TGIF: On "Giving Back"

P&G, the maker of popular household brands like Tide and Downy laundry products, is giving away $10,000 in college scholarships. That's $1.5 million and 150 scholarships in all. My problem, aside from its encouraging college attendance, is with how the company is promoting the program. The television ads proclaim that the company sees the scholarships as a way of "giving back." I've written about this before, but some further thoughts might be useful.

So, to whom does P&G wish to give back? Not to existing customers exclusively. The only eligibility requirements are U.S. residency, a minimum age of 16, enrollment in or acceptance by an undergraduate program, and free registration at P&G's website. The online application does ask applicants if they are first-generation college students and where they do their laundry, which sounds creepy. The program is called a "sweepstakes", and multiple entries are apparently allowed, so the winners are apparently picked randomly. The winners' checks will be sent to the schools.

The "payback" angle that P&G touts will sound good to many people. ("Aw, that's so nice.") I suppose P&G never even considered entries by saying:

Because we at P&G are always looking for ways to increase our profits by creating goodwill, keeping our current customers from looking at rival products, and luring new customers from our competitors, we are giving away 150 scholarships worth $10,000 each. We'd prefer you to just buy our great products, but if that's what it takes to get good publicity, so be it. Enter today!

That would offend too many people, though pro-market and pro-free-enterprise people like me would be approvingly amused. Why call it "giving back"? Unearned guilt, what's why.

Adam Smith famously wrote that we do not believe the grocer puts food on the shelves because they are nice people (which of course they may well be). They do it because that's how they earn a living. Smith wasn't being pedantic. He was acknowledging that shoppers already know this. He writes, "We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages." (Sometimes we talk of our own necessities, for instance, when we can't find what we want. But we know the grocer doesn't help us out because he loves us.)

The "logic" of payback addresses the matter from the seller's, not the buyer's, side. Smith could have addressed grocers by writing:

It is not from the benevolence of the customers that you expect your income but from their regard to their own interest. You address yourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Telling this to merchants would hardly be necessary. No merchant thinks his customers are doing him a favor by shopping in his store. A salesperson asks customers, "How can I help you," not "Here's how you can help me." It's true that when transactions are complete, both the merchant and customer typically express gratitude. It's what John Stossel calls the double thank-you moment. That's an interesting peculiarity of markets. The people on both sides of the counter seem grateful. Each party knows that the other could have been somewhere else. But at the same time, each knows that the other is (properly) acting in his own self-interest. Maybe that is why we are all grateful. Or maybe we're unwittingly approving of the harmonization of diverse interests in a market setting.

P&G and every company that claims to be "paying back" act as if they think we're stupid -- that we buy to help them out and so are owed something. But I don't think that's what such companies really believe. I think they talk about payback because they, like nearly everyone else, suffer from antimarket bias. Even business people have absorbed the view that profit-making is exploitative. To assuage the guilt, they "give back" to their victims. That is sad. It's also wrong. In the absence of coercion, fraud, and government favors, no exploitation occurs.

When two people trade, we know that at that moment each is confident he is getting more than he is giving up. The trade would not happen otherwise. Afterward, one or both may have regrets, but that's a fact of life when you're fallible. Note, though, that in our competitive economy, sellers, eager to win customers, accept returns, no questions asked. That was unusual not so long ago.

As for the seller's profit, in its financial sense it results when buyers value a product so much that they are willing to pay more for it than it costs others to make and provide. It's a reward for the welfare-enhancing service of correcting price discrepancies.

Profit's bad reputation is unearned, But it's not true that only sellers can make a profit. Buyers do also, though in a non-financial sense, because they prefer the thing they obtain to the money's alternative use. Moreover, to the extent that they pay less for an item than they were willing to pay, buyers make an additional profit. No exploitation occurs, of course.

Trade is the harmony of interest on glorious display, and we should celebrate that freedom makes it possible. Now if only we could find a way to get the favor-granting politicians and bureaucrats out of the way.

TGIF: Governments Create Problems; Markets Fix Them

My article "Complete Liberalism" prompted an unexpected challenge. An interlocutor, who says he owns a business and thus is not antibusiness, claimed that my article suggested that, unlike government regulators, businesses never get things wrong. Yet business failures outnumber successes 10,000 to one, this person said, for all kinds of reasons, both innocent and malign, including a desire to pull the wool over consumers' eyes for as long as possible.

The problem with the comment is that my article never claimed that business people always get it right or are always virtuous. I've pointed out repeatedly that the best economists -- especially the Austrian economists -- never ignore the inherent existence of error in describing how markets work. And libertarian writers have never suggested that business owners cannot have bad intentions, which are magnified by access to state power. Quite the contrary! What these thinkers have emphasized are the systematic incentives and disincentives produced by free competition that reward pro-consumer performance and penalize incompetence and malevolence. Think of all the libertarian criticism of the malignant relationship between business and government. Now think of Ayn Rand's businessmen-villains in Atlas Shrugged.

One need only read the accessible writings of Ludwig von Mises ("Profit and Loss," Bureaucracy), F. A. Hayek ("The Use of Knowledge in Society," "Competition as a Discovery Process"), or Israel Kirzner ("Economics and Error") to see that the plague of uncertainty, error, and incomplete and dispersed knowledge figures heavily in good economic analysis. The question they sought to answer is: how can people coordinate their productive social cooperation in the face of such ignorance? Individual freedom produces the only answer for a great society: prices.

In fact, if it weren't for imperfect knowledge, free markets would be unnecessary and profit and loss would disappear. Mises wrote:

If all people were to anticipate correctly the future state of the market, the entrepreneurs would neither earn any profits nor suffer any losses.... What makes profit emerge is the fact that the entrepreneur who judges the future prices of the products more correctly than other people do buys some or all of the factors of production at prices which, seen from the point of view of the future state of the market, are too low....

On the other hand, the entrepreneur who misjudges the future prices of the products allows for the factors of production prices which, seen from the point of view of the future state of the market, are too high. His total costs of production exceed the prices at which he can sell the product. This difference is entrepreneurial loss.

It's hard to believe that an economist who writes about entrepreneurs with correct or incorrect judgments about the future could have thought that business owners were infallible. Economic analysis, after all, is supposed to be about real human beings who, whether they are acting as producers or consumers, are fallible.

The free-market position is that free and competitive markets are not perfect but better than government bureaucracies at detecting and correcting errors about what consumers will want and what they will be willing to pay. That's what counts, isn't it? Since omniscience is not an option, we want the best method available. That's all we can hope for, and it turns out not to be too bad. We must always ask about any touted solution to a problem: compared to what? Thomas Sowell's Law -- "There are no solutions, There are only tradeoffs" -- is relevant here.

David D. Friedman is another important scholar who has shed light on the relative merits of bureaucracies and markets in his important article "Do We Need a Government?" (I recommend his video lecture.) Friedman addresses a different matter than the one I'm concerned with, namely, the collective-action problem, one manifestation of which is called "market failure." But much of what he writes applies. Here's the key, which is about systematic incentives:

In private markets, most of the time, an individual who makes a decision bears most, although not all, of the resulting costs, and receives most of the resulting benefits. In political markets that is rarely true. So we should expect that the market failure that results from A taking an action most of whose costs or benefits are born by B, C, and D should be the exception in the private market, the rule in the political market. It follows that shifting control over human activities from the private market to the political market is likely to increase the problems associated with market failure, not decrease them.

This shouldn't be controversial. We experience this as shoppers when we spend our own money on the very goods we then bring home and use, and as voters, where the disconnect among choices, costs, and benefits is stark. This has critical implications for both business owners and bureaucrats. A fundamental contribution of public-choice theory is that the normal principles of human action apply to government employees. Bureaucracies are filled with ambitious people too, so this is only fair. They don't become sainted creatures with perfect knowledge and perfect virtue merely because they step across the threshold and take government jobs. 

Incentives matter, as we all know first-hand. The same human being operating in two different institutional environments should be expected to behave differently. And indeed they do.

In a competitive -- that is, free -- market a business owner's mistake or bad conduct is someone else's chance to make a profit. Because entrepreneurs know this, they are on the lookout for errors. "Hence in a market society," Friedman writes, "there is an incentive for private parties to find ways around the inefficiencies due to market failure."

Nothing is more powerful than the profit motive, something that even opponents of the market readily concede.

The same incentive is not to be found in bureaucracies, which are not profit-and-loss organizations. Most important, bureaucrats don't have the price information that entrepreneurs have. Their revenue is obtained by force -- taxation -- and their "products" are not offered on markets where prospective buyers can pass them by for competing offerings. That's an entirely different ballgame from market activity.

Notice that bureaucratic failures are routinely portrayed as market failures (most people's economic ignorance leaves them gullible) and are used to justify even more government: larger budgets, bigger staff, and wider powers. If (alleged) market failures require more government, as some people believe, how can government failures require, not more markets, but more government?

We should want the incentives for spotting and fixing errors to be as undiluted as possible. The way to achieve that is to keep the government from interfering with people's peaceful activities.

TGIF: Free Exchange Is Win-Win

With the possible exception of the political class and its cronies, most of us would be healthier, wealthier, happier, and freer if the public knew how to engage in "the economic way of thinking." The late Paul Heyne, who wrote a popular textbook by that name (now in its 13th edition thanks to Peter Boettke and David Prychitko), summarized the economic way of thinking by writing, "All social phenomena emerge from the choices of individuals in response to expected benefits and costs to themselves."

I think of Heyne's title whenever I encounter an example of failing to understand this. Unfortunately, our society is rife with examples and resulting bad government policies, which tells you a lot about why we suffer periodic hardships like the current inflation. The lockdowns during the COVID-19 pandemic were a spectacularly tragic example of the failure to engage in the economic way of thinking.

Other instances of that failure are so thoughtless as to be ludicrous. Take the wealthy business owner who donates a large sum of money to a worthy cause. The fallacy occurs when the donor or someone else inevitably says that the charitable act was motivated by a wish to "give something back," presumably to society or the community.

What's wrong here? It suggests that the donor wants to show gratitude for his fortune by reciprocating. But that makes no sense because the donor's wealth was not the result of people handing over money as a favor and getting nothing in return. Those people were customers, not donors. They bought something they wanted and must have liked the terms of exchange. So there is nothing to pay back. (I have in mind only people operating according to just-market principles: no force, fraud, or favors coercively provided by politicians.)

In the marketplace, profits come from voluntary exchange, which requires that buyers and sellers freely choose to transact business. Why would they do that? They do it because each party expects to benefit -- to be made better off -- by giving up something they own for something that they would rather own. This is clear with barter, but it's equally true when one party trades money. Money, a medium of exchange, expands the opportunity for exchange by enabling people to get what they want even when they don't have the particular items that their available trading partners want.

When Smith trades a sum of money to Jones to acquire shoes, Smith demonstrates that he prefers those shoes to anything else he might have feasibly used the money for, including holding on to it. Jones demonstrates the opposite preference.

Unfortunately, since they are fallible, Smith or Jones (or both) might realize later that he made a mistake. That's life, but it does not change the fact that at the moment of exchange, both sides expected to gain. If they are right, they have a happy win-win, or positive-sum, situation. Both sides profit, not just the one who obtains money because both come out ahead. (The competitive quest for profit has brought us liberal return policies, so the fallibility problem long ago became much less severe. John Stossel likes to point out that at the supermarket, both checkout clerks and customers typically thank each other.)

Free exchange produces mutual gain. If we could quantify the gain (we can't), we would say that after the exchange, the two people have more total value between them than they had before the exchange. This is remarkable, considering no new stuff was created by the transaction. Possession of the product and the money simply changed hands.

To put it qualitatively, we can say that through the exchange, both parties climbed higher on their respective value scales, giving up a subjectively lower-ranking value for a subjectively higher-ranking one. (What counts is how the parties evaluate things.) For this to occur, we need first, two parties with different preferences and, second, freedom, including property rights. Before you can justly trade something, you must own it.

In light of the two-way gain through free exchange, the wealthy seller has no reason to "pay back." He is successful because he provides value to his customers, who are happy to exchange their money. 

It's too bad that people who earn fortunes justly are made to feel guilty about their success. (Ayn Rand and Ludwig von Mises did their best to teach honest producers they had nothing to be ashamed of.) We consumers never feel guilty about the profits we reap. Why should the sellers?

TGIF: The Libertarian Solution

"What's the libertarian solution to social or economic problem X? How about problem Y or Z?"

No libertarian needs to wait long before hearing such questions. But strictly speaking, the libertarian philosophy offers no solutions to specific problems. That's not what it does. It is not itself a solution. Rather, it describes an institutional environment in which imaginative people are free and motivated to discover innovative solutions to individual and collective problems.

That environment has moral, cultural, economic, and legal dimensions, all grounded in self-ownership, respect for others, property, competition, persuasion, and consent, as opposed to government authority, monopoly, decree, and coercion. The cultural dimension is especially important, though often unappreciated. Widespread resentment toward other people's success, for example, is literally deadly, not only for those targeted but for society at large, especially those at the bottom.

Thus when a libertarian says freedom or the free market will solve a particular problem (if politicians stand aside), what sounds like an impossibly oversimplified response is actually highly complex. In contrast to the politicians' boasts, note the humility here. Confidence in market problem-solving is confidence in free human imagination dispersed among countless individuals throughout society. Who can say who will come up with the solution? No one. That in part is why we need everyone to be free.

The unique grounding of the libertarian environment has far different built-in incentives for problem-solvers than any state-based alternative. State problem-solving is characterized by centralized bureaucracy, artificial knowledge constraints, nonconsensual financing (taxation) that precludes feedback, profligacy (producing the disruptive knowledge distortions of debt and inflation), and significant unaccountability. In contrast, social- or market-based problem-solving is characterized by multiple knowledge centers, competition, consensual financing, and the profit motive. In that environment proposed solutions are subjected to intellectual and product competition, which yields better knowledge than other arrangements. F. A. Hayek called competition a "discovery" process. I think of it as the universal solvent.

In the market, problems are potential profit opportunities for entrepreneurs, and as we know, the profit motive is potent. The entrepreneur's job is to figure out where and how resources are used suboptimally relative to what people (not politicians) want most. Solving a problem often requires shifting scarce resources and labor from one purpose to another.

How can anyone know what's the best way to go? Entrepreneurs find clues to that question in market prices, which is why the price system is so important and must not be tampered with by politicians and bureaucrats. If an entrepreneur is correct when thinks he can buy a quantity of resources and hire labor at one price per finished-product unit and make something people will want to buy at a sufficiently higher price, he will earn a profit. That's a sign the enterprise solved a problem for its customers. Profit in the free market (absent government intervention) is a reward for success. It's not a dirty word.

Indispensable to the entrepreneurial function is the consumers' freedom to accept or reject offers as they see fit. Both responses communicate vital information to the problem-solvers. Coercion, the government's way of doing things, sabotages the function.

The freedom-based process is vital in our world of scarcity, trade-offs, and imperfect knowledge. Improvement is always possible, and imperfect knowledge is not the only reason. Another is that people's preferences change. What they wanted yesterday they may not want tomorrow, especially if something new comes along. A third reason is that the array of resources changes, with new materials, technologies, and organization methods proving superior to the old. Government restraints on this process do a disservice to people trying to improve their lives, especially those who have yet to "make it."

In contrast to entrepreneurs, politicians and bureaucrats can't look for price discrepancies (since government "services" are not priced in the market) and wouldn't profit from them in any event. Government officials instead respond to constituencies (relatively small well-connected interests generally) who lobby for "free," that is, tax-financed, stuff. Since most of the benefits bestowed by the government are concentrated on relatively small interest groups with much riding on their single purpose, while the costs are dispersed among the mass of unorganized taxpayers and consumers without a single purpose, the interest groups usually prevail. (Think of quotas and tariffs on imports. A few domestic producers are usually able to dominate a much larger group of consumers.)

Moreover, when politicians and bureaucrats promise to solve a problem and fail, they rarely suffer any consequences since they are able to blame the private sector. (Inflation is blamed on greedy businesses, not on the real culprit: government borrowing that is monetized is by the Federal Reserve.) Spotting that misdirection requires one to engage in the economic way of thinking, but most of the public has no idea what that means. (Frédéric Bastiat in the 19th century illustrated this in "That Which Is Seen, and That Which Is Unseen.") This political trick works so well that government officials can easily turn failure into bigger budgets and more power. The game is rigged against the people, who pay twice: through the tax system and by having to forgo real the solutions that entrepreneurs would have discovered had the government kept its hands off the resources.

Nothing better indicates the superiority of market solutions to state solutions than the fact that market solutions will vary according to local knowledge and preferences. In contrast, state solutions tend to be one-size-fits-all.

No one has ever suggested that the libertarian environment for solving problems is perfect. People aren't infallible, so the private consent-based approach can't be either. Trial-and-error is inescapable but also indispensable. Yet the last time I checked, politicians and bureaucrats were people too. (No, really!) The difference is that people are operationally smarter in a free, decentralized, and competitive environment where they encounter feedback and face the clear consequences of their choices. That's exactly what is lacking in the political environment.

One final note. In a world of scarcity (however much technology loosens its limits), solving problems always entails costs. As Thomas Sowell teaches, in a sense, there are no solutions, only trade-offs. What we all strive for in life is an overall improvement; in effect we exchange situations we don't want (all things considered) for ones we do want. That's the natural condition, which politicians and bureaucrats cannot improve on. But as we can readily see, they certainly can make things much worse.

 

Does Trump Know Anything?

If Trump really wanted to run the government like a business, he'd have to abolish taxation and offer government's purported services in a competitive marketplace. Without competition and a true profit-and-loss test, government cannot be like a business. Prospective buyers must be free to say no to sellers and to go elsewhere if they wish -- and I don't mean to another country.

Take It to the Limit

As I see it, the early American free-market anarchists -- I'm thinking of Benjamin Tucker and the people around his magazine, Liberty -- erred when they attributed profit, rent, and interest per se to the State, rather than argue that the amount of profit, rent, and interest collected is magnified through government privilege and monopoly.

But I'd rather have a thinker go too far in attributing evil to the State than not far enough. After all, Tucker et al. did not call on government to abolish profit, rent, and interest. They merely predicted their disappearance when the market is freed.

Obama's Health-Insurance Cartel

President Obama and other advocates of nationalized health insurance have tried a variety of sales pitches, which indicates their difficulty in getting traction with the public. The latest is”competition and choice.” Who could be against those things? Barack Obama for one.

The rest of TGIF is here.

Must-Read on Health Care

I exaggerate only slightly -- and I mean slightly -- when I say that all you really need to read on the healthcare debate is Steve Horwitz's Freeman article "Profit: Not Just a Motive."

No one who is ignorant of these arguments can be counted as a serious participant in the debate.