Milton Friedman

Universal Basic Income

By Jonathan B. Wight

Charles Murray is pushing the idea of a Universal Basic Income (UBI) for all Americans over 21, an idea he got from Milton Friedman’s “negative income tax.”

This has some commendable features and troublesome quirks.

First, this proposal seeks to reduce economic uncertainty in an era of widespread resource reallocations (which is econ speak for workers getting outsourced and the fundamental nature of jobs changing). 

No longer can we assume that workers coming out of high school will get a middle-class job that will tie them to a company for their careers and a union to represent their interests.  The new normal is part time or contractual jobs that can be terminated at will, subject to market forces. The new normal may well be robots and drones taking over many menial tasks.

Reducing uncertainty in this environment may produce large positive spill-overs in health, since stress produced by anxiety and uncertainty are surely one cause of physical and mental illness. 

Out of the $13,000 annual bequest that Murray proposes, $3,000 would compulsorily be spent on health insurance. The rest could be spent as the recipient chooses. The $10,000 a year is $833/month, which is barely enough to live on, but it would provide a cushion for many families. It is hardly a disincentive to work, although there will be inevitable cases of it.  How this disincentive compares to the disincentives in the current mish-mash of safety net programs is unclear, but it's hard to argue it would be worse.

Second, to pay for this Murray proposes eliminating all other welfare or safety net programs.  Get rid of housing, food stamps, agricultural subsidies, and corporate welfare.  He doesn’t mention the home interest mortgage deduction and gasohol programs, but he should. The administrative costs of these programs are onerous, and too often provide negative incentives.

But Murray goes too far, I think, in advocating eliminating Social Security and Medicare. That isn’t going to fly and skewers the whole deal. I also would make exceptions for programs targeting at-risk kids.  Let’s make real progress on reducing economic distress and bureaucracy but not think we must eliminate everything.

David Freedman has a good article arguing against the UBI. 

[Thanks to Doug Monroe for the initial link.]

The Case Against Patents

Jonathan B. Wight

Many economists have an interesting schizophrenia when it comes to patents. Normally, the moral imperative in neoclassical economics is to maximize the economic surplus. But seemingly out of nowhere, most textbooks are perfectly willing to entertain the idea that another kind of moral imperative could suddenly trump efficiency—and that is long run dynamic growth and innovation. Allowing patent monopolies will hurt output and the economic surplus but—the traditional story goes—will create incentives for risk-taking and discovery. Schumpeter's "creative destruction" is widely touted.

But what if the desired dynamism actually results from more competition and less patent monopoly? This is the argument of Boldrin and Levine, writing in the Journal of Economic Perspectives (27/1)(Winter 2013): 3-22. They argue against patents on empirical and theoretical grounds:

The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity. This disconnect is at the root of what is called the "patent puzzle": in spite of the enormous increase in the number of patents and in the strength of their legal protection, the US economy has seen neither a dramatic acceleration in the rate of technological progress nor a major increase in the levels of research and development expenditure.

Both theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent, the general equilibrium effect on innovation can be negative. The historical and international evidence suggests that while weak patent systems may mildly increase innovation with limited side effects, strong patent systems retard innovation with many negative side effects. More generally, the initial eruption of innovations leading to the creation of a new industry—from chemicals to cars, from radio and television to personal computers and investment banking—is seldom, if ever, born out of patent protection and is instead the fruit of a competitive environment. It is only after the initial stage of rampant growth ends that mature industries turn toward the legal protection of patents, usually because their internal growth potential diminishes and they become more concentrated. These observations, supported by a steadily increasing body of evidence, are consistent with theories of innovation emphasizing competition and first-mover advantage as the main drivers of innovation, and they directly contradict "Schumpeterian" theories postulating that government-granted monopolies are crucial to provide incentives for innovation.

A world without patents seems unimaginable, just as a world of floating exchange rates and an all-volunteer army seemed unthinkable in the mid-1960s when Milton Friedman proposed these. Yet experience has shown that sometimes economists have good ideas for transforming public policy.

Chick-fil-A, Corporate Social Responsibility, and Ethical Consumption

Mark D. White

I've read an enormous amount of what's been written on the Chick-fil-A controversy the last couple weeks, although I'm sure I haven't scratched the surface. But I was fascinated by Will Wilkinson's recent post at The Economist's Democracy in America blog, titled "Feathers Flying," in which he casts the fast food company's stance against same-sex marriage as an example of corporate social responsibility (CSR), though not the typical social justice concerns usually associated with CSR.

It's my view that this sort of skirmish in the culture wars is an inevitable consequence of trends in "ethical consumption" and "corporate social responsibility". Conservatives sceptical of the corporate social responsibility (CSR) movement have often charged that CSR is a stalking horse for liberal causes that have failed to get traction through ordinary political channels. This charge finds some support, I think, in the fact that few in the media seem to see Chick-fil-A's Christian-influenced culture and business practices as an example of CSR, though obviously it is. Doesn't the demand that corporations act responsibly in the interests of society, in ways other than profit-seeking, directly imply that corporate leaders who find same-sex marriage socially irresponsible should do something or other to discourage it?

Rather than comment on Chick-fil-A's position itself, I want to point out Mr. Wilkinson's perceptive comments regarding the politicization of the marketplace itself:

Matters of moral truth aside, what's the difference between buying a little social justice with your coffee and buying a little Christian traditionalism with your chicken? There is no difference. Which speaks to my proposition that CSR, when married to norms of ethical consumption, will inevitably incite bouts of culture-war strife. CSR with honest moral content, as opposed to anodyne public-relations campaigns about "values", is a recipe for the politicisation of production and sales. But if we also promote politicised consumption, we're asking consumers to punish companies whose ideas about social responsibility clash with our own.

Those opposed to a particular company's moral or political position may consider their actions to exemplify corporate social irresponsibility (or worse) rather than just a different type of CSR. The issue for ethical consumption then becomes not just a matter of choosing companies who actively support the "right" causes rather than those who don't, but more important, staying away or boycotting companies that support the "wrong" ones. (This is not new: for examples, labor union members have long refused to patronize nonunion businesses, whether out of solidariry or some other principle.)

Wilkinson's proposed remedy is elegant, and on first blush seems to make perfect sense:

I'd suggest the best arena for moral disagreement is not the marketplace, but our intellectual and democratic institutions. We hash out our disagreements, as best we can, in public deliberation. The outcome of this deliberation becomes input to official policymaking, which in turn determines the rules of the game for business. Businesses then seek profits within the scope of those rules (and the consensus rules of common decency), and consumers buy the products that best satisfy their preferences.

That would be the ideal, I agree. In unpublished work on CSR, I draw a distinction between internal and external actions: internal CSR would cover the operations of the business itself, such as treatment of employees and environmental production methods, while external CSR involves actions not directly related to the business, such as charitable giving--or political positions. My conclusion based on this distinction can be considered a restatement of Milton Friedman's oft-caricatured position that business should focus on maximizing returns to owners within the legal and ethical standards of their industry. The italicized phrase refers to the importance of internal CSR--which still leaves room for controversy, such as whether benefits can be extended to same-sex partners or the extent of environmental safeguards--and cautions against external CSR, either because profits can be devoted to social or political causes by the owners just as well as by the company, or because the business wants to avoid endorsing a controversial position and politicizing its product.

I think that corresponds fairly well to what Wilkinson recommends, but I fear the horse has left the barn on that one. CSR and ethical consumption together comprise a vicious cycle that we will find it very difficult to extricate ourselves from at this point. Consumers have adopted the mindset of making a moral statement with their purchases--with good intentions--and they expect businesses or business leaders to reveal their positions. Businesses are more than happy to comply, sincerely or otherwise, even at the risk of alienating a segment of their customer base. Even companies that remain neutral on heated social issues may be accused of "if you're not with us you're against us"--and certainly with some issues, there is no neutral position. A company can refuse to take a public stand on same-sex marriage, but they either provide same-sex benefits or they don't.

I'll finish--as I often do--with Kant. Often caricatured himself as a rigid demanding moralist, he ridiculed as "fantastically virtuous" any person "who allows nothing to be morally indifferent and strews all his steps with duties, as with mantraps... Fantastic virtue is a concern with petty details which... would turn the government of virtue into tyranny” (Metaphysics of Morals, 409). We can take his comments one step farther and argue that, given our limited attention, the more attention we pay to "petty details," the less we pay to more serious issues or more effective ways to deal with them. Equality for gays and lesbians is no petty detail, of course, but no matter which side you're on, there must be a better way of supporting your position than choosing whether to eat a chicken sandwich.

Reading Ronald Coase – Pt. I

Jonathan B. Wight

I've been reading Ronald Coase's, Essays on Economics and Economists (Chicago: University of Chicago Press, 1994) and finding it a delightful collection. In these articles, Coase displays the virtuous attributes that Frank Knight insists are needed in a serious scholar: integrity, competence, and humility, and one should also add--courage. Getting inside Coase's mind is easy because of his clear and uncluttered writing style. He is quick to point out the weaknesses in his own knowledge and argument, which is refreshing.

In one of the first essays, "How Should Economists Choose?" Coase takes on Milton Friedman's essay on "The Methodology of Positive Economics," and argues that Friedman's account of evaluating models based on their predictions is essentially a normative judgment about how economists ought to proceed:

When Friedman says that the "ultimate goal of a positive science is the development of a "theory" or "hypothesis" that yields valid and meaningful... predictions about phenomenon not yet observed," I cannot help mentioning that a science has no goals, only individuals have goals. (P. 18, emphasis added).

While Friedman's normative goal for science is prediction, Coase argues that in actuality, economists choose the models they endorse in an entirely different way based on whether a model makes more sense intuitively:

Economists, or at any rate enough of them, do not wait to discover whether a theory's predictions are accurate before making up their minds. Given that this is so, what part does testing a theory's predictions play in economics? First of all, it very often plays either no part or a very minor part." (p. 24)

Furthermore, empirical testing is rarely conclusive. Coase observes that "... if you torture the data enough, nature will always confess." (p. 27). On a related point, economists are in a competitive situation. Their research is done to bolster the theory that they already believe in. Hence, "what we are dealing with is a competitive process in which purveyors of the various theories attempt to sell their wares." (p. 28). (This chapter was first published in 1982, and thus presages Deirdre McCloskey's work on rhetoric.)

If scientists are self-interested, and work in a competitive market, will the invisible hand work according to the maxim "Greed is good?" Coase doesn't address this directly, but there are enough hints here to strongly infer an answer. Coase quotes Frank Knight, who argues that the "basic principle of science -- truth or objectivity -- is essentially a moral principle, in opposition to any form of self-interest."

And yet, economists have their own self-interests at stake, which include not only money, but perhaps even more important, status. Coase quotes Samuelson as writing: "In the long run, the economic scholar works for the only coin worth having -- our own applause." (p. 31)

This market for ideas would not work as well unless individual researchers adopted moral principles that constrain self-interest. Coase again cites Knight: "[T]he presuppositions of objectivity are integrity, competence and humility." (p. 15) In other words, science needs virtue.

Web Link for Young Entrepreneurs

Jonathan B. Wight

Do you know a young person who wants to start a business?

Here's a web link of "Teen Merchant and Entrepreneur Resources" that has lesson plans for both students and teachers (thanks to Mrs. Elizabeth Owens of the Pine Mountain Central School District).

One of the games highlighted is a PBS website "Build a Socially Conscious Business" which celebrates "the New Heroes." These heroes are not politicians and "Their 'arsenals' are not of weaponry, but of creative ideas, dogged determination and a deep belief in their power to change the world"—in other words, entrepreneurs.

A few thoughts: a business does not have to be "socially conscious" to do lots of good in the world. Running a business with the motive of making money is entirely ethical, provided one adheres to Milton Friedman's famous dictum to obey all laws, both legal and those embedded in moral norms. [For a friendly critique of Friedman's view that only making money for shareholders ought to be the goal of business, see my article "The Ethical Lacunae in Friedman's Concept of the Manager, Journal of Markets & Morality 11(2) (2008):221-238, with Martin Calkins].

I think the 21st century is the epoch of socially-conscious business for two reasons. First, because genuine caring for others (as opposed to 'enlightened self interest' caring) is a stronger motivator, and leaders that genuinely care will attract better employees, suppliers, and customers. And second, because young people are avidly searching for meaning in their lives. Earning a profit in a competitive world means you are serving others well. Creating a business that not only makes money but also provides a sense of purpose is a double-whammy.

Lessons in Monetary Economics from Playing Monopoly

Mark D. White

The New York Times has a great little piece today on Monopoly (the game), Milton Friedman, and monetary economics, which ends with this description of a particular game which took place in a University of Chicago dorm in the late 1970s:

Monopoly friedman The precise details of our classic game are blurred by the alcohol consumed that night and the years that have passed since then, but this much is recalled. We decided that Monopoly was hostile to a free market because it restricted the number of houses or hotels one could buy. We voted that a player could buy as many hotels as a property could physically bear and rents would be raised proportionally.

But the bank soon began to run out of money. So we did what any government would do. We began printing more of it, by scribbling $500 on scraps of paper. We printed a lot of money.

Prices shot up, which we all knew, even in that inebriated state, was the consequence of expanding the money supply. (After all, the great economist [Friedman] told us, “Inflation is always and everywhere a monetary phenomenon.”)

The inflation became so extreme that we eventually voted to alter the rules again: we’d cut the money supply. Any money we printed that came back to the bank would be taken out of circulation.

A severe depression kicked in, of course. Prices plummeted and it was a race to liquidate assets. One by one the players quickly went bankrupt, and sometime around 4 that morning the game was over.