Nightcap

  1. The criminal as entrepreneur Cedric Muhammad, American Affairs
  2. Did the British Empire depend on separating families? Sumit Guha, Not Even Past
  3. What does nationalism mean in a contested state? Daniel Solomon, New Republic
  4. ‘In the long run we are all dead’ Adam Tooze, London Review of Books

Does business success make a good statesman?

Gary Becker made the distinction between two types of on-the-job training: general and specific. The former consist of the skills of wide applicability, which enable the worker to perform satisfactorily different kinds of jobs: to keep one’s commitments, to arrive on time to work, to avoid disturbing behavior, etc.. All of them are moral traits that raise the productivity of the worker whichever his occupation would be. On the other hand, specific on-the-job training only concerns the peculiarities of a given job: to know how many spoons of sugar your boss likes for his coffee or which of your employees is better qualified to deal with the public. The knowledge provided by the on-the-job training is incorporated to the worker, it travels with him when he moves from one company to another. Therefore, while the general on-the-job training increases the worker productivity in every other job he gets, he makes a poor profit from the specific one.

Of course, it is relative to each profession and industry whether the on-the-job training is general or specific. For example, a psychiatrist who works for a general hospital gets specific training about the concrete dynamics of its internal organization. If he later moves to a position in another hospital, his experience dealing with the internal politics of such institutions will count as general on-the-job training. If he then goes freelance instead, that experience will be of little use for his career. Nevertheless, even though the said psychiatrist switches from working for a big general hospital to working on his own, he will carry with him a valuable general on-the-job training: how to look after his patients, how to deal with their relatives, etc.

So, to what extent will on-the-job training gained by a successful businessman enable him to be a good statesman? In the same degree that a successful lawyer, a successful sportsman, a successful writer is enabled to be one. Every successful person carries with him a set of personal traits that are very useful in almost every field of human experience: self confidence, work ethics, constancy, and so on. If you lack any of them, you could hardly be a good politician, so as you rarely could achieve anything in any other field. But these qualities are the typical examples of general on-the-job training and what we are inquiring here is whether the specific on-the-job training of a successful businessman could enable him with a relative advantage to be a better politician -or at least have a better chance of being a good one.

The problem is that there is no such a thing as an a priori successful businessman. We can state that a doctor, an engineer, or a biologist need to have certain qualifications to be a competent professional. But the performance of a businessman depends on a multiplicity of variables that prevents us from elucidating which traits would lead him to success.

Medicine, physics, and biology deal with “simple phenomena”. The limits to the knowledge of such disciplines are relative to the development of the investigations in such fields (see F. A. Hayek, “The Theory of Complex Phenomena”). The more those professionals study, the more they work, the better trained they will be.

On the other hand, the law and the market economy are cases of “complex phenomena” (see F. A. Hayek, Law, Legislation and Liberty). Since the limits to the knowledge of such phenomena are absolute, a discovery process of trial and error applied to concrete cases is the only way to weather such uncertainty. The judge states the solution the law provides to a concrete controversy, but the lawmaker is enabled to state what the law says only in general and abstract terms. In the same sense, the personal strategy of a businessman is successful only under certain circumstances.

So, how does the market economy survive to its own complexity? The market does not need wise businessmen, but lots of purposeful ones, eager to thrive following their stubborn vision of the business. Most of them will be wrong about their perception of the market and subsequently will fail. A few others will prosper, since their plans meet -perhaps by chance- the changing demands of the market. Thus, the personal traits that led a successful businessman to prosperity were not universal, but the right ones for the specific time he carried out his plans.

Having said that, would a purposeful and stubborn politician a good choice for government? After all, Niccolo Macchiavelli had pointed out that initiative was the main virtue of the prince. Then, a good statesman would be the one who handles successfully the changing opportunities of life and politics. Notwithstanding, The Prince was -as Quentin Skinner showed- a parody: opportunistic behaviour is no good to the accomplishment of public duties and the protection of civil liberties.

Nevertheless, there is still a convincing argument for the businessman as a prospect of statesman. If he has to deal with the system of checks and balances -the Congress and the Courts-, the law will act as the selection process of the market. Every time a decision based on expediency collides with fundamental liberties, the latter must withstand the former. A sort of natural selection of political decisions.

Quite obvious, but not so trite. For a stubborn and purposeful politician not to become a menace to individual and public liberties, his initiative must not venture into constitutional design. No bypasses, no exceptions, not even reforms to the legal restraints to the public authority must be allowed, even in the name of emergency. Especially for most of the emergencies often brought about by measures based on expediency.

On granting the Nobel to Kirzner

In a little over a week, the Nobel Prize in economics will be unveiled. A part of me wishes that Robert Barro wins or maybe Dale Jorgenson or even William Baumol. However, I would be thrilled if Israel Kirzner won. Back in 2014, he was mentioned for the prize and it was the year that Jean Tirole, deservedly, won the prize. Since then, I have been dreaming of it as it would cement into the mainstream the best that the Austrian school of economics can offer.

Unlike many of colleagues, I have always had sympathies for numerous points made by the Austrians. Throughout my training, the Austrian school of economics was largely derided as cranks. Initially, I jumped on the bandwagon and I believed the Austrians to be crazy. However, I became exposed to many of their key points and like Edmund Phelps, I felt that the “best of the Austrians” could not be rejected so easily. True, there is some wheat to sort from the chaff, but the same applies for every school of thought.  I realized that most of their inputs in macroeconomics were largely incorporated in models like Lucas’ Islands Model or in Prescott’s Time to Build. However, what most intrigued me was how they used general equilibrium as a teaching tool, but not as a research tool. General equilibrium is useful for understanding key axiomatic assertions, but when you have an “applied economics” question, it is a hard tool to use – especially for an economic historian like me.

Kirzner is the perfect representation of the best that the Austrian school has to offer. In a way, his entire work can be summarized as such: it is the process leading to (new) equilibrium(s) that is the most interesting aspect of economics.

It is when I understood that insight that I finally grasped the deeper meaning of Hayek’s claim that “competition is a discovery process”. Entrepreneurs are people who look for the $100 bill on the sidewalk by innovating, by exploiting arbitrage opportunities and by discovering what consumers really want. They are constantly heading towards an equilibrium point. But as they try to do so, they shift the ability to produce and consume to greater levels and, in doing so, they generate a new equilibrium. And the process continues as long as human beings are humans.

For someone who studies economic history like I do, this is the most fruitful way of looking at social interactions. After all, the industrial revolution is everything except an equilibrium and the industrial revolution is most momentous structural break in history. The search for equilibrium and the creation of new equilibriums are by far more useful tools for questions like the end of “Malthusian pressures” or the beginning of the Industrial Revolution.

Of course, I am veering into excessive simplification of Kirzner’s contribution. But consider his book, Competition and Entrepreneurship. Alone, it has 7,362 citations (according to google scholar).  This is half the citations obtained by the most cited article in the American Economic Review (Armen Alchian and Harold Demsetz’s Production, Information Costs and Economic Organization). It’s close to 3,000 more citations that Deaton and Muellbauer’s “Almost Ideal Demand System” (4,775 citations). And Deaton won the Nobel last year!

By virtue of being affiliated with the Austrians, mainstream economists could have relegated him to obscurity. However, for such a citation count to be achieved, he must have been to showcase the best that the Austrian school has to offer. Just for that, maybe his contribution should be recognized.

Elon Musk on the Heroic Journey for a Fantastic Future

In ‘The Entrepreneur on the Heroic Journey’ (1997), Dwight Lee and Candace Allen write that entrepreneurs are heroic figures of society whose accomplishments are worth celebrating. Elon Musk is certainly an entrepreneur whose ingenuity and drive to create a fantastic future are admirable. In our current times when it seems fashionable to castigate entrepreneurs and those who have earned a fortune, it is nonetheless hard to read Ashlee Vance’s biography of Elon Musk and not to be in awe of his accomplishments. Elon Musk perfectly matches Lee and Allen’s description of our modern day heroes: individuals who shape society by serving the people and adding value to society through their entrepreneurial activities.

According to Lee and Allen, a hero travels through three stages.

1. The first stage of the modern entrepreneurial hero is a venturing away from the world of accepted norms. The hero asserts “There is a better way, and I will find it!” Deviating from familiar social norms and customs, he travels into unknown territory while risking failure and loss for some greater purpose or idea. That is exactly what Elon Musk did several times in his life. First, as a teenager when he dropped out of the University of Pretoria to leave South Africa for Canada. For someone who has an early inclination toward computers and technology – Musk had taught himself the BASIC programming language at the age of 9-10 and created homemade explosives and rockets – South Africa was like a prison. Although he did not know back then what exactly he wanted to achieve in Canada, his curiosity and intrinsic desire to leave an everlasting impact on the world led him to the United States. His daydreams at Queen’s University and the University of Pennsylvania usually led him to the conclusion that the Internet, the Renewable Energy, and the Space industries were the areas where he could make a huge impact. Back then, Musk already vowed to pursue projects in all three. This was in 1994 when few could’ve predicted the many ways in which the Internet would change people’s lives, when the last successful American automobile startup (Chrysler) was dates back to 1925, and when the American aerospace industry was dominated by only Boeing and Lockheed Martin. A vow like this was surely considered super-crazy. Musk pushed himself, characterized by energy, vision and bold determination into the unknown.

2. In the second stage, the entrepreneurial hero sacrifices himself for a vision or dream he has, putting his own comfort at stake. The two Internet companies he founded were Zip2, the Web’s first yellow pages, and X.com that would eventually merge with Confinity to form PayPal. The second stage of the entrepreneurial hero is his overcoming of hardships and challenges. With just $28,000 invested in Zip2, Musk seemed to never leave the office and slept on a beanbag next to his desk. He would take showers at the YMCA and when Heilman, an early Zip2 employee, would come into the office at 7:30 or 8:00 AM he would give him a kick so Musk would wake up and get back to work. Musk’s slavish devotion to the success of his startups is best expressed when he told a VC investor, “My mentality is that of a samurai. I would rather commit seppuku than fail.” (Vance, 2015, p. 72)

Zip2 would eventually be taken over by Compaq Computer for $307 million and would earn Musk $22 million for his 7% stake in the company.

Musk’s second start-up was X.com which was an initial attempt to create an online bank. During his internship at the Bank of Nova Scotia, he found out that “bankers are rich and dumb” (p. 83) and that this provided a massive opportunity to disrupt the industry. Realizing that money is nothing but an entry in a database, Musk thought that he could enter the industry with relatively little investment. This could however not be any further from the truth. The regulatory issues they were facing seemed insurmountable and several of the early employees of X.com soon left the company after believing that Musk’s vision to disrupt the banking industry is unrealistic. One other X.com employee said, “There were a million laws in place to block something like X.com from happening, but Musk didn’t care” (p. 92). Despite such issues, Musk held on and secured a banking license, FDIC insurance and formed a partnership with Barclays.

Musk had also faced many other misfortunes in the two companies that he founded soon after he left X.com: Tesla and SpaceX. In 2008, he was almost broke while divorcing his first wife – fearing he had been wasting almost all of his $180 million he earned from the sales of PayPal to eBay. SpaceX had just enough money for its fourth Falcon 1 launch, and possibly the last launch of SpaceX. Tesla had still not delivered on its promise to produce its Roadster and needed a government loan at a time when other automobile and financial corporations were also struggling. In Musk’s words: “I remember waking up the Sunday before Christmas in 2008, and thinking to myself, ‘Man, I never thought I was someone who could be capable of a nervous breakdown.’ I felt this is the closest I’ve ever come, because it seemed… pretty dark.”

3. In the third stage, the heroic entrepreneur returns to the community with his product, service, or new process. Having been just days or weeks away from bankruptcy for both Tesla and SpaceX, Musk had eventually survived and created the first successful car company since Chrysler in 1925 and was now competing with Boeing, Lockheed Martin, the Russians and the Chinese in the aerospace industry. Tesla has since delivered the Roadster, the Model S, X and is planning to deliver the Model E which will have a starting price of $35,000 by late 2017. Tesla is on its way to alter the automobile industry. SpaceX had produced rockets that can return back safely on earth which significantly lowers the costs of sending rockets into space. Elon Musk’s reward for increasing benefits to society are his profits and his wealth that he could only have accumulated when people value his products enough that they are willing buy them.

Looking at the many accomplishments of Musk and how he has served the public with his products, I believe that he can truly be considered a modern hero. The greatest contribution I think is that he has given people hope and renewed faith in what technology can do for mankind.

References
Allen, C., & Lee, D.R. The Entrepreneur on a Heroic Journey, 1997
Vance, A. Elon Musk: Tesla, SpaceX, and teh Quest for a Fantastic Future, 2015

Coase’s “Nature of the Firm”: An Anthropological Critique

But is it a good one? Is it even made in good faith? I need help.

From American anthropologist John D Kelly’s The American Game…:

Ronald Coase’s theory of the nature of the firm rescued, for neo-classical economics, the existence of firms or corporations as rational entities […] Markets always come first, and the problem of the existence of firms is depicted as the problem of why a rational manager would rely on employees rather than markets. State planning and private firms are taking over what already exists, integrated by the price mechanism of markets, and are successful to the extent that they lower costs, since there are a variety of costs involved in market transactions. Thus marginalist analysis implies that an equilibrium will always be found between planning structures and integration by price mechanism, especially since, as Coase says in “The Nature of the Firm,” “businessmen will be constantly experimenting, controlling more or less” and “firms arise voluntarily because they represent a more efficient method of organizing production.” The rise of the firm, as Coase imagines it, is always a movement from many pre-existing contracts to a controlling structure, “For this series of contracts is substituted one.” (94)

The emphasis is mine. Kelly continues:

This imaginary fits poorly the situations that were precisely the actual origins of firms, as when banks gave mortgages to planters, or stock markets funded companies of young agents, prepared to cut plantations into captured wilderness for tropical commodities […] usually employing labor moved long distances and disciplined by direct violence. There is more in the universe than Coase’s imagination, more motives for controlling powers of firms than their cost efficiencies. (94-95)

Kelly goes on to give a brief account of 1) how corporations created commodity production out of thin air, 2) how these corporations were tied to European imperialism, and 3) how they used slaves and indentured servants even when it would have been cheaper to hire the locals.

I want to address Kelly’s summary of Coase’s paper (here is a pdf, by the way, in case you want to follow along), mostly because I’ve never read it although I know it’s important, but first I want to make a couple of digressions. Libertarians would more or less answer Kelly’s three charges listed above as follows: 1) yes, and this is a good thing, 2) state-sponsored corporations and private firms are two distinct entities with two very different incentive structures, and 3) see #2. There is also an issue of accuracy in regards to Kelly’s brief summary of world history since 1600. I don’t want to get into the details here, but I do want you to recognize that I am reading Kelly critically. My last digression is simply to point out that libertarians and Weberian Leftists like Kelly have more in common than we think.

To get back to Coase’s paper, and Kelly’s critique of it, I want to highlight one sentence from Kelly’s book in particular and then turn it over to the peanut gallery in the hopes of gaining some insight:

Markets always come first, and the problem of the existence of firms is depicted as the problem of why a rational manager would rely on employees rather than markets.

Is this the puzzle Coase was trying to grapple with in his paper? I ctrl+f’d Coase’s paper (“employe” – not a typo) and couldn’t find anything that actually confirms Kelly’s summary, but it would be an interesting project (if I am right in stating that Kelly’s summary of Coase’s paper is not accurate) to follow this line of thought and delve into Kelly’s insight about the reliance that entrepreneurs/firms have on employees (rather than markets)…

Undergraduate degrees are a stamp of participation

Here’s an article I wrote for my college newspaper ( = designed for a different audience). I’m mostly interested in the direction college “worthwhileness” is going alongside more opportunities for starting small businesses, entrepreneurship, etc.

Getting a degree is a stamp that says you participated in the established educational conduct. Wisdom, implementation and experience can all be achieved elsewhere. The worst misuse of this stamp is when administrations arbitrarily select it as their sole judgment of criterion, namely, other teaching facilities.

I’m interested in opinions and disagreements anyone might posit – particularly from any professors or postgraduate writers.