Unintended Consequences Matter

I linked to Aaron McKenzie’s disentanglement of self-interest and greed here.

In this post, Arnold Kling recommends reading an essay called Capitalism and the Jewish Intellectuals.  In it, he writes, the authors believe intellectuals are hostile to capitalism because of this entanglement of self-interest and greed.  They interpret “incentives matter” as “greed drives capitalism.”

So, they recommend a way to get intellectuals over that hump.  Kling poses their recommendation in the form of a Q&A:

Q: How would you break down that hostility to capitalism?

A: By de-emphasizing “Incentives matter” and instead emphasizing that “unintended consequences matter.” That is the message of Adam Smith. It is the message of Hayek. Once we embed people in complex economic and political systems, selfish intentions can turn out well (because of competition), and good intentions can turn out badly (because of imperfect knowledge).

Though, based on Aaron’s advice, I would reword part of the answer to:

…self-interested intentions can turn out well (because of competition)

Democracy: Two Wolves and a Sheep Voting on What’s for Dinner

Responding to this post on Cafe Hayek, morganovich concisely sums up moral hazard:

why act responsibly if acting irresponsibly gets you free stuff?

He also concisely sums up the problem with government charity:

it’s always folks wanting to be generous with my money then voting themselves less skin in the game through purported defense of the “middle class” and its “unfair tax burden”.

10 years ago 24% of americans paid no net federal income tax.

that number is now 51%.

that’s a terrifying number as they are now the majority, so every time a new “compassion” issue comes up, a majority knows it’s not their money. it does not take a brilliant game theorist to see where that leads.

Well-said, even without proper capitalization.

A source of our stagnation?

Does anyone disagree with what Rep. Ryan has to say in this video (HT: W.E. Heasley)?

 

46 seconds in Ryan nails it:

Every dollar that companies spend lobbying for a better tax deal, is a dollar they are not spending making a better product.

The graphic at 1:17 is telling.  The U.S. ranks second behind Japan in combined federal, state and local corporate tax rate of 39.2%.  Japan has been stagnant since the late 80s.

Most folks don’t understand that they pay corporate taxes.  They see that as a tax on the wealthy.

But, most of us own corporations through our retirement and investment accounts.  Here’s a simple way to estimate the amount of corporate taxes that are paid on your behalf each year.

Find the total value of your retirement and investment accounts.  Multiply that by 2% and 4%.  That’ll give you a rough ballpark low and high range of the corporate taxes that you pay.

So, someone with $250,000 in investments will pay between $5,000 and $10,000 in corporate taxes. This is a tax that most investors never realize they pay.

Add that to the income and payroll taxes that you pay directly (and are paid on your behalf by your employer) and you’ll get a better sense for how much total tax paid you paid.

A lower corporate tax rate will help everybody.

I’m a skeptic about most politicians, but I like what Ryan says here.

Self interest is not greed, nor selfishness

Speaking of Aaron McKenzie, he did a great job in this post at untangling two concepts that many people get tangled up: Self-interest and greed.  These are not the same.

 

Restaurant Impossible

I recently discovered Restaurant Impossible on the Food Network and I enjoy watching it.

Its precursor, Dinner Impossible with chef Robert Irvine, was a failed experiment.  But, Food Network brought back Irvine for this show.  It’s modeled on another successful experiment (or proven formula): Ramsey’s Kitchen Nightmares, which is a restaurant version of Supernanny.  And, they also makeover the restaurant (Extreme Makeover: Home Edition — spinoff of Extreme Makeover).  Funny how innovation works (evolutionary).

On Restaurant Impossible, Irvine comes into a failing restaurant and turns it around in two days and a makeover budget of $10,000.

I’m impressed with Irvine’s knowledge of the restaurants, leadership and his business acumen.  I find it extremely educational to see what he hones in on — bad menus, bad inventory management, bad leadership, bad communication, unmotivated servers and lackluster kitchen management to name a few — and how he communicates that to the staff.

His communication style is a bit over the top, (reminiscent of Ramsey) but every now and then I think the real Irvine slips through.

I can’t quite figure out why Irvine yells at the designer and builder so much.  They aren’t responsible for the failing restaurant and I believe they are donating their efforts (albeit for some TV exposure) and they usually get the job done.  It’s consistent enough from show to show, that I think it’s just a dramatic bit the producers have built into the ‘formula’ to make it look like Irvine is running herd on everyone.

I’m amazed what the designers can do to a restaurant space with $10,000 (though, I believe lots of free labor goes into it).  I’ve always been impressed with good designers who can transform spaces with great success.

If you have any interest in business management, restaurants and design, you might enjoy it.

At the end, of the show it often says things like, “Four months after the turnaround the restaurant is thriving. ”

I’d love to know Irvine’s success rate.

Update: Jon notes in the comments that Dinner Impossible is not a failed experiment.

“…government does not create jobs”

I would prefer it if more politicians sounded like Herman Cain.  Here is a great paragraph that he wrote in today’s Wall Street Journal:

As a longtime leader in the business community, I know firsthand that government does not create jobs. It can only create the conditions in which businesses operate. These conditions can spur growth, or they can suppress it. The conditions imposed by the current administration have suppressed growth.

I’ve heard Cain derided by both left and right as a simple “pizza maker”.   Yet, I’ve heard very few politicians who understood this truth.

A refreshing look at jobs

I much prefer Phil’s take (HT: Arnold Kling) on jobs to Megan McArdle’s.

From Phil:

The same technology that is eliminating jobs also connects us and empowers us in ways unimaginable just a few years ago. Maybe what’s becoming obsolete is not jobs per se, but the idea that they are something that you simply find.

Increasingly, perhaps, a job is something that we each have to create. We can’t count on someone else to create one for us. That model is disappearing. We have to carve something out for ourselves, something that the machines won’t immediately grab.

That sounds difficult, maybe even a little dangerous. We’re all comfortable with the idea of “finding” a job. We search for them; we hunt them; we land them. All of these images assume the job already exists.

But to create something new…what does that even mean? Do we all become entrepreneurs? (I think the answer to that question is yes, although many of us will have to learn to be entrepreneurs within existing organizations.) Ultimately, it means we have to find something useful to do, something so useful that others are willing to pay for it.

In other words, as my grandparents use to say, go out make yourself useful to somebody.

All problems can be traced to the feedbacks

At least that’s my theory.

Problems in feedbacks in human behavior can also be called incentive distortions.  What looks to many people like a “free market” failure, is usually an incentive feedback loop that has been distorted by government intervention.

Sowell hits on this in his column today:

Obama says he wants “federal housing agencies” to “help more people refinance their mortgages.” What does that amount to in practice, except having the taxpayers be forced to bail out people who bought homes they could not afford?

No doubt that is good politics, but it is lousy economics. When people pay the price of their own mistakes, that is when there is the greatest pressure to correct those mistakes. But when taxpayers who had nothing to do with those mistakes are forced to pay the costs, that is when those and other mistakes can continue to flourish — and to mess up the economy.

People paying the price of their own mistakes is an important feedback loop in a free market. It encourages more prudent decision-making in the future.

Pushing the cost of those mistakes to taxpayers who had nothing to do with those mistakes, distorts that feedback and loop, and causes mistakes to “continue to flourish.”

Good news and bad news

Good news…

A super-earth has been found.  It’s about 3.6x bigger than earth and only 35 light years away.

Bad news…

No reason for real estate markets to react.  It’s 35 light years away (that’s small on a universal scale, but a very long way at the speeds we can travel).

More bad news…

If it supports intelligent life that has learned to communicate with radio, like we have, within the last 30 to 35 years, we’d probably be hearing something from them by now.  I think.