Alan Reynolds: Why Piketty's Wealth Data Are Worthless - WSJ

Alan Reynolds: Why Piketty's Wealth Data Are Worthless - WSJ

No book on economics in recent times has received such a glowing initial reception as Thomas Piketty's "Capital in the Twenty-First Century." He remains a hero on the left, but the honeymoon may be drawing to a sour close as evidence mounts that his numbers don't add up.
Mr. Piketty's headline claim is that capitalism must result in wealth becoming increasingly concentrated in fewer hands to a "potentially terrifying" degree, on the grounds that the rate of return to capital exceeds the rate of economic growth. Is there any empirical evidence to back up this sweeping assertion? The data in his book—purporting to show a growing inequality of wealth in France, the U.K., Sweden and particularly the United States—have been challenged. And that's where the story gets interesting.
In late May, Financial Times economics editor Chris Giles published anessay that found numerous errors in Mr. Piketty's data. Mr. Piketty's online "Response to FT" was mostly about Europe, where the errors Mr. Giles caught seem minor. But what about the U.S.?
Mr. Piketty makes a startling statement: The data in his book should now be disregarded in favor of a March 2014 Power Point presentation, available online, by Mr. Piketty's protégé, Gabriel Zucman (at the London School of Economics) and his frequent co-author Emmanuel Saez (of the University of California, Berkeley). The Zucman-Saez estimates, Mr. Piketty says, are "much more systematic" and "more reliable" than the estimates in his book and therefore "should be used as reference series for wealth inequality in the United States. . . (rather than the series reported in my book)."
Zucman-Saez concludes that there was a "large increase in the top 0.1% wealth share" since the 1986 Tax Reform, but "no increase below the top 0.1%." In other words, all of the increase in the wealth share of the top 1% is attributed to the top one-tenth of 1%—those with estimated wealth above $20 million. This is quite different from the graph in Mr. Piketty's book, which showed the wealth share of the top 1% (which begins at about $8 million, according to the Federal Reserve's Survey of Consumer Finances) in the U.S. falling from 31.4% in 1960 to 28.2% in 1970, then rising to about 33% since 1990.
In any event, the Zucman-Saez data are so misleading as to be worthless. They attempt to estimate top U.S. wealth shares on the basis of that portion of capital income reported on individual income tax returns—interest, dividends, rent and capital gains.
This won't work because federal tax laws in 1981, 1986, 1997 and 2003 momentously changed (1) the rules about which sorts of capital income have to be reported, (2) the tax incentives to report business income on individual rather than corporate tax forms, and (3) the tax incentives for high-income taxpayers to respond to lower tax rates on capital gains and dividends by realizing more capital gains and holding more dividend-paying stocks. Let's consider each of these issues:
• Tax reporting. Tax laws were changed from 1981 to 1997 to require that more capital income of high-income taxpayers be reported on individual returns, while excluding most capital income of middle-income savers and homeowners. This skews any purported increase in the inequality of wealth.
For example, interest income from tax-exempt municipal bonds was unreported before 1987—so the subsequent reporting of income created an illusory increase in top incomes and wealth. Since 1997, by contrast, most capital gains on home sales have disappeared from the tax returns of middle-income couples, thanks to a $500,000 tax exemption. And since the mid-1980s, most capital income and capital gains of middle-income savers began to vanish from tax returns by migrating into IRAs, 401(k)s and other retirement and college savings plans.
Balances in private retirement plans rose to $12.4 trillion in 2012 from $875 billion in 1984. Much of that hidden savings will gradually begin to show up on tax returns as baby boomers draw them down to live on, but they will then be reported as ordinary income, not capital income.
Tax law changes, in summary, have increased capital income reported at the top and shifted business income from corporate to individual tax returns, while sheltering most capital income of middle-income savers and homeowners. Using reported capital income to estimate changing wealth patterns is hopeless.
• Switching from corporate to individual tax returns. When individual tax rates dropped from 70% in 1980 to 28% in 1988, this provoked a massive shift: from retaining private business income inside C-corporations to letting earnings pass through to the owners' individual tax returns via partnerships, LLCs and Subchapter S corporations. From 1980 to 2007, reports the Congressional Budget Office, "the share of receipts generated by pass-through entities more than doubled over the period—from 14 percent to 38 percent." Moving capital income from one tax form to another did not mean the wealth of the top 1% increased. It simply moved.
• Tax rates and capital gains. There were huge, sustained increases in reported capital gains among the top 1% after the capital-gains tax was reduced to 20% from 28% in 1997, and when it was further reduced to 15% in 2003. Although more frequent asset sales showed up as an increase in capital income, realized gains are no more valuable than unrealized gains so realization of gains tells us almost nothing about wealth. Similarly, a portfolio shift from municipal bonds, coins or cash into dividend-paying stocks after the tax on dividends fell to 15% in 2003 might look like more capital income when it was merely swapping an untaxed asset for a taxable one.
In his book, Mr. Piketty constructed estimates of top wealth shares, decade by decade, melding and massaging different kinds of data (estate tax records, the Federal Reserve's Survey of Consumer Finances). These estimates are suspect in their own right; but as we now learn from Mr. Piketty's response to Mr. Giles, we can ignore them.
Yet Mr. Piketty's preferred alternative, the Zucman-Saez slide show, is also irreparably flawed as a guide to wealth concentration. Mr. Piketty's premonition of soaring U.S. wealth shares for the top 1% finds no credible support in his book or elsewhere.
Mr. Reynolds, a senior fellow with the Cato Institute, is author of a 2012 Cato Institute paper, "The Misuse of Top 1 Percent Income Shares as a Measure of Inequality."

Dear Ultra-Rich Man : The Freeman : Foundation for Economic Education

Dear Ultra-Rich Man : The Freeman : Foundation for Economic Education

You probably don’t know me, but unlike you, I am one of the 99 percent, a proud and unapologetic advocate of free and open markets. I’m writing you because your letter to other rich guys has gone viral. Each time I saw it, I thought, “Somebody should respond to this guy.” I got tired of waiting. So I hope you’ll read this. I leave your prose in italics so I can address your major points in turn.
You probably don’t know me, but like you I am one of those .01%ers, a proud and unapologetic capitalist.I admit I’m already suspicious. If you were a proud and unapologetic capitalist, I doubt you’d write the things you did. Now, maybe you’re an apologetic investor, or even an entrepreneur. But to my mind, a capitalist is one who understands and advocates for a system of free and open markets—as opposed to other economic systems—such as State capitalism, crony capitalism, mercantilism, or Keynesian interventionism. If by capitalist, you mean, “guy who likes to make money in business,” then great. I just want to make sure we’re not talking past each other.
I have been rewarded obscenely for my success, with a life that the other 99.99 percent of Americans can’t even imagine. Multiple homes, my own plane, etc., etc.Did you create something of value for people, or make it possible for people to get something of value in return? Did they willingly hand over what economist Walter Williams calls “certificates of performance”? Or did you take subsidies or lobby the government for competitive advantages? If the former, I certainly don’t begrudge you your airplane. If the latter, then you are a crony capitalist (crapitalist), or rent-seeker. There is a big difference.
I was so excited by the potential of the web that I told both Jeffs that I wanted to invest in whatever they launched, big time. It just happened that the second Jeff—Bezos—called me back first to take up my investment offer. So I helped underwrite his tiny start-up bookseller. The other Jeff started a web department store called Cybershop, but at a time when trust in Internet sales was still low, it was too early for his high-end online idea; people just weren’t yet ready to buy expensive goods without personally checking them out (unlike a basic commodity like books, which don’t vary in quality—Bezos’ great insight). Cybershop didn’t make it, just another dot-com bust. Amazon did somewhat better. Now I own a very large yacht.What if the other Jeff had called first? You might be living next door to me. The point is not that you were successful, but rather that—at that time—the capital you gave to either Jeff could not be used for any other purpose. As it happens, Jeff Bezos was a good steward of your capital. He has created value for hundreds of millions of people, so both you and he have since been rewarded for being good stewards of capital. Without either of you, there would have been no Amazon (and thus no Amazon Prime, which lets me watch good TV cheaper than cable).
What sets me apart, I think, is a tolerance for risk and an intuition about what will happen in the future. Seeing where things are headed is the essence of entrepreneurship. And what do I see in our future now? I see pitchforks.We might quibble about the essence of entrepreneurship. You get it partially right, at least. But if you see pitchforks, it’s only because egalitarian ideologues are spreading bad economic ideas and fomenting the worst instincts in people: cruder emotions such as envy. Yet the poorest quintile of Americans is wealthier and healthier than two-thirds of the entire world. We should not be brandishing pitchforks at you. We should keep on sending you our certificates of performance—if, that is, you keep satisfying our wants and needs, and solving our problems.
At the same time that people like you and me are thriving beyond the dreams of any plutocrats in history, the rest of the country—the 99.99 percent—is lagging far behind.Guess what? I, too, am thriving beyond the dreams of any plutocrats in history! Later, in this very letter, you admit that on the things that matter, there isn’t really much of a gap between us at all. You write, “I earn about 1,000 times the median American annually, but I don’t buy thousands of times more stuff. My family purchased three cars over the past few years, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men.” Looks to me like we’re pretty equal where it counts. Because when it comes to consumption power, we little guys also have it made, yachts notwithstanding. (You’re more likely to find me on a pontoon boat. That’s okay.) You leave those surpluses to be used as capital—hopefully by other able entrepreneurs.
The divide between the haves and have-nots is getting worse really, really fast. In 1980, the top 1 percent controlled about 8 percent of U.S. national income. The bottom 50 percent shared about 18 percent. Today the top 1 percent share about 20 percent; the bottom 50 percent, just 12 percent.Accepting this statement on its face: So what? These statistical abstractions tell us nothing about how well people live today compared with the past. The more important questions are: Compared to 1980, is any one of us more likely to have greater access to the goods and services we need to live a decent life? Can plebs like me get mobile devices we couldn’t in 1980? Are we living longer than in 1980? Can we buy food, shelter, pants, TVs, transportation—on a website? Is total compensation (including non-wage benefits) more than it was in 1980? (Yes, yes, yes, yes, and yes.)
Now, might any of this have to do with entrepreneurs and investors directing capital to productive uses?
According to Michael Shermer, writing in Scientific American of all places, the American dream is not dead.
The top-fifth income earners in the U.S. increased their share of the national income from 43 percent in 1979 to 48 percent in 2010, and the top 1 percent increased their share of the pie from 8 percent in 1979 to 13 percent in 2010. But note what has not happened: the rest have not gotten poorer. They’ve gotten richer: the income of the other quintiles increased by 49, 37, 36 and 45 percent, respectively.
Not only that, but all quintiles have access to Netflix, Trader Joe’s, and mobile devices.
Now, there are desperately poor people out there. But worrying about what the desperately poor lack is very different from worrying about what the ultra-rich have. Surely guys like you can find creative solutions to helping the least advantaged without making them dependent on State largess, or without placing any more burdens on business.
Our country is rapidly becoming less a capitalist society and more a feudal society. Unless our policies change dramatically, the middle class will disappear, and we will be back to late 18th-century France. Before the revolution.This could be true, but not for the reasons you think. Again, there is a big difference between those who lobby politicians to transfer resources into their coffers through subsidies, regulations, and other political means and those who actually serve customers in order to make their lives better. The former should be called “crapitalists,” and there are way too many of them in the world. But crapitalism is a consequence of too much government power, power that ends up on auction. Such was the case in Rome, Paris, and Saint Petersburg. As long as poor people aren’t systematically excluded from entrepreneurial opportunities, the pitchforks will pitch hay.
(Note: Minimum wage laws can exclude poor people from opportunities.)
In fact, there is no example in human history where wealth accumulated like this and the pitchforks didn’t eventually come out. You show me a highly unequal society, and I will show you a police state. Or an uprising. There are no counterexamples. None. It’s not if, it’s when.Sure there are counterexamples: Singapore. Hong Kong. Switzerland. These days the pitchforks are coming out in societies where the poor don’t have access to real property, collateral, and low-cost legal institutions that help them become upwardly mobile—places like Egypt, Brazil, and Turkey. (See the work of Hernando de Soto). The pitchforks come out not when there is inequality of outcomes, but when political power is being sold to the highest bidder, or put differently, where political powers pick winners and losers and where business and government collude unfairly to become a “monstrous hybrid.” Pitchforks come out when the welfare well runs dry, as in Greece.
Many of us think we’re special because “this is America.” We think we’re immune to the same forces that started the Arab Spring—or the French and Russian revolutions, for that matter. I agree. We are certainly not immune to populist uprisings. But this is no justification for wealth redistribution or minimum wage hikes, which are likely—revolution or no—to make those with the pitchforks worse off than they would otherwise have been. "People don’t like that other people have gotten rich" is not an argument for confiscating wealth.
The model for us rich guys here should be Henry Ford, who realized that all his autoworkers in Michigan weren’t only cheap labor to be exploited; they were consumers, too. Ford figured that if he raised their wages, to a then-exorbitant $5 a day, they’d be able to afford his Model Ts. What a great idea. My suggestion to you is: Let’s do it all over again. We’ve got to try something. These idiotic trickle-down policies are destroying my customer base. And yours too.Wait, didn’t you say you were “rewarded obscenely”? Looks to me like your customer base is doing just fine. Do you really want to use the “company town” as the model for the good society? Good luck with that. Now, if we’re being charitable in interpreting you, we might point to companies like Costco that pay more for labor. It works for them. If it works for you, then what’s stopping you? If any such model works so splendidly, people will replicate it.
Finally, don’t you think it’s a bit rich (no pun) to call “trickle-down” policies “idiotic” and then propose them in the same breath? What’s more “trickle-down,” after all, than the notion that raining free money from on high—whether via fiat wages or welfare checks—will “stimulate” a middle class to burgeon? If anything, it will stimulate them to do more of less. These tired Keynesian nostra only end up in perfectly good capital being misallocated. (Burning planks from a ship at sea might keep you warm for a night, but it won’t get your ship to port.)
It’s when I realized this that I decided I had to leave my insulated world of the super-rich and get involved in politics.Why not help people with charity? Why not create better-faster-cheaper goods? Politics, at its root, is just some group compelling other people with the threat of violence to try to refashion the world as they see it in their minds. If that’s not inequality, I don’t know what is. But more importantly, you have already demonstrated that you can make the world a better place. It is better with Amazon than without. People are employed. I buy products and services from you that enrich my life. Thank you. Now, if you have more money than you can spend, why not build more businesses that solve more human problems? Why not engage in superphilanthropy instead of amateur economics?
I wanted to try to change the conversation with ideas—by advancing what my co-author, Eric Liu, and I call “middle-out” economics. It’s the long-overdue rebuttal to the trickle-down economics worldview that has become economic orthodoxy across party lines—and has so screwed the American middle class and our economy generally. Middle-out economics rejects the old misconception that an economy is a perfectly efficient, mechanistic system and embraces the much more accurate idea of an economy as a complex ecosystem made up of real people who are dependent on one another.So far neither you nor Mr. Liu have demonstrated anything to suggest you understand the nature of the economy as an ecosystem. You seem to be selling the same old ideas that brought us mechanistic economics like “priming the pump” or “fixing” the economy with economic stimulus, fiscal transfers, and price controls—none of which takes into account effects on real flesh-and-blood people involved in that complex ecosystem, and instead reduces them to macroeconomic abstractions. (I’m bracing for more Keynesianism from you, Mr. Hanauer.)
Which is why the fundamental law of capitalism must be: If workers have more money, businesses have more customers. Which makes middle-class consumers, not rich businesspeople like us, the true job creators. Which means a thriving middle class is the source of American prosperity, not a consequence of it. The middle class creates us rich people, not the other way around.Ah, more magical thinking from Keynes. First, it’s simply a myth that the American middle class is disappearing. And  Mr. Hanauer: You get things entirely wrong about the sources of prosperity. Most of the planet is poor, in fact, though it’s getting richer all the time.
The question we have to ask ourselves—inequality notwithstanding—is: Why did the rich countries get rich to start with? If we go by your logic, all we have to do to make sub-Saharan Africa rich is transfer massive amounts of wealth there until a “middle class” has enough money to go buy stuff. (Oh yeah, that didn't work.) But the arrow of causation doesn’t run that way. Instead, wealth originates from people like the pillow makers in your family—perhaps starting small—operating within stable rules, creating goods and services that people value enough to trade their time and labor for it—that is, if they have nothing else to trade. Economies of scale and specialization kick in. Then, like a great coral reef, the economic ecosystem emerges through distributed processes of interdependency that flow from within simple rules (such as property, prices, and profit-or-loss).
Of course, time and labor are not enough to make society wealthier. If they were, then we really could dig ditches and fill them up again, as Keynes suggested, to become rich. Yes, entrepreneurs figure into a wider economic ecosystem that includes consumers. But Hong Kong did not become the richest rock on earth because of wealth transfers. It became rich because entrepreneurs and investors did not squander capital, but rather used it in wildly diverse ways to expand the base of capital goods so entrepreneurs could produce consumer goods and services—better, faster, and more cheaply. It started with little sweatshops and ended up with megacompanies. But this required savings, investment, ideas, innovation and entrepreneurship. Lather, rinse, repeat. You can try to shortcut this process with Keynesian manna. But rich guys have to get rich by creating wealth first.
So, without Henry Ford, no company town. Without a stable business environment, no Henry Ford. Yes, the open market is a virtuous ecosystem, but it is not improved by zero-sum (or negative sum) wealth transfers like you’re proposing. The ecosystem is seeded with ideas that make people more productive. More productivity creates surpluses that end up as investment in more capital goods or more consumption goods—all of which feeds better ideas that make people more productive and create further surpluses. Creative entrepreneurs, willing to take risks, get the ball rolling (not the other way around). They are the prime movers.
On June 19, 2013, Bloomberg published an article I wrote called “The Capitalist’s Case for a $15 Minimum Wage.” Forbes labeled it “Nick Hanauer’s near insane” proposal. Forbes was right. I’m sorry. But it is near insane. Price controls don’t work in the energy markets. Price controls don’t work in healthcare. Why would price controls work in labor markets? Your proposal amounts to nothing more than price controls. But prices are information signals wrapped in incentives. When you try to control prices, you’re distorting both the information and the incentives.
You go on to brag that your idea saw implementation in Seattle. I’m surprised a businessman of your caliber would do that. You see, we have to look at outcomes, not inputs. I know, you said you left business to go into “politics.” And politics is that bottomless well of aspirations in which people reward themselves for good intentions—that is, for getting things passed. But what are the effects of a policy?
Back in the business world, people have to live with the consequences of politics. And so far, the minimum wage in Seattle has already resulted in perverse effects. As businesses are forced to adapt—cutting back labor, hours, and substituting labor for technology—your policy hastens this process. You may think you’re making big companies pay their “fair share,” but you’re hurting small businesses: restaurateurs with slim margins, someone opening a little child care center, maybe a guy who runs a body shop. And more importantly, you’re depriving people of opportunities. When you raise the minimum wage by 25 percent, you are raising the costs of hiring a minority teenager by 25 percent. If the minimum wage makes it too costly to open another store, the business owner won’t open another store.
The thing about us businesspeople is that we love our customers rich and our employees poor.This doesn’t sound like a sentence written by a businessperson at all. Labor, like any other market phenomenon, has a market value. That may sound crass. But it’s true. If it weren’t true, we could set the minimum wage to $150 per hour. Now, it may be that some companies want to pay their workforces more than comparable wages in an area—perhaps in exchange for loyalty, or so that they’ll spend more at the company store. Maybe they attract better, more reliable workers. For some employers, it’s worth it: They value the labor that much based on their particular circumstances. In North Dakota, Walmart employees are being offered $17 per hour. Why? Labor supply and demand. For other companies, it might be a form of charity. But the truth is, we don’t know from one company to the next. One thing we do know, however, is that blanket policies don’t do a good job of determining which companies have which circumstances.
Every time the capitalists said exactly the same thing in the same way: We’re all going to go bankrupt. I’ll have to close. I’ll have to lay everyone off. It hasn’t happened. In fact, the data show that when workers are better treated, business gets better. The naysayers are just wrong.The most comprehensive study of minimum wages is by Neumark and Wascher (and you can buy it on Amazon). These scholars have determined that the net effects of minimum wage laws over the years have been primarily deleterious. (And predictably so.) Treating an employee “better” may or may not have positive effects for a given business. But the thing about entrepreneurs is they are highly attuned to such opportunities. And if such opportunities are a win-win, they will pursue them. But the net effect of assuming you or anyone else knows what’s best for all companies has been shown to be negative in theory and in practice.
Most of you probably think that the $15 minimum wage in Seattle is an insane departure from rational policy that puts our economy at great risk. But in Seattle, our current minimum wage of $9.32 is already nearly 30 percent higher than the federal minimum wage. And has it ruined our economy yet? $9.32 versus $15.00? That’s a big difference. Normally politicians set minimum wages right around where they might otherwise be—say in a large, gentrified area like Seattle—and so the ill effects go away pretty quickly as companies adapt, if they need to at all. Politicians do this to create the illusion that they are making things better with policy, when actually they are getting out in front of a trend in order to take credit for it. But if entry-level wages are hovering around $9 in Seattle or San Francisco, they aren’t in Stockton (where the unemployment rate is 14 percent). Indeed, no one should believe for a second that a jump of more than 50 percent is going to be easy for companies to adapt to, and won’t require wrenching ill effects. Again, the labor pool and conditions are heterogeneous, so blanket policies are ill-advised. Remember, you said yourself the economy is like an ecosystem, not a machine. Wage rates can’t be set by a single rheostat.
The two cities in the nation with the highest rate of job growth by small businesses are San Francisco and Seattle. Raise it to $15 tomorrow and you’ll slam on the brakes. Or you’ll see lots of small businesses with fewer employees or just the owners.
Guess which cities have the highest minimum wage? San Francisco and Seattle. The fastest-growing big city in America? Seattle. My sources show my home city Austin is the fastest growing, despite a minimum wage of $7.25. Other major Texas cities—sucking in Californians by the day—have similar minimum wages. But let’s not facts get in the way of your hypothesis.
Fifteen dollars isn’t a risky untried policy for us. It’s doubling down on the strategy that’s already allowing our city to kick your city’s ass.Did I mention I live in Austin, one of four Texas cities among the 10 fastest growing? How is this kicking our ass? While San Francisco’s unemployment rate may be low and its small start-ups doing okay for now, the rest of the state is a mess. You’ll have to look at other factors besides wage rates to see why.
It makes perfect sense if you think about it: If a worker earns $7.25 an hour, which is now the national minimum wage, what proportion of that person’s income do you think ends up in the cash registers of local small businesses? Hardly any.It would make perfect sense if there weren’t so many counterexample cities that completely belie your claim—many here in Texas. But what’s what’s more, the United States already has an income support system called the Earned Income Tax Credit (EITC). That means rich people like you already subsidize wages for workers under a certain income threshold. So it’s not clear to me why shifting the burden directly onto individual businesses is going to create some sort of magic. If your argument is that there should be a bigger EITC, that’s a separate discussion.
Please, please stop insisting that if we pay low-wage workers more, unemployment will skyrocket and it will destroy the economy. A $15 per hour wage is not likely to destroy the economy. It will certainly destroy prospects for groups like African-American teens, whose unemployment rate currently hovers around 40 percent. Minimum wages don’t destroy the economy, they remove the bottom rungs of the income ladder for people who need to gain skills and experience to be upwardly mobile. And they often raise prices for consumers, including those making low wages.
The most insidious thing about trickle-down economics isn’t believing that if the rich get richer, it’s good for the economy. It’s believing that if the poor get richer, it’s bad for the economy.It depends upon which straw man you’re beating up here, Mr. Hanauer, but neither of your “trickle down” claims is true. The rich getting richer is an effect, not a cause. The poor getting richer is an effect, not a cause. If all groups are becoming better off—as they have been (I refer you to the Shermer citation above) then the causes of those improvements across quintiles are good for the economy.
Indeed, what is good for the economy—and human well-being—is when people get richer due to becoming more productive, solving more problems, and satisfying more wants and needs. The value of a worker’s effort is determined according to the subjective valuations of individual entrepreneurs in unique circumstances. You can’t possibly know these circumstances, Mr. Hanauer, because you are not treating the economy like a complex ecosystem. How do I know? Because you say…
In order for us to have an economy that works for everyone, we should compel all retailers to pay living wages—not just ask politely.But again, a “living wage” is a numerical abstraction—detached from any real economic ecosystem. If we were to view the economy as an ecosystem, we would have to reckon with its complexity and heterogeneity. Price controls treat the economy as a static thing that can be jump-started by edicts from a central committee.
[Instead of buying stuff…] I sock my extra money away in savings, where it doesn’t do the country much good. What makes you think your savings don’t do the country much good? If it’s gaining interest at all, then it most certainly is doing the country good. You seem to be laboring under the mistaken notion that consumption drives production. But consider for a moment that Lord Keynes was wrong. When you save, somebody is going to use that money for something (unless the Fed has other ideas). Now, if you’re just letting it sit in a zero-interest account, or you’re bathing in dollars, I would encourage you to diversify and/or use your savvy to create more wealth for both yourself and the country. If you’re a true capitalist, you know more interest/income is a signal that you’re doing something right—that you’re making the world a better place, even if you’re just leaving your money in the bank.
Bottom line: If you don’t agree, you can always give it away. One wonders why you haven’t.
So forget all that rhetoric about how America is great because of people like you and me and Steve Jobs. You know the truth even if you won’t admit it: If any of us had been born in Somalia or the Congo, all we’d be is some guy standing barefoot next to a dirt road selling fruit. It’s not that Somalia and Congo don’t have good entrepreneurs. It’s just that the best ones are selling their wares off crates by the side of the road because that’s all their customers can afford.If this were true, Hong Kong would be a backwater, poor as it was 100 years ago. As Nobel Laureate Douglass North said in his prize speech:
The organizations that come into existence will reflect the opportunities provided by the institutional matrix. That is, if the institutional framework rewards piracy then piratical organizations will come into existence; and if the institutional framework rewards productive activities then organizations—firms—will come into existence to engage in productive activities.
And entrepreneurs start firms. In the Congo, piratical organization is rewarded by the institutional matrix. It’s been a corrupt dictatorship for years, so people who take bribes and join the army get the rewards. Make no mistake: Changes to Congo’s institutional matrix—along with the entrepreneurial culture—will give rise to dramatic changes in living standards, as they did in Hong Kong. There are 75 million potential customers in the Congo.
So why not talk about a different kind of New Deal for the American people, one that could appeal to the right as well as left—to libertarians as well as liberals? Edge of my seat.
If people are getting $15 an hour or more, they don’t need food stamps. They don’t need rent assistance. They don’t need you and me to pay for their medical care. Raising the minimum wage is effectively no different than raising the corporate tax for welfare benefits for assistance, except that one has greater potential to harm businesses. In both cases, people are getting something for nothing.
If the consumer middle class is back, buying and shopping, then it stands to reason you won’t need as large a welfare state. How’s that? If fewer poor people are being hired—a la Neumark and Wascher—more poor people will require assistance.
And at the same time, revenues from payroll and sales taxes would rise, reducing the deficit.If all these positive effects were to come about, how does this address the so-called “problem” of inequality? If you’re correct that all this crazy consumption is going sustainably to push up company revenues (which I doubt), aren’t guys like you still going to get richer under your theory?
There are three main problems with any proposal to raise the minimum wage in lieu of welfare:
First, there are better, more pragmatic proposals out there for a minimum income, including the negative income tax (i.e., expanding the EITC and getting rid of welfare). Charles Murray’s In Our Hands is a good start, though his numbers might need updating. That proposal reduces the direct burden on companies compared with your proposal, because it redistributes after profits rather than before. Minimum wage laws are indifferent to whether a firm is profitable, which makes them dangerous by degree.
Second, any policy that simply transfers wealth can have incentive effects that discourage upward mobility. That being said, I will grant that your proposal would help people avoid “welfare traps” if there were no negative effects on employment. But if your government-set wage rates are pricing people out of the labor market, there will be just as many unemployed workers, if not more.
Third, any such grand compromise ideas about minimum income—as much as we might like to think about them—are very likely not to be implemented. How do you plan to combat the welfare-industrial complex? There are armies of vested interests in the welfare bureaucracy. They will be extremely difficult to send packing.
Capitalism, when well-managed, is the greatest social technology ever invented to create prosperity in human societies. But capitalism left unchecked tends toward concentration and collapse. I think you might be confused about what capitalism is. If by capitalism, you mean crapitalism, then you’re right. It’s not sustainable. And only checking the State’s power to assist cronies will we rein in the excesses of crapitalism. If by capitalism, you mean free and open markets, then you are simply mistaken. In competitive environments, it’s very difficult for firms to hold on to market dominance for very long. Firms have to consistently deliver on quality and price. Almost all monopolies and cartels are created and shored up by corporate-State collusion. And corporate-State collusion almost always starts with the State trying to “manage” capitalists. Regulation is inherently anticompetitive.
Now there will be resource concentrations in a free and open market, as with any natural system, but they too are difficult to maintain over time. In other words, there is incredible churn at the top—because only the best stewards of capital can stay there.
My family, the Hanauers, started in Germany selling feathers and pillows. They got chased out of Germany by Hitler and ended up in Seattle owning another pillow company. Three generations later, I benefited from that. Then I got as lucky as a person could possibly get in the Internet age by having a buddy in Seattle named Bezos. You may feel guilty about this. After all, your forebears were real value creators. Maybe you inherited a fortune and got lucky knowing Jeff Bezos. Maybe you really aren’t that good at predicting the future, identifying trends, etc.—just lucky. Maybe Bezos just called you first and you simply rode the wave. Still, we shouldn’t begrudge you your fortune, any more than we should pity a guy who loses at the tables.
Things get tight for me and my family. We’re trying to figure out how to fix the fender on my car (my fault) and renovate the old house we just bought. But at least we’ve got a car to fix. We’ve got a house to fix up. We eat nutritious food. My son has a Kindle Fire. And my wife and kid are about the best family a guy could have. We don’t have much, but we have enough to make Louis XVI positively green.
Yeah, you might be lucky, Mr. Hanauer. But so am I.
Max Borders is author of Superwealth: Why we should stop worrying about the gap between rich and poor, which you can buy for your Kindle at Amazon.

Why Capitalism Isn't Going Anywhere - Reason Magazine

Link: http://reason.com/archives/2012/02/20/why-capitalism-isnt-going-anywhere

It's the only system known to humanity that increases both growth and freedom.

At the height of the financial crisis in late 2008 and early 2009, a wave of articles declared the end of capitalism. A half-dozen reporters writing about the issue called Allan Meltzer, who since 1957 has been teaching about capitalism at Carnegie Mellon University in Pittsburgh.
Five of the calls he answered. The sixth was from a reporter of Die Zeit, the German weekly, who, as Professor Meltzer recalls it, asked, “Professor, what do you think about the end of capitalism?”
Professor Meltzer replied that that was the stupidest question he’d been asked in 50 years.
The reporter hung up the phone before Mr. Meltzer got to explain why, but the fuller answer is in Mr. Meltzer’s new book, Why Capitalism?, which Oxford University Press published this week.
The book is short — just 160 pages — but its simple, clear, and direct language makes a big point: that capitalism “is the only system known to humanity that increases both growth and freedom.” As a result, far from ending, capitalism has spread to formerly socialist or communist enclaves such as Eastern Europe, India, and even China.
The book is not simply a paean to capitalism, though. It’s also a look at some of the problems the country is facing, including the decline in the value of the dollar, the financial crisis and its aftermath, and the federal debt and deficit.
Mr. Meltzer’s three laws of regulation help in part to explain the crisis. The first is that “lawyers and bureaucrats regulate,” but “markets circumvent regulation.” Second, and related, is that “regulations are static. Markets are dynamic.” Third, “regulation is most effective when it changes the incentives of the regulated.”

Occupy Wall Street Now Protesting Against Math

Occupy Wall Street Now Protesting Against Math

via Big Journalism by Mark Polege on 10/20/11

- Those supporting the Occupy Wall Street Movement are up in arms as 30-year Democratic Campaign Consultant Doug Schoen reported his polling data in the Wall Street Journal on Oct. 18th. Arielle Alter Confino, a senior researcher at Schoen's firm, polled about 200 OWS members at New York's Zuccotti Park on Oct. 10th and 11th.

- Schoen described his findings as:

"Our research shows clearly that the movement doesn't represent unemployed America and is not ideologically diverse. Rather, it comprises an unrepresentative segment of the electorate that believes in radical redistribution of wealth, civil disobedience and, in some instances, violence."

- Here is a breakdown of the polling data gathered by Schoen's research. Tell me if this sounds like the way in which the Occupy Wall Street, as well as those in cities around the country, are promoting themselves:

• (52%) have participated in a political movement before
• (98%) say they would support civil disobedience to achieve their goals
• (31%) would support violence to advance their agenda
• A vast majority of demonstrators are actually employed, and the proportion of protesters unemployed (15%) is within single digits of the national unemployment rate (9.1%)
• An overwhelming majority of demonstrators supported Barack Obama in 2008
• (51%) disapprove of the president while 44% approve, and only 48% say they will vote to re-elect him in 2012, while at least a quarter won't vote
• (32%) call themselves Democrats, while roughly the same proportion (33%) say they aren't represented by any political party
• (65%) say that government has a moral responsibility to guarantee all citizens access to affordable health care, a college education, and a secure retirement—no matter the cost.
• Protesters are divided on whether the bank bailouts were necessary (49%) or unnecessary (51%)

- Schoen summarized his polling data with this statement:

What binds a large majority of the protesters together—regardless of age, socioeconomic status or education—is a deep commitment to left-wing policies: opposition to free-market capitalism and support for radical redistribution of wealth, intense regulation of the private sector, and protectionist policies to keep American jobs from going overseas.

- On the same day Judd Legum at Think Progress came out with his view on Schoen's polling data. One point of contention was Question 17 where Schoen described 4% of the polled OWS members believing in "radical redistribution of wealth."

Schoen did not specify in the WSJ article that 35% of those polled would like to "influence the Democratic Party like the Tea Party did with the GOP." Though I can understand Legum's concern for that 35% figure not being included in the WSJ article, I am more alarmed by the other answers of the "Open Ended" Question 17. With the exception of a Flat Tax, all the other answers definitely tilt Left. What is even more intriguing is that two words are completely absent from this open-ended question in what the OWS movement wants to achieve; "Constitution" and "freedom." Oddly enough even "Not Sure" got a greater mention as an answer than either of those two words.

What does this mean? It could be open to interpretation but what it appears to me is that those two words are neither in OWS' mindset or even their vernacular. This further illustrates the clear difference in the OWS crowd and the Tea Party.

Legum also highlights Question 16, however he misrepresents Schoen's data as it is presented in the WSJ article.

Schoen did not specifically and solely say that a "large majority express opposition to free-market capitalism." Instead, Schoen described the information in a list of ideologies that "binds a large majority of the protesters together—regardless of age, socioeconomic status or education." The rest of that list is "support for radical redistribution of wealth, intense regulation of the private sector, and protectionist policies to keep American jobs from going overseas."
First off, the polling data already documented that (32%) admitted to being Democratic, while (33%) say they aren't represented by any political party. In addition, (65%) said they believe "government has a moral responsibility to guarantee all citizens access to affordable health care, a college education, and a secure retirement—no matter the cost." [my emphasis] In order to defend his argument I can only guess that Legum must believe that these ideologies are something other than "Left-Wing," because that sure looks like a majority to me.

The article on Think Progress is representative of the radical Left's frustration in trying to sell the astro-turfed "grassroots" movement as a mass, wide-spectrum People's movement. In addition to failing to convince many Americans that they share our nation's goals with some lost souls who are part-time activists & part-time street bums, the quantitative data exposes the facade of just how radical are the views of the OWS groups –and ironically, another WSJ piece shows that 48% of those protesting Wall street would vote for the Wall Street President. Lastly, if you have to call in the "rent-a-thugs" of big labor unions in order to try to give your movement momentum, then you really need to ask yourself, "If you are not motivated enough to leave the park when the owners want to clean it, then why should ANYONE follow you?"

Burning Man: The Ultimate Celebration of Capitalism

» Burning Man: The Ultimate Celebration of Capitalism - Big Government

I suggested that my Marxist friend might have things exactly backwards. I proposed that there is no such thing as “excess” in a capitalist system; what he had identified was actually “surplus.” And it is the very concept of surplus that enables events like Burning Man. Around the country, Burners are productive enough fifty-one weeks a year to spend the fifty-second “gifting” the bounty that they have accumulated. No one leaves for Burning Man, I noted, wondering whether the gifts they are distributing would render them incapable of affording food or rent upon their return. Furthermore, I suggested that the manner in which Burning Man motivated artists to conceptualize grand installations, trained numerous organizers in logistics, and promoted the professional development of event planners, DJs, and lighting specialists throughout the year, was precisely the capitalist system in action.

My Marxist friend hung his head. It seems that at no point in his academic career had anyone ever suggested that capitalism did any of these things. But to my surprise, my survey of the crowd—heavier in sex educators, radical lesbians, aficionados of fine pharmaceuticals, and spiritual healers than academics—revealed a fair amount of head nodding. While they may not have characterized it as such, they all seemed to possess an inherent understanding of the importance of motivation and surplus.

Poverty is the norm

http://www.thefreemanonline.org/columns/pursuit-of-happiness/poverty-is-easy-to-explain/

 

Since collectivists often trivialize private property rights, they are worth elaborating. When property rights are held privately the costs and benefits of decisions are concentrated in the individual decision maker; with collectively held property rights they are dispersed across society. For example, private property forces homeowners to take into account the effect of their current decisions on the future value of their homes, because that value depends, among other things, on how long the property will provide housing services. Thus privately owned property holds one's personal wealth hostage to doing the socially responsible thing—economizing scarce resources.

Contrast these incentives to those of collective ownership. When the government owns the house, the individual has less incentive to take care of it simply because he does not capture the full benefit of his efforts. It is dispersed across society instead. The costs of neglecting the house are similarly spread. You do not have to be a rocket scientist to predict that under these circumstances, less care will be taken.

Nor is nominal collective ownership the only force that weakens social responsibility. When government taxes property, it changes the ownership characteristics. If government were to impose a 75 percent tax on a person selling his house, it would reduce his incentive to use the house wisely.

This argument applies to all activities, including work and investment. Whatever lowers the return from or raises the cost of an investment reduces incentives to make that investment in the first place. This applies to investment in human as well as physical capital—that is, those activities that raise the productive capacity of individuals.

--

The Wheel of the Year: Now available on Amazon Kindle

The Official Manual for Spice Cadets: Now available on Amazon Kindle

A Marxist indictment of capitalism — and why the indictment must be wrong

A Marxist indictment of capitalism — and why the indictment must be wrong

The Anchoress posted at her blog a semi-animated video by a self-avowed Marxist explaining why Marxism, not capitalism, will save the world.  I have to admit that I didn't watch it.  It wasn't the content that drove me away, it was the choppy visuals, which trigger migraines.  Having just beaten back a migraine, I wasn't willing to go for round two.  If you want to watch it, though, please do so, here.

Without having seen the video, though, I can still tell you that anything it says is fallacious, to the extent that it tries to argue that Marxism is a better system than Capitalism.  I know this because I've had a lifetime to consider that argument.

My father, who was raised a Communist before dying a Reagan Democrat, kept believing to the day he died that Communism could somehow work, if it was just done right.  The problem, in his Communism steeped brain, was that the Russians, and the Chinese, and the Cubans, and the North Koreans just weren't doing it right.   Back in those days, since I was young, and hadn't refined my thoughts, I argued with him simply by reiterating that because Communism hadn't yet been done right, no matter the time or place tried, that alone was a pretty good indication that it couldn't be done right.

Those arguments are long gone, but I have finally distilled the principles that, in my mind at least, establish conclusively that Marxism, which draws all power away from the individual and vests that power in the State, can never be done right.  A few epigrammatic statements about the State are all I need:

• The State has no conscience.
• The State will always put its collective survival ahead of the living, breathing "cogs" that animate it (and it will dehumanize those cogs to the status of disposable cockroaches if need be to maintain its survival).
• The State is incapable of rapid response to changing situations (with the federal response to the Gulf Spill being the ultimate example of the rigidity that renders it incapable of abandoning its perfect standards in the face of an overwhelming amount of spilled oil).
• An all-powerful State, without any competition, has no incentive to provide good service, whatever that service may be (health care, housing, etc.).  Competition is the spur to quality.
• Power corrupts and absolute power corrupts absolutely.  This was true before Lord Acton said it, and it will be true in perpetuity.  If you vest all power in the State, you inevitably have, not only absolute corruption, but you have absolute corruption with unfettered life-and-death power over every living and breathing "cog" under its control.

Your comments about either the Anchoress' video or my conclusions?

Cross-posted at Right Wing News

Wal Mart

An insider's view

Some people, usually community activists, loath Wal-Mart. Others, like the family of four struggling to make ends meet, are in love with the chain. I, meanwhile, am in awe of it.

....

Getting hired turned out to be a challenge. The personnel manager told me she had received more than 100 applications during that month alone, chasing just a handful of jobs. Thus the mystery deepened. If Wal-Mart was such an exploiter of the working poor, why were the working poor so eager to be exploited? And after they were hired, why did they seem so happy to be there? Anytime I shopped at the store, blue-clad Walmartians encouraged me to "Have a nice day" with the sincerity of the pope issuing a benediction.

....

A week later, I found myself in an elite group of 10 successful applicants convening for two (paid) days of training in the same claustrophobic, windowless room. As we introduced ourselves, I discovered that more than half had already worked at other Wal-Marts. Having relocated to this area, they were eager for more of the same.

Why? Gradually the answer became clear. Imagine that you are young and relatively unskilled, lacking academic qualifications. Which would you prefer: standing behind the register at a local gas station, or doing the same thing in the most aggressively successful retailer in the world, where ruthless expansion is a way of life, creating a constant demand for people to fill low-level managerial positions? A future at Wal-Mart may sound a less-than-stellar prospect, but it's a whole lot better than no future at all.

....

And so we came to the Wal-Mart Pledge. Solemnly, each of us raised one hand and intoned: "If a customer comes within 10 feet of me, I'm going to look him in the eye, smile and greet him." Having pledged ourselves, we encountered the aspect of Wal-Mart employment that impressed me most: The Telxon, pronounced "Telzon," a hand-held bar-code scanner with a wireless connection to the store's computer. When pointed at any product, the Telxon would reveal astonishing amounts of information: the quantity that should be on the shelf, the availability from the nearest warehouse, the retail price, and (most amazing of all) the markup.

All of us were given access to this information, because - in theory, at least - anyone in the store could order a couple extra pallets of anything, and could discount it heavily as a Volume Producing Item (known as a VPI), competing with other departments to rack up the most profitable sales each month. Floor clerks even had portable equipment to print their own price stickers. This was how Wal-Mart detected demand and responded to it: by distributing decision-making power to grass-roots level. It was as simple yet as radical as that.

....

My starting wage was so low (around $7 per hour), a modest increment still didn't leave me with enough to live on comfortably, but when I looked at the alternatives, many of them were worse. Coworkers assured me that the nearest Target paid its hourly full-timers less than Wal-Mart, while fast-food franchises were at the bottom of everyone's list.

I found myself reaching an inescapable conclusion. Low wages are not a Wal-Mart problem. They are an industry-wide problem, afflicting all unskilled entry-level jobs, and the reason should be obvious.

In our free-enterprise system, employees are valued largely in terms of what they can do. This is why teenagers fresh out of high school often go to vocational training institutes to become auto mechanics or electricians. They understand a basic principle that seems to elude social commentators, politicians and union organizers. If you want better pay, you need to learn skills that are in demand.

....

To my mind, the real scandal is not that a large corporation doesn't pay people more. The scandal is that so many people have so little economic value. Despite (or because of) a free public school system, millions of teenagers enter the work force without marketable skills. So why would anyone expect them to be well paid?

In fact, the deal at Wal-Mart is better than at many other employers. The company states that its regular full-time hourly associates in the US average $10.86 per hour, while the mean hourly wage for retail sales associates in department stores generally is $8.67. The federal minimum wage is $6.55 per hour. Also every Wal-Mart employee gets a 10% store discount, while an additional 4% of wages go into profit-sharing and 401(k) plans.

....

The argument, of course, is that smaller enterprises cannot compete. My outlook on this is hardcore: I think that many of the "mom-and-pop" stores so beloved by activists don't deserve to remain in business.

When I first ventured from New York City to the American heartland, I did my best to patronize quaint little places on Main Street and quickly discovered the penalties for doing so. At a small appliance store, I wasn't allowed to buy a microwave oven on display. I had to place an order and wait a couple of weeks for delivery. At a stationery store where I tried to buy a file cabinet, I found the same problem. Think back, if you are old enough to do so, and you may recall that this is how small-town retailing used to function in the 1960s.

As a customer, I don't see why I should protect a business from the harsh realities of commerce if it can't maintain a good inventory at a competitive price. And as an employee, I see no advantage in working at a small place where I am subject to the quixotic moods of a sole proprietor, and can never appeal to his superior, because there isn't one.

By the same logic, I see no reason for legislators to protect Safeway supermarkets with ploys such as zoning restrictions, which just happen to allow a supermarket-sized building while outlawing a Wal-Mart SuperCenter that's a few thousand square feet bigger.

Based on my experience (admittedly, only at one location) I reached a conclusion which is utterly opposed to almost everything ever written about Wal-Mart. I came to regard it as one of the all-time enlightened American employers, right up there with IBM in the 1960s. Wal-Mart is not the enemy. It's the best friend we could ask for.

Now I feel even less guilty about shopping at Wal-Mart (if that's even possible).  I live about fifteen minutes away from three different stores, and I'm a regular customer. 

Did Enron Prosecutors withhold exculpatory evidence?

Article at the end of the link.

Health care questions

There are those who like to paint the Health Care Establishment as uncaring, if not outright evil.

Insurers, for example, will often refuse to pay $150 for a diabetic to see a podiatrist, who can help prevent foot ailments associated with the disease. Nearly all of them, though, cover amputations, which typically cost more than $30,000.

– Ian Urbina, The New York Times, January 11, 2006

Somehow, health insurers are supposed to prefer paying $30,000 for one procedure over paying $150 to prevent it. If you or I were told, "you have a choice: you can pay $150, or you can pay $30,000. Which do you prefer?" it'd be a no-brainer.

Urbina focuses on the Beth Israel diabetes treatment center that closed because of lack of funding. The treatment philosophy of the center comes across as sound. Urbina tells some inspiring anecdotes. However, he offers no data on the overall performance of the treatment center. Did it achieve success with fifty percent of its patients? Ten percent? One percent?

I would trust liberals a lot more if they would ask questions about effectiveness. Instead, Urbina, like many people who trade in folk Marxist narratives, focuses on establishing the superior motives of the Beth Israel diabetes treatment center and the misguided motives of health insurance companies and others.

Kling discusses some reasons why Beth Israel may have closed. I suspect Urbina would love to see regulations passed forcing insurers to keep the center open, even if its success rate is only one percent.

(By comparison, if only 1% of the $150 podiatric visits prevent an amputation, you're spending $15,000 to prevent a loss of $30,000. It still looks attractive, as long as the amputation is not too far in the future. If that amputation is, say, 20 years in the future, the future value of the $15,000 may be more than $30,000. In fact, if the interest rate is higher than about 3.5%, it will be.)

Kling mentions one factor in the management of diabetes:

Poverty is one obvious factor in the low skill level of some diabetics. One would hope that Medicaid would work to alleviate this. However, Urbina's article points out that the Beth Israel Center lost money on Medicaid patients because of Medicaid reimbursement rules. To me, this suggests either that the government was not convinced of the value of Beth Israel's treatment system or that single-payer health insurance is not the panacea for disease management that liberals take it to be.

Or maybe both.

Greed

One of the reasons people have problems with capitalism is that it encourages – indeed, relies on "greed".

In discussing this with my girlfriend yesterday, I recalled a Talmudic legend:

Every person is subject to the Yetzer ha-Tov and the Yetzer ha-Ra – the Will to do Good and the Will to do Evil. One day, the rabbis managed to trap the Yetzer ha-Ra and lock it away from humanity. With the Yetzer ha-Ra locked away, humanity was subject only to the Yetzer ha-Tov. There was no Will to do Evil anywhere in the human race.

...continued in full post...

Everyone sat around being nice, and no one had the desire to do much of anything. Fans of Star Trek will recognize elements of at least two episodes here. In one, the Enterprise crew is infected by spores that protect them, and the colony they came to rescue, from deadly radiation. The spores also eliminated all negative thoughts and feelings, and everyone lived in perfect happiness. When the spores were eliminated, they realized they had also made no progress since they had landed.

In another episode, a transporter malfunction splits Captain Kirk into two people &ndash one containing only the "good" parts, one containing only the "evil" parts. Neither one was capable of doing anything productive. The dark Kirk could only indulge his animal pleasures and destroy whatever stood in his way. The light Kirk was a passive observer, too nice to take any action.

The moral (and Star Trek Classic had a large number of morality plays): The "evil" side of human nature is essential for progress. It has to be controlled by the "good" side, but it has to be present.

An article on Tech Central Station discusses intellectual property rights, and makes the case that you don't help third-world people by eliminating these rights and making intellectual property freely available to anyone who wants it.

It would seem that ownership of ideas is based in "greed" and making people share their ideas freely is a good thing. After all, greed is bad, and generosity is good.

To be sure, the initial effect is that all existing intellectual property will be freely available to everyone. The follow-up is that much less new intellectual property will be available to anyone.

Like people everywhere, people of developing nations can and do invent things. Indeed, when they immigrate to developed countries they are often among the most creative and inventive people in their new homes. The problem in developing countries is that there is little reward for innovation. In conversations with developing world businessmen, Sherwood found that they were well aware of the consequences of the lack of intellectual property rights. These businessmen often did stumble onto innovations, but rivals would soon copy them. In such circumstances, a smart businessman knows that putting resources into innovation and creativity is a bad investment. You cannot capture a return, and you have no property right in which others can invest. In the absence of intellectual property laws, innovation must remain accidental and creative work is for amateurs.

OK, call it "greed". But it's not going away. When people have limited resources, they will spend those resources where they get the most return. If there's no profit in innovation, there will be no innovation. Greed – or the sensible allocation of resources – drives invention when there's a profit to be made, and brings it to a halt when there's none.

You can rail against this fact of life. Or you can control it and channel it in a positive direction.