massive subsidies and protections governments make into the health care industry. Undoubtedly it has enriched workers in the health care industry, encouraged talent to pursue health care careers, and resulted in the wide distribution and accessibility to high technology. But clearly it has been at significant, and potentially disastrous, cost.

morganovich July 18, 2011 at 3:49 pm

“See my other post. This is a common, but quite silly, argument.”

actually, i think it is your rejoinder that is common yet silly. you seem to understand neither the chinese software nor african music industries. it is precisely the lack of IP protection that makes them fail. chinese steel does just fine, but anything with an IP component does not. alternatively, the indian software industry thrives, yet they are more similar to china than the US apart from IP issues thereby providing a good test case.

your argument lacks any factual basis at all. you are just being dogmatic.

no sane business would spend $100 million developing windows 7 or $2 billion developing a drug without patent protection.

justin-

yes. that is exactly what i am saying. the developments costs of the iphone were huge. why would you undertake them if a competitor could knock them off the next day and underprice you?

vikingvista July 18, 2011 at 4:28 pm

“you seem to understand neither the chinese software nor african music industries”

Correct. Like everyone else, I do not understand all of the specifics of those industries, nor of any industries. But I do understand two things that you do not:

(1) you cannot de-confound an industry from all of the cultural, historical, legal, political, and other societal influences of the people in that industry, and

(2) government monopoly privilege is not necessary in general to have profitable industries. That is, I recognize that profit is possible in the presence of vigorous competition. Unlike the IP cult, I’m not blind to the myriad array of nearly identical products available to consumers–available only because there is profit in it.

“you are just being dogmatic.”

You don’t help your so-far unsubstantiated arguments by revealing that you don’t know what “dogmatic” means. I am giving you reasons, not mere assertions. It would be useful for you to start addressing those reasons.

“no sane business would spend $100 million developing windows 7 or $2 billion developing a drug without patent protection.”

One thing more silly than the typical IP argument, is this claim that $100 million is the correct amount of money that should be
spent on developing an operating system. Why not $1 billion? Why not $10 million? As I said, I’m not disagreeing that holders of government monopoly privilege THEMSELVES benefit. I’m merely pointing out the facts that:

(1) there are also costs–costs that IP cultists ignore, and costs which *may* very well be greater to the non-monopolists than are the benefits;

(2) government monopoly privilege is not the only source of profit in a free market economy.

BTW, does your computer lack a shift key, or did someone cut off your pinkies?

Justin P July 18, 2011 at 5:46 pm

“yes. that is exactly what i am saying. the developments costs of the iphone were huge. why would you undertake them if a competitor could knock them off the next day and underprice you?”

Yes, because they have the First-Movers advantage. Apple is a great example. Apple is synonymous with smart phones. There are better phones on the market; faster, more memory, better screens, etc…but Apple has until only recently dominated the market for them. Same thing with the Ipad. Not the best on the market for sure, but they sell a lot mainly because of product recognition.

Take another IP issue, music. Do you think that just because William Hung can sing “She Bangs” probably a hell of lot cheaper than Ricky Martin (Sorry first example to pop into my head) that people would not pay to buy or see Ricky Martin perform? Do you think that just because people can go see a knock off performer at a karaoke bar, they won’t still pay for that new CD or go see their fav artist?

And when it comes to music, another example, I used to get all my Mp3s from Napster like site, haven’t really bought a new CD for about 5 years…yet I still pay to go see live shows. So just because the music artist doesn’t get any money from Mp3s from me, that they will not perform or record music?

Now take the fashion industry, they copy everyone all the time…still seeing new designs ever spring…

Like I said, some IP protections help, but I think people would do what they love to do even without those protections.

People write code for the fun of it, people create music because they love it, people write books because it’s an escape for them…did JK Rowling write the Potter series only because she was betting it would make her a billionaire? Or did she do it because she used it to cope of the lose of her mother?
http://en.wikipedia.org/wiki/Harry_Potter_and_the_Philosopher%27s_Stone#Development

vikingvista July 18, 2011 at 6:58 pm

Justin P,

All good points. The most devout IP advocates simply don’t realize the many hurdles their arguments need to overcome. Let me add another:

They argue that government-protected companies invest more in their products, and thus make higher quality products than they otherwise would have. This, of course, may be true. But if we are to take decisions about the kind and quality of available products out of the hands of consumers, why not just have the government do all of the investing? If a $100 million investment in an operating system based upon government protections is better than, say, a $10 million investment favored by the market, why wouldn’t $500 million be even better?

vikingvista July 18, 2011 at 1:51 pm

“why would anyone spend tens millions developing the next version of windows if the property were not protected?”

I can’t (and you can’t) predict how much would be spent, but only that it would be spent, for the same reason as now–to make a profit. Undoubtedly government monopoly is a source of some profit for the monopoly holder, but a good business is so much more than its government privilege. Bill Gates may be worth only $1 billion rather than $50 billion, but his product, or a very similar product, would remain in demand.

It is really odd that people think IP is the reason for profitability. But let me attempt to deprogram you:

Do you think Tylenol is profitable when it competes on the same shelf as generic acetominophen brands?

Do you think Kleenex is profitable when it competes with Puffs?

Do you think Louis Vuitton profitable in the face of illegal replicas for sale on the streets of NYC?

Do you think Time Warner is profitable in the face of illegal copies of its movies being readily available on the Internet, sometimes even before theatrical release?

Do you think Penguin is profitable when it publishes out-of-copyright books?

Is Red Hat, Inc. profitable with its open source software?

morganovich July 18, 2011 at 4:05 pm

“Bill Gates may be worth only $1 billion rather than $50 billion, but his product, or a very similar product, would remain in demand.”

this is just a foolish argument. people invest in search of profit. how do you profit if, the minute you have a new invention, someone else just starts making it too? their costs will always be lower than yours as they did not do development.

you have this illusion that windows 7 would exist just because it is demanded. that is not true. lots of things are demanded that do not exist. there is a ton of demand for music in africa, but it’s not recorded because you cannot make money doing so.

your tylenol argument equally misses the point: the question is “would it have been profitable to ever develop it if you faced instant competition”. likely no. the cost to create/approve a drug now exceeds a billion dollars. if you had to sell at 5-10% l the price (like a generic), no one would bother developing them. when a drug goes off patent, it generally stops being much of a money maker.

your kleenex example is even more off the mark. it’s not a technology product. it took very little development to create it, and it costs your competitors as much as it costs you to make it. it has little to do with innovation.

software and drugs are not like that. neither is semiconductor design. if UMC were allowed to rip off pentium designs and sell them, there never would have been pentium designs.

red hat doesn’t make software. they resell someone else’s and sell support. do you think it’s as useful as windows or mac os? if so, you are in a severe minority.

seriously, have you ever even worked NEAR tech?

your other examples are meaningless. lv replicas are not the same thing at all. many media companies have been damn near driven out of business due to IP theft. perhaps you missed what happened to the music industry and how hard it had to fight to keep from being bankrupted?

you keep missing the point entirely with all these examples.

if you take away the rewards of innovation, you get less of it. this is econ 101 simple.

lower selling price = less supply.

what is it about that that you find so difficult to grasp?

what you describe as a “silly argument” is actually the most basic tenet of economics.

vikingvista July 18, 2011 at 4:47 pm

“if you take away the rewards of innovation, you get less of it. this is econ 101 simple.”

Once AGAIN. I don’t argue that monopoly benefits monopolists. I do argue that there are costs which you IP cultists ignore.

Of course it is true that if you subsidize and grant monopoly privileges to the health care industry, e.g., you get more of it. If you remove those privileges, there will be great turmoil in the health care industry while the economy readjusts.

But if you ignore the costs of those privileges, you get a national government teetering on bankruptcy.

The econ 101 that YOU are ignoring is the parable of the seen versus the unseen.

“lower selling price = less supply.
what is it about that that you find so difficult to grasp?”

The ice under feet could not have become thinner. We’re talking about a market, not price fixing. Lower price means increased quantity demanded (i.e. greater consumer availability). Removing monopoly privilege shifts the supply curve to the right. Once again, you undercut the strength of your position by focusing on only one effect, and ignoring the unseen costs, even after you’ve been alerted to them.

morganovich July 18, 2011 at 5:40 pm

“government monopoly privilege is not necessary in general to have profitable industries. That is, I recognize that profit is possible in the presence of vigorous competition. Unlike the IP cult, I’m not blind to the myriad array of nearly identical products available to consumers–available only because there is profit in it.”

you are confusing 2 arguments here.

clearly, you can make money without a monopoly.

however, failure to grant rights for intellectual property unambiguously gets you less innovation. why go to the trouble to build windows if red hat can just take your code and sell it too, underpricing you because they have no development costs.

why would anyone EVER try to publish a novel?

i am a bit dumbfounded that you cannot see this.

it’s better to have a software industry with a bit of pricing power for providers (though checked by others, red hat and apple keep msft’s pricing in line) than not to have one at all.

if you took away the IP protection, whole american industries like software and pharma would disappear. no one would bother ever creating a new product.

also: patent protection is not monopoly. microsoft can patent windows, but not an operating system, just as pfizer can patent viarga, but not erectile dysfunction drugs.

you seem to be very ideologically confused on this. you cannot seem to tell property protection from monopoly nor the ability to profit from incentive to innovate.

i just don’t like capital letters. it also makes it clear when someone is excerpting me.

morganovich July 18, 2011 at 5:46 pm

“Lower price means increased quantity demanded (i.e. greater consumer availability). Removing monopoly privilege shifts the supply curve to the right”

no, it is you who do not understand investment. you invest seeking return. if your ROIC drops, so does your propensity to invest.

regarding the shifting curves, you seem to be ignoring a key aspect of business:

if anyone can copy my software and sell it, then price shifts to the marginal cost of the marginal producer (at best). that will always be the developer in this case. he spent the money to make it. everyone else just copies it and sells it. thus, their profit becomes zero. quantity is irrelevant, and if i can copy and sell it for $1 then the whole market for windows likely drops below the cost to develop it.

you seem trapped in some very dogmatic thinking about monopoly that is blinding you to the fact that if you can;t keep what you invent, you won’t bother.

why would any firm enter a market where they knew they would be the high cost provider of a completely identical product?

vikingvista July 18, 2011 at 7:50 pm

“failure to grant rights for intellectual property unambiguously gets you less innovation.”

Of course that is NOT true. Again, you presume there is no cost to imposing a monopoly. The cost of innovating using protected products includes the monopoly prices that must be paid for those products. The funds available to consumers to purchase other products is diminished by the monopoly prices they must pay for some products. All you are capable of seeing is the benefit to the monopolist, which you then assume is the benefit to us all sans any opportunity cost.

Seen and unseen. Seen and unseen. Seen and unseen. I realize the unseen is often difficult to identify, but you are not even trying.

“why go to the trouble to build windows if red hat can just take your code and sell it too, underpricing you because they have no development costs.”

1. What makes you think Windows should exist as it is today? Who are YOU to decide that for the rest of us?
2. Bayer has always cost more than generic aspirin. How is that possible?
3. Red Hat does invest in development. If nobody buys the software they support, they can’t make a profit.
4. If Windows did not exist, you think maybe there would be more consumer demand for another operating system?

“why would anyone EVER try to publish a novel?”

What is the matter with you that you are unable even in the face of my replies to anticipate the answer to this? Examles in the market abound. They would publish for profit. They would profit in the same way Penguin profits by publishing Shakespeare even though other profitable companies also publish Shakespeare, and it is also available on the Internet for free. Competition reduces profit, and encourages efficiency, it does not eliminate profit.

Of course, they would also profit by reputation building. There is a wide market for good writers and editors in many industries. The more impressive resume will likely attract the higher compensation.

“it’s better to have a software industry with a bit of pricing power for providers (though checked by others, red hat and apple keep msft’s pricing in line) than not to have one at all.”

No software industry at all? Come on. That statement must make even you laugh.

“if you took away the IP protection, whole american industries like software and pharma would disappear. no one would bother ever creating a new product.”

Utter nonsense. There are points to be made for IP, but this ridiculousness is not one of them. The industries would undoubtedly change, and current industry leaders *may* become less profitable or go out of business. That’s what happens when monopoly privileges are revoked. But entrepreneurs do not lose interest in satisfying consumer desires.

“also: patent protection is not monopoly. microsoft can patent windows, but not an operating system, just as pfizer can patent viarga, but not erectile dysfunction drugs.”

It absolutely is monopoly. By your argument, there is no such thing as monopoly, because there is no universal protection across all products and all jurisdictions. The government violently suppresses competition. That is monopoly, and all of the usual economic analysis regarding monopoly applies.

“you cannot seem to tell property protection from monopoly”

Property *protection* is another issue, and I would revoke that monopoly as well, but I have not been arguing that point here. The issue here, right from my first post, is whether it is clear that government IP protection benefits the non-monopolist or not. You make the strong statement that it unequivocally does. I point out the fact that it is not unequivocally clear.

“nor the ability to profit from incentive to innovate.”

I think this is the 4th or 5th time in our discussion that I’ve pointed out that monopoly privilege is an incentive, so apparently you’ve only been skimming my replies. Once again, much like the victim of a cult, you are totally oblivious to even seeing that the discussion is about costs.

“i just don’t like capital letters. it also makes it clear when someone is excerpting me.”

How do you know they are not excerpting e.e. cummings?

vikingvista July 18, 2011 at 8:28 pm

“no, it is you who do not understand investment. you invest seeking return. if your ROIC drops, so does your propensity to invest.”

So what? Revoking your monopoly privilege may cause YOU to invest LESS, but you may still invest, because profitability is not abolished for you. But what is more important, return on investment for others increases by not having to pay monopoly prices. There is a widespread DECREASE in the cost of innovation by removing monopoly pricing from the equation that you are totally ignoring.

Seen and unseen. Seen and unseen. Seen and unseen. Please, at least try. This whole argument is about costs costs costs. You have yet to even recognize that let alone address it.

“regarding the shifting curves, you seem to be ignoring a key aspect of business:
if anyone can copy my software and sell it, then price shifts to the marginal cost of the marginal producer (at best). that will always be the developer in this case. he spent the money to make it. everyone else just copies it and sells it. thus, their profit becomes zero.”

Totally ridiculous. You are claiming that all businesses are created equal. There is more to making a business competitive than the particular product that it sells. First to market, marketing, reputation, preproduction contracts, production efficiencies, etc.–I mean, why do I have to teach you these things, have you never worked in a business? And somehow Amazon.com, Penguin, and others have costs associated with production and distribution of out of copyright material, but somehow still manage to profit from them, when all anyone has to do is download them free from the Internet. How is that possible in your world?

BTW, you didn’t really address the shifting supply curve. You still continue to focus on the loss to the monopoly while ignoring the gain to everyone else. Whether or not you believe the benefits exceed the costs, you will continue to fail to make a strong case until you at least recognize that the costs exist. Is that a blind spot you can overcome?

“quantity is irrelevant, and if i can copy and sell it for $1 then the whole market for windows likely drops below the cost to develop it.”

You miss the point to my reply. I was trying to alert you to your mistake if ignoring all angles. Low *market* price means greater consumer availability. Of course, by advocating for monopoly privilege I realize you have little regard for the consumer, but that doesn’t mean you can’t see the point I was making.

“you seem trapped in some very dogmatic thinking about monopoly”

Now would be a good time for you to look up the meaning of the word “dogmatic”. You are the one proclaiming religious certainty while refusing to even recognize my point that the presence of costs makes certainty impossible.

“that is blinding you to the fact that if you can;t keep what you invent, you won’t bother.”

Except that it is the ABSENCE of IP laws that would ensure you can keep what you invent (at least free of government violence).

“why would any firm enter a market where they knew they would be the high cost provider of a completely identical product?”

Because:
1. Even that doesn’t mean it won’t be profitable (typically one firm alone does not saturate a market)
2. Innovation gives a competitive advantage even without IP (first to market, reputation, contracts)
3. Cost of innovation doesn’t necessarily mean that they will be the high cost provider (businesses are not created equal).

You simply have no justification for your dogmatic certainty of the consumer benefits of IP laws.

morganovich July 19, 2011 at 9:33 am

ving:

“Of course that is NOT true. Again, you presume there is no cost to imposing a monopoly”

this is just non sequitor and nonsense. can you seriously argue that if you reduce wages, more people will want a job?

if you cut the benefits of innovation, fewer people will innovate. to argue anyhting else is to go against every basic tenet of economics.

sure, monopolies have costs, but to eliminate IP protection is to eliminate industries entirely. surely you are better off having access to windows at a higher price than you might prefer that you are having no access to it at all.

this is where your cost weighting breaks down utterly. you are making the faulty assumption that these products would exist anyway. they would not. every innovator would be the high cost provider in his own space. software and pharma innovation would cease all but completely. what you call “benefit to the monopolist” is in fact, incentive to innovate at all.

you notion that is would still be demanded is irrelevant. for supplier to seek to meet demand, they must see profit in it.

you really do not seem to get this. producing copies of software of a drug is nearly costless. all the cost is in development. the first copy of windows costs a billion dollars. each additional one costs a dime. why would you even consider spending that billion if you knew that the minute you released it, i’d copy it for free and sell with lower costs that yours? you’d NEVER recoup your investment. therefore, you would not innovate.

this is what makes this argument:

“The industries would undoubtedly change, and current industry leaders *may* become less profitable or go out of business. That’s what happens when monopoly privileges are revoked. But entrepreneurs do not lose interest in satisfying consumer desires.”

so irretrievably flawed. you are thinking like kleenex. software and drugs are not like tissue. copying windows is damn near costless. you don’t need a factory and there are no costs of goods sold.

you have this bizarre dogmatic insistence that entrepreneurs will do as they have always done , just for less money. that’s utterly wrong. you seem unable to grasp that if you spend a billion on software than i can costlessly copy and sell too, that i will make all the money and you will make none. every piece of software innovation will become disastrously negative sum in terms of profit.

you tell me, why would anyone innovate under those circumstances? as someone who has started 5 companies, i can tell you, entrepreneurs goal is not “satisfying consumer desires” it is to profit by satisfying consumer desires. that’s a CRITICAL distinction. take the former out and you are relying on altruism. we all know how well that works.

“No software industry at all? Come on. That statement must make even you laugh”

ask china.

perhaps a more apt phrasing would have been “no software industry worth of the name” as there might well be a few participants, but you’re talking about a 99% drop in potential.

how can a company with development costs EVER compete with a company with no development costs selling an exactly identical product that has no cost of goods sold (like software)?

until you can answer that, you have no argument at all.

if the choice is higher pricing or no products at all, the former provides far more utility. you have choice. in the latter, you have nothing.

morganovich July 19, 2011 at 9:49 am

“Except that it is the ABSENCE of IP laws that would ensure you can keep what you invent”

this is just insane. so, if you write software, and i take it and sell it, you feel like you have kept you property? if so, your definition of property is so narrow that you would destroy the notion of IP entirely.

if you write a novel, i can copy it and sell it as mine, maybe even put my name on it and claim the work as my own?

and this is just highlighting you ignorance:
“Totally ridiculous. You are claiming that all businesses are created equal. There is more to making a business competitive than the particular product that it sells.”

you are thinking like CPG. in tissues, this may be so, but not in software or in pharmaceuticals. you appear to have no understanding at all of IP based business. if you can buy windows 7 from microsoft for $599 or from morganovich.com for $5 (just download and go) for the EXACT SAME PRODUCT, where are you going to go? why wouldn’t GE just buy one copy and the put it on every desktop in their firm? suddenly, 50,000 seats = 1 seat sold.

IP is not like other property because it can be costlessly taken and duplicated. you can know the recipe for coke, but without a bottling plant and a distribution system, it’s no much good to you. (though you could severely damage coke by selling it to a another bottler)

but this is NOT so of having the code to windows. you can start selling it right off your home PC.

thus, people buy from you, not the one who has to recoup development costs, killing innovation.

that fact that you cannot see this amazes me.

you inhabit this fantasy world where you can shoulder developments costs, then compete with someone selling exactly what you developed against you. in a space like tissue, maybe, but your seem mired in that world. software is not the same at all. reputation is irrelevant. it’s the same product. your competitors will use YOUR reputation to sell it

the size of the market for windows (in dollars) will drop like a rock. no plausible number of additional users can offset a 99%+ drop in price and even then, you will not make most of the sales. this gets MUCH worse when an entire corporation just buys one copy for 50,000 seats.

suddenly, the market for windows drops from $50 billion a year to $100 million if you are lucky. you think they’ll develop new versions for a 20% share of that?

no way.

there is just no other way to slice it.

i cannot tell if you are brainwashed by the “it’s OK to steal digital music” crowd or what, but to argue that a $100 million market will drive as much innovation as a $50 billion one is just insane.

morganovich July 19, 2011 at 11:53 am

“but Apple has until only recently dominated the market for them. Same thing with the Ipad. Not the best on the market for sure, but they sell a lot mainly because of product recognition.”

this is a deeply flawed argument for several reasons.

if HTC were allowed to precisely copy the iphone the minute it beceame available, software and all, then first mover advantage is pretty much gone.

apple has “product recognition” because of unique look and feel and software capability. they would have none of those things if htc could copy them all at will.

if HP were allowed to use the OS from the ipad, they would sell far more of their own pads.

think about a pure form of this argument: an OS like snow leopard.

if, the day you launch it, i can copy it and use it or sell it, your product has no value. you have dev costs, i do not. i can ALWAYS underprice you.

i’ll take it to CNET and sell it as a download certified by them to be the same as yours.

price will drop from $600 to $1. i’ll make money, you’ll hemorrhage it.

how are you going to feel about spending that next round of development cash on the new OS?

why would anyone bother?

“Do you think that just because people can go see a knock off performer at a karaoke bar, they won’t still pay for that new CD or go see their fav artist?”

are you really this naive? why would anyone buy a CD at all when they can legally download the music for nothing? without IP protection, there is all but no such thing as “an artist selling a CD”.

once you sell about 20, the music will be all over the web. others will copy the CD’s and sell them. they’ll charge $2. web downloads will be free.

still feeling good about paying the studio fees to cut that album?

your property has been shiven of value. recorded music becomes (at best) a loss leader. a whole industry evaporates.

welcome to africa.

you seem to be falling into the trap of thinking that intellectual property is not property just because it can be costlessly reproduced/stolen.

Justin P July 19, 2011 at 12:33 pm

“if HTC were allowed to precisely copy the iphone the minute it beceame available, software and all, then first mover advantage is pretty much gone.”

And you say I have a flawed argument? If HTC were to copy IOS or the Iphone exactly, they still wouldn’t have what Apple has….brand recognition. In all of your analysis, you keep forgetting the most important player….the Consumer.

The consumer has their own preferences and choices about what they want and what to buy.

There are a lot of people that do not like Apple or it’s products for various reasons. If HTC were to copy Apple down to the screw, they would loose huge market share to the phone maker that does cater to the non-Apple-ites, like me.

I do not like Apple OS, I prefer Windows, again your not even talking about consumer choice at all. Consumers, if not on a budget, prefer the brand name over the knock offs. I remember back in the day, I would rather pay %30 for the Sony brand Walkman rather than the $15 GPX knockoff. And guess what, sony kept on innovating and making even better Walkmans even when faced with cheap knockoffs. Sony only just recently stopped making MD players, meaning there was still a market for them until recently.

While I usually agree with most of what you write, I think you have fallen into the trap that consumers don’t matter. Consumer preferences have far more power than IP. Apple can have all the IP protections they want but if consumers don’t like their products, it does Apple jack….so regardless of IP protections Apple must Innovate or Die it’s that simple. IP is meaningless except at the margin.

vikingvista July 19, 2011 at 5:13 pm

“can you seriously argue that if you reduce wages, more people will want a job?”

Your confused analogy reflects your confused thinking on this whole issue (and an apparent misunderstanding of basic simply supply-demand dynamics). When you increase the number of SUPPLIERS of a product to a market, the supply curve shifts to the right. For a given demand schedule, that means lower prices AND greater quantity of product sold. We are talking about a market here. The prices are therefore lower, and qantities higher, as a result of voluntary choices of buyers and sellers, not some government action to push prices away from equilibrium. There are no shortages or surpluses in this scenario.

That is one of the basic effects expected when you revoke a company’s monopoly privileges, and in practice the benefits to the consumer are not usually subtle. Nothing new here. If you are still confused, look it up.

“if you cut the benefits of innovation, fewer people will innovate. to argue anyhting else is to go against every basic tenet of economics.”

I thought I explained this pretty well and repeatedly. Either I didn’t, or you didn’t pay attention. By revoking monopoly privilege, you are not JUST cutting the benefits of innovation, because the cost of other innovation includes the monopoly prices that must be paid to other innovators. It therefore also DECREASES the cost of innovation. You get an F in Econ 101 for continuing to not realize that it is not a simple matter of decreasing profits to the monopoly.

“sure, monopolies have costs,”

PLEASE, if you truly believe this, do me a huge favor and list as many of these costs as you can. Because, it seems from your words above, that you don’t really understand this.

“but to eliminate IP protection is to eliminate industries entirely.”

Entirely? You continue to make this absurd extreme statement, and expect to be taken seriously? At any rate, I’ve already explained why this is nonsense. I can’t force you to read my comments.

“surely you are better off having access to windows at a higher price than you might prefer that you are having no access to it at all.”

Why is economics so hard for you? Please look up Bastiat and search for the following “seen and unseen”. Bastiat will completely change the way you think about economics. If a fantastic alien ray evaporated all trace of Microsoft tomorrow, the world a year from now would not look like the world today with a hole where Microsoft used to be. The demand for computers and the software to run them would not diminish, and existing smaller companies and/or brand new companies would emerge to satisfy that need. Likewise, if Microsoft could not find a way to be profitable without IP (highly unlikely) other companies, perhaps with other business models would emerge. It may be a bigger more popular and better financed Red Hat, or something completely different. But computers would have operating systems, and the operating systems would be used as a competitive selling point.

The point is, just because a government props up a product, whether through monopoly protection for Microsoft or subsidies for General Motors, the resulting bigger shinier more expensive product that results is not necessarily (actually is definitely not) the exact product that best meets consumer desires. Windows may be a simpler product in such a case, and perhaps it should be. But even that is not guaranteed.

“this is where your cost weighting breaks down utterly. you are making the faulty assumption that these products would exist anyway.”

I am making no such assumption, as I’ve already make explicit in my (apparently unread) comments to you. As I’ve already said (and hopefully you’ll read it this time), when you revoke a monopoly’s privileges, that monopoly will face change, including hardship and possibly bankruptcy. What I am telling you, and what you clearly don’t understand, is that when you remove the violent suppression of competition, the competition tends to do better.

“every innovator would be the high cost provider in his own space.”

I went to some care responding to this previously. Please go back and read my post to you. This statement reveals an unrealistically myopic view of business and markets.

“software and pharma innovation would cease all but completely.”

“All but”?! Well! You are finally starting to come around. Perhaps you are reading my posts after all. Previously you were sure it would wipe out the industry entirely. There is hope for you yet. Now start thinking about why it wouldn’t wipe it out completely, and what you might do as an entrepreneur to find profit without monopoly protections. Hint: I’ve already described some of them for you in my previous posts.

“what you call “benefit to the monopolist” is in fact, incentive to innovate at all”

It may be an incentive to innovate, but as I’ve explained to you at length already, it is not the only incentive.

“you notion that is would still be demanded is irrelevant. for supplier to seek to meet demand, they must see profit in it.”

Yep. They would, just as there are numerous examples today where they do. Monopoly is not, as you so strongly assert, the driving force of a thriving free market economy.

“producing copies of software of a drug is nearly costless. all the cost is in development. the first copy of windows costs a billion dollars. each additional one costs a dime. why would you even consider spending that billion if you knew that the minute you released it, i’d copy it for free and sell with lower costs that yours? you’d NEVER recoup your investment. therefore, you would not innovate.”

Jesus. It seems our discussion is over, if you are not even reading my replies. Let me rehash:
1. $1 billion expenditure/company the correct amount? Why not $100 billion or $50 million?
2. Monopoly increases the prices of products used to innovate.
3. Bayer, Tylenol, Penguin, Red Hat.
3. Reputation, first to market, contracts, efficient production, marketing, freemiums

“you are thinking like kleenex. software and drugs are not like tissue. copying windows is damn near costless. you don’t need a factory and there are no costs of goods sold.”

1. “No costs”? There are always costs. Another F in Econ 101.
2. Bayer aspirin requires a factory, and costs more than generics on the same shelf. Weird, huh?
3. Red Hat. I suspect their share price and earnings would rise if Windows disappeared.
4. Red Hat. I suspect they would market Windows compatible OS if MS lost its monopoly protections.
5. I suspect Lipitor would’ve cost less to develop, if they weren’t paying monopoly prices for all the patented equipment and copyrighted materials that were used in its development.
6. Familiar pattern: lower cost, lower price, higher sales.
7. Why do people pay $8.50 for _MacBeth_ on Amazon.com when they can get the Kindle version for $0.99, or a free version from numerous online sites? So weird.

“you have this bizarre dogmatic insistence that entrepreneurs will do as they have always done , just for less money.”

So…you don’t think there are any entrepreneurs interested in selling low priced products? And you call MY views bizarre?

“you seem unable to grasp that if you spend a billion on software than i can costlessly copy and sell too, that i will make all the money and you will make none.”

Clearly I’m not getting through your steel-reinforced programming. Let’s again rehash:

1. There are always costs.
2. Why do YOU think a billion is the right number and the right product?
3. Reputation, first to market, contracts, efficient production, marketing, freemiums

“every piece of software innovation will become disastrously negative sum in terms of profit.”

“Every”? Seriously? How it is possibly for someone today to be so ignorant of the software industry. You can’t think of even a single piece of software that is freely copied and distributed, yet still generates enough profit to encourage continued development? Not one? Nowhere?

“you tell me, why would anyone innovate under those circumstances?”

I already did. What you are asking me to do, is to repeat myself yet again. Please go back and read my posts to you.

“as someone who has started 5 companies, i can tell you, entrepreneurs goal is not “satisfying consumer desires” it is to profit by satisfying consumer desires. that’s a CRITICAL distinction. take the former out and you are relying on altruism. we all know”

Three letters: duh. Nothing I’ve written, mostly now in triplicate, assumes anything else. I think if you do a search through my posts on the word “profit”, you will see it there numerous times. And clearly it will be your first time seeing it.

“ask china.”

I did. Here’s one thing they told me:

The software industry recorded revenues of 345.4 billion yuan (US$53.34 billion) in the first quarter of 2011, growing 27 percent over the same period last year.

Now, if one of those companies was granted some sort of a monopoly, I predict that company would have higher sales, more investment in innovation, and probably even a higher quality product. It’s product would probably also cost more. Why would that be better? Perhaps monopolies aren’t utilized enough?

“how can a company with development costs EVER compete with a company with no development costs selling an exactly identical product that has no cost of goods sold (like software)?
until you can answer that, you have no argument at all.”

The market has answered that more times in the economy even than I have in my posts to you., which is saying a lot.

“if the choice is higher pricing or no products at all, the former provides far more utility.”

Perhaps, if those were the only choices. But as I’ve repeatedly explained, that is clearly not the case.

Thanks for the discussion, but it seems I’ve repeatedly addressed all of your points. There is no gain for me continuing the repetition. If you should happen to read my responses and find some particular point that I did not address, let me know.

If you’re not interested in reading what I have written to you, maybe you’ll look elsewhere. None of this is new, and there are many good web sites. Here’s blog post, for example, that scratches the surface of your misunderstanding.

vikingvista July 19, 2011 at 5:18 pm

morg–

I just spent considerable time writing a post in response to you, but it looks to be forever lost in “Your comment is awaiting moderation” land, and I haven’t the energy to redo it.

No loss to the debate, since I had already addressed all of your points. It seems in your eagerness to reply to me, you failed to read most of what I wrote. If you go back and read my responses, and still find a point that I did not address, maybe you can post it and I will reply.

The Other Tim July 17, 2011 at 5:00 pm

Agreed that the net wealth of investors in both countries can still rise when we trade domestic capital for foreign imports, but I think a simpler objection would be this:

Mr. Fletcher, you have a problem if Mr. Smith in Virginia sells his land to Mr. Lee in China in order to buy imports from China, but wouldn’t have a problem if he sold it to Mr. Lee in Maryland to buy imports from Maryland. Therefore, your objection is not to free trade, but to free trade with Chinese people. Therefore, shut up you xenophobe.

This is also the kind of logic which will more easily penetrate the thick skulls of many Americans who don’t care about economic theory, but who do care about not being accused of political incorrectness. Protectionism has always been, after all, a racket wherein the richest workers of the world, white Americans, try to get even richer by stepping on the heads of all the non-white and non-American workers whose competition poses a serious threat to their unjustifiably inflated wages.

Jim July 18, 2011 at 7:14 am

Like

Greg Webb July 18, 2011 at 1:44 pm

Mr. Fletcher’s politically-correct views on international trade likely means he is a racist as well, though he is unlikely to admit it because the truth would make him feel bad. My guess is that he strongly supports minimum wage laws as well.

kyle8 July 18, 2011 at 2:47 pm

Yes, it is just China bashing. No one seems upset that Great Britain owns a very large portion of our economy and always has been a big investor.

Martin Brock July 17, 2011 at 5:54 pm

What happens if Mr. Smith buys a house for $100,000 and Mr. Lee buys a mortgage backed security incorporating Mr. Smith’s mortgage and Mr. Smith ultimately defaults on the house, as it’s value falls to $70,000, and the Fed buys Mr. Lee’s mortgage backed security at “par value” anyway?

Chris July 17, 2011 at 7:23 pm

This reminds me of when Daimler bought Chrysler for 34b, sold it to Cerberus for 20b, who sold it to Fiat of all people for 5 or so. Nobody got bailed out at face value..
Nobody should, unless the finacial system itself is at risk. Then the tax payers pay for allowing the politicians to do stupid things.

Chucklehead July 18, 2011 at 1:48 am

How valuable is a financial system at risk? Is it better to let it collapse so hard lessons are learned, and a new, more stable system can take its place? With a bailed out system, there is no market for a new system.

Chris July 18, 2011 at 4:10 am

Theoretically, I agree, I’m not sure it’s possible in practice, without throwing the baby out with the bathwater…

PrometheeFeu July 17, 2011 at 8:47 pm

The President wins the next election for saving America.

Chris July 17, 2011 at 7:13 pm

Another possibility is that the lot never gets sold, if there are not enough investors. Then Smith never gets his 100k, the land produces nothing and therefore Americans are guaranteed to lose. Lee can still invest in Canadian oil sands and make a killing. Protectionism in action, bit of an an oxymoron in this light…

Daniel Kuehn July 17, 2011 at 7:36 pm

And yet people make precisely this mistake when it’s government doing the spending all the time. How often do you hear “a dollar that the government spends is a dollar less that the private individuals can spend”?

I agree – zero-sum thinking is bad. Let’s apply it universally. Free men trading with each other is good. Free men deciding how they will be governed is good. In liberalized societies, nothing has to be zero-sum.

The Other Tim July 17, 2011 at 7:46 pm

The difference being under a democratic system some free men determine how other unfree men will be governed. Legislation doesn’t require the consent of the governed, only the consent of 51% of them.

Subhi Andrews July 17, 2011 at 8:58 pm

It doesn’t take even 51%. Actually a lot less.

The Other Tim July 17, 2011 at 9:04 pm

It takes 51% under a democratic system. The fact that it doesn’t under our own system simply proves how far we are from a representative democracy.

vikingvista July 17, 2011 at 10:05 pm

Subhi is right. Democracy is almost always plurality. Not that it matters either way, given the widely varying values of even those who happen to agree on the better of the ridiculously few choices alloted to them.

The Other Tim July 17, 2011 at 10:51 pm

The point is, under the “perfect” democratic system as envisioned by champions of “popular rule,” the majority has unfettered control over the lives of the minority and can exploit them however they please. The extent to which the reality fails to live up to the ideal isn’t really germane. The point is, the ideal fails to fall short of a just system. It’s just the tyranny of the majority at the best of times.

vikingvista July 18, 2011 at 5:12 am

It’s tyranny whether it is 95%, 51%, or 23%. It is tyranny if you have unanimity minus 1. But the absurdity of coercive democracy is the presumption that 2 or 3 undemocratically chosen choices (because at some level democracy is necessarily always undemocratic) comes close to reflecting the values of even 2000, 2 million, or 200 million present and future people who might on one particular afternoon happen to make the same choice.

If we had a vote over whether Snoopy or Mickey Mouse should be embroidered onto every shirt made in or imported into the USA, you may get a 85% agreement on a 5% voter turnout. Or even a 90% turnout. But does anyone really care that much about shirts? How many preferred choices among those who voted, including doing nothing, never show up on the ballot?

Of the trillions of choices that human beings make every day, who decides which 2 or 3 are put to democratic vote and forced upon everyone and posterity? Democracy isn’t at best 51% majority rule. It is at best oligarchical.

Greg Webb July 18, 2011 at 1:52 pm

Vikingvista, you are exactly right, which is why the United States was founded to be a Constitutional Republic, which allows for majority (but sometimes plurality) rule subject to certain inalienable rights of individuals. It is sad to see so many otherwise smart people (especially in government) argue for pure democracy when that is not what the Founding Fathers intended nor is is desirable given the lessons learned from the French Revolution with its idiotic propaganda of liberty, equality, and fraternity. The reality was the Reign of Terror.

The Other Tim July 18, 2011 at 6:00 pm

Vikingvista, I don’t think we’re seriously in disagreement. The only point I’m trying to make is that the *ideal* democracy, the hypothetical form of government wherein 51% rule, is tyrannical.

I don’t particularly see why I’m getting so much disagreement on this. Sure, ideal democracy can’t exist. We believe that, but statists don’t. To a statist or a progressive, everything can be fixed. 51% rule can exist. It’s worth pointing out to the statist that even if he’s right, he’s still wrong, because his perfect system still isn’t just. To stand exclusively on the argument that all real political systems will be unjust due to corruption and ignore the fact that even an uncorrupted system would still be tyranny is to fight with only one arrow in the quiver, particularly when the statist tends to be immunized to the former argument.

vikingvista July 18, 2011 at 8:47 pm

“ideal democracy can’t exist”

“Democracy”, as democracy advocates use the term, is not a well-formed concept. As you say, the 51% they think exists, can never exist. It is about as realistic as 51% of Americans coincidently simultaneously uttering the same phrase. It is nonsense.

I don’t know that I ever disagree with you. It’s just easier for me to make a good succinct point on the back of someone else’s good point. Plus, I’m more likely to respond to the posters I consider worth reading.

PrometheeFeu July 17, 2011 at 8:29 pm

The difference is that in a voluntary transaction, all parties expect to be better off. When the government steals my money to give it to a bunch of farmers, or in order to go and bomb somebody, that was not voluntary and I lost. So sometimes, a dollar spent by the government on by behalf is worth less than $1 and sometimes even less than $0: I would prefer to pay to stop the government for doing some of what it does.

PrometheeFeu July 17, 2011 at 8:40 pm

Pressed submit too soon:

For instance, the government spends large amounts of money forcing all of us to pay into a “retirement” plan. Many of us would prefer not to pay into that plan and handle our retirement through the private sector. In other words, When the government spends $1 forcing me to pay into Social Security, I would prefer to pay some non-zero amount of money to have them instead take that $1 they had stolen from me and burn it. Same thing concerning Medicare, the war on drug and much of defense spending. So no, government is not a zero-sum game a negative sum game.

morganovich July 18, 2011 at 10:28 am

agreed.

tyranny of the majority is still tyranny. freedom derives from rights, not democracy. rights are what protect you from negative sum democratic policies. shamefully, we have not protected them as we should. every time you hear a politician utter the word “collective good”, what it really means is trampling the rights of a few to benefit the many. that’s how you wind up back at tyranny.

Frank33328 July 17, 2011 at 8:34 pm

But for Smith and Lee, there was a TRADE involved. At least in the perception of each, each believed they were better off than before the trade.

When the government simply takes from Mr. Smith, it is NOT a trade and therefore zero sum seems to apply. Somewhat like when a thief steals from Mr. Smith, that too cannot be said to be a win-win, but another case of zero-sum.

PrometheeFeu July 17, 2011 at 8:43 pm

Actually, when a thief steals from you it is a negative sum game. Recently, some jerk broke my car window in order to take a broken cellphone. It cost me some $500 to fix the window. They gained a good 1 or 2 cents. Same thing for the government. Not only am I taxed, I have to spend considerable amounts of time trying to not get screwed on my taxes and trying not to break the rules in a way that might land me in jail. And then most of my money goes towards things I don’t want to see happen: useless defense spending, social security, medicare, molesting children at airport. Definitely a negative-sum game.

Chris July 18, 2011 at 4:29 am

Hmm, in my view this is where the straight transaction thinking starts to break down. Yes, defense spending is a lot of money, but controlling ALL the world’s oceans is very valuable, if not priceless. How much did WWII cost? Now nobody can start one, that’s gotta be worth something! :)
All these benefits are not easy to quantify. Being #1 in any market has measurable benefits, if we knew how to value the market itself.

Justin P July 18, 2011 at 1:34 pm

Your right it is subjective.
But when government takes your money, they use the pretext of a multiplier to give it some quantifiable number; X billion in Gvt Spending * Multiplier to the hundreths place (giving it the appearance of being scientific). So while Bridge Y doesn’t have a definite quantifiable cost $X, it benefits only a small percentage (positive value) while that money and resources, for the larger section of the population, had more and better uses (negative value).

morganovich July 18, 2011 at 10:30 am

“Actually, when a thief steals from you it is a negative sum game”

the same is true of when a government takes from you. it too is usually negative sum. calling it zero sum is giving them too much credit.

Subhi Andrews July 17, 2011 at 9:04 pm

Government wastes a lot of resources. In some cases it may not be zero sum, but in many cases, government produces negative sum, it loses more than it takes from public in taxes – by their mere presence. India was a good example, under the advice of the likes of Galbraith, Kaldor, Robinson etc.

Here is an example. and this is not the first time for AI. It has been in this situation for ever.

I was at the local DMV to renew my license. I spent two hours in line and then I was told to come back again because it was past 4:30PM. Those two hours I wasn’t working, and I’ll not be working when I go back again next.

Subhi Andrews July 17, 2011 at 9:05 pm

BTW, A crore is 10 million.

Ken July 17, 2011 at 10:04 pm

Disingenuous Kuehn,

“Free men deciding how they will be governed is good.”

What a farcical statement to make when referring to government spending. Government spending by and large by the federal gov is about taking from the ordinary tax payer and giving it to the politically connected. Even your simpleton brain should be able to understand that this is the very definition of zero-sum: the taking from one group and giving to another. Government spending for the most part IS zero-sum.

The reason free trade is NOT zero sum is because ALL parties involved in the trade are free from coercion, thus ALL benefit.

Please tell me how I personally benefited from the tens of billions of dollars given to GM. Please tell me how I personally benefit from the military action going on in Libya, Iraq, Yemen, Afghanistan, Pakistan and Samolia. Please tell me how I personally benefit from Medicare, Medicaid, and Social Security. Please tell me how I personally benefit from paying of retirement benefits for previous gov employees who no longer provide a gov service to anyone (since they are retired). I get to pay for these items, but they all represent direct wealth transfers from me to beneficiaries. For these beneficiaries to benefit someone else MUST lose.

Regards,
Ken

John Dewey July 18, 2011 at 11:27 am

Ken: ” Even your simpleton brain should “

Would you consider that perhaps Daniel Kuehn has a very fine brain, but that:

1. he may not have been exposed to the same knowledge and arguments which you have been exposed to; or

2. he may have been exposed to the same knowledge and arguments but that he interprets thos arguments differently than you do; or

3. he may have been exposed to relevant knowledge and arguments that you have not been exposed to.

Just consider, please, that just because Daniel Kuehn may not agree with you, that does not mean he possesses a simpleton brain.

Ken July 18, 2011 at 3:38 pm

JD,

1. No.
2. I think this is exactly what DK would say, but the use of the word “interpret” here would really mean “redefine to what I want it to mean regardless of the actual meaning of the word used”, e.g., redefining government spending as free trade.
3. No.

“Just consider, please, that just because Daniel Kuehn may not agree with you, that does not mean he possesses a simpleton brain.”

He’s a simpleton for making simpleton statements, i.e., ones that are disprovable pretty much out of hand. For example, “zero-sum thinking is bad. Let’s apply it universally. Free men trading with each other is good. Free men deciding how they will be governed is good.” Government spending is BY DEFINITION not free trade.

Government spending is NOT “free men deciding how to be governed”. It is, in the US, the majority of politicians, notably a minority compared to the general population (With participation rates so low, they cannot be called representative. In 2008, only 62% of eligible voters voted, meaning that Obama is representing only 32% of elegible voters. Elected politicians need only garner a majority of votes, not the majority of eligible voters’ votes.), force their political enemies to pay for their pet projects. Money is forcefully taken from tax payers and given to political favorites. To equate free trade and government spending is factually wrong and logically fallacious. Two things DK cannot not know.

But you’re write, though, DK is not a simpleton. He is a liar. Because he knows that government spending is NOT free trade, saying they are the same is a lie. Hence the moniker “Disingenuous Keuhn”.

Regards,
Ken

John Dewey July 18, 2011 at 4:10 pm

Well, at least I understand now the relative values you place on courtesy and rudeness.

Ken July 18, 2011 at 5:33 pm

Good.

Regards,
Ken

Ken July 18, 2011 at 5:40 pm

JD,

I now understand the relative values you place on truth and rudeness. You prefer a nice liar rather than a rude non-liar.

And spare me any diatribe on how you can be both nice and a non-liar. I have no respect for liars and refuse to use euphemisms in the face of lies for the sake of civility. I am rude to a couple of commenters here because they are liars and do not deserve the courtesy of being civil.

Regards,
Ken

Craig S July 17, 2011 at 11:58 pm

Daniel the reason every dollar spent by govt is a dollar less that individuals can spend is because the govt can only spend what it first takes in taxes. Taxes, unlike trade, are a zero sum.

vikingvista July 18, 2011 at 5:44 am

Since taxes reduce the number of trades, they are actually a negative sum.

Daniel Kuehn July 18, 2011 at 12:09 pm

Well yes – if I only analyzed one side of a market transaction it would make it look pretty zero-sum too.

Ken July 18, 2011 at 5:55 pm

Taking $X from A and giving it to B is analyzing BOTH sides of the market transaction. The fact that B will use $X to purchase goods from C he finds more valuable than $X doesn’t negate the fact that A is poorer by $X. YOU are the one only analyzing one size of the market transaction.

For the free trade between B and C to occur above, the taking from A must occur first. A is made poorer so B and C can be made richer, i.e., zero-sum.

Regards,
Ken

Dan J July 18, 2011 at 3:14 am

Nice try! Big difference. Involuntary action. Reallocation of personal wealth by someone else. I would have used personal wealth for X, while a thief, government, forcibly relieved me of my wealth for another individuals gratification on Y. I had $$, and govt forcibly took $. I would have bought a widget. They spent my wealth on a thingamajig for somebody else. I am now poorer.

Daniel Kuehn July 18, 2011 at 5:45 am

OK, everyone’s mentioning involuntary and voluntary nature of trades. Certainly. This is precisely why we think that government should only step in when the market is imposing involuntary costs and benefits, and in those situtations – while there’s nothing like the guarantee of the price mechanism – government can absolutely be a non-zero-sum game and is likely to be a non-zero-sum game. Sorry – I should have spelled that out more clearly.

Certainly we don’t go around with the assumption that it HAS to be a zero-sum game.

Also – I’d appreciate it if people stopped calling me “Disingenuous Kuehn”.

Methinks1776 July 18, 2011 at 8:12 am

Government is always negative expectancy. In “correcting” market failure all I’ve ever observed government do is to exacerbate market failure and create new unintended consequences.

It is theoretically possible for government to interfere positively, but evidence suggests that positive outcomes are rare and negative outcomes are abundant. Thus, the negative expectancy of government intervention.

Also, Daniel, government is unlike any other player in competing for resources. It can outbid any other player and it change the rules as it wants to. In the private market for any resource private bidders bid for assets based on the projected cash flow of those assets. Government doesn’t. Private bidders bid with their own money. Government bids with ours. Private bidders have incentive to use those assets efficiently. Government doesn’t – there is nothing I can think of that is run more efficiently by government than by the private sector. Government is a wealth destroyer on net. In competing for assets, more efficient users crowd out less efficient users (on net). When government does the crowding out, the least efficient user crowds out more efficient users.

I really don’t understand how you can’t see the difference between government and private actors, Danny.

Daniel Kuehn July 18, 2011 at 9:45 am

You’re first paragraph is a little strenuous, but the rest of your post is redundant – it covers things I’ve already noted. Just reread my comment and note my point about the price mechanism. Nobody is claiming the government can do what the market can do (or at least not many are – and certainly not me).

I’m tired of explaining to you why I actually agree with you on points that you are determined to pretend I disagree on.

re: “I really don’t understand how you can’t see the difference between government and private actors, Danny.”

That’s because you’ve shown a pattern of being entirely uninterested in listening to what I’m actually saying. If I actually thought what you attribute to me I’d be baffled by me too.

Methinks1776 July 18, 2011 at 12:31 pm

Truth can be strenuous for some people, Daniel.

Though it might be a blow to your ego, I don’t actually read every word you post here – and sometimes none of them. So, I’m still at a loss now you square your supposed love of markets and freedom and your love of social engineering.

If you agree with what I said above about government, then how can you write what you wrote in the post I responded to. When has government interference (beyond maintenance of Rule of Law) ever been anything but destructive or, at best, less efficient than the private sector? Government even screws up protecting the realm..

Ken July 18, 2011 at 3:47 pm

Disingenuous Kuehn,

“being entirely uninterested in listening to what I’m actually saying.”

Not true. I enjoy reading you write things like free markets are the bomb and should be used as much as possible, then write that the gov should take an active role in the economy since, for you, government spending = free trade. It’s interesting, and hilarious, to watch you rationalize and redefine to justify your clear preference for government interference into much of our lives.

I’m also interested in what you are saying because even when you are clearly wrong, you won’t admit it. A problem very much associated with our political class. If we can’t get an insignificant bug like you to admit you’re wrong when you are clearly wrong, how can we can we get self important sociopaths (most politicians) to admit when they are wrong when they are clearly wrong.

The primary solution, as always, is to limit gov. If politicians have little power to begin with, there is very little convincing needed, since they aren’t involved with most things. But punks like you take a dim view of people like me and my choices, then take steps to limit what I can and can’t do, despite you not knowing what my goals, preferences, weaknesses and strengths are.

Regards,
Ken

PrometheeFeu July 18, 2011 at 10:46 am

” government can absolutely be a non-zero-sum game and is likely to be a non-zero-sum game”

I think this is only half-right. I just don’t see where you get the “likely” from. It is of course possible for government to be a positive sum game. (Though remember that tax collection which is a necessary first step is itself negative sum because we spend resources trying to prevent the government from levying taxes whether through evasion or avoidance so for the government to be a positive sum-game it has to first overcome the costs of taxation) However, I just don’t see any mechanisms which push the government strongly in that direction. On the contrary, there are many strong mechanisms which push the government away from positive sum public-good-type activities. (Basically, the benefits being dispersed make it hard to lobby for public goods)

PrometheeFeu July 18, 2011 at 11:18 am

I should amend: Yes, the chances that the government is a zero-sum game are actually pretty slim. But I don’t see much evidence that it is likely to be a positive sum game. I understood your statement as meaning the government is likely to be positive sum and that is what I answered. If that is not what you meant sorry to put words in your mouth.

Martin Brock July 18, 2011 at 9:32 am

You can always assume that a dollar of government spending creates a dollar’s worth of public goods. I doubt this assumption, because I have no evidence of it. On the other hand, when I freely pay you for a good, by exchanging my own valuable good for yours, the transaction itself is this evidence. This exchange is free men governing themselves. Barack Obama ordering me at the point of a gun to pay for whatever “good” he alleges is not, even if the orders follow a quadrennial plebiscite, even if the plebiscite is as “free and fair” as it can possibly be.

Daniel Kuehn July 18, 2011 at 9:50 am

Martin -
Yes, the mere existence of the transaction reveals the paucity of claims by people that the market is zero sum. We shouldn’t make the mistake, however, of assuming that there aren’t other involuntary impositions that occur with a market transaction. As I’ve said a couple times now, the government is no substitute for the price mechanism. It can never use knowledge as efficiently to allocate resources. But that’s very different from saying it can’t be efficient and welfare-improving.

These broadly agreed upon reassertions that the government has no price mechanism don’t prove what a lot of people try to prove with it. Nobody is disagreeing about the difference between government allocation and price allocation. This isn’t sufficient argument or evidence for writing free government off. Free, limited government with decentralized authority and a dedication to addressing things like externalities have proved phenomenally robust when you compare them with:

(1.) Governments that do not limit themselves or do not restrict themselves to addressing externalities, and
(2.) Societies where such responsible governments fail to emerge at all.

You are focusing on a line of argument by raising the price mechanism that (1.) I completely agree with you on and (2.) doesn’t constitute a disproof of my assertions about limited, decentralized, externality-focused government.

Dan J July 18, 2011 at 10:57 am

Externality focused govt? Haven’t read your dissertation on that, yet. How does that work? I only read a term that govt can interpret broadly to claim huge powers or itself as they have done in ‘welfare’ statement of Constitution and the expanded use of commerce clause to regulate people behavior. Wonder how the reins will be pulled in and kept with the biggest supporters of expanded govt authority in the super majorities in govt.

Daniel Kuehn July 18, 2011 at 12:04 pm

Nothing’s perfect and nobody should even feel required to justify everything in any social order. But if you look at the activities that the United States government engages in, it generally sticks to situations where there is a widely known externality case for invovlement. Government is constitutionally limited, tasks are decentralized, and decision making is republican. It maintains property rights and allocates most goods and services with the market.

You don’t need a dissertation – you see a rough-and-ready example of it and it’s doing great. You and I can obviously come up with a number of problems with this particular example, but there’s no great mystery about the reality or the source of the success of this more-or-less classical liberal society.

Methinks1776 July 18, 2011 at 7:36 pm

But if you look at the activities that the United States government engages in, it generally sticks to situations where there is a widely known externality case for invovlement.

This is where you are 100% incorrect. You clearly have no idea how regulation works if that’s the impression you’re under. You clearly haven’t processed Don’s post about civil forfeiture and the way the police behave and you’ve clearly never built a house.

government is constitutionally limited,

Government has systematically found a way around each of those limits.

It maintains property rights..

Only if you happen to be a crony. If not, your property rights are at risk of being violated and they are violated fairly regularly. That’s why is such a good idea to buy political power – it’s very cheap and very useful. It’s exactly like buying protection from the other mafia. Please….I used to think these naive things when I was young too. But, then I got acquainted with reality.

Lots of people with a lot more experience in a lot of different industries have written plenty about it in the comment section of this blog. You choose not to believe it. That’s youth. I was there once.

Greg Webb July 18, 2011 at 8:27 pm

*LIKE*. It’s not youth, however. There are lots of old big government types. It’s wisdom that allows someone to put aside ego and emotions to realize that you don’t know everything that you need to know, you should not try to control others even if your intentions are good, and good intentions often have bad, unforeseeable consequences.

Dan J July 19, 2011 at 1:01 pm

Buuuuzzzzzzzzzz!!!!!

Methinks is correct!

Govt has been Perverting the Constitution, regularly. This is not an ‘imperfection’, but an attack on individual liberties. As the authors and signors of the Constitution had predicted, govt comprised of men, would look to lay siege upon the ramparts of individual freedom. And, govt is succeeding.

Martin Brock July 18, 2011 at 11:51 am

Your assertions about limited, decentralized, externality-focused government are like Don’s assertions about comparative advantage and positive sum exchange in a market economy. You both discuss fairy tales. The state ruling me is very far from a limited, decentralized, externality-focused government, and the economy in which I labor and trade is far from an ideally free, market economy, so any theoretical conclusions reached from these assumptions are academic.

Is Boudreaux or Fletcher closer to the truth? Do U.S. trade deficits signal some sort of threat to the wealth of U.S. citizens? When Mr. Lee “invests” in entitlement to rents rather than entrepreneurial risk, Don’s reasoning does not apply, and the answer is not obvious to me. Whether or not free, international trade should be limited is irrelevant when we’re discussing decidedly unfree trade.

Daniel Kuehn July 18, 2011 at 12:06 pm

re: “The state ruling me is very far from a limited, decentralized, externality-focused government, and the economy in which I labor and trade is far from an ideally free, market economy, so any theoretical conclusions reached from these assumptions are academic.”

Nothing is perfect, but “very far” is too strong here, Martin. The United States has done a pretty good job at these ideals. Always room for improvement – always. But let’s not let that obscure the fact that the record of the United States demonstrates pretty clearly the success of classical liberalism.

If you’re looking for perfection, though, I’m afraid you’ll be disappointed. Revel in the reality of things and do your best to make improvements on the inevitable imperfections.

Martin Brock July 18, 2011 at 2:04 pm

“Very far” and “too strong” are obviously ambiguous, but when one year’s deficit far exceeds the entire cost of the interstate highway system, I find it extremely hard to believe that a few hundred central planners in the Congress can possibly know the “good” of what they’re buying with their expenditures. Even if I believe that creating public goods is their goal (and I don’t believe it), I doubt they can possibly accomplish the goal. I doubt that 435 Einsteins, all with the good intentions of Jesus (pick your iconic good guy), could do it.

I’m not looking for perfection. Right now, I’d settle for the United States of ten years ago.

Dan J July 19, 2011 at 7:47 pm

@DK

Govt has been Perverting the Constitution, regularly. This is not an ‘imperfection’, but an attack on individual liberties. As the authors and signors of the Constitution had predicted, govt comprised of men, would look to lay siege upon the ramparts of individual freedom. And, govt is succeeding.

vikingvista July 18, 2011 at 5:09 pm

Amen to that.

John Dewey July 18, 2011 at 11:39 am

At the risk of being insulted by numerous commentors, I’m going to partially agree with Daniel.

As I see it, some government spending does enable an increase in total wealth of the U.S. IMO, after the government built the interstate highway system, the standard of living of Americans increased. That’s because the transportation cost of goods was reduced significantly. Because the interstate highway system was financed by the very consumers who benefitted from it, I do not see that system as a transfer of wealth from one party to another. It is true that Americans did not each voluntarily agree to the direct and indirect fuel taxes which were levied on them. But that does not mean all such persons are automatically worse off than before.

I would also agree that a private entity could possibly have designed a better interstate highway system than the government designed. So perhaps someone can make the argument that wealth was sacrificed because private enterprise was not allowed to do so. Still, even though the interstate highway system may not have been the best that could have been built, that does not, to me, mean that it was a zero-sum or negative-sum endeavor.

As I see it, the nations public universities are also examples of government spending wich increases the wealth of Americans. Although private enterprise might have created better universities, that does not mean to me that creating the nation’s public universities was a zero-sum or negative-sum endeavor.

I fully expect to be insulted by the people who comment here. But that won’t stop me from offerring my thoughts which might disagree with theirs. And I hope it also does not stop Daniel.

Daniel Kuehn July 18, 2011 at 12:08 pm

And to add to this – notice that those are both classic cases of positive externalities.

When the government strays from this – when it strays into territory where the market does just fine – you get far less positive results.

Martin Brock July 18, 2011 at 12:47 pm

I’m still basically a road socialist myself, so I have no reason to insult you, but the virtues of the interstate highway system don’t effectively counter an argument that Federal spending is negative sum.

The scale of Federal spending boggles the mind. I’m reading now that the entire interstate highway system cost half a trillion dollars (in 2006 dollars) over a thirty-five year period. The entire cost is roughly fifteen percent of last year’s Federal budget and less than half of last year’s “stimulative” deficit.

A fraction of last year’s deficit could have built the entire interstate highway system, but I don’t see comparable public goods blooming. I don’t even see the seedlings. I rather imagine countless baby boomers and their financial agents desperately shuffling entitlement to rents hoping to preserve the longest possible period of retirement with the greatest possible consumption in exchange for the smallest possible production.

So I agree that the interstate highway system is a public good, and I agree that its value is rationally related to its cost, as evidenced by drivers’ purchase of the gasoline taxed to finance the construction; however, one example of a tiny public good, compared to total Federal spending, however valuable it seems to me as an individual, is not very compelling.

And I doubt that a private entity could have designed a better interstate highway system. Many private entities, acting independently, competing with one another, coordinated only by the market and market prices, might have created many different roads that, viewed as a single system, might be superior in some respects than the interstate highway system, but labeling a central planner “private” makes no difference.

John Dewey July 18, 2011 at 1:55 pm

martin brock: “but the virtues of the interstate highway system don’t effectively counter an argument that Federal spending is negative sum.”

I agree with you, IMO, in total, federal spending is negative sum.

martinbrock: “might have created many different roads that, viewed as a single system, might be superior in some respects than the interstate highway system,”

The power of eminent domain was required, IMO, to build an efficient highway system. I read a libertarian essay which argued otherwise. I was not convinced.

I_am_a_lead_pencil July 18, 2011 at 1:55 pm

“I’m reading now that the entire interstate highway system cost half a trillion dollars (in 2006 dollars) over a thirty-five year period.”

Martin,
Where are you getting these numbers?

Martin Brock July 18, 2011 at 2:54 pm

I’ll go ahead and cite Wikipedia. It’s typically a good source of official statistics, and it cites its source.

http://en.wikipedia.org/wiki/Interstate_Highway_System#Construction

$425 billion in 2006 dollars is the cost of constructing the originally planned system completed in 1992.

kyle8 July 18, 2011 at 2:53 pm

I have no problem with infrastructure spending as long as you can keep the graft and corruption down to a level somewhat below that of Boston’s Big Dig.

The problem is that infrastructure spending is never a major part of any govnerment budget anymore.

Martin Brock July 18, 2011 at 2:55 pm

I have no problem with rain as long as the skies are not cloudy all day.

Don Boudreaux July 18, 2011 at 2:59 pm

:-)

Justin P July 18, 2011 at 1:28 pm

It’s a different between voluntary trade and mandatory taxation. Once you take the voluntary out of the equation, there is no guarantee that both sides will be better off.

vikingvista July 18, 2011 at 2:02 pm

Exactly right. As long as there is some transfer of money from one person to another, regardless of the subjective valuation of that transaction to the forced participants, it is accounted the same as a voluntary transaction. Wealth destruction is counted as wealth creation.

kyle8 July 18, 2011 at 2:50 pm

OMG Daniel that was one of the stupidest things I have ever read. The big difference is that with Government it IS a zero sum game as they must extort the money from a third party. The second difference is that government spending is never done for economic reasons, but for political reasons.

Please, I know you are not THAT stupid, you ought to think before you write.

John Dewey July 18, 2011 at 4:17 pm

Kyle8: “Government it IS a zero sum game as they must extort the money from a third party”

I disagree. Government does not always need to extort money from a third party. Government can build a toll bridge, financed by bonds which aare repaid solely from toll revenue. In fact, government has done this many times.

Please note: I am not arguing that only government can build such a bridge.

kyle8: “The second difference is that government spending is never done for economic reasons, but for political reasons.”

I do not believe those purposes are mutually exclusive. A toll bridge can both reduce costs for those who use it and provide political advantages for the elected official who champions it.

vikingvista July 18, 2011 at 5:21 pm

“Please note: I am not arguing that only government can build such a bridge.”

But if you remove that violent monopoly property from government, it is no longer a government, but a private organization.

John Dewey July 18, 2011 at 6:51 pm

I do not understand what you are trying to say, vikingvista.

Is it illegal for a private organization to build a bridge in the U.S.? According to the U.S. Bureau of transportation Statistics, 1,500 highway and railway bridges in the U.S. are privately owned. I’m sure that many thousands more bridges on private roads are privately owned.

The Supreme Court has ruled that the federal government has the authority to regulate all navigable waters. So the government can restrict or remove any bridges which would impede the navigation of navigable waterways. But I don’t think that’s the same thing as “violent monopoly power”.

Do you have knowledge of other government powers which restrict private building of bridges?

vikingvista July 18, 2011 at 8:52 pm

John,

Violent monopoly is the violent restriction of competition. It is also a distinguishing characteristic of government.

So, if you envision an example of a *government* competitively constructing a road in complete absence of any involuntary action, then in what sense do you envision it as being a government?

vikingvista July 18, 2011 at 8:54 pm

“But I don’t think that’s the same thing as “violent monopoly power”.”

Oh yes of course it most definitely is. Try peacefully ignoring their dictates, or attempting to provide a competing service, and you will discover the violence.

John Dewey July 19, 2011 at 8:58 am

Your first response to me referenced my comment:

“I am not arguing that only government can build such a bridge.”

I am still not clear why you chose to respond to that comment with a comment about “violent monopoly power” and “attempting to provide a competing service”. As I pointed out, privately owned bridges have long existed in this country.

Again, do you have any evidence that U.S. government would prevent the private construction of a bridge in the U.S.?

vikingvista July 19, 2011 at 6:44 pm

John,

I am referring to your imagining of a government doing something (in this case building a bridge) without the use of violence (in your example, extortion). That’s why I asked you the question (which remains unanswered):

“if you envision an example of a *government* competitively constructing a road in complete absence of any involuntary action, then in what sense do you envision it as being a government?”

I’m sure you have your reasons for avoiding the question, but the point was to eventually show that you can’t separate government from violence. “Government is force”, which you may have heard from time to time, means that there is always a connection to force in anything the government does. If there were not, it wouldn’t be government.

Put another way, you were disagreeing with kyle8 that government must extort. In fact, there would be no government at all (and therefore no government bridges) if it didn’t somewhere use violence against its innocent citizens. Theoretically, the violence necessary to ensure its monopoly needn’t be specifically in the form of extortion, but in practice it aways in part is.

John Dewey July 20, 2011 at 6:35 am

Vikingvista,

Your replies to my comments have been confusing to me. That’s why I did not reply to your question. Had I been able to understand the point you were making, I probably would have replied earlier.

I’m a little bored with your implication that government is not government if it does not usde force, I disagree with you, but I’m not interested enough to argue that further.

vikingvista July 20, 2011 at 2:10 pm

“I’m a little bored with your implication that government is not government if it does not usde force”

It isn’t an implication, but seems to me to be a clear and obvious fact. If I and others are wrong about this, it seems a clever gent like you could do us great service by correcting us. So I’m sorry it is not something you want to think about. I’m sure it has nothing to do with discomfort about what you might discover if you do.

Dr. T July 17, 2011 at 7:43 pm

“There are ways other than the one I highlighted in my above example with Smith and Lee that FDI in America results in increases in both the net wealth of foreign investors and in the net wealth of Americans. Take a stab in the comments section offering examples.”

Why bother? Logical arguments and solid examples rarely convince people such as Ian Fletcher that they should alter their illogical and biased opinions.

James N July 17, 2011 at 8:59 pm

“Why bother? Logical arguments and solid examples rarely convince people such as Ian Fletcher that they should alter their illogical and biased opinions.”

Wow, can I relate to that statement. I’ve lost track of the number of times I’ve used a logical example to explain an issue or situation, only to have the other individual completely ignore my offering and go off on some straw man rant.

muirgeo July 17, 2011 at 11:32 pm

“Suppose my neighbor Smith sells his vacant lot in Virginia for $100,000 to Mr. Lee from China. Mr. Lee then grows corn on that lot and earns profits from doing so. Mr. Lee’s net worth rises. Has my neighbor’s net worth declined?”

Fetcher’s position obviously is the proper one.

In the scenario above take it back one step. Mr Lee produces a product and trades $100,000 worth of it for IOU’s given to him by Mr Smith who has not produced anything new of value to trade.

Now Mr Lee uses the IOU’s to purchase Mr Smiths Vacant lot. Mr Smith has not become any more wealthy while Mr Lee has a new asset worth $100,000. Mr Lee is $100,000 richer while Mr Smith has $100,000 minus any portion of what he traded for that he consumed.

An easy video explains that Don would indeed be an excellent candidate for mayor of Squandersville. Or you can look outside your window and see this happening to our country in real time.

http://www.youtube.com/watch?v=5DvuyvuHmJI

Emil July 18, 2011 at 3:52 am

right….

How can Mr Lee become 100k richer when he has, in your example, traded 100k of one asset (the product he produced) for 100k of another asset (the vacant lot)?

And what does how much Mr Smith consumes (in unrelated transactions) have to do with it and not what Mr Lee consumes?

Martin Brock July 18, 2011 at 9:49 am

The $100,000 price that Mr. Lee paid for the land wasn’t a free market price, i.e. the price incorporates rents imposed by the state unrelated to market dynamics. If Mr. Lee’s price includes a steep sales tax, would you agree that he exchanges produce more valuable than he receives in exchange?

Someone gains from these rents imposed on the transaction, but it’s not Mr. Lee. Maybe it’s Mr. Smith. Maybe it’s someone else. Whoever it is doesn’t produce goods for Mr. Lee. He simply receives a rent to which the state entitles him. Given the existence of these rents, the transaction could be zero sum or even negative sum, even if both Mr. Smith and Mr. Lee perceive themselves winners in the transaction.

The rent is an externality that both take for granted, a cost that they simply assume that they must pay, even though they receive no value for it. Their economic calculation of comparative advantage doesn’t account for it.

muirgeo July 18, 2011 at 1:58 pm

Here is Fletcher’s key point.

“Unfortunately, the only rational standard for how much America should produce is how much Americans wish to consume. Because the only way to consume is either to produce what you wish to consume, or produce something else you can exchange for it.”

If you are not producing anything new and just trading away your assetts you are becoming poorer….

Subhi Andrews July 18, 2011 at 2:37 pm

It is spending that matters. Demand is what drives the economy. That’s your mantra.

muirgeo July 18, 2011 at 3:48 pm

Yes indeed Subhi. If people are not producing their wages will stagnate and people will borrow to make up the difference. For a while the borrowing can replace lost demand due to stagnant wages. But then at some point the debt needs to be paid. Ussually after a speculative bubbles transfers more wealth from borrowers to lenders the econmomy crashes. If we didn’t have stagnant wages and massive inequality demand would have stayed up with productivity and the borrowing would not have needed to happen. Likewise for the crash. But no, we followed the neoliberal prescription and here we are stuck in a shitty neoliberal economy…AGAIN… it will not improve until the neoliberal policies are overturned. It will be clear when that happens.

Today a small step was taken when Obama nominated a director for the Consumer Financial Protection Bureau.

Subhi Andrews July 18, 2011 at 4:14 pm

and you said the following…
“If you are not producing anything new and just trading away your assetts you are becoming poorer….”

muirgeo July 18, 2011 at 10:42 pm

Yeah subhi…. and what is China’s GDP.. Germany’s… our??

Slappy McFee July 18, 2011 at 2:45 pm

I’ll just go ahead and edit Mr Fletcher for you.

“Unfortunately, the only rational standard for how much HUMANS should produce is how much HUMANS wish to consume. Because the only way to consume is either to produce what you wish to consume, or produce something else you can exchange for it.”

And BTW –

“If you are not producing anything new and just trading away your assetts you are becoming poorer….”

Doesn’t this refute your aggregate demand solution to every problem? You see, all those people who demand something, must be able to supply something to exchange first.

People don’t consume so they can produce in the future. We labor SO we can consume.

Try not to get your chickens and eggs messed up again, it makes for a really nasty omelet.

andy July 18, 2011 at 4:30 am

“That the investment took place may be a good thing, but this doesn’t change that fact that when foreigners, rather than Americans, own an investment, this increases the net worth of foreigners and reduces the net worth of Americans by the same amount.”

Sorry muriego, one counterexample invalidates the whole proposition. Don gave the counterexample; he invalidated it all. Don didn’t say that there might be a situation where the americans might “lose” (i.e. when they consume the obtained money); however, Ian proposed it as a _fact_ that the americans will (always) lose. And that is simply incorrect.

muirgeo July 18, 2011 at 2:03 pm

No he didn’t Andy … see above. If we produce equal to what we consume ( or trade for) no problemo… we are not doing that.

morganovich July 18, 2011 at 10:41 am

what IOU’s?

when i buy a chinese toaster, where’s the IOU? i pay cash.

equating a trade deficit with an IOU is totally invalid.

when you buy a gallon of gas, do you create an IOU to chevron? why would it be any different if you bought it form lee’s gasoline emporium?

you are starting from a set of faulty assumptions.

muirgeo July 18, 2011 at 2:07 pm

“when you buy a gallon of gas, do you create an IOU to chevron? ”

Yes…it goes onto my credit card… if I haven’t already produced something of equal value I AM poorer… that is what the $1 trillion dollar trade deficit is saying. We’ve underproduced by that much and have had to sell off our savings or other assetts to make upthe difference.

Don is protecting a dominantbut dead zoombie ideologt.

I recommend you read the book Bad Samaritan… it blows the lid of of Dons and other free traders positions.

morganovich July 18, 2011 at 4:18 pm

you are just being disingenuous.

and that is NOT at all what a trade deficit is saying.

if you have an apple tree that grows 100 apples every year, and you give me 4, you will have an apple “trade deficit”. but you are not running out of apples.

the domestic economy is the main driver. if the US has a $600bn “trade deficit” that’s a not even material. every year, we produce over $14 trillion of goods and services. we still have 96 apples. every year and are getting richer.

how can you get worse off by exchanging money for somehting you value more? why does it matter where your trading partner lives?

you are the one spouting a dead ideology. all trade barriers cause a deadweight loss and a drop in overall wealth. this is a simple, irrefutable fact.

http://mjperry.blogspot.com/2011/03/econ-101-protectionism-for-dummies.html

look at the graph and you’ll see why this must ALWAYS be so. consumers lose more than producers gain every time.

running a trade deficit is not the same as running out of stuff or of wealth.

you almost certainly will have a trade deficit with the grocery store your whole life. this does not mean you will get poorer or run out of money.

if you make $100,000 a year domestically and spend $4 a year on french wine, tell me how that’s unsustainable. you seem to lack even a basic grasp of how economics and wealth creation work.

that is probably why you are a protectionist and cannot see through the drivel preached by folks like chang. i know the book, and he’s a clown. he mistakes the brake for the gas and growth of big corporations for gains in societal welfare. when you undergo an industrial revolution, the growth from that is sufficient to swamp the bad trade policies he champions, but to get to actual consumer welfare, you need to drop them as well.

Greg Webb July 18, 2011 at 6:27 pm

George, you may be a nice guy in regular life. I don’t know. But, your posts on Cafe Hayek reveal that you are the proponent of the brain-dead mercantilist ideology.

Methinks1776 July 18, 2011 at 7:41 pm

Greg,

He’s the proponent of anything brain dead. Talking to Muirdiot is a lot like spitting into a headwind.

muirgeo July 18, 2011 at 10:59 pm

Greg,

Indeed I am a nice guy. However, you have to explain why I’m wrong rather ten just claim so.

Why is it ok to produce less then what you are trading for? And to sell off your assets to make up the difference? That’s not a sustainable position… our real economy fits with my claim that free trade is hurting more then helping. You guys seem oblivious to the real world facts.

You shoul read… Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism by Ha-Joon Chang

It might help you…. IF… you aretruely a truth-seeker and not some one just needing to validate a false premise wich happens to be personally profitable.

Greg Webb July 18, 2011 at 11:51 pm

George, I’ve explained why you are wrong before. You responded with the same old mercantilist playbook and reference some other statist’s work. Like I said in our debate rules, no simple linking of other people’s work. You read it and convincingly argue why his ideas are correct. I’ll respond.

Dan J July 19, 2011 at 7:43 pm

You exchanged fuel for some form of compensation with the credit card….. The fuel station gets paid….. Your debt is to the creditor…. But, you got something in return…… Your choice on use of your product is just that… Choice.
Stick with diagnosing strep throat and ear infections.

Ghengis Khak July 18, 2011 at 11:16 pm

Your whole position is baffling.

I live in California in a different county than you. If I buy the house next door to yours, does your net worth necessarily decline? If not, why is it different for someone from China?

James N July 18, 2011 at 8:41 am

I’m convinced more and more, each time I visit this site, that muirgeo is doing nothing more than engaging in some type of perverse parlor game. The established rules go something like this. He and his friends sit around and visit random websites, where they offer moronic viewpoints, that are a direct contradiction, to the prevailing thoughts of the majority of individuals on the thread. The winner is the guy who gets the largest number of responses to his obviously illogical, mindless offerings.

I mean what other possible reasons could you find for the claptrap he produces?

morganovich July 18, 2011 at 2:01 pm

he could be a psychology grad student studying responses to repeated illogic and non sequitor.

Ghengis Khak July 18, 2011 at 11:22 pm

LOL wow. I just spit milk + cereal all over my keyboard.

Greg Webb July 18, 2011 at 11:30 pm

LOL! That’s funny!

muirgeo July 18, 2011 at 2:08 pm

I find it re-enforces my positions as legitimate when so many of you can’t even attempt anything more than an ad hom for a reply…. so thank you for yours.

James N July 18, 2011 at 2:45 pm

What difference would if make? I’ve witnessed innumberable times where you been handed your a.. on any number of subjects and it doesn’t faze you. Why waste our time explaining that the sun rises in the east to a guy who only faces west? Sorry, I’ve got better things to do with my time.

Greg Webb July 18, 2011 at 11:28 pm

George, please see our debate on your blog…

Ron H July 18, 2011 at 9:50 pm

James N:

The winner is the guy who gets the largest number of responses to his obviously illogical, mindless offerings.

LOL A troll club!

Mike July 18, 2011 at 9:20 am

Wait, we’re only talking about ‘personal’ net worth here right? So the net worth of individuals may increase based on how each person allocate their resources, but for America as a whole they would be losing actual ownership of their properties except the government owned ones.

morganovich July 18, 2011 at 10:42 am

no.

if you take the 100k and invest it in a business, then you own that.

there are lots of kind of property.

Mike July 19, 2011 at 9:44 am

Right, but not everyone invests their net worth in businesses. If we’re talking about America in general then everyone definitely does NOT invest their money in businesses (except government funded initiatives, directly or indirectly).

Mike July 19, 2011 at 9:48 am

My point is just that in terms of ‘richer’ and ‘poorer’, everyone should be able to become ‘richer’. But if ownership of a business requires one to invest money into them (and not by hereditary rights or whatever) then foreigners are indeed ‘owning’ more and more American property.

But if everybody’s rich, who cares about ownership, right? (sarcasm intended)

Hobson July 18, 2011 at 10:08 am

Swerving back to Don’s original post, I found interesting Fletcher’s invocation of Friedman to support his case. As Don points out, it is possible for everyone involved to have more wealth as a consequence of the trade [thereby refuting Fletcher's main point]. But if everyone is better off as a consequence of the trade, did free lunches abound?

No (at least for the most part). The trade could result in everyone being worse off, e.g., Mr. Lee might prove to be a terrible farmer or crop prices unexpectedly plunge after planting and/or the value of the property declines after the purchase, and Mr. Smith’s sister-in-law’s business might flop and/or the value of the property rises after the sale. The wealth that is to be created is created, if at all, as a consequence of risks taken, skill applied, and effort exerted. That stuff is not free.

I wonder, however, whether Fletcher inadvertently disclosed a flaw in the “no free lunch” thesis. At the instant after the trade Mr. Smith feels better about having the cash than the land and Mr. Lee feels better about having the land than the cash. Isn’t that a “free lunch?”

Emil July 18, 2011 at 5:19 pm

“The trade could result in everyone being worse off, e.g., Mr. Lee might prove to be a terrible farmer or crop prices unexpectedly plunge after planting and/or the value of the property declines after the purchase, and Mr. Smith’s sister-in-law’s business might flop and/or the value of the property rises after the sale.”

1) of course there can sometimes be bad consequences from trade (usually to do with fraud or similar), but as a whole trade has made (and continues to make) us all better off – just try asking the Cubans

2) that is not a consequence of the trade but of mis-management / bad luck / whatever after the trade

3) this would be a problem in all kinds of trade and not only in the ones with foreigners, wouldn’t it?

Ron H July 18, 2011 at 10:01 pm

No.

Chucklehead July 20, 2011 at 3:09 am

Mal investment or squandering aside, at the time of the trade, Mr. Lee needs the land more than the 100k. The seller need for the 100k is greater than his need for the land. The exchange takes place , both needs fulfilled in a mutually beneficial way at that moment. When Mr. Lee sells his land or poor crop, again he values the money more than the land or crop, and vice versa. Again he is better off from the moment before. The period in between is a question of markets and management which are beyond the scope of this model.

Slappy McFee July 18, 2011 at 12:50 pm

Here is my favorite part of the exchange:

“Henderson
It seems that you think I’m advocating economic decline. I’m not. And I’m not sure how you got that idea.

Fletcher
You aren’t advocating economic decline, but you’re saying it’s fine if people choose to maximize short-term consumption at their long-term cost–which means saying it’s fine if people chose economic decline.

Henderson
Correct. This time you said it accurately.

Fletcher
Indifference to economic decline, in the face of forces pushing this country in that direction, means choosing to let it happen.”

Yes, Mr Fletcher, it is perfectly acceptable in a free society for people to make choices that make themselves worse off. You see, Mr Fletcher, this makes it much easier for people who do make the ‘right’ decisions to make their lives better.

NotSure July 18, 2011 at 2:49 pm

muirgeo, you are complaining about America not producing anything new, then at the same time advocate ever higher taxes, ever more government programs and ever more regulation. Yet you remain perplexed why the entrepreneur would rather move operations to more business friendly China.

kyle8 July 18, 2011 at 2:55 pm

America could sure use a lot less of what he produces on this site.

vikingvista July 18, 2011 at 5:23 pm

I don’t know. You think my garden might grow better if I put it in the soil?

brotio July 18, 2011 at 8:33 pm

I don’t know, either. Is dipshit a good fertilizer?

vikingvista July 18, 2011 at 9:47 pm

Hard to tell. Smells like fertilizer, but looks like poison.

ArrowSmith July 19, 2011 at 2:20 am

One could fertilize many fields with the stuff muirgeo produces.

Dan J July 19, 2011 at 7:39 pm

Govt will properly allocate and produce great stuff thru programs headed up by an expert panel for each industry.

Chucklehead July 20, 2011 at 3:15 am

What is a foreigner? Is it a non citizen living in another country, a citizen living in a foreign country, a non citizen residing in the US? In the very least, a non citizen supplying their capital here is better than no capital at all.

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