Free to Exchange: Socialism in Venezuela and India

Kevin Grier and G.P. Manish join Ben Powell on Free to Exchange to discuss various socialist policies in Venezuela and India and their outcomes.

The Free Market Institute (FMI), in conjunction with KTTZ-TV, produces Free to Exchange, an interview-based television program that focuses on both historical and contemporary economic and public policy issues.

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Benjamin Powell
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Date: 
Tuesday, February 20, 2018
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Banking Regulation, Regulatory Capture and Inequality

January, 2018

Regulation of the banking and finance industry may lead to a more equal distribution of income if regulators pursue goals in the public interest. Alternatively, the economic theory of regulation predicts that regulatory and supervisory processes may be captured by the banking industry, leading to policies that promote the industry’s interests. The liberalization of the banking and finance sector since the 1980s has produced more intense banking supervision and prudential regulation. In this study we find that banking supervision regulation is associated with greater income inequality. These findings are consistent with the economic theory of regulation. We interpret these results as evidence that regulatory capture in the banking and finance industry can have pernicious effects on the distribution of income.

The Mises-Knight Theory of Uncertainty and Its Implications for Entrepreneurship, Equilibrium, and the Theory of the Firm

September, 2016

The goal of this paper is to analyze the views of Frank Knight and Ludwig von Mises on the topic of uncertainty and how it influences the theory of individual decision-making and to trace out the implications of the same for the theories of entrepreneurship, equilibrium, and the firm. The paper adopts a historical approach in its analysis of the theory of uncertainty, with an extended discussion of the primary writings of Knight and Mises on this topic. It then uses the insights gleaned from this discussion in order to address issues and topics that have found a prominent place in the modern literature on entrepreneurship, equilibrium, and the firm that draws its inspiration from the Austrian School. The paper offers three main findings: in the realm of entrepreneurship it argues that there can be no theory of the entrepreneur without the concept of uncertainty provided by Knight and Mises, whereas with regard to the theory of equilibrium it focuses on highlighting the concept of an equilibrium with error prevalent in the Austrian tradition and on the implications that an explicit introduction of uncertainty has for the existence of a process of equilibration that pushes the economy toward a state of general equilibrium in real time. As regards the theory of the firm we find that a proper understanding of uncertainty ultimately reverses the direction of any causal explanation of economic organization, making the firm an outcome of dealing with uncertainty rather than a means to do so.

Error, Equilibrium, and Equilibration in Austrian Price Theory

August, 2014

Theorists of the Austrian school have long maintained that every realized price is market-clearing, in sharp contrast to the adherents of the neoclassical mainstream, who view realized prices as constituting a state of disequilibrium with a mismatch between demand and supply. The heart of these theoretical differences lies in the equilibrium constructs used by the members of the two schools of thought in their analysis of price formation. This paper seeks to clarify and develop the conceptual foundations underlying the Austrian position, especially the concept of the plain state of rest, which represents a state of market equilibrium with error. It also provides a brief sketch of the role that realized prices play in the process of error correction and entrepreneurial selection that forms a key part of the market process as described by Ludwig von Mises.

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Corruption, Crime, and Economic Growth

January, 2010

The relationship between corruption, crime and economic growth seems obvious to most people. Both crime and corruption increase uncertainty and the cost of doing business, so crime and corruption must discourage entrepreneurial activities that cause growth. However, the relationship between crime and growth and corruption and growth is much more complex than it first appears. Scholars studying corruption have theorized both how corruption can reduce growth but also how it can increase growth, for example, by avoiding bureaucratic delays. The results of cross-country empirical literature on the effect of corruption on growth are mixed. Recently a new literature has emerged controlling for the quality of institutions to examine the effect of corruption on growth. In the next section of this chapter we review the existing literature on corruption and growth, highlight some of the shortcomings in the literature, and then report on some of the newer studies that examine the interaction of institutions, corruption and growth. We believe this final strand of literature provides the most accurate view of how corruption impacts growth.

Find the chapter online at Benjamin Powell's website.

Mastery versus profit as motivation for the entrepreneur

March, 2016

This paper argues that entrepreneurs are motivated not only by the desire to maximize profits but also by the desire for mastery. It then attempts to analyze the implications of mastery seeking for the economics and politics of government privileges and favors for businesses. Using the existing psychological literature on mastery as motivation the paper first attempts to conceptualize how the desire for mastery manifests itself in the context of entrepreneurship. Next, it attempts to clarify the implications of this for the existing literature on the effects of government policies promoting cronyism. The paper argues that in business mastery involves producing a good product or service, and validation of the performance occurs via the choices of sovereign consumers. Mastery is thus achieved through participation in a process of competition that is free from government favors. Given that crony polices can disrupt the consumer choice process and consequently the validation of performance they can therefore affect the types of individuals who become entrepreneurs, with a high level of government intervention pushing success seekers to pursue mastery in other life endeavors, with adverse implications for innovation and growth in the economy. The exploration of implications of a plausible but underexplored motive for entrepreneurs and the interaction between this motive and the effects of various policies fostering cronyism or rent seeking are potential contributions of the paper.

From Subsistence to Advanced Material Production

October, 2015

This chapter provides a summary of the lessons that the Austrian theory of capital holds for the field of development economics. It provides an introduction to the concepts of the structure of production and time preference and a brief overview of how the rate of time preference limits both the available pool of savings and the extent of capital formation. The implications that this uniquely Austrian insight holds for the theory of economic growth are spelled out, in particular the fact that what constrains the growth of developing countries is not the availability of technology but the availability of savings to undertake investment. The chapter also provides a brief exposition of the concept of capital heterogeneity and its implications for the impossibility of economic calculation under a system of central planning. A critique of some popular models that advocate planning as a means of economic development is also provided.

The Oxford Handbook of Austrian Economics is available through Oxford University Press.

Editors: 
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Christopher Coyne
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Peter J. Boettke

Liberalism in India

September, 2015

The authors give an overview of classical liberal ideas and their proponents in India over the last century. The liberal movement in India, especially during the postcolonial era, was defined by the socialist ideas it opposed. The authors detail the different stages of central planning in India and the liberal opposition to the planning apparatus. The liberal movement consisted of three components. First, dissent from the ideology of planning emanated from the halls of academia. This dissent was led in the 1950s almost singlehandedly by B. R. Shenoy, who was followed in later decades by other expatriate academics. Second, there has been an anti-planning movement in politics and civil society. And third, liberal voices have emerged recently in the media.

Crony Capitalism Undercuts Entrepreneurs' Mastery Motivation

Tuesday, September 8, 2015
Authors: 
Daniel Sutter

Economic competition can often usefully be compared to sports. As many jaded sports fans know, economics plays a chief role in the decisions made by their favorite teams and athletes. But sports can teach us about economics as well: For example, how crony capitalism – or government favoritism toward preferred firms and industries – may be even more costly than commonly perceived.

Competition for NFL roster spots among thousands of players will ideally lead to the highest quality play possible in the upcoming season. Similarly, competition never ends in the business world. Financial rewards for success, including football contracts and business profits, incentivize effort.

But few would argue that certain athletes and entrepreneurs at the tops of their professions – think Michael Jordan or Steve Jobs in their primes – were in it strictly for the money. Each chased something harder to define: the challenge of competition, of striving for one's personal best and succeeding against the best efforts of others. We certainly found this to be true in our recent working paper, "Mastery vs. Profit as Motivation for the Entrepreneur." Yet society tends to associate this internal drive with sports, but not entrepreneurship.

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Mastery vs. Profit as Motivation for the Entrepreneur

August 18, 2015

Entrepreneurs are not driven by profits alone: mastery of the goods or services they produce is an important motive, and their performance is validated by comparison with other entrepreneurs’ products. Entrepreneurs find validation in the choices of individual consumers, which motivate them to continue to deliver high-quality products and services. 

A new study published by the Mercatus Center at George Mason University synthesizes psychologists’ research on intrinsic motivations with research on the motives of entrepreneurs and shows that entrepreneurs are often motivated by a desire to succeed in competition with others. Consumer choice in markets provides validation to entrepreneurs about who provides the “best” product, so government intervention that results in disruption of choices in markets can make entrepreneurs who care about mastery worse off and harm economic growth. 

To read the study in its entirety and learn more about its authors, economists G. P. Manish and Daniel Sutter, see “Mastery vs. Profit as Motivation for the Entrepreneur: How Crony Policies Shape Business.” 

MASTERY SEEKING VS. PROFIT SEEKING 

Mastery seeking is an entrepreneur’s intrinsic desire to produce a good product or service. Profit seeking is a businessperson’s desire to make a profit regardless of the quality of the product or service. 

  • Competition is motivation for entrepreneurs. Many of the great entrepreneurs who have contributed to the prosperity of the economy appear to have been motivated not solely by money, but also by the competition offered by markets and business. They have continued to build businesses and create new products after accumulating enormous riches.
  • Profit is not the only motive. Profit may be a way of keeping score in the game of business for such entrepreneurs, not the ultimate or only goal. 

KEY FINDING: GOVERNMENT-GRANTED PRIVILEGES CAN HARM ENTREPRENEURSHIP AND SLOW ECONOMIC GROWTH 

In the modern economy, governments often grant privileges and hand out favors to certain busi- nesses through a wide array of policies, such as subsidies, tariffs, taxes, and regulations. Policies that allow governments to intervene in the market and favor some businesses over others can be called “crony” policies, as governments will favor those who support politicians’ continued politi- cal power. 

  • Government privileges disrupt consumer choice. Crony polices can disrupt the consumer choice process and consequently the validation of performance. As a result, government fa- vors may increase profit but reduce realized performance for entrepreneurs, making entre- preneurs motivated by mastery worse off.
  • Entrepreneurs are forced to satisfy politicians, not consumers. Politicization of the economy inevitably leads entrepreneurs to seek to satisfy politicians (through lobbying) as opposed to consumers alone. Spending time lobbying produces nothing of value to consumers, which slows economic growth.
  • Cronyism can harm entrepreneurship and economic growth. The level of cronyism in a na- tion could affect the types of individuals who tend to become entrepreneurs, with extensive government intervention pushing mastery seekers to pursue mastery in other life endeav- ors. This will slow economic growth, as the best entrepreneurs no longer provide quality goods and services to consumers. 

CONCLUSION

Political favors and regulations actually interfere with free competition in the market, and they do not necessarily enrich businesses. Cronyism can create a system of skewed competition. Conse- quently, the best entrepreneurs who value mastery may have no interest in joining or continuing to participate in a rigged game. Without strong entrepreneurship in an economy, economic growth will falter. 

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