Yearly Archives: 2013

Eliminate, Don’t Raise, the Minimum Wage

Argumentum ad populum

Of the various flavors of government interventionism in our lives, the minimum wage is perhaps the most welcomed. It appeals not only to our innate sense of “fairness” but also to our self-interest. It’s allure may erroneously lead us to the conclusion that because “it is popular” ergo “it is right”. Arguments for the minimum wage that are predicated on such popularity succumb to the logical fallacy known as argumentum ad populum (appeal to popularity). Mere popularity does not translate into legitimacy. The truth of this statement should be apparent to any citizen of a country that at one time exhibited popular support for prohibitions on biracial marriage and women’s voting, Jim Crow laws, and of course, slavery itself.

Even if we accept the assumption that an essential function of government is to make all human interactions “fair” and thereby enhance the outcomes of those interactions, it is still prudent to examine the principals and methods employed towards those ends to see if they are in fact achieving those goals.

 

A Priori Principals

Prior to examining the empirical evidence resulting from employing these methods we should first examine the principals behind them in order to determine if what we are trying to achieve is even theoretically possible. Although some principals must be verified by empirical evidence to confirm their validity, there are some that are immune to such testing. For example, the geometric axiom that the ratio of a circle’s circumference to its diameter equals “pi” is a priori true (meaning the truth of the statement does not depend on experience or examination). Measuring one circle or a million circles to test that principal cannot alter its universal validity. Likewise, there are economic principals that are also a priori true. One of these is that given two parties, the total wealth of both parties cannot be increased by transferring wealth between parties (this economic reality is a corollary to the Law of Conservation of Mass). To the extent one party gains, the other party loses, and the net remains zero. It is immaterial whether one believes this process is right or wrong, the simple fact is this process cannot increase total wealth. Owing to the subjective nature of value it is impossible to say that $1 in the hands of Person A has more value to him than it would in the hands of Person B. People’s value scales are different and can not be added or subtracted any more than one can add dollars and pesos.

 

Empiricism tested – The seen and the unseen

So, given the truth of this a priori economic principal, how is it that so many empirical studies show no deleterious effects or even positive effects of redistributive policies (e.g. minimum wage increases, redistributive taxation, fiat money inflation, etc)? Has an a priori principal been disproven? Not at all. Such programs appear to work for the same reason we are fooled by magic: misdirection. Economic misdirection illustrates the principal described by 19th century economist Fréderic Bastiat, namely that of the “seen and the unseen.” Magic appears to work because we “see” the surface illusion, but we do not see the action behind the surface, the gears, as it were, that are driving the illusion. Similarly, empirical studies of the effects of the minimum wage observe only the positive benefits while turning a blind eye to the unseen harms. As Henry Hazlitt wrote in “Economics in One Lesson”1.

 

“the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups”

 

Studies that show no effect from such redistributive policies such as a minimum wage are guilty of violating Hazlitt’s axiom: they examine the consequences only for one group, or only the immediate effects.

The more astute proponents of minimum wage laws often grab the metaphorical bull by the horns and address its most obvious conceptual flaw, namely that a $1,000/hour minimum wage would be unequivocally detrimental. However, the argument quickly turns to dismissing this fear by demonstrating that empirically no such job loss occurs when minimum wages are slowly raised. This is akin to saying that although fire can boil water, a small fire small won’t heat it up.  The support for this assertion is the oft-cited 1994 study of Card & Krueger2 showing a positive correlation between an increased minimum wage and employment in New Jersey. Many others have thoroughly debunked3,4 this study and it is not my intent to engage in a “weedy” deconstruction here, but suffice it to say even the original authors eventually retracted their claims.5

The problem with such “studies” that purport to demonstrate a neutral or positive effect from a rising minimum wage is that there necessarily must be a positive bias even from the most careful and fair-minded researcher. Why is that? The “seen and unseen” effect. It is quite easy to count individuals whose pay went up. What is more challenging, if not impossible, is to count the people that would have been hired but were not. This has the effect of masking increased unemployment: if the unemployment rate remains the same but would have dropped absent a minimum wage increase then this is a net increase in unemployment even though the absolute rate did not change. Likewise, offsetting reductions in non-monetary compensation will not show up in a monetarily focused analysis. Additionally, unemployment may also slowly rise without any direct job loss. How can this be? New positions will become constrained due to either stretched payroll budgets or a shift toward automation, which at a lower wage was not economically viable but is so at higher wages. Someone new to the employment market that cannot find work is seeking work and is thus counted as unemployed even though they have never been “fired”.

 

Empiricism supports prediction of youth unemployment

If we believe that those who will be most negatively impacted by a minimum wage should be those with the least amount of experience and skills then that that would lead us to predict higher unemployment among such a class of individual as compared to those with more experience and skills. To test this prediction we can then examine unemployment data for those aged 16-24 (less experience) as compared to those 25 and above (more experience). Indeed, if we look at the data6 from the Bureau of Labor Statistics (www.bls.gov) we find that the unemployment rate (June 2013) among 16-19 year olds is 24% and among 20-24 year olds is 14%. These values far exceed the unemployment rate (6%) of those workers with sufficient experience and skills to make them largely immune to minimum wage pay scales, namely 25-54 year olds. But it gets worse. Even when there are jobs to compete for, the young are at an experience disadvantage. Again the empirical evidence bears this out since were this not the case youth unemployment should slowly decline following minimum wage increases as the two groups equally compete for the same jobs. However we do not see this, youth unemployment is consistently higher across decades.7 The reasons for this are born out by the following analysis: At a given wage X (minimum wage) it is difficult for inexperienced worker A to compete with experienced worker B. However, Worker A could be competitive at wage X–Y. Think of it this way. If the government mandated a minimum haircut price of $200 per haircut whom would you hire for the task? The person who had been cutting hair for years or the person who had never done so? If you have to spend a $200 you might as well get the best you can get. However absent such a mandated wage you might be willing to try the neophyte for $5. You get a cheap, albeit imperfect haircut; the neophyte gains experience and improves his skillset.

 

Deleterious effects of youth unemployment

Although the redistributive effects of a minimum wage may be economically neutral in terms of wealth transfer between parties, it is definitely not neutral in terms of its non-economic effects, namely the prevention of free people doing as they please (i.e. gaining experience and contributing to society through work). People whose productive value is less than the minimum wage are de facto unemployable. They are denied the opportunity to gain experience and skills. Their exclusion from the job market is a net loss to society.

Minimum wage laws are a misguided attempt to help “the poor” by presuming all workers are similarly situated, i.e. that the vast majority of hourly employees earn minimum wage and that they are uniformly composed of heads of households. In fact the opposite is true. Only 2.1% of hourly employees earn minimum wage and of that 2.1% over half (55%) are 16-24 years old.8

If the intent were to help the poor, it would be better from a strict economic standpoint to simply eliminate the minimum wage and concomitantly expand social support for that tiny 1.2% of workers at the bottom if needed. The vast increase in youth employment resulting from a minimum wage repeal would expand the productivity of the economy thereby resulting in lower prices for goods and services, which would help “the poor” by giving them a stronger dollar.

 

There’s no free lunch – the many pay to support the few

If the wealth transfer effects of the minimum wage are economically neutral (in terms of strict monetary transfers) then who is gaining and who is losing? Obviously the people who get raises gain the most. Who loses? Everyone else. We lose in terms of higher prices resulting from cost increases being passed on. We also lose due to higher costs resulting from the withholding of labor of the unemployed, which reduces productivity relative to what it would have been. How much will prices go up? It depends. Do not be fooled by citations of a single study that demonstrates prices would not go up or if they did it would only be nominal. The truth is if you got twelve different studies you’d get twelve different answers. There are a multitude of variables because every company and industry is different. Some of those variables include: percentage of labor cost in the goods, percentage of workforce that will be affected, presence or absence of unionization, and elasticity of demand for the goods (i.e. will consumers pay more or not). Even if the effect is small, it still exists. Justifications based on the size of the cost are no different than justifying a new tax because it is proclaimed to be “nominal.” Whether the reason 100 million people pay an extra $1 so that 1 million people may be given $100 is the result of a tax or a law, the outcome is the same: redistributionary theft of the many to the few. It is wrong when corporations benefit from such practices and it is wrong when an individual benefits. Morality does not turn on the numbers engaging in the act. Just because the effect may be small at the individual level does not mean we just found our free lunch.

Even when costs are not passed on (due to inelastic demand) the owners of the company are “paying” in the form of decreased profits. Some may be inclined to argue that the workers “deserve” it more than the owners, however what one may not argue is that there has been a net benefit to the economy. It is often argued that if workers have more money they will spend it, all the while ignoring the fact that if the original owner of that money still had it they would have spent it as well. If one wishes to argue that some are more deserving, then simply be honest about that assertion and own up to the fact that one is advocating theft in order to rectify perceived social injustice. Do not attempt to shroud your motives behind a façade of economic utilitarianism (i.e. theft is ok because the economy benefits). These firms with inelastic demand for their product that are made to endure multiple bouts of minimum wage hikes will eventually go out of business as profit margins are squeezed down to 0%. Or if they are fortunate they will be in a position to automate most processes (think self-checkout lines). Automation or bankruptcy increases unemployment. Surely this is incontrovertible harm to those workers (the newly unemployed) that must be suffered in order that some workers at other firms may enjoy a small increase in pay.

 

No one earns minimum wage for life

Even those who start out making minimum wage do not continue to make minimum wage their whole life. They gain experience and skills and move up the pay scale in a company or they may move onto other employers who have a vested interest in acquiring such skilled labor. Just because you’re stuck at McDonalds making minimum wage does not mean you will be working there at minimum wage your entire life. You will at some point decide you want to make more and you will seek out a new job at a higher wage. And you will be able to do so precisely because of the skills and experience you acquired at your prior lower wage job. Low wage jobs serve a function in an economy. They should not be outlawed. They provide the opportunity for the inexperienced and unskilled to acquire both. They also offer those not looking for a career or who are not supporting themselves the means to engage in remunerative short-term work. Low wage jobs exist in those industries where job duties do not require any particular skill set and where consumers are sensitive to the price of goods in that industry. For example, McDonalds could pay all their employees $50,000 a year however the market for $50 Big Macs would necessarily be much smaller than it is today. At some point it is not the employer that sets the wage but rather it is the consumer. If the consumer will not spend more than X on a product then the wages to make such a product must necessarily be some fraction of the cumulative sales of X.

 

How did we get here? The subsidization of poverty.

Why are we even having this discussion? Do we really need the government to tell people to not work for less than they can survive on? Surely if people were working below a true “living wage” they would be dying in droves. Why is that not the case? Why are the streets not littered with the corpses of minimum wage workers? The key to this question is to understand that workers earn two wages: one from their employer and one from the state. Such workers are provided with the full panoply of government assistance. For example, someone making the current full time minimum wage earns $15,000/year, however they are also eligible for additional government benefits that bring their total remuneration to approximately $35,000/year if they are childless, or up to $52,000 year if they have children.9 In fact, earning more does not get one out of this situation as government assistance drops off slowly or precipitously depending on how much income has increased. These decreases in benefits actually incentivize the worker to not make more lest their higher income disqualify them for various aid programs. These benefits include the earned income tax credit, refundable tax credits, food stamps, housing, energy, and childcare assistance. These safety net systems, although started with the best of intentions, have resulted in the perverse incentive of encouraging the very thing we are trying to eliminate. Both the employer and the employee are aware of these safety nets, so each is willing to offer less and accept less given the assurance that society will pick up the tab. In other words, absent such subsidization, taxes supporting these programs would necessarily fall and wages would necessarily rise. Not out of generosity of an employer but as a result of the fact that absent any assistance no one could live on $15,000 a year, therefore no one would accept that wage any more than they would accept $100 a year. The young who make up about 20% of the labor pool8 would quickly fill in all the low wage job demands and once that pool was consumed employers who wanted more employees would have no choice but to pay the higher market wage.

 

Summary

Minimum wage laws should be understood for what they are: an unwarranted interference by Tom, Dick and Harry into the private trade negotiation of Dave and Fred. At its core, labor is just like any other good. The laborer would like to acquire money and is willing to sell his labor. Likewise the employer has money and would like to acquire labor. The two parties come together in order to reach a mutually agreed upon price. If that price is lower than you would like don’t blame the employer, blame competition. There are too many others willing to do the job for that price. Do stores blame their customers or the competition if they lose a sale? Blaming your employer for too low a wage is as silly as a store blaming its customers for not buying from them.

Minimum wage laws are simply price fixing by another name. They allow the public to intervene in employee/employer negotiation and tell the employer “It is illegal to pay less than X for this labor” and likewise tell the laborer “It is illegal for you to sell your labor for less than X”. When it comes to handling your own affairs, your neighbors do not know better than you. We should all be free to make such decisions for ourselves without outside interference.

Regardless of our current pay, everyone always wants more. There are two routes though to obtain more. There is the unethical route of using force (government) to extract what we want. This method is appealing in that it requires little effort, in the same way that picking up a gun and robbing someone requires little exertion. Theft is the time-honored tradition of obtaining goods with less effort than would have been expended in their honest production. But as with any theft, it is a zero sum game, there is always a winner and there is always a loser. The pie stays the same size because the thief has added nothing to it; pieces have merely been shuffled.

However, there is another method to achieve higher wages. Improve yourself so that you have a basis for negotiating. Differentiating yourself from the competition means you have less competition. You are capital that owns itself. You have it in your power to enhance the value of that capital. Wages correlate directly to the value society places on the tasks we perform. If we acquire those skills that society values more highly then we will necessarily produce greater value for society and this in turn will be reflected in the higher wage we are able to demand. These gains are not a zero sum game. The pie gets bigger because your enhanced productivity adds to the pie. Your employer pays you more not out of generosity but because you are able to give him more than you used to.

We each hold in ourselves the ability to improve our circumstances in a way that benefits us as well as society. Self-improvement through education and/or work experience is the answer to the question: how do I earn more? Elimination of the minimum wage is a necessary, although not sufficient, condition for improving the economic value of the inexperienced or unskilled.

A version of this article also appeared as a Mises Daily on January 16, 2014.

References

1. Hazlitt, Henry. “Economics in One Lesson”, (1946), p.5,

2. David Card and Alan B. Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania,” American Economic Review 84, no. 4 (1994): 792. A later book expanded on these results, see David Card and Alan B. Krueger, Myth and Measurement: The New Economics of the Minimum Wage (Princeton: Princeton University Press, 1995). (this reference cited here)

3. David Neumark and William Wascher, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment,” American Economic Review 90, no. 5 (2000): 1390. Researchers from the Employment Policies Institute also reported finding data errors in the Card and Krueger sample. In one Wendy’s in New Jersey, for example, there were no full-time workers and thirty part-time workers in February 1992. By November 1992, the restaurant had added thirty-five full-time workers with no change in part-timers. See David R. Henderson, “The Squabble over the Minimum Wage,” Fortune, July 8, 1996, pp. 28ff. (this reference cited here)

4. Block, Walter. “The Minimum Wage Once Again”, Labor Economics from a Free Market Perspective, (2008), pp 147-154.

5. David Card and Alan B. Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Reply.” American Economic Review 90, no. 5 (2000): 1419. (this reference cited here)

6 http://www.bls.gov/web/empsit/cpseea10.htm

7. http://www.americanprogress.org/issues/labor/report/2013/04/05/59428/the-high-cost-of-youth-unemployment/

8. http://www.bls.gov/cps/minwage2012tbls.htm#1

9. http://www.aei-ideas.org/2012/07/julias-mother-why-a-single-mom-is-better-off-on-welfare-than-taking-a-69000-a-year-job/

 

Changing the Rules of the Game

September 1 will mark the end of an era, at least in Georgia anyway. This is the date that Amazon.com must begin collecting sales tax in Georgia. Some day you will wax nostalgic and regale your grandchildren with stories of how there was once a place where people could escape the clutches of intrusive government: the Internet. This was a place where anarchism reigned and yet everything worked without any rules or leaders. But slowly government began to stamp out the embers of this freedom bit by bit. First it was taxes, then it was privacy, and next it will likely be access. Internet license, please. As Nature abhors a vacuum, so too does government abhor freedom. Big Brother the busybody knows no boundaries. Big Brother demands his “piece of the action” in every transaction, no matter how small. Just as the mafia feels they have a right to a slice of any economic activity that occurs within their self-proclaimed “territory” so too does government operate upon an identical principal.

So how is it that this has come to pass in Georgia? Has Congress managed to stealthily pass the “Tax Fairness Act”? Fortunately no. This current state of affairs is the result of Georgia House Bill 386 passed on March 20, 2012. This bill follows the Orwellian mantra that if conventional definitions of words aren’t working for you, then simply write new definitions. This bill redefines a term called “nexus” in order to dragoon Amazon and similar entities into becoming uncompensated tax collectors for the state of Georgia. Nexus is a tax term which means “a connection” i.e. if a company has a physical presence (office, warehouse, employees, equipment, etc) then they are said to have a connection to the state sufficiently similar to a resident so as to make them liable for the same taxes a resident would be liable for. But this bill has now turned that definition on its head by broadening the term to the point where merely having a business relationship with an entity in Georgia will confer “nexus” upon the foreign entity. It is hard to see how those who voted for this bill did not recognize the perverse incentive buried within it, namely that companies outside of Georgia will choose to NOT establish any business dealings with companies inside Georgia lest they become entangled with the Georgia Department of Revenue.

As if loss of business opportunities and higher taxes wasn’t bad enough, it gets even worse. Nexus and residency have always had a common shared characteristic: physical presence. Not anymore. Now that nexus is based on the most ephemeral of connections to the state how long is it until the residency definition undergoes a similar metamorphosis? If the two are indeed linked in their common purpose of establishing tax liability, then a change in one will invariably result in a change in the other. Therefore Georgia may one day establish that residents of other states are also in fact Georgia “residents” for purposes of income tax. Once that precedent comes to pass then what is to stop others states from likewise inflicting such taxes upon Georgians? Perhaps some day you’ll get an income tax notice from Florida because you vacationed there once. “You enjoyed the generous state benefits of roads and municipal services while here, so certainly you should be paying your fair share” will be the justification. Each blow of the precedential ax upon the tree of freedom accumulates damage until finally one day that tree is felled.

Naturally this new sales tax collection is being heralded by the economically illiterate as a boon for the “brick and mortar” stores. The initiation of sales tax collection will have ZERO effect on expanding local sales in Georgia. Why? People aren’t ordering on line to avoid a few bucks in taxes. They are ordering online because it is convenient. The lack of sales tax is just a perk. Removing that perk is not going to change people’s behavior. It is however going to reduce what people can spend to the tune of $16 million. This will only harm the individual as well as local businesses they are already shopping at. Increased taxes reduce the individual’s capacity to spend – everywhere. This is supposed to help the economy?

 

Calculating The Social Cost of Horse Manure

Imagine the following: It is the year 1700 and growth in the American colonies is threatening an economic and environmental catastrophe. Human and equine populations are expanding rapidly in tandem. The horse is integral to the economic engine that drives all economic output. But there is an unaccounted cost: manure. The horses are fed fuel (hay), do work, and out comes waste (manure). Harvard scientists have extrapolated that based on current trends there will be so many horses that manure will cover the colonies to a depth of three feet by the year 2000! Something must be done! There is clearly an unaccounted cost to all this manure lying about. The only solution to stem the tide: a manure tax.

Hopefully this seems a bit silly – it was meant to be. However our betters (those in government) are in engaging in similar sophistry. They make pie in the sky predictions cloaked in an aura of mathematical certainty concerning the “social costs of carbon” up through the year 2300. To wit: to little media fanfare the White House Working Group recently released an update to its estimates of the Social Cost of Carbon. Why is this notable?  The revised figures were up to two times larger than the previous “estimates” made by the same office only 3 years ago. Is the problem of climate changing getting worse? Hardly. The White House has merely “updated” its numbers in a climate cost-analysis model that has enough variables in it to send an algebra student screaming into the night.

These “equations” are nothing so scientifically resolute as E=mc2. No, rather they are a mathematical house of cards that can be manipulated to yield any desired value. For example, one of the key variables is something known as the “discount rate”, that is, the interest rate one would need to invest a dollar today in order to earn some amount in the future. So, if we invest $1 today that grows to $40 in one hundred years and we assume by then there will be $40 in economic losses due to one pound of carbon, then we say the cost of one pound of carbon today is $1. This is the “social cost of carbon”. The goal then is to spend $1 today to clean up one pound of carbon, thus averting $40 in damage in one hundred years. We would not spend $2 to clean it up because it would be more profitable to earn $80 and incur the $40 cost. If the social cost of carbon is low, then it is difficult to justify expensive remediation efforts, whereas if it is high then imposition of costs on the populace is that much easier to rationalize.

All we can do is pile assumptions on top of estimates of cherry picked data.

Of course the rub is how does one actually figure out the cost of environmental “damage” in 100, 200 or 300 years? All we can do is pile assumptions on top of estimates of cherry picked data. For example, loss of tourism dollars at ski slopes is counted as a cost, however the shifting of those dollars to newly more temperate regions is not counted as an offsetting benefit.

Even if we assume the science is ironclad and the calculations of the costs are solid, there is still the problem of the discount rate. It is the logarithmic volume control on the stereo of climate economics. Small changes have dramatic effects. For example, a discount rate of 2.5% yields a cost of $98/ton but 5% yields only $27/ton. Curiously the WHWG ignored the government’s own Office of Management and Budget (OMB) directive to also include a value of 7% in the analysis. It is estimated that at a 7% discount rate the Social Costs of Carbon would likely have been nearly $0 or even negative (meaning that CO2 actually confers a net benefit, not cost). It is also telling that the White House Working Group also ignored the OMB directive to only integrate domestic costs into their models, not global costs, an apparent “oversight” which further tends to push the Social Costs of Carbon estimates upward. This is what is known as “stacking the deck” in your favor.

So, back to our horse manure tale. What would the outcome have been had such a tax been implemented 300 years ago? Money would have drained from the economy, thereby lowering people’s standard of living while simultaneously retarding capital growth. This lack of capital would have had a deleterious effect on future generations’ economic output. Just as people in the year 1700 never could have conceived of the technological marvels that would make their hypothetical fear moot, so should we not be so conceited as to believe future humans will not make similar discoveries that will render our fears of climate catastrophe about as realistic as drowning in a sea of manure.

Time to Raise the Hood

A common business practice is to require that all employees take some vacation time each year. It not only improves morale but also ensures that potential problems attributable to that employee will be brought to light in their absence (as co-workers unwittingly uncover latent issues). In other words, although it can be disruptive to the status quo, sometimes it is a good idea to raise the hood every now and again and make sure all is working as it should. This is nowhere more true than in government. This country has been handing out billions of dollars in foreign aid for decades. For the most part this funding is on autopilot, it’s simply rubber stamped each year as the routine process of government functioning. But there’s been a recent snag in the status quo. Some in Congress are (finally) questioning the wisdom of sending billions of dollars overseas when we face such a tremendous deficit at home. That sentiment, coupled with the recent military coup in Egypt, has brought to the forefront the legitimacy of the US continuing to send foreign aid to a country in political turmoil. Discontinuing aid should be a no-brainer even for foreign aid proponents, just turn off the money spigot until we know who is actually in charge. But alas, it is apparently not so simple after all for some senators. It turns out much of this aid is funneled right back into the home districts of many in Congress. This long obscured truth is THE dirty little secret of foreign aid.

The public has been, as they say, “sold a bill of goods” when it comes to foreign aid. The propagandized message is that such “aid” is going to help poor people overseas. In fact, the money is funneled to rich people (the well connected in foreign governments) in poor countries and to even richer people in the US. How does this money end up back here? Almost all foreign aid comes with either implicit or explicit “strings” attached that stipulate that aid must be “directed” toward the purchase of goods or services from US based corporations. And which corporations might those be? Predominantly those that are part of the “military industrial complex” – the very same crony capitalist war machines that President Eisenhower presciently warned us about over 50 years ago.

So what’s the problem with foreign aid? Is it that it spreads state of the art weaponry across the globe (weaponry that could easily fall into the hands of terrorists) resulting in a planet armed to the teeth poised at the brink of war? Is it that we are borrowing money from China to subsidize foreign governments in an attempt to bribe them into submission? Is it that food aid actually harms more than it helps by destroying farming as an occupation in countries receiving aid (who could compete with free food)? No, for those in Congress none of these deleterious effects are a problem. Why? Because “foreign aid” gets many re-elected, particularly when such aid is directed at companies in their home district (e.g. Sen. Carl Levin (D-Michigan), is rather adamant that aid not be cut off to Egypt, and by bizarre coincidence it just so happens that a General Dynamics plant is located in Michigan.

At its core, foreign aid is no different than other government “stimulus” programs – it simply takes money from those not in favor with the political elite (that is, us) and hands it over to those who are in favor with the political elite (the true 1%). But there is one key cost incurred by foreign stimulus not typically seen in domestic stimulus: death and suffering. These are a direct result of the weapons produced and the tyrannical regimes supported. The political unrest in Egypt has finally forced us to raise the hood and take a closer look at the wisdom of foreign aid. To those in Congress who got caught with their hand in the foreign aid cookie jar, take note: your days are numbered.

Think Different, Think Free

It is a peculiar characteristic of US anti-trust law (Sherman Anti-Trust Act) that competition itself can be characterized as “anti-competitive”. The recent e-book price-fixing case against Apple (in which Apple was ruled against on July 10) is a prime example. The case is rather “weedy” so I will provide a pared down synopsis, however for those interested in the details please see this article for an excellent summary. Prior to Apple’s entry into the e-book market in 2010, Amazon was in a monopsony position in the wholesale e-book market and a monopoly position in the retail e-book market. No, I did not misspell “monopoly” – monopsony is a situation where a market has just one buyer (as opposed to just one seller with monopolies). In this case Amazon was the only (over 90% market share) buyer of e-books from the “Big 6” publishing houses. As such it was in a position where it could dictate the terms of sale to the publishers. Amazon sold every e-book for $9.99 and often lost money on these sales. The publishing houses were not happy with this situation as they felt Amazon’s low prices tended to devalue hardcopy books in the consumer’s mind and thereby potentially weaken their sales position further in retail book outlets (as people balked at paying high prices for print copies when e-books could be had for so much less).

In comes Apple to save the day. It’s a win-win situation for Apple and the publishing houses. Apple wants to chip away at Amazon’s dominance in the e-book market and the publishers want to have an alternate buyer for their e-book wares. So the upshot of all this? E-book prices went up, Amazon made more money (due to not losing money anymore), the publishers made less money (due to decreased sales resulting from higher prices) and Apple got a foothold into the e-book market. Unfortunately the judge ruled against Apple, citing that “depriv[ing] a monopolist of some of its market power is [not] pro-competitive” merely because some e-book prices rose after the fact. In other words, for competition to be permissible in this country it must fall into a narrow and arbitrarily subjective standard of behavior. If you enter a market and cause prices to rise too much then you are a monopolist. If you enter a market and causes prices to fall too much then you are a ‘predator’. And finally, if you enter a market and charge the same price as everyone else, then you are a cartelist.

The irony is that government should be the one prosecuting supposed anti-competitive behavior when it is government itself that is the sole source of monopolies and anti-competitive behavior. For example, this country still engages in New Deal era agricultural price controls intended to prop up prices by limiting production. Tariffs, subsidies, grants, regulations, certificates of need, insurance commissions, utility boards, public schools – all are either outright government granted monopolies or are examples of policies that have the direct effect of limiting market entrance or production and thus raising prices and stifling competition.

All “anti-trust” legislation should be abolished. Such legislation is akin to anti-witch legislation; a pointless attempt to prevent something that cannot nor did exist prior to enactment in 1890, myths of “Robber Baron” monopolies notwithstanding. Trusts, cartels, and monopolies – such things cannot exist in a free market for any appreciable length of time as long as competition is not short-circuited by arbitrary government edicts. To the extent a monopoly could exist in a free market it would be a testament to the degree to which such an entity is satisfying the preferences and demands of its consumers.

The government has spent millions of dollars prosecuting Apple over its behavior in a market for a luxury good that did not even exist 5 years ago. Perhaps it never occurred to anyone that if e-book prices were too high then people would simply stop buying them? Ultimately it is the consumer, exercising control over the purse, that dictates what will and will not succeed in the market. Government “anti-trust” witch hunts do nothing but harm the consumer by scaring off potential competitors who fear censure for not competing in precisely the manner prescribed by our wise overlords.

Crying Wolf

The acquittal this week of George Zimmerman in the death of Trayvon Martin has been divisive to say the least. It has re-opened old wounds with respect to race and justice in this country. Although these wounds had long since scared over, the self-flagellation of the professional racism-baiters has managed to incite conflict where none existed. Like the boy who cried wolf, warnings against racism are weakened when applied to every event involving hetero-race conflict. Trayvon’s death was a tragedy, but not because he was black and Zimmerman was not. It was tragic because the death of anyone is so, and that label is particularly apt when applied to a child (no matter the age). The self-appointed “leaders” of the black community would have us believe his death was entirely the result of “white” racism on the part of Zimmerman and that it is entirely impossible that Zimmerman was simply an overly paranoid idiot. As an aside it is odd that Zimmerman is labeled a “white Hispanic” because he has one parent from each “race” while Obama is not labeled as a “white black” even though his parentage is similarly divergent – apparently such labels are selectively applied when it is convenient toward advancing one’s biased narrative.

The narrative in this case is that if Person A suggests that non-white Person B acts or appears suspicious then clearly Person A must be racist. No further evidence is needed. For some reason it has been overlooked that not only was Trayvon black, he was also young, and he was a male. If you can “profile” someone for one characteristic, then why would that exclude them being profiled for all other characteristics? Oh, that’s right, if he were profiled as a “young male” then that would have not have been sufficient to turn this case into a media circus. Isn’t it just as possible Zimmerman saw a suspicious male teenager, who, to quote George Carlin “just happened to be black”? There is nothing else in Zimmerman’s background (beyond blogosphere innuendo) to suggest he holds racist views. Had there been you can be sure such information would have come to light at trial. Such information was conspicuous in its absence. My point is not to exonerate Zimmerman, but merely to demonstrate that the deliberate injection of a racial component to this tragedy does a grave injustice to Trayvon’s memory. He will not be remembered for who he was, but rather merely as a hollow symbol. A symbol that the “leaders” in the black community would like to co-opt for their own purposes. They have capitalized on Trayvon’s death solely to bolster their own reputations and bona fides as “leaders”. Perhaps I’m too harsh. Perhaps their actions betray a positive light. If the only racial issues are ones they must manufacture then perhaps we are finally hearing the death rattle of racism in this country.

So, if this case is not about race, what was it about? I was not there, nor were any of you dear readers, so what I will discuss is what we do know: Zimmerman had a gun and that gun was used to kill Trayvon. Although I count myself among those that believe the government has no right to restrict gun ownership, I think it would be intellectually dishonest to ignore the fact that although increasing gun ownership will tend to lower rates of crime, there will be a concomitant increase in accidental harm. This is one of those situations. How can we prevent similar accidents of escalation stupidity? I do not know. Nobody knows. The problem is that in theory we would like to find the exact perfect equilibrium point of gun ownership where both crime and accidents are minimized, but there is no non-arbitrary method by which one can divine that point. Laws will never solve this. Only incentives and technology will move us in the right direction. Those opposed to gun ownership should devote their resources not toward futile “whack-o-mole” efforts toward 20-20 hindsight prevention but rather toward developing the ideal non-lethal defensive weapon (Star Trek phasers anyone?). All things being equal, if one can repel an attack by lethal or non-lethal methods the vast majority of people would opt to do so non-lethally. If such an alternative were available on the market, then that alternative would come to dominate, making such senseless gun deaths like Trayvon’s a distant memory. We can all agree on that goal.

The libertarian war over the Civil War

My comments on this recent Washington Post article concerning the kerfuffle over Jack Hunter.

Full article is here.

This piece perpetuates the myth that there is some embarrassing subset of libertarians, so called “neo-confederates” that embrace slavery as being “ok” and that still pine for a CSA. This is absolutely total hogwash. There are no “neo-confederates” (whatever that neologism is supposed to mean) – nobody who calls themselves a libertarian is pro-slavery, pro-racism or pro-CSA. Nobody. The term “neo-confederate” is just a made up term that attempts to smear libertarianism by conjuring guilt-by-association imagery (“my, my that word has “confederate” in it – so those people must think just as the confederates did”). For example the author states “There are contrarians who criticize Lincoln’s use of federal power and argue that the South had a right to secede — but have no love for slavery or the Confederacy.” – so – this then implies that the “contrarians” exclusively hold this position and thus obviously the “neo-confderates” do not hold this position and therefore they must have a love for slavery. In point of fact this is the exact same position held by those commonly referred to as “neo-confederates”

Concluding that those libertarians who denounce Lincoln and his methods of waging war must somehow be the intellectual hiers of the confederacy and therefore must support all the things the confederacy stood for is as absurd as concluding that libertarians approve of prostitution and drug use because they call for repeal of laws that criminalize such behavior. Yes, I realize people do conclude that, but it is an intellectually bankrupt argument. 
To see the fallacy here, turn it around, let’s suppose the north had wanted to secede because they no longer wanted to be part of a union that included slavery – and then suppose the south had said “no” you may not leave, waged war, and kept the union intact. In both cases the putative goal of the war – “save the union” would have been achieved. So to say one war is good and one war is bad implies the validity of the civil war was not based on “preservation of the union” but rather on the legitimacy of slavery. So if that is the case, then it is quite odd indeed that Lincoln did not “free” the slaves until after 2 years into the war – and even then only in the seceded states – ironically he did not free any slaves in union states that had not seceded. Can you say hypocrite? Had the war truly been about “freedom” Lincoln would have freed all slaves everywhere in all American territories first and then that would have precipitated war. Slavery was nothing more than a tactical weapon in the arsenal of the north. Slavery was the industrial strength of the south and freeing the slaves was an attempt to undermine that strength, nothing more. Slavery may have been the political irritant that engendered sectional tensions and ultimately secession, however, make no mistake, the war was not about abolishing slavery, it was about preserving the union, i.e. not permitting an independent political body to break away, which is the most common cause of war throughout history.
 
So you’ll have to excuse me if I find it difficult to take seriously the cartoonish image of Lincoln we are taught in school as some sort of Don Quixote-esque crusader for truth, justice and freedom.

Invalid Means yield illegitimate Ends

Damned if you do and damned if you don’t. This sentiment pretty much sums up the state of affairs in Georgia with respect to DUI evidence collection. If a driver is pulled over in Georgia and is suspected of being inebriated, then the law requires that the officer ask if they will submit to a BAC (blood alcohol content) test. The law also permits the driver to refuse, however under Georgia’s “implied consent” laws (one’s tacit agreement with the state in order to acquire a driver’s license) any driver who refuses will have their driving license revoked for not less than 1 year. However, just as in an M. Night Shyamalan movie, there is a twist. Since 2006, if you refuse the test, the police can then get a search warrant and forcibly extract your blood. This is done in rather Guantanamo-esque style  in Gwinnet county (see video) where at least five burly officers forcibly hold the suspect down while being tightly strapped to a gurney. This dehumanizing treatment is visited upon both the resistant and compliant alike.

Now don’t get me wrong, those that drive under the influence of anything (alcohol, drugs, texting, etc) are among the vilest sort of individuals. They put their own selfish pursuits above the safety of others as they recklessly navigate our roadways. Removing such drivers from the roads should be one of the paramount goals of the police. I see no issue with sobriety stops per se. Were the roads not monopolistically owned by the government it would be equally incumbent upon private road owners to purge their roadways of such drivers (dangerous roads are bad for business). So while I object to the government owning roads (as there is no justification for state sanctioned monopolies in any industry) I also recognize the reality today is that they do own them. Therefore, as owners, they have an obligation to keep them safe. Sobriety checkpoints are a valid tool to achieve that goal. The only problem with such checkpoints from a civil liberties standpoint is when they are used as a pretext to engage in warrantless searches and seizures that have nothing whatsoever to do with driving safety.

If the goal is to remove impaired drivers from the road before they can cause harm, then this is clearly achieved via license loss. Forcing a BAC test is superfluous if license loss has already occurred. In fact, making the penalty for refusal equal to the penalty for a positive test would more efficiently achieve the desired goal. It would both provide an even greater incentive to not drive drunk while removing from the roadways those that do so anyways. If an accident has occurred and a presumably drunk driver kills someone, then that driver is not going to go free even if they refuse a BAC test; they will be prosecuted based on their actions. Absent any mitigating circumstances (like proof of being drug/alcohol free) they will incur the maximum penalty. A refusal harms no one but the accused.

The 5th amendment guarantees the right of each person not to “be compelled in any criminal case to be a witness against himself.” Obtaining a warrant to invade someone’s body makes a mockery of the intent of this amendment.  If this is not compelling someone, then I don’t know what is. If some day there is technology that can read memories shall the police be permitted to obtain warrants against all suspects and witnesses and then forcibly extract whatever information they deem might be relevant? The truth is important. Justice is important. But results are what matter. The goal should be to achieve the desired result without violating human rights and dignity. So yes, the ends do matter, but the means of achieving those ends matter even more. America, Georgia, is selling its soul for the illusion of justice and safety.

The times they are a changin’

There is nothing quite like a Supreme Court decision to add fuel to the fire of politicized hyperbole. One example: the recent US Supreme Court decision regarding the Voting Rights Act set aside just a single section (Section 4) as no longer applicable as written – but the “sky is falling” remarks of those opposing the decision would have us believe the entire bill was voided AND that from now on the KKK would be in charge of voter registration. “Return to Jim Crow!” – “Rampant disenfranchisement!” Give me a break. All the court did was say that perhaps after 50 YEARS, just perhaps, there have been some changes in the hearts and minds of the citizenry in those states it was originally targeted at. To argue, as opponents are, that racism is just as prevalent today as it was 50 years ago is to willfully ignore not only all the gains minorities have made in the last 50 years but likewise the fact that we’ve added two new generations of non-racists since that time. Why do you think “gay rights” are more widely accepted today? Changing attitudes? Hardly. It’s just demographics. The prejudices of the old die with them. Is racism wiped out? No, of course not. But to suggest that there has been ZERO improvement is an equally absurd assertion.

If one truly believes in the anti-discriminatory role of the VRA then one should have been concerned that Section 4 focused solely on historical regions of discrimination while turning a blind eye elsewhere. Not only does it use stale data, it uses stale methods. To the extent racism does exist, it is no longer overt, it has grown subtle.  The methods used to root it out must change so that it can be identified. The rescission of Section 4 now provides Congress the opportunity to establish new criteria better suited to rooting out actual voter discrimination rather than imagined discrimination. If the disease is evolving then one’s treatment method must evolve with it.

“Oh but you’re wrong, as soon as this passed Texas moved to reintroduce a voter ID law!” I’m sorry; I have never understood this knee-jerk response that Voter ID = Discrimination. How is it that merely requesting proof that one actually has the right to vote can be construed as nothing other than a blatant attempt at discrimination? Is it not possible, just perhaps, that a border state, such as Texas, which possesses a large portion of non-citizen immigrants, would want to ensure that non-citizen immigrants are not voting (since in most cases all you need is a pulse to get registered to vote)? The most commonly requested ID is a driver’s license, but for some reason this is decried as creating an unreasonable hurdle for most minorities. Really, so the vast majority of minorities do not drive? To suggest that voter ID laws disproportionately harm minorities is to imply that driver’s license regulations disproportionately bar minorities from driving. If that is the case then it seems there should be more outrage over this horrible discrimination keeping our roadways nearly minority free.

Do voter ID laws create an impediment to voting? Sure they do… in the exact same way that the fact that the polling place is not in my living room creates an impediment to my voting. I have to expend effort in getting in my car and driving to the polling place. But it is minimal effort. In the same way, being requested to show some sort of ID before one may vote is not an insurmountable obstacle. It might take some minimal effort but it is doable. It’s not like you have to prove you can run a marathon before you can vote. If you can’t pass the tiny hurdle of obtaining the requested ID then apparently voting is just not all that important to you. So, please stop with the crocodile tears about how “voter ID” disenfranchises voters. If you are truly concerned with voter discrimination then use this opportunity the Supreme Court has handed the country and encourage Congress to fix Section 4 of the VRA so that it is relevant to the world we live in today, not the one we lived in 50 years ago.

Ideas are not Property, on dismantling IP

The US Supreme Court ruled unanimously this past week that human genes may not be patented. That was a good decision. However those in support of this ruling are by and large hypocrites. They vociferously decried the negative consequences of upholding such patents (limiting research, higher costs, limited choice) but then fail to acknowledge these same deleterious consequences occur for ALL patents. It’s not like these bad things don’t occur for “legitimate” patents but do occur for “illegitimate” ones. Patents are the problem, not their “legitimacy.”

So what are patents (and copyright) (aka Intellectual Property or IP)? Quite simply they are a state granted monopoly for a fixed period of time during which the presumed creator has an exclusive right to do with their creations as they see fit. The hope is that in providing, as a reward, a period of monopolous profits such entities will be incentivized to expend resources in creation and thereby benefit mankind. This unquestioningly presumes that risk should be subsidized by the state. Risk the right way and the state will support you, risk the wrong way and you’re out in the cold. But that’s ok, because IP helps the “little guy” right? Wrong. The IP holder must enforce their IP. This necessitates enormous financial resources to legally pursue IP violations. Only the “big boys” can afford this and thus it becomes clear for whom the IP system was created. The IP system is nothing more than a symptom of state and business cronyism. One of the hallmarks of cronyism is the arbitrariness of the rules and regulations supporting it and IP is nothing if not arbitrary. IP terms have changed over the years, often in concert with the needs of the large corporations whose IP is threatened by expiration.

Although its cronyist roots are reason enough to withdraw support from the IP system, we find that upon closer inspection the whole raison d’être of IP is actually quite absurd. IP rests on the idea that mere ideas can be considered property. For a proper claim (title) to be made, the material in question must be “scarce.” “Scarcity” means there is some marginal cost of production, e.g. clothing is commonly available but it is scarce because it does not simply pop into existence; obtaining it requires some non-trivial expenditure of resources. Where there is scarcity there exists the potential for rivalry or conflict over some particular good. There are two ways to prevent such conflict: 1) invent a way to make the good non-scarce or (2) establish property rights in such objects.  Property rights are the civilized, non-violent alternative to killing each other in order to determine ownership/possession. But when it comes to ideas or non-scarce goods there can be no conflict because both parties can simultaneously possess the thing in question. Therefore without conflict there is no reason to have property rights. Such rights are entirely absurd – you might as well attempt to establish property rights in looking at the moon or the right to whistle. The only possible conflict is over who can legitimately say they thought or did something “first”. Fine, fight over that if you wish. But that is not a property right; just because you had the name “Greg” before me doesn’t preclude me from also using that name.

The idea of scrapping the entire IP system will raise the ire of those who have fallen sway to the false choice paradigm we are propagandized with our whole lives, namely that without such “protections” people will simply stop being creative and all new literature, music and inventions would dry up. Seriously. Now doesn’t that sound pretty stupid when you say it out loud. Do you really think there are NO other possible ways creators might get remunerated for their work? Do you truly believe that patents and copyright are the ONLY possible way this could work? These types of objections are about as imaginative as the “but who will pick the cotton?” rejoinders thrown at those that desired to end slavery. In other words, one’s lack of imagination does not invalidate my argument. End the shackles of IP and let loose the entirety of human creativity. (For a more in depth discussion please see the godfather of anti-IP, Stephen Kinsella’s “Against Intellectual Property” which can be downloaded, for free.

The following is an adjunct to the discussion above . The question “But how will this work?” is not a refutation of the principle that IP as a concept is invalid… however…it can be an interesting intellectual exercise to start from a priori free market principals and imagine how people might conduct themselves in order to accomplish the same goals absent a coercive state influence. I will go through some of the more common objections to dismantling IP.
The most common objection to ending IP is that businesses simply won’t innovate anymore because other businesses (the parasites) will just copy everything they do which in effect results in the innovating business subsidizing the parasitic businesses who have no R&D budget. There is just one problem with this. It only looks at one side of the equation (however in this case it reverses the usual paradigm of the “seen benefit and unseen harm” described by Bastiat into one of the “seen harm and the unseen benefit”).
These assertions always ignore the benefits to both society AND the business from whom the idea was stolen. Obviously society will benefit with lower prices and more choice (just as they do when drugs go off patent and can be made as generics). However all businesses will benefit because now it is “legal” for everyone to “steal” ideas from everyone else and improve upon them. So for every ten businesses “stealing” from Business A, Business A can in turn “steal” the ideas of ten other businesses themselves – often the same one that “stole” their idea to begin with. The playing field is leveled if everyone can participate. Rather than restricting R&D to just one company that happens to hold a patent, the creative R&D resources of thousands of companies can bang away at some idea, sowing improvements at each iteration, each company striving to outdo the others in either price, efficacy or quality.
As an aside here I would like to mention this is not an endorsement of industrial espionage. By that I mean businesses can have their employees sign non-disclosure agreements (contracts) and if such agreements are violated they have full legal grounds to pursue not only those employees but most likely the business they disclosed it to (tainted fruit as it were). Now some might object and say “well technically the business it is revealed to can’t be sued because they are not party to the contract”. True, however in a truly libertarian system (no employment law tying the hands of the employer or employee) any higher level employment situation (i.e. knowledge workers with the potential to bring innovation to the table) would be established under an employment contract and in such contracts only a fool of an employee would sign such a contract that did not stipulate that the employer will indemnify that employee in any lawsuit related to their actions in the course of employment (which would of course cover conveying ideas/processes learned at a former employer that could benefit the new employer). In that situation then the employer would be a fool to not make entirely sure all information they get from the employee is not covered by any sort of non-disclosure agreement since if it is, and they don’t check, the employer opens themselves up to an enormous amount of liability (indirectly via their employment agreement). This system would of course not stop such transfer of proprietary knowledge, but it would greatly mitigate the likelihood and even today’s system does not stop all of it either so to say that people might find a way around it and so therefore it can’t work is to say what we have today can’t work because people today find ways around our current system.
Now, back to trade secrets: If your process is truly novel and inventive then it will not be readily copied as no one will be able to figure it out (because without patents you would not need to disclose to the world how it works). If it is a secret, then keep it secret. However, if you are the inventor of something fairly obvious (i.e. one-click checkout, round edges on a phone) then it will be trivial for others to copy you. But because the invention was trivial you would not have had much invested it in anyway. Therefore in a free system those that invent truly novel things that are difficult to reverse engineer will naturally reap the most reward before competitors finally figure it out (if ever). “First to market” is still a powerful incentive to innovate. And even after others figure out an invention there is still much value in the reputation of being the seller of the “original” or “authentic” version of something.
Next common objection, “Ok Mr. Smarty pants, without IP you’d have even more firms like the Chinese just making cheap knock offs and putting the innovators out of business and since they aren’t innovating there is nothing to copy from in this iterative process you describe”. Think about what those “knock off” companies are doing. They are making stuff efficiently and inexpensively. They are making it less expensively than the makers of the “original” products. Now to the extent the knock offs are sub par in quality and function, there will be little market penetration beyond those who never would have bought the authentic product to begin with because of price – so no real loss there. But to the extent there are such manufacturers that actually are basically making “generics” of whatever product it is, that means they are of nearly equal quality and efficacy but for a lot less. In other words between the two such companies (the R&D company making it for a lot of money vs the Manufacturing company making it for little money) there is a stark difference in comparative advantage. One is really good at making stuff and one is really good at inventing stuff. That means each will tend to specialize and become better and better at what they do. Without a patent system we would tend to see more company specialization. For example today companies are more vertically integrated in that they invent things and then manufacture them and then waste time and resources going after those that copy them. In a system without patents the “inventor” companies would specialize in R&D and inventing things and then they would turn around and sell the information on how to make some hot new thing to the manufacturing companies. Basically it is contract manufacturing – which already exists today. The resources they formally spent fighting them with are now used to make improvements. The manufacturing firms are weak in R&D but great at manufacturing. It is a natural symbiosis where the strengths and weakness of each partner complement each other. So as companies specialize in this way we get better R&D and we get better manufacturing. It doesn’t mean that companies can’t still invent things and then make them and sell them, it just means that market pressures will tend to minimize the number of companies operating this way. Only companies whose products require enormous capital investment (e.g. auto manufacturing) would likely continue to exist in this arrangement or within markets that are too small to justify specialized manufacturing needs. Just because the structure of businesses today may not work under a no patent system does not mean there is not a different way to structure business that is just as good if not better in terms of net benefits for society in terms of total goods produced and the function of such goods. For example, perhaps without IP the variety and innovation in smart phone technology would be much more advanced than what we have today and there would be greater variety and lower prices, all because all parties could copy off each other, incorporating each new innovation.
And since I’m throwing out ideas about how things might work, let us now turn to how artists (musicians, authors, print, cinema, etc) could ensure remuneration under a no copyright system. One approach used today is the license, which I believe would work in many situations although it does not protect against copying from a non-license holder (e.g. occurring from loss or theft from a license holder) or violation of the license that can’t be tracked to the originator. But for most situations it would work.
Another approach is the pricing approach, i.e. make the product so cheap that the marginal cost of actually pirating is higher than just buying it (e.g. if songs were a nickel is it really worth your time to scour the web for some hack site trying to track down that song…is it really worth it for those people to maintain such a site? It does actually cost money to maintain such sites (domain fees, server hosting fees, etc). Maybe you spend just 5 minutes doing so but even at minimum wage you just wasted 60¢ of you’re your life away when with one click in 2 seconds you could have the song you want for a nickel.
In general, if people are pirating things that means they cost too much (the cost to pirate is lower than the cost of just buying) and if people are scalping things then they cost too little (i.e. you’re basically giving it away). The key is to find that sweet spot of price where the costs of pirating are higher than what it is sold for, but the sell price is not so low that someone can actually realize an arbitrage advantage by buying it at that level and reselling it at a higher level. For unknown artists this approach is already used today. Many simply give away their fares for free or for next to nothing. They simply want to become known. Once they are known and in demand, then they can slowly raise their price.
Another approach is one I call the “trickle down” approach. It is somewhat similar to the system we have of publishing houses or record labels although it is certainly not restricted to such entities (i.e. an artist could sell to whomever they wish at the initial high price). Here’s how it would work: The artist would be paid upfront a very high sum that would cover the total of what they want (the more well known they are, the more they can demand up front). So copying of works really doesn’t hurt them insofar as they have already received everything they expected to get for the work. But the basic idea is incentive driven copy protection. So for example lets say some artist comes out with some great new work and in order to ensure they get as much as they need based on the effort that went into it they would sell each copy of the work for say $200,000. So let’s say only 5 people want it at that price – the artist made a million bucks right off the bat, not over decades of trickling in royalties. Now each of those buyers at $200,000 has the right to resell it. They’ve spent $200,000 so they sure as heck are not going to just give it away, they have a great incentive to get back what they paid and possibly more. They are all competing against each other as well so the price they charge will tend to start out high but drop as they compete more and more in trying to squeeze out every bit of value from their investment. They might sell 200 copies at $1,000 each. If you spent $1000 on a book or CD would you just “share” it with your friends? No. But you might sell it to them or others at a level where you hope to perhaps break even or make a little.
At some point the price reaches a level where the marginal costs become low enough that people will start to trade or give away what they bought. So this system is not much different than from what we have with any hot new product that comes to market. The rich will pay exorbitant amounts to have bragging rights to be the first to have something and as more of them buy it, costs come down and then more and more can afford it until eventually all can afford it. Progressives should love this as the “rich” pay disproportionately more for something based on their income level, but they do so willingly. The “poor” end up getting things for next to nothing or for free. The only real penalty being that the “poor” must wait longer, but is it really a tragedy if those of limited means must wait a few months to enjoy the latest hot album or book or movie when compared to the rich that have access to it immediately? One objection might be this would not work for new or unknown artists. True, and I did not say this is the way it must work for everyone. This is just one idea. And that is the point, there could be dozens of different creative and inventive approach’s people will take up. Many artists today sell direct to their consumers and that works well for the small or unknown artists as they tend to have a loyal following and there is little market to pirate the works of unknowns.
So to ask “how would this work?” is a bit silly – obviously people would figure out ways to make it work. I’ve presented only a handful here. In order to answer this question the onus is shifted from the questioner (who can’t justify his position) and onto the questioned party to come up with the outcome of what will take the creative efforts of thousands or millions to come up with. The questioner presumes that if the answer provided might have even one tiny hole poked in it as to how there might be a problem with this approach or that, then the whole idea must be scrapped. Based on that reasoning we should dismantle the IP system as it has dozens of problems. It certainly hasn’t stopped “piracy” has it? The only fixes offered up amount to nothing more than greater and greater intrusions of state control in our lives (PIPA, SOPA, etc). Must we give up all semblances of privacy and private property in order that the state be enabled to guarantee IP “rights”?