“Giving back”

Carnegie Library at Syracuse University

This post from Don Boudreaux and this opinion piece from Daniel Henninger at the Wall Street Journal are about  “giving back” to the community.

Boudreaux takes exception to the use of the phrase after receiving a promo piece from Ritz-Carlton touting their “giving back” to the community activities.

Please, though, unless your profits are the product of dishonest deals or theft, please drop the rhetoric of “giving back.”  This sort of talk implies that you possess something that isn’t rightfully yours.

Henninger defends against the idea that the government must act as the intermediary of “giving back” by pointing out that voluntary philanthropy seems to be working well:

Since the Pilgrims, no nation has seen more wealth flow back from those who earned it into the welfare of the nation they inhabit.

Andrew Carnegie alone built more than 1,600 libraries in the U.S. Today, according to Internal Revenue Service data, there are some 110,000 grant-making private foundations in the U.S. Beyond the foundations bearing the names of famously undertaxed plutocrats such as Warren Buffet and Bill Gates there are another hundred thousand or so, often run by modestly wealthy families whose foundations support a vast array of needs—scholarships, schools, hospitals, cultural institutions and even causes across the political spectrum, no doubt including windmills.

Great points.  But I think there’s a more important point that we overlook when thinking about “giving back”.

Before business owners donate a dime to charity they have already “given back” a great deal just by the mere existence of their business.

First, they’ve given back in the form of the value they create for customers who voluntarily pay for the business’s product or service.  It’s this value that differentiates us from our cave dwelling ancestors, gives us the standard of living we enjoy, enables government to exist and generates the wealth that can be donated to charity.  And that is not well understood by most people.

Many people seem to view businesses as criminal-like organizations designed to exploit customers, even though most of these same people take delight and comfort in many of the products these enterprises make available to them.  This has to be some sort of paradox or dissonance.

Second, businesses have “given back” in the form of the gainful employment they’ve provided to the employees of the business.

Because of the value of the products and services and the jobs it provides, I contend that owning and operating a successful business often does more good for the community than a charity and is the source of what allows us to donate to charity.

Even wealthy folks don’t seem to grasp this.  Once they earn their wealth, they often create charitable foundations to “give back”.  I don’t begrudge them of their right to do this.  But, I wonder if they consider whether that’s the best use of their wealth.

Henninger cites Andrew Carnegie for building 1,600 libraries.  I love libraries and I think they add tremendous value to a community.

But, we ignore opportunity cost and we don’t ask what would we have if Carnegie didn’t build a library for us?  Would we have nothing?  I don’t think so.

Donations were not used to open thousands of Blockbuster video stores across the nation, which is essentially a for-fee library.  Donations were not needed for Netflix and RedBox to find better ways to lend videos.

We might have something very different without Carnegie’s libraries, but I believe we would have something.  Without Carnegie, libraries might look more like Blockbuster than the august buildings we have now (see picture).  But, is that really so bad? Do we like libraries because of their grand buildings or because they give us access to a wide range of books, periodicals and reference materials?  My local library is not in an extravagant building and that doesn’t stop me from using it.

Rather than over build beautiful free libraries, perhaps Carnegie could have paid for the less fortunate to use Blockbuster-like fee libraries that may have emerged.  He could have invested in for-fee libraries and built an organization that could be sustained by its users rather than third party funding sources.

Which brings us back to opportunity cost.  Was there a more effective way for Carnegie to use his money?

I would argue yes.  We’ll never know how much better off and how many more jobs we would have now had Carnegie decided to invest and grow more businesses instead of building libraries that might have been built anyway.

The same goes for many of the other wealthy who are “giving back”.  They may find creative and effective ways of donating that will produce great value.  But, all I ask is that they consider that, for some, the best thing they may be able to do is to reinvest and teach others how to carry on their efforts.

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I was the 301st person to watch this on Youtube

Here’s the second round of the Keynes vs. Hayek.  Enjoy.  I donated $50 to this project.

And here’s Round 1 in case you missed it.

Thanks to Russ Roberts and John Papola for their excellent efforts, great lyrics and high production value!  There’s a lot of depth to both videos in the lyrics, in the folks who are mentioned and the folks who pop up in the video.  These are excellent learning tools.

Gas prices

A common quandary that perplexes many folks is fluctuating gas prices.  Whenever gas prices increase quickly, I typically hear something like the following:

1. The cost of the current stock of gas in the underground tank at the gas station was bought at a lower price.
2. Rising gas prices do not change what the gas station paid for that current stock.
3. The gas station could keep the lower pump price and still have cleared a nice profit on that stock of gas.
4. Why do they raise the price?  It must be greed.

I have something for folks who have not got past this quandary to think about.

Let’s say you bought a rookie baseball card for pennies.  Years later, that rookie develops into a future hall-of-fame player and is loved by a large fan base.

Ten years from when you bought that rookie card, you discover you have it and look up the market value and find that it is now worth $50.

You tell a friend that you have the card.  He wants it.  What do you consider to be a fair price?

You tell your friend the price is $50 since that’s the market value.  He might argue that it only cost you a few cents and even with inflation, the cost of the card to you in today’s dollars is $1.   He might offer to pay you a storage fee of $0.10 per year, which brings the total offer price to $2. Does he have a fair argument?  Are you motivated by greed for not agreeing to sell it for $2 and wanting $50 instead?

While you are negotiating a price with your friend, the player tragically dies in a car accident and you find out the next day that demand for his memorabilia has increased substantially.  You see his rookie card is now selling for $400 on eBay.

Remember, you only paid a few cents for the card and you have not agreed to a final price yet.  Do you accept your friend’s offer of $2?  Do you stick with your original asking price of $50?  Do you raise the price to $400?

If you choose the second or third option, you are behaving identically to the gas station owner and you are not being motivated by greed, but rather by your opportunity cost.

By selling the card to your friend for $2 you would give up the opportunity to sell it for $400 and you are giving your friend that opportunity. You recognize that what you paid has little bearing on the situation.  You also recognize that you would be giving your friend $398.

Now, let’s revisit the gas station.   The gas station owner fills his underground tank for $10,000 and sets a price that will earn him $11,000 once all that gas is sold – a tidy $1,000 profit.

A fire takes out a major refinery and the price of gas on the commodity market jumps.  The gas that cost the the owner $10,000 last night is now going for $15,000 on the commodity market.

Let’s say there’s a local law that requires the gas station owner to not change his price until he sells out of this batch.  He can sell the gas to his customers and make $11,000 or he can call his supplier and have them come pump the gas out of his tank and sell it back to them for $15,000.  Which would you do?

Trump ignores the opportunity costs of his foreign trade policy

In today’s column, Thomas Sowell proposes that one reason Trump is leading the Republican polls is his:

…ability and the willingness to articulate his positions clearly, forcefully and in plain English. Too many Republicans talk like the actor of whom a critic once said, “he played the king like he was afraid that someone else was going to play the ace.”

Sowell has a good point, but I think there are other characteristics that make Trump appealing to folks.

One, he isn’t a politician, yet.  Two, he is market tested.  His TV show attracts viewers. Three, he is a successful businessman, which appeals to folks who want jobs.

But, folks need to get over their crush on Trump.  His foreign trade policies stink and his views on government are no better than any other politician.

First, foreign policy.  With his protectionist approach, he wants to restrain imports to create jobs.

He doesn’t understand that is like me deciding not to buy food from grocery stores (imports to my home) so I can create the job of growing my own food.  While it’s true that restraining grocery imports to my home will create work for me, most people will deduce that I am not better off with my protectionist policy.

Instead of working an hour each day to buy those grocery imports (and an overabundance of calories), I will now need to work 10 to 12 hours plus weekends to produce just enough calories to sustain myself.

Which means I also need to give up whatever it was I was doing before to earn the wealth I used to buy the imports.  What I gave up to produce my own food is my opportunity cost.  It’s a steep cost that nearly everyone would advise me not to incur, wouldn’t you agree?

Yet it’s that very same opportunity cost that Trump, and all the folks who like what he says, ignores.  While he points out the work that is created, he misses the opportunity cost of creating that work by restraining imports.

My example is not much different when you expand it from the boundaries of my property to the boundaries of our country.

The big difference is that whomever is made busy with protectionist policies are easy to find and make great emotional anecdotes in Trump’s stump speeches, while the enormous opportunity costs (like going from one hour a day to earn an abundance of calories to 10-12 hours + weekends to produce a sustenance level of calories) are spread across millions and cannot easily be imagined or pointed out in a stump speech.

The other problem I have with Trump is that, like most politicians, he seems weak on the Constitution and the role of government.   I think he suffers from the same affliction as Obama.  He believes the President’s role is to run the country rather than defend liberty.  Unfortunately, many of the voters in the country have that affliction as well and vote accordingly.

Why not?

I stumbled upon this nice article about Brian Wong, young CEO of Kiip, a company that is effectively integrating ads into mobile games.  He asks an interesting question.

Every single one of us wanted to be an astronaut when we were young. And every time I say this, everybody goes, “Yeah, yeah.” I’m like, “What happened?” Like why did everybody just start deciding to be an accountant or a banker.

How many of us would do this?

John Maloney is the president of Tumblr, and I’ve known him since September of 2009. I actually made a trip out to New York with some friends as a vacation, which was the first time I’ve ever been to New York. Instead of being on vacation, I decided to be an idiot and emailed like 40 people. Folks like Fred Wilson [a venture capitalist] and John Maloney responded. I ended up having coffees with both of them, and John brought me back to the Tumblr offices.

On keeping perspective and succeeding:

…a year ago I was broke and I had no job [after being laid off from Digg].

And then seven, eight months later, when I call my mom up and I’m like, “Hey mom! We just got money!” And she’s like, “Oh. Now that your company’s healthy, you need to be healthy. Eat some more vegetables.” Like my dad literally grew up in a village in the middle of China that had mud houses. And to him, what he has now — like he’s living in an apartment, he has a roof over his head, he has food to eat and he can eat whatever he wants, he can walk along the water, which is where [my parents] live in Vancouver — it’s like he taught me how to be appreciative of the little things. He taught me to remember where you’re from, and that as long as you have a beating heart and you’re not a lazy motherf*cker, you can make something out of yourself. That’s it.

The tax machine

In a recent column, Taxes and Politics, Thomas Sowell writes:

Someone once said that taxes are the price we pay for civilization. That may have been true when he said it, but today taxes are mostly the price we pay so that politicians can play Santa Claus and get reelected.

That’s not the worst of it. We may think of taxes as just a source of government revenue. But tax rates are a big political statement on the left, whether they bring in any revenue or not.

After all, “the rich” paid that larger sum of taxes only because their incomes had risen. Their paying a higher share of all taxes doesn’t matter to the “progressives,” who see high tax rates as a way to take a bigger bite out of the incomes of higher-income people, not just provide more revenue to the government.

Tax rates are meant to make an ideological statement and promote class-warfare politics, not just bring in revenue.

The whole column is worth a read.

“You can’t run the government like you run a business”

I often hear folks proclaim that you can’t run the government like you run a business.

Next time I hear that I intend to ask, what should you run the government like?  Is there a good analogy?

What special circumstances does government face that makes it unattractive to run it like a business?  What aspects of running a business is not befitting of the government?

Update:  Don’t miss W.E. Heasley’s follow-on to this on his blog, The Last Embassy.  It reminds me of something Walter Williams points out.  We don’t expect government to build fighter jets.  Government collects taxes and uses that to pay a private business to do that.  Why do we expect them to provide education?  Why not collect taxes and pay private enterprises to do that?

“Decimal points are people too”

Here’s a long post from Megan McArdle on health care and it’s well worth reading.

That’s not “market based reform”

In the Wall Street Journal, Randi Weingarten of the American Federation of Teachers, writes that Markets Aren’t the Education Solution.

Market-based reformers advocate using student test scores to evaluate and compensate teachers, increasing the number of charter schools, firing teachers in low-performing schools, and relying on corporate executives and business practices to run school districts.

She concludes:

But there is increasing evidence it doesn’t work.

Using test scores to evaluate and compensate teachers is not market-based reform.  It’s test-score accountability.

As a market-based reform supporter, I agree that it makes little sense to use test scores to judge teacher performance. Test scores should be used to judge student performance.

Also, relying on corporate executives and business practices to run school districts are not necessarily market-based reforms.  But, they may not be bad ideas.

The distinguishing characteristic of a market-based reform is that it gives more power to choose to the end users of the education system — the parents of school age children.  Any reform that does not clearly do that should not be referred to as market-based reform.

Majority “fallacy”

#1 Candy

One conversation from the dinner table this weekend sticks out.

The topic was a ranking of favorite candies in Readers Digest.  The #1 favorite candy was Reese’s Peanut Butter cups.  Some found this surprising.  They didn’t care for peanut butter cups and they didn’t think a majority of people they knew were fans of peanut butter cups either, so they couldn’t figure out how Reese’s PBC were #1.

I must have been tired.

I didn’t have the motivation to explain that in a market with many choices (many choices usually result in a free market),  a majority following is not necessary for a #1 ranking.   With so many candies to choose from only a small percentage following, sometimes in the single digits, is required to earn the top spot.

I’ve encountered this before, where folks confuse #1 and majority.   I call it the majority fallacy, even though it’s not exactly the same thing as the real majority fallacy (which says that just because the majority of people believe something, that doesn’t make it true).

In a business process I work with, a market survey often comes back to say that such-and-such is the #1 problem.   Based on this survey, the business designed ways to solve this problem and each year they were surprised to see how little effect their efforts had.

They never seemed to understand that even though the problem was #1, it was only cited by a relatively small percent of customers.  They thought they were going after a “majority” problem, when they were really attacking a minority problem.