Research Reports: April 4, 2011
Markets Can Ease the Food Crisis
With proper incentives, developing nations can profit from higher prices.
by Craig J. Richardson, PhD, Visiting Research Fellow
Higher Tax Rates Won’t Fix Deficits
History has shown that increasing the tax burden of the rich would have little impact on cutting the deficit. Instead, it slows growth.
by Julie Ni Zhu, Research Intern
Ask the Expert: Health Savings Accounts
by Kevin T. McGrath, CPA, a tax partner with BST Advisors, LLC.
Business-Cycle Conditions, April 2011
The Consumer Returns, But Timidly
People are spending more and cautiously borrowing. But no clear engine of growth has emerged to drive the still-modest recovery.
by Polina Vlasenko, PhD, Research Fellow
RR20110404
History has shown that increasing the tax burden of the rich would have little impact on cutting the deficit. Instead, it slows growth.
by Julie Ni Zhu, Research Intern
Ask the Expert: Health Savings Accounts
by Kevin T. McGrath, CPA, a tax partner with BST Advisors, LLC.
Business-Cycle Conditions, April 2011
The Consumer Returns, But Timidly
People are spending more and cautiously borrowing. But no clear engine of growth has emerged to drive the still-modest recovery.
by Polina Vlasenko, PhD, Research Fellow
RR20110404
People are spending more and cautiously borrowing. But no clear engine of growth has emerged to drive the still-modest recovery.
by Polina Vlasenko, PhD, Research Fellow RR20110404
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The State Is Not Your Proxy
A few days ago, it was my pleasure to spend two hours listening to the ideas and concerns of a well-educated and politically informed – dare I say socially privileged – self-described socialist. A Bernie supporter, of course. I tried not to argue back but rather listen and learn. Sadly, there wasn’t too much there that I found challenging or new but I tried to understand nonetheless.
Her soliloquy began with the usual complaints about the very rich. Millionaires. Billionaires. They should not exist.
Okay, I did slightly push back. Shouldn’t we aspire for everyone to be very rich rather than smiting those who succeed?
Not according to her. They got rich because they were fated to be that way by virtue of education, race, gender, social connections – and these are far from being evenly distributed throughout society. Moreover, because of some fancy (and ultimately fallacious) economic theory, their gains come at others’ expense, she explained.
The ideal society, she insisted, would be one in which everyone began at the same starting place. If people succeed by merit, that’s fine but then they should share their wealth with those who have not succeeded because they are not yet equal. In other words, the goal here is a society in which there are no accidents of birth. Also, any post-birth achievements need to be redistributed.
The idea here is to equalize opportunities (in every sense in which you can render that term) in order to realize equal results. Everything that exists between opportunity and result is purely artificial, from this point of view, and should be mitigated by state policy.
To be sure, nothing like such a system has ever existed but hope springs eternal. It’s not even clear how one would begin trying to create such a world. If you could somehow isolate geography, for example, as a variable with a significant probability of determining results in life success, it would be impossible to even distribute that evenly, simply for physical reasons.
Observe that this outlook is hegemonic in every respect; it would affect everything and everybody in every aspect of life experience. Maybe she is okay with that. But it does raise some questions, as follows.
There is probably not much point in a detailed demolition of the positive economic plan of socialism, given that this has been achieved millions of times over. A core problem that socialism has never solved is the need for any non-primitive, growing and changing society to produce new wealth. That problem has occupied the subject of economics for half a millennium, and there are good answers to it: the division of labor, capital accumulation, a market for capital, the security of private property, stable rules, tolerance for creativity, active and competitive markets, and so on.
The idea of socialism obsesses only about existing wealth without dealing with the ongoing problem of the need to create new wealth to feed and house everyone. There is a reason why every regime that has ruled in the name of socialism has flopped in this regard. There is no substitute for market forces.
But really, from this conversation, I got the distinct impression that her view of socialism was not really about the positive economic plan. It was about feeding an ideology fueled by anger at perceived social injustice, all of which is conveniently summed up in the word capitalism said with a snarl.
I was also struck by the sheer materialism of the socialist outlook. Somehow it all comes down to who owns what and how much they own and control, as if this is the very essence of life itself.
This perspective completely overlooks enormous complications over life-cycle changes, among other factors. Young people in school are typically broke and going deep in debt with the hope that this schooling will enhance life earnings over time. In assessing their material wealth in anticipating the great equalization, are we going to take from the bartender down the street, who has saved and scrimped his entire life in order to pass on inheritance to his grandchildren, and give to the poor student at MIT?
Maybe your answer is: no, we won’t do that. In which case: why? This is a complicated situation, one of the millions and billions of complicated situations. Who precisely is going to determine what is and isn’t just is a matter we’ll get to in a moment.
I had the sense that her materialist perspective overlooks epically important struggles in life having to do not with money as such but more with spirit, confidence, determination, character, and values generally. These factors are present in everyone whether rich or poor. Well-to-do parents also face problems (perhaps even more problems) ensuring that their kids are going to be good people with good values. Often this requires the parents themselves to material deprive their own children, which is one of the hardest decisions a parent can make.
Is there no reason at all to have sympathy with these types of struggles? They are real. The struggle is real for everyone, rich or poor and everything in between.
The truth is that the non-material aspects of life management are as important or more so than the material ones. A deterministic materialism is preposterously reductionist, flattening out every other complication of life itself. Even if you could somehow mathematically divide all existing wealth equally, there is no way to equalize the manner in which every individual confronts normal life challenges without blotting out human volition completely. So long as people are free to act and choose, wealth will be unequal again in a flash, and then you have to redistribute yet again.
And this gets us to the real point: the socialist mind presumes the existence of a powerful, wise, and just decision-making body at the top of society that has the capacity and competence to make vast and sweeping decisions over what people own, what they do, what is just, and what is equitable. Leave aside every other problem of socialism (such as how it can rationally manage an economic process or achieve perfect material equality), and you are still left with the massive problem of power. How to contain it and control it once it is created?
Here is the single most mystifying aspect of the socialist mind: its enormous leap of faith to presume without question that the state will magically become a proxy for the compassionate mind of the socialist dreamer. But the state is not your proxy. It’s never happened. It’s not happening now. There is no plan in place to somehow make the state become this. The problem doesn’t really seem to enter the mind of the utopian thinker at all.
Which is profoundly irresponsible.
Now, to be sure, the problem of the state as proxy for an intellectual’s vision is not limited to socialists. It’s true for collectivists of the right too who might imagine a society organized around a nationalist vision, a racialist ideology, an agenda of universal patriotism and compliance. Or consider the theocrat: one religion for everyone. This too imagines the state as a proxy for one’s theological and spiritual position. You want eternal salvation for the world, so you presume that the state should desire the same.
What’s remarkable about this outlook, widely held and deeply presumed in our political culture, is that there’s not a shred of evidence that forcing the state to comply with one’s personal philosophical outlook, whether benign or malicious, can ever happen under any known reality, not from history and not from theory. And yet no presumption is more deeply baked into the everyday political debates of our time.
So I would say this to my new socialist friend. Your intentions are rooted in something generally well-meaning, an extension of your dear heart and intelligent mind. Of this I have no doubt.
But the right way safely to act on your values is on a small scale, through voluntary means, consistent with the wisdom of time and place, and caring compassion for the people affected by your ideology. Give it a go but be careful: humility requires that you recognize that state violence unleashes forces in the world that you cannot control. Are you ready to take responsibility for all results, whatever they may be? If not, find a more peaceful way to realize your aspirations.
Finally, I will just say this outright: here is the case for liberalism. Liberalism is a society, a world, of bottom-up experimentation that affirms the legitimacy of individual human volition. Only a template of freedom rooted in a sense of unending discovery is fully consistent with human rights. It also so happens to yield the greatest material prosperity ever known on the planet. We dare not depart from it, much less displace it with a manufactured vision for how society should be. We don’t know the answers for everyone; we barely know them for ourselves.
This is precisely why liberty matters.
Jeffrey A. Tucker
Jeffrey A. Tucker is Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages, most recently The Market Loves You. He is also the editor of The Best of Mises. He speaks widely on topics of economics, technology, social philosophy, and culture. He is available for speaking and interviews via his email. Tw | FB | LinkedIn
Related Articles – Socialism
It’s a Disservice to Urge Young People To Become Entrepreneurs
Talk to a businessperson today about hiring twenty-somethings and they will tell you what’s what. Too often they bump into: no skills, no discipline, no patience for customers, no concern for doing what the boss says, no clarity about what a job even is.
What’s gone wrong? Part of the answer is that young people are too often caught up in the alternative path of getting rich through “entrepreneurship.”
The word itself sounds dreamy, so fancy and French. In the popular understanding, you get a great idea, disrupt an industry, get chased around by billionaires who throw money at you, end up on the cover of Time, and retire at 40 and sail the world on a yacht. If this is really possible, why would anyone choose the drudgery of just having a regular job like anyone else? Hey, be the CEO b****, as the movie The Social Network rendered the pep talk first given in a bar to Mark Zuckerberg.
Truly, it’s not just dreams of Zuckerbergism that has captivated the young generation. It’s also Elon Musk, Bill Gates, Steve Jobs, that WeWork guy, and so on. Everywhere you look these days, there are people and programs urging people just out of school to forget working for the man; instead, just start a new business and become a folk hero.
The legend of the twenty-something business wunderkind is everywhere in pop culture.
Here’s the problem. The data are in. It turns out that the whole thing is a gigantic myth.
Young founders of businesses fail, almost certainly, and at a much greater rate that people who are much older, wiser, more skilled, and more knowledgeable about the industry. It turns out that succeeding in business is extremely difficult. It takes maturity above all else to achieve it.
We know this now thanks to a fascinating study by Javier Miranda, principal economist at the U.S. Census Bureau; Benjamin Jones, professor at the Kellogg School of Management at Northwestern University; and Pierre Azoulay, professor at MIT’s Sloan School of Management and research associate at the National Bureau of Economic Research. They took a detailed look at the demographics of successful entrepreneurship. The results were so conclusive as to debunk the myth of the young startup founder. They paint a portrait that is much more consistent with your own intuition from experience.
They conclude: “The mean age at founding for the 1-in-1,000 fastest growing new ventures is 45.0. The findings are similar when considering high-technology sectors, entrepreneurial hubs, and successful firm exits. Prior experience in the specific industry predicts much greater rates of entrepreneurial success.”
In other words, up with middle age! Actually, more precisely, up with experience, skills, discipline, and knowledge, all of which are more common among forty-somethings after two two decades of work experience as compared with twenty-somethings. “Young people are just smarter,” says Mark Zuckerberg. Maybe so but it takes a lot more than that to make a successful enterprise.
Here are some key findings of the research:
- Founders in their early 20s have the lowest likelihood of successful exit or creating a 1 in 1,000 top growth firm.
- Across the 2.7 million founders in the U.S. between 2007-2014 who started companies that go on to hire at least one employee, the mean age for the entrepreneurs at founding is 41.9.
- The mean founder age for the 1 in 1,000 highest growth new ventures is 45.0.
- The most successful entrepreneurs in high technology sectors are of similar ages.
- The “batting average” for creating 5 successful firms is rising dramatically with age. Conditional on starting a firm, a 50-year-old founder is 1.8 times more likely to achieve upper-tail growth than a 30-year-old founder.
- Younger founders appear strongly disadvantaged in their tendency to produce the highest-growth companies. Below age 25, founders appear to do badly (or rather, do well extremely rarely), but there is a sharp increase in performance at age 25. Between ages 25 and 35, performance seems fairly flat. Starting after age 35, there is increased success probabilities. Another large surge in performance comes at age 46 and is sustained toward age 60.
So you look at this data and ask the question: what is the best age to be an entrepreneur? It’s middle age, not young. Why then are there so many programs and pundits urging young people to forget about getting a job and instead change the world by founding the new Apple or Facebook? The whole thing seems to be based on a fashion, not facts.
When I first brought up this data to a friend, he immediately retorted that perhaps this is just because it takes several tries to get it right. You start in your 20s and keep being a “serial entrepreneur” until it clicks. The authors, however, found no evidence of this at all. In fact what happens is that young people attempt new businesses, go into debt, run out of luck, enter a period of demoralization, and then face the grim realities of life: you are far better off getting a job, buckling down, learning a trade, and then once you have experience and social capital, try your hand at starting something new.
The greater problem is that urging entrepreneurship on the young is creating an illusion that is distracting them from the best-possible path for life success: gaining skills, knowledge, and accumulating various forms of capital (financial, social, intellectual). Here is where we find a massive failing among people just leaving college today. Youth employment has never been lower. Having spent their lives in classrooms and all their free time consuming media, they are not gaining the values that lead to success. The notion that they should just hang up a sign and rock it has no empirical support.
Swearing that you will never work for wages and never obey a boss, while dreaming of the great new social media company you will dream into existence, is a potentially catastrophic path. The data indicate that this is almost certain to fail.
That said, a fundamental problem could trace to too narrow a definition of entrepreneurship, if by that word you mean seeing unmet needs and open opportunities and taking the risks necessary to meet them. It doesn’t necessarily mean starting a new business. That path is available in every industry for those who seek it out.
I recall being in the clothing business when I was in college and going to market with the buyer of the store. What to buy to put on display for customers fully 8 months in advance is a high-stakes gamble: if you buy too little of a successful product, you forego profits; if you buy too many to sell, you eat the profits on those you did sell. It’s an ominous choice.
At the wholesale market, I became convinced that a particular pair of navy corduroys with a yellow duck motif could sell (hey, this was the 80s). My boss was unsure. He wanted me to be sure. I finally persuaded him to take the risk and buy three runs of all sizes. When they arrived at the store, I knew I was on the line, so I sold them like a maniac. They did very well! Whether this was because it was a good choice or because I refused to face failure, I do not know.
The point is that it was a good example of entrepreneurship within a job, a realistic form that is fun with a low risk of failure. Here we find experiences that genuinely train people for a life of commercial success. Getting a real job is the best “incubator” there is.
The bigger problem with urging young people to start businesses is that this advice feeds disgruntlement with an actual path to success, which is not running a cool startup but doing the very thing that entrepreneurship chic implicitly puts down: getting a skill, obeying the boss, gaining wisdom, and developing a solid career bit by bit.
We should stop lying to young people about commerce and tell the truth that business is hard. Work is hard. Saving money is hard. Serving customers is hard. For some people, just showing up is hard. These are all learned skills. The fun comes once you master them.
An additional to baking entrepreneurship into your job, the best path is to take a job to provide income flow, while keeping your eye on a side business to start as your long-term capital plan. That way one can more easily become the other while you gather skills and information, while relieving the financial pressure for instant success. This is not only bends in the odds in your favor; it’s also just good financial management.
Start a business when you are young? Sure. Just don’t quit your day job yet.
Jeffrey A. Tucker
Jeffrey A. Tucker is Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages, most recently The Market Loves You. He is also the editor of The Best of Mises. He speaks widely on topics of economics, technology, social philosophy, and culture. He is available for speaking and interviews via his email. Tw | FB | LinkedIn
