March 7, 2019


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Also in today’s newsletter, US, Taiwan and Japan to share real-time drone data and ESG support sinks
Board member Frank Elderson warns that destroying nature will ‘destroy the economy’
Joe Biden’s vague IPEF structure is no match for deals that offer tangible commercial gains
Pay data bucks trend in US and eurozone, and highlights inflation challenge facing Bank of England
Treasuries retreat amid concerns central banks may tighten further
Also in this newsletter: UK house prices fall, Telegraph titles set for sale and NYC sues Hyundai over car thefts
Silicon Valley VC group’s lucrative foray into rival nation ends as geopolitical tensions flare up
Currency undergoes biggest fall since late 2021 after finance minister’s pledge to restore ‘rational’ policies
Also in today’s newsletter, OECD says global growth set to slow and PGA and LIV Golf agree truce
Imports decline less than expected in optimistic signal as manufacturing growth continues to lag behind
Clare Lombardelli says measures must now target ‘those who really need it’
Trade minister says relations between Canberra and Beijing are thawing and EU is just one of its ‘dance partners’
Eurostat data out Thursday could show region contracted in the fourth quarter of 2022 and first three months of this year
A review says that is due mainly to abolishing quotas for highly skilled workers and for migrants’ success in getting jobs
A Target Band for Inflation?

David Beckworth directed me to this tweet:

If the Fed had a single mandate to target inflation, then there would be an argument for switching from a point target like 2% to a band such as 1.5% to 2.5%. But the Fed has a dual mandate, under which an inflation band would be completely pointless. The Fed already allows inflation to fluctuate above and below 2% as required to achieve the high employment side of their mandate.

Calling something “pointless” might be viewed as mild criticism, but I have other concerns. I fear that something like this might be the sole outcome of the next Fed review of its operating procedure, which is scheduled for 2025. In that case, an inflation band would shift from pointless to deplorable.

The past two years have clearly demonstrated that the Fed is off track, and it’s not hard to see where the problem lies. Fed policy since 2021 has been far too expansionary. The biggest problem seems to have been the Fed’s “flexible average inflation target,” which, despite its name, does not call for flexible average inflation targeting. The best outcome for the Fed upcoming policy review would be to actually adopt flexible average inflation targeting. Under this regime, the Fed would make up for inflation overshoots with lower than 2% inflation going forward, and inflation undershoots with above 2% inflation going forward. Over longer periods, the Fed would keep the average inflation rate close to 2%. Obviously, the Fed isn’t doing that today. The policy must be symmetrical.

As for the “flexible” part of the policy, the Fed would allow transitory deviations from 2% inflation due to supply shocks. The best way of implementing flexible average inflation targeting would be to set a target path for the level of NGDP at a rate of 2% plus the Fed’s estimate of long run RGDP growth. Those trend growth estimates might be updated every 5 or 10 years.  

I’d actually prefer a simple NGDP level target, but as long as Congress gives the Fed a mandate for stable prices, they cannot entirely ignore inflation. Fortunately, the two options are pretty similar in practice, as long run growth trends change very slowly over time.


A few years ago, when Obama was president, I read that new federal dishwasher standards were coming. So even though we didn’t really need a new dishwasher, ours was fairly old and so I bought a new one before the new standards would be implemented. My reason? The standards required future dishwashers to use less water, meaning that the dishes would take longer to clean and probably would be dirtier.

When Trump was president, he lightened the rules a little. But now President Biden’s Department of Energy has repealed the Trump liberalization and is imposing new standards that will require less water and less energy.

How much energy will the dishwasher rules save? Christian Britschgi of Reason writes:

The department [of energy] estimates that consumers will save $3 billion over the next 30 years, or $100 million per year, on their utility bills thanks to the rougher rules. That’s a pretty small per capita savings when spread across the 89 million dishwasher-owning households.

Yes, that is small. It amounts to $1.12 per year. And your dishes will likely take longer to wash and be dirtier.

So if you were thinking of replacing your dishwasher, now would be a good time.

A Tribute to Adam Smith


The great Adam Smith was born sometime in early June 1723. I’m not going to spend time figuring out which day because it doesn’t really matter.

To commemorate Smith’s birthday, Reason magazine asked various people to give their favorite quotes from Smith and comment on them. I like a lot of the choices. Among my favorites are the ones noted by Dan Hannan, Russ Roberts, and Don Boudreaux.

Here are four of my other favorites:

Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that. When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him. Man sometimes uses the same arts with his brethren, and when he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will. He has not time, however, to do this upon every occasion. In civilised society he stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

The folly of empire:

To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers. Such statesmen, and such statesmen only, are capable of fancying that they will find some advantage in employing the blood and treasure of their fellow-citizens to found and maintain such an empire. Say to a shopkeeper, Buy me a good estate, and I shall always buy my clothes at your shop, even though I should pay somewhat dearer than what I can have them for at other shops; and you will not find him very forward to embrace your proposal.

The second sentence in the quote above is one of my all-time favorite pithy Smith statements. It reads as if it could have been written last week.

Smith’s early cost/benefit analysis of empire:

The maintenance of this monopoly has hitherto been the principal, or more properly perhaps the sole end and purpose of the dominion which Great Britain assumes over her colonies. In the exclusive trade, it is supposed, consists the great advantage of provinces, which have never yet afforded either revenue or military force for the support of the civil government, or the defence of the mother country. The monopoly is the principal badge of their dependency, and it is the sole fruit which has hitherto been gathered from that dependency. Whatever expence Great Britain has hitherto laid out in maintaining this dependency has really been laid out in order to support this monopoly. The expence of the ordinary peace establishment of the colonies amounted, before the commencement of the present disturbances, to the pay of twenty regiments of foot; to the expence of the artillery, stores, and extraordinary provisions with which it was necessary to supply them; and to the expence of a very considerable naval force which was constantly kept up, in order to guard, from the smuggling vessels of other nations, the immense coast of North America, and that of our West Indian islands. The whole expence of this peace establishment was a charge upon the revenue of Great Britain, and was, at the same time, the smallest part of what the dominion of the colonies has cost the mother country. If we would know the amount of the whole, we must add to the annual expence of this peace establishment the interest of the sums which, in consequence of her considering her colonies as provinces subject to her dominion, Great Britain has upon different occasions laid out upon their defence. We must add to it, in particular, the whole expence of the late war, and a great part of that of the war which preceded it.

The late war was altogether a colony quarrel, and the whole expence of it, in whatever part of the world it may have been laid out, whether in Germany or the East Indies, ought justly to be stated to the account of the colonies. It amounted to more than ninety millions sterling, including not only the new debt which was contracted, but the two shillings in the pound additional land tax, and the sums which were every year borrowed from the sinking fund. The Spanish war, which began in 1739, was principally a colony quarrel. Its principal object was to prevent the search of the colony ships which carried on a contraband trade with the Spanish Main. This whole expence is, in reality, a bounty which has been given in order to support a monopoly. The pretended purpose of it was to encourage the manufactures, and to increase the commerce of Great Britain. But its real effect has been to raise the rate of mercantile profit, and to enable our merchants to turn into a branch of trade, of which the returns are more slow and distant than those of the greater part of other trades, a greater proportion of their capital than they otherwise would have done; two events which, if a bounty could have prevented, it might perhaps have been very well worth while to give such a bounty.

Under the present system of management, therefore, Great Britain derives nothing but loss from the dominion which she assumes over her colonies.

Smith’s prediction of the outcome of the revolutionary war and the future of the United States:

Unless this or some other method is fallen upon, and there seems to be none more obvious than this, of preserving the importance and of gratifying the ambition of the leading men of America, it is not very probable that they will ever voluntarily submit to us; and we ought to consider that the blood which must be shed in forcing them to do so is, every drop of it, blood either of those who are, or of those whom we wish to have for our fellow-citizens. They are very weak who flatter themselves that, in the state to which things have come, our colonies will be easily conquered by force alone. The persons who now govern the resolutions of what they call their continental congress, feel in themselves at this moment a degree of importance which, perhaps, the greatest subjects in Europe scarce feel. From shopkeepers, tradesmen, and attornies, they are become statesmen and legislators, and are employed in contriving a new form of government for an extensive empire, which, they flatter themselves, will become, and which, indeed, seems very likely to become, one of the greatest and most formidable that ever was in the world.

But hey, what did he know?



Robert Hetzel has written an outstanding new book entitled The Federal Reserve: A New History. I reviewed the book for Central Banking. Here’s an excerpt:

During 2008, the Fed overreacted to (transitory) rising energy prices, and policy became too contractionary during the early stages of the Great Recession. Just as during the Great Depression of the 1930s, policymakers misdiagnosed the core problem as the financial system, whereas the actual problem was an overly tight monetary policy.

This incorrect diagnosis of the problem led to a number of interventions into the banking system, which failed to boost the economy in late 2008. Even worse, fear of inflation led the Fed to enact some misguided contractionary policies, such as its decision in October 2008 to sharply raise the interest rate paid on bank reserves. The goal was to prevent its liquidity injections from going out and stimulating the broader economy.

The economy only began to recover in 2009, when the Fed switched from banking rescue operations to monetary stimulus. The Covid crisis saw the Fed make the exact opposite error, an overly stimulative policy that relied on the now discredited 1960s idea of a trade-off between inflation and unemployment.

In 2020, not many economists correctly diagnosed the dovish policy errors being made by the Fed. Even fewer correctly spotted the overly hawkish policy during 2008. Robert Hetzel is one of a vanishingly small number of economists who were correct on both occasions. Perhaps it’s time we started paying more attention to his views.

Hetzel’s book should become the new standard for those who wish to understand how monetary policy has shaped the economy over the past 110 years. Read the whole thing.

Why Would It Kill Us???

If you’ve been paying any attention to EconTalk over the last few months, you know that Artificial Intelligence (AI) is very much on host Russ Roberts’ mind. This episode may end up being the most frightening of them all, as Russ welcomes Eliezer Yudkowsky, a Research Fellow at the Machine Intelligence Research Institute, and an AI, er…skeptic. Skeptic of course does not begin to encapsulate Yudkowsky’s position; Yudkowsky argues that AI will kill everyone on earth. Is his position too extreme, or are you just as concerned?

Let’s hear what you have to say. And feel free to reference any of our Artificial Intelligence episodes as well! As always, we love to hear from you.



1- Both Roberts and Yudkowsky agree that the current level of AI is not dangerous. Roberts recalls an analogy from this 2014 episode with Nick Bostrom, “In general, you wouldn’t want to invite something smarter than you into the campfire.”

Why does he bring this up, and how does it help explain the distance between Roberts and Yudkowsky’s viewpoints? Perhaps put another way, to what extent can algorithms have goals, as Yudkowsky suggests?


2- Can AI really become smarter than us? Roberts challenges his guest, “What does it mean to be smarter than I am? That’s actually somewhat complicated, at least it seems to me; i.e., does ‘it’ really know things are out there, or is this just an illusion it presents?”

What does Yudkowsky mean when he talks about an invisible mind that AI might come to possess?


3- To what extent is AI analogous to the to the market process, particularly with regard to unintended consequences?

Yudkowsky challenges Roberts, ” Put yourself in the shoes of the AI, like an economist putting themselves into the shoes of something that’s about to have a tax imposed on it. What do you do if you’re around humans who can potentially unplug you?” Roberts counters with another question, “How does it [AI] get outside the box? How did it end up wanting to do that, and how did it succeed?” How would you respond to these questions? Whose answer better convinced you- Roberts’ or Yudkowsky’s?


4- Several times Yudkowsky mentions man’s moon landing, asserting that one would not be able to explain that achievement from an evolutionary perspective. To what extent do you agree? Roberts again challenges huis guest asking whether this viewpoint requires a belief that the human mind is no different than a computer? Again- whose answer were you more convinced by?


5- Roberts recalls his conversation with neuroscientist Erik Hoel in which the threat of mutually assured destruction had been able to “regulate” nuclear proliferation. Is there any way we can retrain AI that’s similarly meaningful? Can it be done without govt/ the use of threat of lethal force? To what extent do you agree with Yudkowsky that if the government comes in and wrecks the whole thing, that’s better than the thing that was otherwise going to happen?


Hyperbole has its rhetorical or pedagogical advantages, but it must not overcome reality. I am not casting the first stone at Financial Times columnist Edward Luce, but I do want to criticize a recent column of his (“Beware Elon Musk’s Warped Libertarianism,” May 24, 2023).

On what basis does Mr. Luce claim that Elon Musk is a libertarian? I have never seen anything written by Mr. Musk that would show his support for this political philosophy. Andrea Mays, who teaches economics at California State University in Long Beach, has “no idea how thoroughly he has considered [libertarian principles],” and she has “never come across any of his writings on the subject” (personal correspondence). Surely, she adds, he could hire someone to write op-eds for him if he wished to explain his personal philosophy.

I haven’t completely given up on Musk but, as John Maynard Keynes wrote, “in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age.”

Consider the following quotes from Luce’s column, followed by my comments:

Billionaire libertarians … have the money to do whatever they want.

This is hyperbole, of course. Nobody has the money to do whatever he wants. The first lesson of economics is that resources are scarce compared to human desires, which are quasi-infinite. This limitation also applies to Mr. Musk—although obviously not as much as to you and me, but envy is not the greatest virtue.

American libertarians should rarely be taken at face value.

There is some truth in that, as for any group of partisans, but the “rarely” is exaggerated. Among defenders of minority ideas, who feel like Martians in their society, you are bound to find eccentric figures. I confess that, in another life, I myself co-translated a book from one of them (I am not speaking of my translation work on James Buchanan’s The Limits of Liberty). But libertarian thought remains necessary to understand our world, even from its American theorists!

It is as rare to find an impoverished libertarian as it is to find a wealthy socialist.

This is a statement is simply baseless and must contradict the experience of most people who know, personally or in writing, more than one libertarian and one socialist. Luce mentions George Soros, who is a mild socialist. Incidentally, I agree when the Financial Times columnist condemns “Soros demonization,” like when Musk tweeted that this fellow billionaire “hates humanity.” Rich socialists are very numerous, even if you consider only the first percentile of total income, which starts below $500,000 in the US. Luce could have mentioned many woke habitués of the World Forum in Davos. Bernie Sanders is less rich, but probably qualifies. Hugo Chavez (of “21st-century socialism” fame) and his family did better, like Friedrich Engels. One can also find candidates for the rich-socialist label among the rulers or high-level apparatchiks of past communist countries or socialist banana republics of our days. In our countries, socialists are fortunately constrained on what they can suck from the state, but Mr. Luce must have heard of what in France is called la gauche caviar (“the caviar left”).

Young idealistic libertarians are often poor. Many of Andrea’s students must be. I certainly wish that all libertarians were wealthy. Wealth is not a sin by itself. To simplify a bit, it depends on whether a rich person has made his money through voluntary transactions and interactions, or whether he has stolen it.

[The American libertarians’] libertarianism rarely stretches beyond their personal freedoms, especially the liberty not to be taxed. Other people’s freedom is their own lookout.

There are certainly some libertarians who have not reflected on all the implications of their beliefs. But again, I don’t think Mr. Luce’s sample is representative. Libertarians, who may be conceived as the radical wing of classical liberalism, have this rather rare virtue of defending a formal liberty that, by construction, can only belong equally to all individuals—contrary to the sort of “freedom” requiring that some be harmed by the state in order to favor others. One reason why libertarians are often seen as eccentrics is, indeed, that they defend the freedom of prostitutes or drug consumers, the right of self-defense for ordinary people (ordinary people, ma chère!), as well as the freedom of great entrepreneurs and famous journalists. The only constraint is the respect of everybody’s equal liberty: as John Stuart Mill wrote (in his 1859 On Liberty), “Over himself, over his own body and mind, the individual is sovereign.”

The continuity between classical liberalism and libertarianism is an interesting topic. Anarchist economist Anthony de Jasay describes himself as a liberal. I give other examples in my EconLog post “The Continuum Between Liberalism and Anarchism.” Needless to say that this current of thought covers a wide spectrum of ideas and analytical approaches, which contrasts with the poverty of American “liberalism,” an adulterated liberalism that the Financial Times seems close to. But let’s continue with the quotes from Mr. Luce:

[Musk’s] philosophical confusion … applies to many in his cohort, such as Peter Thiel, Ken Griffin and Charles Koch.

Perhaps Peter Thiel and Ken Griffin are in Musk’s cohort, I don’t know. Some years ago, Mr. Thiel made noises that sounded libertarian: see my Regulation review of his 2014 book From Zero to One (pp. 54-56 in the linked file). He has now stopped. Only Charles Koch seems to me to be clearly a classical liberal. I would argue that the philosophical confusion is, anyway, at least as much on the side of the Financial Times columnist.

Some of Musk’s fellow billionaires support Donald Trump, who is the most un-libertarian figure in US politics. … Not much of this seems to bother the libertarians.

Like myself, nearly all libertarians, I think, would agree that Trump is a very authoritarian, i.e., un-libertarian, figure. Some eccentric libertarians have other opinions; a few hope, or hoped, that Trump would lead to a crash of the statist system and open the field for anarchic nirvana. Yet, there are a number of other candidates for “the most un-libertarian figure in US politics” in both the Republican and Democratic parties.

As for the second sentence in the quote above, there must not be many libertarians who are not bothered. So I don’t know whom Mr. Luce refer to as “the libertarians.” Does he see the world in terms of woke identity groups?

Musk’s Tesla, for example, received $465mn of taxpayers’ stimulus money in 2009.

I heard about that, and I would agree that it is worse than socialists purchasing iPhones or sending their children to private schools. We must concede this criticism, but it adds to Luce’s burden of showing that Musk is a libertarian.

Musk’s love of free speech vanishes when it comes to China.

I also find that troubling, as I think virtually all classical liberals and libertarians do.

One thing that seems clear anyway is that Mr. Luce has not demonstrated that he understands what libertarianism or classical liberalism is.

Socialism Is as Socialism Does

Some concepts in political economy operate like a Rorschach test. When someone defines them, you often learn more about them than about the concept. Democracy, fascism, capitalism, liberalism, conservatism, neo-anything, and socialism often mean different things to different people. I make no claim to being exceptional in this sense. Nonetheless, in this essay I want to offer a functional definition of socialism. This definition definitely reflects my own intellectual interests. But it also illuminates some central features of socialist systems and how they operate.

Since I tell my students not to write mystery novels when presenting an argument, here is my proposed definition: socialism is the prohibition of free entry into markets. This definition is functional in that it focuses on what socialism does. Many define socialism according to its aims, motives, or goals. But individuals can act selfishly or altruistically in the context of any political or economic system. Some socialists promise material abundance, while others extoll the virtues of asceticism. And socialists seek to implement their ideal system through a variety of means, from authoritarian central planning to anarchic communes. By stressing what socialism does, I hope to identify a common thread across these visions. If it walks like socialism and it breaks eggs like socialism, it is socialism.

Why not stick with the tried and true “common ownership of the means of production?” I in no way reject the usefulness of this definition and consider mine complementary to it. But ownership can be understood in a wide variety of ways. Were Soviet factories really owned in common, or were they effectively under the control of party elites? And by focusing on the immediate effects of socialism, I hope to provide a diagnostic tool for various policies and institutional arrangements that de facto operate in a similar way.

To arrive at this functional definition of socialism, I revisit the socialist calculation debate. Not because it is my favorite thing to talk about—though that may be true—but because it concerned a variety of ways in which socialism might be implemented. In what sense do these very different systems all lay claim to the title?

Mises: No Calculation in natura

Though a number of texts predate it, the beginning of the socialist calculation debate is typically attributed to Ludwig von Mises’s 1920 “Economic Calculation in the Socialist Commonwealth.”1 The core of his argument is quite simple. Under socialism, because there is no private ownership of the means of production, there will be no markets for those means. In the absence of markets there will be no prices for these capital goods. And in the absence of prices, it is impossible to determine what how to most economically produce goods and services. In particular, Mises identifies three advantages of market prices for economic calculation (p. 97-98):

1. A market price “renders it possible to base the calculation upon the valuations of all participants in trade.” 2. Profit and loss calculations allow anyone who engages in production to determine “whether he has worked more economically than others.” 3. Lastly, such calculation “makes it possible to refer values back to a unit.”

In a world of scarcity, any act of production involves an opportunity cost. What else could these resources have been used for? As the complexity of production processes increases in deploying a diverse array of capital goods, it becomes impossible to reckon such cost without a common denominator. Should we build the train tracks around the mountain and use up more steel, or through the mountain and use up more drilling equipment? Market prices do not represent some external standard of the truth about opportunity cost, but they do provide an indication of what other individuals think are the best alternative uses of resources. The process of buying and selling aggregates these judgments into an individually usable measure of what we forego and what we gain from production processes.

Mises discusses several alternatives to market prices, arguing that they cannot solve the problem of economic calculation. His primary targets are Marxists and Otto Neurath. Both of these approaches to socialism posit in natura (“in nature”) calculation. Such theories argue that socialist regimes could calculate based on something intrinsic to the nature of economic goods, rather than the extrinsic exchange value assigned from market prices. For instance, Marxists [see Karl Marx] often posited that labor inputs should and could serve as the ultimate unit of economic calculation and distribution. Mises points out the fundamental problem that just as there are a great diversity of capital goods, there is great diversity in labor. In natura approaches contrast most sharply with Mises’s insistence on exchange value and thus prices as the only way to reckon opportunity cost in a complex economy. I am not concerned here with the substance of Mises’s critique, but only that it took aim at these in natura arguments.

A Lange-Winded Response

In 1935, F.A. Hayek published an edited collection Collectivist Economic Planning, which includes an English-language translation of Mises’s 1920 article. In response, Oskar Lange tries to rehabilitate socialism in a two-part essay the Review of Economic Studies.2 Lange’s opening move is bold: he admits that Mises is right. Economic calculation is vital to the success of a socialist economy, and it does require money prices. No money prices, no calculation of opportunity cost, no material abundance.

Where Lange disagrees with Mises is in the necessity of market institutions. Lange argues that prices for the various factors of production could be set by socialist central planners. In a perfectly competitive market equilibrium, he points out, we know that two conditions obtain (pp. 58-59). First, the average cost to produce a given unit of a good will be minimized. That is, when considering the cost of production of all cars, the cost per unit will be as low as humanly possible. Second, the marginal cost of producing the last unit of a good will equal the price of that good. If it takes ₽5,000 to make the last car produced, it will sell for ₽5,000. Producers will have squeezed every last bit of consumer surplus out of the market. These twin relations are shown in Figure 1, which haunts the nightmares of many Econ 101 students. (If you think economists get excited when two curves intersect, just imagine how happy they are when it’s three curves.)

Figure 1.

After reviewing these conditions, Lange offers a fairly straightforward proposal (pp. 60-66). Free markets in consumer goods and labor would remain. A Central Planning Board would set accounting prices for capital goods. Production plant managers—the equivalent of entrepreneurs, but government officials instead of private owners—would use those accounting prices to calculate the least cost method of production (minimizing average cost). Directors of industries, such as the car czar, would expand or contract the number of production plants so that marginal cost equals the price. In essence, Lange proposed to use the theory of how markets work as a substitute for actual markets. Hence, market socialism. The calculation problem: solved.

How would the Central Planning Board set prices? Don’t even worry about it, says Lange. They definitely wouldn’t need a complex set of simultaneous equations (pp. 66-67).3 They could even pick prices arbitrarily. If those prices turned out to not be equilibrium prices, they would be able to observe surpluses and shortages of goods. Just like markets do, they would approach equilibrium through a process of trial and error. The system might even approach equilibrium faster since the planners would be adjusting multiple prices at once instead of just one.

Hayek’s Rejoinder

There are many potential objections to Lange’s proposal. I want to focus on one in particular. Several of Hayek’s most famous articles—”Economics and Knowledge,” “The Use of Knowledge in Society,” and “The Meaning of Competition”—can best be understood against the backdrop of the calculation debate.4 In these articles, Hayek articulates a view of how a competitive process makes use of widely dispersed knowledge about economic conditions.

“Mises sought to answer the question: what can socialism use to calculate, if not prices? Hayek had to answer the question: what makes market capitalist prices different from market socialist prices?”

A lot of ink has been spilled about the extent to which Hayek’s rejoinders to the market socialists are similar to or different from the argument put forward by Mises. Some insist that Mises’s calculation argument has nothing to do with knowledge.5 When considering this possibility, is important to keep in mind that Mises and Hayek were taking aim at two very different proposals for implementing socialism. Mises sought to answer the question: what can socialism use to calculate, if not prices? Hayek had to answer the question: what makes market capitalist prices different from market socialist prices?

One answer is to retreat to incentives. Socialist plant managers, industry czars, and central planners simply will not have the incentives that private owners of capital would have in a market system. This rejoinder is true, but I have never found it satisfying. This is the “socialism is great in theory, but not in practice” response. It is a retreat from the original Mises-Hayek view, which is that socialism is, in fact, bad in theory.

Hayek’s tack is different. Echoing Mises’s 1920 claim that there is an “intellectual division of labor” (p. 102) at play in market societies, Hayek insists on the importance of the division of knowledge (p. 50). Knowledge about the relative scarcity of factors of production is not given to any one mind in its entirety. This often idiosyncratic or even tacit knowledge is dispersed throughout society. Market capitalist prices reflect—however imperfectly—this broadly dispersed knowledge. Market socialist prices reflect only the knowledge of the Central Planning Board. Don Lavoie would later come to call this the knowledge problem.6 Market socialism can introduce a common denominator for economic calculation, but the prices expressed in that denominator do not reflect economic reality to nearly the extent that free market prices do.

Kirzner’s Synthesis

Decades later, Israel Kirzner offers a helpful clarification of the difference between market socialism and market capitalism. In an article building on Don Lavoie’s Rivalry and Central Planning, Kirzner argues that it is no accident that Mises’s post-debate work placed entrepreneurship at the center of the market process.7 The entrepreneur, for Mises, is “the first to understand that there is a discrepancy between is done and what could be done” (p. 336).8 Entrepreneurship drives the market towards increased levels of coordination, driving the prices of production goods to more accurately reflect their relative scarcities.9

In a second article, arguing for the essential continuity between Mises and Hayek’s views, Kirzner draws these threads together.10 Misesian entrepreneurs solve Hayekian knowledge problems. Real, existing prices are never equilibrium prices that would result in perfect coordination between market participants. They need not even be “proximate” or “close” to their equilibrium values. Nonetheless, they reflect “the best available entrepreneurial knowledge concerning market conditions” (p. 223). Because entrepreneurship wins profits or incurs losses, those entrepreneurs most attuned to the conditions of the market will typically have more resources at their disposal than those who are less alert. Market prices are not perfect but they do reflect knowledge that is dispersed and judgment that has passed a selection test.

The key condition for this “marvel” is freedom of entry. “It is only the possibility of unrestricted entrepreneurial entry which permits more alert entrepreneurs to deploy their superior vision of the future in order to correct the misallocations of resources reflected in the false prices which characterize disequilibrium” (p. 216). Prices do not move by magic. They move when entrepreneurs bid them up or mark them down. It is only prices that are subject to such revision that can effectively guide economic calculation.

Entrepreneurship, for Mises and Kirzner, is not the province of an elite class of businessmen. It is a part of human action. “In any real and living economy every actor is always an entrepreneur and speculator” (Mises 2007, p. 252). The more expansive freedom of entry is, the more likely is it that errors will be detected and corrected. We do not know ex ante whose knowledge will prove relevant to producing what we want at least cost. Freedom of entry means that anyone can have a go, tapping maximally into the dispersed knowledge of a modern society.

Following Kirzner, then, an essential component of a free economy is freedom of entry. By contrast, as Murray Rothbard notes, “a centrally planned economy is a centrally prohibited economy (p. 831).11 In order for there to be a central plan at all, private entrepreneurs must be prohibited from driving production decisions. A Central Planning Board may still act entrepreneurially in changing The Plan. But they will act without prices shaped by other entrepreneurs’ knowledge, alertness, and judgment. It is precisely the prohibition on exercising the entrepreneurial function that makes calculation in a socialist economy arbitrary.

De Facto and De Jure Socialism

Having made my argument as to why socialism can be understood as a prohibition of free entry, I now turn to why such a definition might be useful. Political economists are wont to distinguish between de jure edicts—what official law or policy declares to be the case—and de facto realities—what in fact is the case. By focusing on what socialism does rather than how it is constituted, the prohibition view allows us to distinguish between socialism in name and socialism in practice.

This definition does confront an important ambiguity that must be noted. Prohibitions are rarely, if ever, complete. As with all definitions of socialism, the prohibition view admits of degrees and of variation. Governments try to prohibit drugs, but they often remain available. Black markets also thrive in socialist countries. Some level of private enterprise is usually tolerated while the “commanding heights” remain under government control. Likewise, there are variations in the degree of prohibition. The most socialist states ban many forms of private enterprise outright, though even there a private individual might gain the ear of a high official and be allowed to proceed. Less stringent implementations make entrepreneurs go through a lengthy and costly process of introducing a new enterprise.

The prohibition view of socialism is thus congenial with Gary Anderson and Peter Boettke’s observation that Soviet socialism was not, for most of its existence, central planning per se.12 Rather, it was a decentralized but heavily interventionist system of extraction by elites of wealth that was largely produced in black and gray markets. Elite party members had de facto control of large and visible productive resources (contra the common ownership view) and prohibited entry into those markets. There was a formally socialist economy that existed parasitically on top of informal economic activity.

What about fascism? Contemporary socialists get quite agitated when proponents of economic liberalism identify national socialists as socialists. In a fascist economy, productive resources are privately owned, but their decisions are coordinated with one another and the central government. Rather than focusing on ownership and coordination, the prohibition view asks a different question: was someone who thought they had a better idea of how to organize production free to have a go? Were they permitted to buy productive resources and deploy them according to their own vision of the future? If not, then fascism counts as socialism.

Finally, let’s turn back to Lange. One might object that market socialism doesn’t really count as socialism, since consumer and labor preferences and quasi-market forces still shape production decisions. But it still shares the same functional limitations as cruder forms of central planning. The central planning board promulgates commands to industry czars and plant managers about how to combine resources in a way that is supposed to substitute for how freedom of entry shapes the size of industries (pp 58-60). In this formulation, Lange ignores the most important feature of freedom of entry, that it brings new ideas into an industry.

Even the managers in Lange’s scheme lack much capacity for entrepreneurship. Those who make production decisions are not to treat prices as Misesian entrepreneurs do. In the Mises-Kirzner view, entrepreneurs treat prices as inputs into decision making but not determinants of decision making. Indeed, a key function of entrepreneurship is to identify where current prices are sending incorrect signals. By contrast, for Lange “the parametric function of prices must be imposed on [managers] by the Central Planning Board as an accounting rule” (p. 63). Lange’s managers are prohibited from making use of their idiosyncratic knowledge, alertness, and judgment.

For more on these topics, see

“Ludwig von Mises’s Socialism: A Still Timely Case Against Marx,” by Steven Horwitz. Library of Economics and Liberty, Oct. 1, 2018. Fascism, by Sheldon Richman. Concise Encyclopedia of Economics. Socialism, by Robert Heilbroner. Concise Encyclopedia of Economics. Podcast episode Larry White on the Clash of Economic Ideas. EconTalk.

Not all socialists ascribe to the ideal of central planning. Common ownership can be understood in a wide variety of ways, and implemented in more or less decentralized fashions. Some stress ballot democracy, others deliberation, and still others are just fine with an elite vanguard shepherding the people. What all these alternatives share, however, is the idea that individuals are either outright prohibited from or must seek permission to act on their imaginative views of how to serve others. Socialism is as socialism does, and what it does is outlaw the creativity that enables economic adaptation and progress.


[1] Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth,” in Hayek, ed. Collectivist Economic Planning. George Routledge and Sons, 1935.

[2] Oskar Lange, “On the Economic Theory of Socialism,” The Review of Economic Studies, Volume 4, Issue 1, October 1936

[3] It is hard to see how central planners could avoid the use of some formulas. A key insight of price theory is that markets are interdependent. The price of beef is affected by the prices of pork and of hamburger buns. Without appeal to some mathematical tools, the Central Planning Board really would be blindly groping.

[4] Collected in F.A. Hayek, Individualism and Economic Order, University of Chicago 1948.

[5] Mises might be surprised by the claim that knowledge was not central to his original argument. Economic calculation “affords us a guide through the oppressive plenitude of economic potentialities” (p. 101). “The human mind cannot orientate itself properly among the bewildering mass of intermediate products and potentialities of production without such aid [of calculation]” (p. 103). “Every graded system of pricing proceeds from the fact that men always and ever harmonize their own requirements with their estimation of economic facts” (p. 107). “We cannot act economically if we are not in a position to understand economizing” (p. 120).

[6] Don Lavoie, National Economic Planning: What is Left? Cato 1985.

[7] Israel Kirzner, “The Economic Calculation Debate: Lessons for Austrians,” in Peter Boettke and Fred Sautet, eds., Competition, Economic Planning, and the Knowledge Problem, Liberty Fund 2018.

[8] Ludwig von Mises, Human Action: A Treatise on Economics, Vol. 2, Liberty Fund 2007.

[9] This is not to say that this is all that entrepreneurship does. Calm down, Schumpeterians. Joseph Alois Schumpeter, 1883-1950.

[10] Israel Kirzner, “Reflections on the Misesian Legacy in Economics,” in Peter Boettke and Fred Sautet, eds., Ludwig von Mises: The Man and His Economics. Liberty Fund 2019.

[11] Murray Rothbard, Man, Economy and State. D. van Nostrand, 1962.

[12] Gary Anderson and Peter Boettke, “Soviet Venality: A Rent-Seeking Model of the Communist State,” Public Choice Vol. 93, 1997.)

*Adam Martin is Political Economy Research Fellow at the Free Market Institute and an assistant professor of agricultural and applied economics in the College of Agricultural Sciences and Natural Resources at Texas Tech University.

For more articles by Adam Martin, see the Archive.

A Wealth Tax Reality Check
wealth-income-tax-300x300.jpg At every opportunity, President Joe Biden has pressed a central tenet of his social agenda: “Extremely wealthy Americans don’t pay their fair share of federal income taxes” (emphasis added). By Internal Revenue Service definitions of income, top income earners generally pay a far greater federal income-tax share than do lower income groups. Without saying so, the President has greatly expanded wealthy Americans’ income to include their considerable unrealized capital gains, dramatically lowering their income-tax rate, which he uses to advance his wealth-tax case. To initiate wealth taxation, Biden proposes a “minimum billionaires tax,” under which wealthy Americans will pay at least 20% of their “total income”—including unrealized capital gains—in federal income taxes.1 A sizable majority (59%) of diverse Americans2 also favored a wealth tax in 2022.

Political support for a wealth tax appears to be built on two incorrect presumptions: First, wealthy Americans pay precious little income taxes (conventionally defined). Second, workers’ “income” and the wealthy’s “capital gains” are conceptually the same. As explained, given the economics of wealth accumulation, the wealthy (especially those self-made) should be celebrated, not denigrated, because of the resulting far greater gains provided non-wealthy Americans.

The Wealthy’s “Low” Tax Rates?

President Biden stresses that extremely wealthy Americans pay a meager 8% income-tax rate, giving the impression that he’s using IRS definitions. However, the Tax Foundation3 found that in 2020 (the latest year of data), the top 1% of taxpayers received 22.2% of taxable income and paid an average tax rate of 26.0%. The top half of taxpayers, who received almost 90% of taxable income, paid an average tax rate of 14.8%. The bottom half received 10.2% of taxable income and paid an average tax rate of 3.1% (with many paying nothing). In short, the top 1% of taxpayers received 2.2 times the income share of the bottom half but paid an average income-tax rate 8.4 times the tax rate of the bottom half.

The Tax Foundation also found that the top 1% in 2020 paid 42.3% of all federal income taxes, or 18 times the share of the bottom half, which was 2.3%. The top 10% of taxpayers received almost half the total income but paid almost three-quarters of all income taxes. Moreover, the income-tax share paid by the top income groups has risen substantially since 1980, while the share of the bottom half of taxpayers was more than halved (findings dramatized in a National Taxpayers Union Foundation4 chart).

Did the wealthy pay their “fair share” of income taxes? The tax-share statistics surely leave more room for debate than Mr. Biden suggests.

Biden’s Income Definition

In the press for a wealth tax, Biden’s economic advisors5 have expanded substantially the definition of taxable income (but only for the extremely wealthy), arguing that

When an American earns a dollar of wages, that dollar is taxed immediately at ordinary income tax rates. But when they gain a dollar because their stocks increase in value, that dollar is taxed at a low preferred rate, or never at all. Investment gains are a primary source of income for the wealthy…

Because many non-wealthy Americans have little to no investments (so claimed), the President’s advisors have declared that the tax system favors the wealthy by lowering their tax payments (and undercutting funding for social programs). Because worker earnings and capital gains are measured in dollars, Biden’s advisors see them as conceptually equivalent, but are they? Not really—and treating them the same is a political sleight-of-hand.

The advisors have defined taxable income for wealthy Americans to include their annual capital gains and certain “consumption” expenditures, mainly their now legally tax-deductible charitable contributions.6 The advisors’ redefined income-tax rate for extremely wealthy Americans—meaning Forbes’ top 400 wealthiest families—is an imputed 8.2% for 2014-2018 (one-third the conventionally computed tax rate for the top 1% above). The advisors have estimated that during 2014-2018, Forbes 400 paid $149 billion in total income taxes on their newly defined taxable income of $1.82 trillion, making for the 8.2% rate. Biden’s advisors make no effort to impute similar tax rates for lower wealth groups, on the claim that only the extremely wealthy have significant capital gains (even though 58% percent of Americans owned stocks in 2022 and their retirement accounts were valued at $40 trillion in 2021).

The Income/Wealth Conceptual Divide “Presidential advisors assert that the wealthy’s capital gains are conceptually the same as worker earnings, except they escape taxation. But that’s not the case.”

Presidential advisors assert that the wealthy’s capital gains are conceptually the same as worker earnings, except they escape taxation. But that’s not the case. The most prominent difference? The extent to which the two forms of “income” are realized. Workers’ annual earnings are realized in their paychecks—and are spendable and savable, and not subject to future losses! By contrast, the market value of wealth holdings—say, corporate stocks—is best approximated by the present value of market estimates of companies’ ever-changing future and yet unrealized profit streams, appropriately discounted for time and risks that expected future profits will not be realized. And those unrealized gains can’t be realized until… well, the future arrives.

With the future always unrealizable today, shareholders will unavoidably carry risks of their unrealized capital gains evaporating or morphing into losses. And unrealized future profit streams can vary with errant government (say, tax and regulatory) policies and a multitude of ever-changing economic, social, geopolitical, and environmental forces (among others) over which wealth holders have no control.

Risk costs may only be expected and seem ephemeral, but they can become real as products and firms fail. Remember Sears? When Sears was the world’s top retailer in 1969, many shareholders likely had unrealized capital gains, subject to unrealized (and unrecognized) risks. Then, many Sears executives had probably not heard of Walmart expanding in small Southern markets. Walmart was, surely, a force in the emergence of Sears’ losses in the 21st century, with its last store closing in 2021.

Wealth-tax proponents need a reality check: Most firms’ anticipated future profits are never realized, partially because most new firms fail (half in their first five years). Remember Kmart, Radio Shack, and Blockbuster? Their stockholders once had unrealized capital gains. Bed, Bath & and Beyond’s stock price doubled to $35 in 2021, which left some stockholders flush with capital gains—but also with considerable risk that the company’s future was in jeopardy. Its future would have been further jeopardized had the IRS then drawn off some of the shareholders’ capital gains, taking a portion of the failing company’s desperately needed capital. As it was, BBB’s stock plunged after 2021, dipping below a dime at this writing (April 2023).

Wealth-tax advocates seem to imagine the extremely wealthy’s wealth as granite, readily quarried. Well, Forbes 400 lost a half-trillion of their $4.5 trillion total wealth in 2022. Jeff Bezos alone lost $57 billion7. If the Forbes 400 had paid unrealized capital gains taxes in 2020, would wealth-tax proponents have refunded their taxes (or covered their realized losses) in 2022? Do advocates want American taxpayers to assume market risks, or are they proposing only to share in the wealthy’s gains, but not their pains?

Errant Fiscal and Monetary Policies

Because stock prices today are founded on discounted future profit streams, they are sensitive to interest-rate movements. And stock prices do move counter to interest rates. This means Federal Reserve rate cuts can, and do, lead to unrealized capital gains, as experienced in the run-up to the 2007-2009 Great Recession. As bankers (and economists) began re-learning in 2022, unrealized capital gains can be bolstered but then undercut by prolonged easy monetary policy meant to hold interest rates down to near zero, partially to monetize the string of trillion-dollar federal deficits. The Fed and wealthy and non-wealthy shareholders also re-learned in 2022 how unrealized capital gains can evaporate with monetary-induced jumps in the inflation rate that feed into higher interest rates and lower equity prices.

To properly evaluate the “fairness” of an unrealized capital gains tax, wealth-tax advocates need to understand that the extremely wealthy will be twice hit by a wealth tax. First, they will pay taxes on their current capital gains. Second, market investors will see taxes on future profits become capitalized today into lower stock prices. Fearing today’s narrowly applied wealth tax will be broadened, investors will be more inclined to sell and more resistant to buying stocks. Thus, a capital gains tax can put downward pressure on today’s stock prices and impair firms’ investment in innovative products, leading to slower growth in workers’ real incomes and retirement accounts. Non-wealthy stockholders will, of course, share lost capital gains from any market downturn.

Biden and company are unlikely to concede on the fairness of wealth taxation, especially since they see capital gains as income, and untaxed at that. If fairness is their banner, might they not understand that any wealth-tax proposals should be accompanied by an allowance for risk costs? Without such an allowance, investors will shift toward safer assets, to avoid paying a tax on risk costs embedded in higher returns on riskier investments. Granted, a risk-cost allowance would likely throttle enthusiasm for a wealth tax for a practical reason: How can risk costs possibly be computed with reasonable accuracy across all ever-changing portfolios, especially when such costs can be imputed (to varying extents) into stock prices?

Wealth as a Fixed-Pie

Progressives have often pressed for wealth taxes based on modern versions of the fixed pie theory of income and wealth that both Adam Smith (1723-1790) and Karl Marx (1818-1883) adopted. Given wealth’s presumed fixity, many of today’s wealth-tax proponents imagine that the national wealth pie can only be divvied up among people (or groups). Capitalists, presumably, can’t grow the pie (because labor, not capital, is considered the sole source of value). If a billionaire’s wealth increases, others must suffer smaller slices, a point that a progressive New York Times columnist8 has crystalized: “[W]e have spent the last 30 or so years transferring trillions of dollars from the middle class to the people at the very top” [my added emphasis], implying that the wealthy have largely taken their wealth from others, not by increasing the wealth pie.

Thieves are infamous for forcibly taking what others have. But is (zero-sum) thievery the way wealthy people build their fortunes? Amazon’s Jeff Bezos, Microsoft’s Bill Gates, and Tesla’s Elon Musk have largely accumulated fortunes in an old-fashioned way: by offering their buyers added value for their dollars (a prerequisite for inducing buyers’ voluntary purchases). In treating wealth accumulation as zero-sum, wealth-tax advocates exploit an asymmetry in the measurement of gains from purchases. They point to the exact dollar wealth of billionaires: “Jeff Bezos has $123.7 billion in wealth today, up four-fold from 2014.” Advocates don’t consider the economic gains of Amazon’s buyers—because their gains aren’t measured—and can’t be! Buyers’ gains are subjective, which are realized in enhanced product quality, beauty, convenience, faster delivery, and so forth.

If asked to monetize their added gains, many Amazon buyers might assess them on individual purchases as no more than nickels and dimes. Across the company’s 200 million-plus global buyers, however, those small gains, when totaled, can be far larger than Bezos’ wealth. Given the measurement asymmetry, however, buyers as voters can be forgiven if they (wrongly) deduce that Bezos’ gains are far greater. Can that be, other than in, say, car jackings? If Amazon buyers didn’t gain from their purchases, how could the company have so many (eager) repeat buyers? An obvious uncomfortable implication for the wealthy’s critics: Absent force, growth in the wealth of the wealthy will, generally, be accompanied by growth in the economic gains of others, including the non-wealthy.

The Added Profits Extracted from Firms Added Value Streams?

Extremely wealthy people—like Bezos—build their fortunes partially by drawing down their firms’ profits, which wealth-tax advocates seem to imagine represent a sizable percentage of revenues. Are their impressions on target? Across industries, corporate net profit margins (revenues minus cost of goods and operating expenses) averaged 8.9% in 2022 (with wide variation). And the average profit margin isn’t net of a nontrivial business cost, risk.

Being in retail, Amazon has an expected low net profit margin. In 2022, its net margin was only 1.42% (highly variable but consistently low). Bezos must have built his fortune by developing a huge value stream for his customers. And he did, with annual sales reaching $514 billion in 2022.9

Developing a more credible assessment of founders’ wealth takes is fraught with estimation problems. However, MIT economist William Nordhaus10 has taken up the challenge. He has estimated the extra (above-competitive) profits technology firm founders received in 1948-2001. Nordhaus estimated that company founders appropriated only 2.2% in extra profits from their firms’ added-value streams (suppressed mainly by rapid entry of imitators). Overall, Nordhaus estimated that of the $6 trillion in their total added value, tech entrepreneurs were able to capture only $400 billion, leaving $5.6 trillion of added value for others, mainly buyers. In addition, Nordhaus estimated that innovators’ added profits covered annually only .19% of their capital replacement cost.


Wealth, especially great wealth, is a tempting tax target. It is easily attacked as unearned, undeserved, unfair, as well as unneeded, and an economic drain on others (with base drives of envy and covetousness coloring policy advocacy). The wealthy’s riches can be seen solely as enabling the wealthy to acquire, say, expensive cars and wardrobes. In truth, the wealthy wouldn’t be wealthy for long if they didn’t put much of their wealth to work productively.

President Biden and other wealth-tax proponents should reconsider how the wealth-tax debate has lacked balance. The wealthy pay more income taxes (conventionally defined) than widely presumed. The asymmetry in measuring sellers’ and buyers’ gains from trades has left the impression that only the wealthy have gained from trades, a mockery of how wealth accumulation works. Buyers’ gains have generally been far greater than sellers’ gains. Also, it has been all too easy for wealth-tax advocates to overlook and forget the untold uncompensated hours, sleepless nights, and risks many of today’s wealthy endured in their pasts with only a glimmer of hope that they would be wealthy today.

Wealth-tax proponents don’t seem to appreciate critical points: Foremost, people’s wealth today is founded on sequences of future evolving and interacting events that are unavoidably fraught with risks. Second, wealth taxes today may yield substantial current government revenues, because of much wealth’s short-term immobility. However, wealth’s long-term mobility is likely to be far greater than imagined, given that wealth taxes imposed today can lower firms’ expected future profit streams (apart from the taxes extracted) and undercut future investments—and the country’s taxable future wealth.

For more on these topics, see

Capital Gains Taxes, by Stephen Moore. Concise Encyclopedia of Economics. Present Value, by David R. Henderson. Concise Encyclopedia of Economics. Why a wealth tax was abandoned in Britain, by John Phelan. EconLog, Jul. 17, 2022. Podcast episode Afterthoughts on Piketty, by Russ Roberts. EconTalk Extra, Sep. 24, 2014.

Policy makers must remember that while much wealth takes the historical form, buildings and heavy machinery, considerable contemporary wealth comes in digitized ideas, which can be sent across the globe at the touch of a few computer keystrokes and at the speed of light. In short, added taxes on “extreme wealthy” Americans can unavoidably impair the economic futures of non-wealthy Americans.


[1] Under President Biden’s “Billionaire Minimum Income Tax,” American households with a net worth of more than $100 million—”the top one-one hundredth of one percent (0.01%)”—would be required to pay in federal taxes a minimum of 20% of their “full income,” including unrealized capital gains.

[2] Zhang, Sharon. “Majority of Voters Support Biden’s Billionaire Income Tax, Poll Finds” in Truthout. Available online at

[3] York, Erica. “Summary of the Latest Federal Income Tax Data,” 2023 Update, January 26, 2023. Available online at

[4] Brady, Demian. Table 1. “Who Pays Income Taxes: Tax Year 2020.” Who Pays Income Taxes? National Taxpayers Union, December 13, 2022.

[5] Leiserson, Greg and Danny Yagan. “What Is the Average Federal Individual Income Tax Rate on the Wealthiest Americans?” The White House, September 23, 2021. Available online at

[6] Making the wealthy’s charitable contributions taxable can be expected, of course, to draw opposition from the country’s multitude of charities that now benefit from the wealthy’s efforts to lower their income-tax payments.

[7] The 2022 Forbes 400 List of Richest Americans: Facts And Figures, Forbes, September 27, 2022. Available online at

[8] Tomasky, Michael. “Bill Gates, I Implore You to Connect Some Dots,” The New York Times, November 11, 2019. Available online at

[9] A very rough (hardly satisfying and likely exaggerated) measure of Bezos’ extracted wealth from Amazon’s “added value stream” is the ratio of his wealth to Amazon’s annual revenues. In 2022, Amazon had a market cap of about $1 trillion. Bezos’ wealth was judged by Forbes to be $114 billion (down by $57 billion in March 2022). This means his wealth was then about one-seventh of Amazon’s annual sales, which greatly exaggerates his take. He built his wealth in multiple years of prior Amazon sales, and he likely invested his extracted profits in a diversified investment portfolio. Moreover, his wealth is the current discounted value of Amazon’s entire future profit stream, covering multiple annual sales with adjustments for unrealized risks.

[10] Nordhaus, William D. “Schumpeterian Profits in the American Economy: Theory and Measurement,” NBER Working Paper No. 10433, April 2004. Available online as PDF at

*Richard B. McKenzie is the Walter Gerken Professor Emeritus in the Merage School of Business at the University of California, Irvine. His latest book is Reality Is Tricky: Contrarian Takes on Contested Economic Issues (2023).

For more articles by Richard McKenzie, see the Archive.

Why Bigger Isn’t Necessarily Better: A Swiftian Perspective
Jonathan SwiftJonathan Swift Healthcare in the United States is in the midst of a massive wave of consolidation. For example, fifty years ago, virtually all non-academic, non-government U.S. physicians had an ownership interest in their practices. Today, approximately 70% of U.S. physicians are employed by hospitals or other corporate entities. Likewise, mergers and acquisitions have landed more than 70% of hospitals and 90% of hospital beds in multi-hospital health systems. As such, health care organizations have increased in size and their complexity has multiplied. For example, between 1975 and 2010, the number of U.S. physicians roughly doubled, but the number of healthcare administrators—employees of medical practices, hospitals, and health systems who do not directly care for patients—increased about thirty-six times. These sea changes have produced vigorous and ongoing debates over the effects of consolidation on quality and costs of care, but there are deeper issues at stake that cannot be adequately understood through healthcare statistics alone. Is consolidation, on balance, a good thing? What are its effects on patients and those who care for them? Where can we turn for a deeper understanding of the effects of changing size on healthcare organizations?

Jonathan Swift’s Gulliver’s Travels offers one of the most penetrating and sustained explorations of the idea that size really matters. Published in 1726 after Swift’s political ambitions had largely foundered, during a period in which he was serving in a kind of exile in the land of his birth as Dean of St. Patrick’s Cathedral in Dublin, the novel was inspired in part by the success of Daniel Defoe’s 1719 Robinson Crusoe. Both novels present tales of shipwreck and castaway but differ in other key respects. Defoe presents a largely hopeful account of the resilience, creativity, and dedication of a single person, suggesting that human beings can not only survive but also thrive in isolation. By contrast, Swift offers a portrait of a man who is always transformed by the social circumstances in which he finds himself, implying that human beings are largely defined by the society of which we are part. One of the most dramatic changes in social context Gulliver experiences during his voyages to strange lands concerns size—in the Land of Lilliput, the inhabitants are one-twelfth the height of Gulliver, while in the Land of Brobdingnag, Gulliver is one-twelfth the height of the natives.

Among the miniscule Lilliputians, Gulliver’s relatively immense size transforms his sense of his own identity. At first, he is seen as a great threat and shackled, and the inhabitants never completely get over their fear of him. Eventually convincing them that he intends them no injury, he is given the run of the land, on the condition that he avoid harming anyone. He soon becomes a favorite of the royals, although it is clear that he is prized above all for utilitarian reasons. The king persuades him to subdue a rival people, the Blefuscudians, by stealing their fleet. However, Gulliver refuses to make vassals of them, provoking royal displeasure. Soon thereafter, when he extinguishes a potentially disastrous conflagration by urinating on it, he is charged with treason. Convicted and sentenced to be blinded—a punishment that would largely deprive him of the ability to act independently yet preserve his immense potential as a power tool—he escapes the island. In a land of miniaturized human beings, where the king inspires awe because he is taller by the breadth of Gulliver’s fingernail than others in his court, otherwise ordinary Gulliver stands out as a Colossus.

In Brobdingnag, the tables are turned, and tiny Gulliver is regarded as little more than a curiosity. The farmer who finds him first gives him to his daughter as a pet, but then realizes that he can exhibit him for money. Soon sick of being shown as a freak, Gulliver is purchased by the queen of the land, who arranges for a special tiny house to be built for him. He is the butt of numerous indignities, including an attack by wasps and a near-death experience at the hands of a monkey who carries him to the rooftop. Just as in Lilliput Gulliver’s relative size meant that even the most trivial and routine aspects of his daily life, such as feeding and excretions, were transformed into matters of great moment, so among giants, everything about Gulliver seems trivial, mean, and subject to ridicule. How could such a small creature, the Brobdingnagians ask, possibly amount to anything worthy of more than trifling consideration? Such insults to Gulliver’s human dignity are compounded when he discusses history and politics with the king, who concludes that Europeans are “the most pernicious race of little odious vermin that nature ever suffered to crawl upon the surface of the earth.” In Swift’s account, seemingly defining human traits such as reason and virtue amount to very little indeed in the face of mere miniaturization and magnification.

In the spirit of Swift, consider the effect of size on health care organizations, from medical practices to multi-hospital health systems. On the one hand, increasing size can offer some readily apparent advantages. For example, larger organizations can take advantage of economies of scale in purchasing, marketing, and overheads. Medical supplies, equipment, and drugs often cost less per unit when purchased in large quantities. A larger organization can afford to mount larger and more sophisticated marketing campaigns, taking advantage of a wider range of media. Governance, documentation, billing, and information technology are among the overhead costs that may be relatively reduced as an organization grows. Moreover, larger organizations typically wield greater bargaining power, offer a greater variety of resources (such as different medical specialties and diagnostic and treatment options), exert greater influence in a healthcare market, and provide greater compensation to their executive staff, based at least in part on the rationale that they are overseeing a larger organization and therefore doing more work.

I do not think anyone would contest that we need some large healthcare organizations. A solo-practice physician cannot offer the same around-the-clock care as a group of physicians staffing different shifts. Likewise, a family physician cannot offer the same level of subspecialty expertise as a multi-specialty group practice that includes specialists in fields such as neurology, cardiology, and gastroenterology. Moreover, as a medical practice grows in size, it is able to reduce duplication and per-physician administrative costs such as record keeping, coding, and billing, a consideration that also applies to hospitals. A small hospital of a few dozen beds or less cannot afford to offer the same diagnostic and therapeutic equipment and services, including PET/MRI scanners, robotic surgery devices, and highly advanced service lines such as cutting-edge neurosurgery and cancer care, as can a hospital of hundreds of beds. Some also argue that larger healthcare organizations can also improve quality of care and reduce costs, although this is hotly debated. If bigger is not necessarily better, it does at least open up multiple opportunities for enhancement.

Yet there are also numerous downsides to consolidation, one of which is the inevitable rise of bureaucracy, or “the rule of desks.” In a small organization, everyone can know everyone else, and many decisions can be made on the basis of personal relationships, based on respect and trust. As organizations grow, not everyone can know everyone else, and decisions must be made on the basis of impersonal factors, such as job descriptions, organization charts, and policy and procedure manuals. In an industry such as manufacturing, this might not pose a problem, but medicine is founded on relationships between individual patients and physicians. As bureaucratization progresses, organizations such as medical practices and hospitals tend to become more and more rigid and less and less creative. People are hired, promoted, and fired less on the basis of the personal relationships they build than on whether they do what those above them on the organization chart expect. Everything must be done according to the chain of command, and if someone steps outside that chain, even though their idea is first rate, they are likely to be reprimanded.

“Just as Gulliver soon longs to be treated as a human being, so no physician wants to be treated as little more than a member of the class of internists, pediatricians, or surgeons.”

In Lilliput and Brobdingnag, the royals do not really care about Gulliver as a person. Instead, their interest in him is based on what he can be made to do—in the land of the small, to function as a weapon of war, and in the land of giants, as a sort of parlor trick. His functions are fixed according to the advantages of his relative size, and if he were the same size as the inhabitants, they might take no interest in him at all. Gulliver becomes nothing more than a member of a size-based class, and any other European would be treated in the same way, as a tool of war or amusement. It is no wonder that Gulliver does not wish to linger in either land, where genuine companionship is rendered essentially impossible. Just as Gulliver soon longs to be treated as a human being, so no physician wants to be treated as little more than a member of the class of internists, pediatricians, or surgeons. Every physician wants to be seen as making distinctive contributions, but a heavily bureaucratized organization finds it difficult or impossible to treat the occupants of the boxes on its organization chart as anything else. What matters most is not the initiative of physicians but whether they are obeying the rules and performing their jobs as prescribed.

Physicians in a small-group practice or a single hospital may function day to day by putting relationships first. They are likely to know their patients and colleagues as individual human beings, with distinctive personalities, life stories, and aptitudes and interests. Such relationships help to get things done, precisely because people know and trust one another. By contrast, as organizations grow, they begin functioning more and more like inhabitants of what sociologist Max Weber called an “iron cage.” To those working within it, the organization feels less and less like a network of personal relationships—a community—and more and more like a machine. What seems most real in a small organization is often people and interpersonal relationships, but what seems most real in a bureaucracy is the design and operation of the machine, in comparison to which personnel such as physicians are often made to feel like interchangeable cogs. For people whose professional identity is bound up with caring for individual human beings, this machine-like—even prison-like—environment can prove profoundly disheartening and even positively disabling. Gulliver quickly grows weary of being treated as a mere tool.

Of course, the pernicious effects of consolidation are not confined to physician practices or hospitals. They are also readily apparent in other industries, where just as growing hospitals and health systems can begin to think of themselves as businesses whose service line happens to be healthcare, so other industries can think of themselves in terms of little more than market share, profits, and market capitalization, gradually devoting less and less attention to the quality of the products and services they were originally founded to provide. In other words, money can become such an overarching consideration that some businesses will forsake quality, reputation, and trust in order to make more of it. As Plato wrote 2,500 years ago, when this happens, a physician ceases to be a physician, a craftsman ceases to be a craftsman, and a politician ceases to be a politician, as all three are transformed into little more than money makers. Such metamorphoses are especially common when finance seems to rule the economy, business school graduates are presumed to be ready to lead in any field, and companies are bought and sold, located and relocated, and staffed and downsized based strictly on financial considerations.

For more on these topics, see

“Gulliver’s Travels: Adam Smith’s Favorite Novel,” by Shannon Chamberlain. AdamSmithWorks, October 30, 2019. “Re-Imagining Medicine,” by Richard Gunderman. Library of Economics and Liberty, Jul. 4, 2022. “Inside Leviathan: Lessons from Gordon Tullock’s Bureaucracy,” by Stefanie Haeffele and Anne Hobson. Library of Economics and Liberty, Nov. 4, 2019.

It is just at this point, when our pride gets the better of us, that we are most vulnerable. Medical practices, hospitals, and health systems exist not to expand their markets, to boost their profits, or to fatten the wallets of their executives. They exist to care for patients, and even though remaining small may run counter to every instinct of the contemporary business school graduate, there are many things in healthcare that tend to be better done at a smaller scale. First and foremost is caring. Just as Gulliver can find no intimacy with the Lilliputians, and the Brobdingnagians can find no intimacy with him, so a large and necessarily bureaucratic healthcare organization cannot care for its employees or the people for whom its employees care. Why? Because it does not operate at their scale. It is simply too big to operate on personal relationships because it is too big to see individual human beings. And any organization that cannot operate on personal relationships, with a steady focus on individual human beings, cannot, by its very nature, foster the human excellences on which good medicine depends.

*Richard Gunderman is Chancellor’s Professor of Radiology, Pediatrics, Medical Education, Philosophy, Liberal Arts, Philanthropy, and Medical Humanities and Health Studies at Indiana University. He is also John A Campbell Professor of Radiology and in 2019-21 serves as Bicentennial Professor. He received his AB Summa Cum Laude from Wabash College; MD and PhD (Committee on Social Thought) with honors from the University of Chicago; and MPH from Indiana University.

In Search of Stable Money
61QAh8XNfEL._SX428_BO1204203200_-199x300.jpg Under a gold standard, government bonds are nearly free of inflation risk but not of default risk. Under a fiat standard, the reverse is true. ——White, Lawrence H. Better Money: Gold Fiat or Bitcoin? (pp. 214-215).1 In his new book, Lawrence H. White compares three possible monetary systems: a gold standard, a fiat money standard, and a Bitcoin standard. He interprets history to provide evidence for how these standards operate.

It would seem that the best monetary standard is one in which the purchasing power of the monetary unit is stable. An unreliable money imposes large costs on households and businesses. They have to spend resources understanding the meaning of price movements (is this a relative price change or part of general inflation?), forecasting the rate of inflation, and trying to protect purchasing power of savings.

The search for the best monetary standard is therefore a search for stable money. White analyzes gold, fiat money, and Bitcoin from that perspective.

A gold standard is one in which a dollar is defined as a certain weight of gold. This means that all dollar exchanges can be ultimately settled in gold. But it does not mean that all payments must be made in gold.

Suppose that all of the gold in the world sits in a single vault. Title to the gold is tracked on a computer. What circulates are abstract representations of title to gold. These could be dollar bills, bank checks, or other media. When I pay for groceries, the amount of gold to which I have title goes down, and the amount to which the grocer has title goes up.

White points out that one reason that banking emerged is that payment using physical gold was cumbersome. Coins were not uniform:

Out of the coin-changing business, modern banking arose to provide a way for merchants to cope with the confusing welter of coins. p. 51

A bank can over-issue notes. It can profit by lending out more than the value of its reserves (which would be gold under a gold standard). The bank is counting on not all depositors redeeming their notes at once. This is called fractional-reserve banking. If fractional-reserve banking were outlawed, then profitable opportunities to the economy would be lost. But if banks do over-issue, they are potentially subject to runs. White suggests that some fractional-reserve banking is natural, and I agree that its advantages outweigh its pitfalls. However, these advantages and pitfalls prevail under any monetary standard.

In a fiat money standard, the government issues money, and people accept money as payment. As White points out:

No country we know of switched to a fiat standard following an open public discussion of its benefits and costs. p. 194

Instead, fiat currency arises from a bait-and-switch. A government will start with a well-defined currency, with its value tied to gold or some established foreign currency. Then the public becomes accustomed to using that currency. At some point—typically during a crisis—the government will let the currency float, dropping its promise to exchange currency for gold or other valuable assets. Europeans switched to fiat currencies during World War I in order to be able to print more money to pay for the war. America did it in 1971, because it could no longer sustain redeeming paper dollars for gold at the parity established at Bretton Woods in 1944.

“Network effects and lock-in effects enable the bait-and-switch to fiat currency.”

Network effects and lock-in effects enable the bait-and-switch to fiat currency. The network effect is that when other people are using a medium as money, it pays for me to accept that medium as money. Because other people are using it, I know that I will be able to use it. In this way, people are, to a large extent, locked in to using currency even after the government withdraws its promise to maintain the value of the currency. Network and lock-in effects:

… habituate people to accept redeemable paper money, with the result that, when redemption ends, they continue accepting it so long as it works, and it works (given moderate supply growth) so long as others follow the same strategy. (p. 195)

This means that a society is not necessarily using the optimal money. There might be a better monetary standard available, but no one will switch because they are waiting for others to switch.

An argument against fiat money is that it makes it tempting for governments to run deficits, print money, and inflate away its debts. An argument for fiat money is that it gives the government more freedom to engage in counter-cyclical fiscal and monetary policy, creating better macroeconomic stability.

White argues that in practice, fiat money has made macroeconomic instability worse, not better. He compares macroeconomic performance in the United States in three eras: prior to the establishment of the Federal Reserve in 1913; under a Fed-managed gold standard from 1913 to 1971; and under pure fiat money standard from 1971 to present. He indicts the fiat money regime as having high inflation and volatility, particularly compared with the gold standard as it operated prior to 1913.

A large section of Better Money discusses a Bitcoin standard. White argues that in theory Bitcoin could offer the benefits of a gold standard, but because of network and lock-in effects it will be difficult for the economy to shift to a Bitcoin standard.

One issue with Bitcoin is that some people want to use Bitcoin through intermediaries for convenience and efficiency, but other people want to avoid intermediaries in order to preserve privacy. These two different modes of use do not reinforce one another. They do not create a single network effect for Bitcoin.

Under our existing fiat currency regime, gold and Bitcoin are speculative assets. One motivation for speculating in gold or Bitcoin is to protect against a complete collapse of the fiat dollar. If government deficits continue to be mismanaged, it could transpire that hyperinflation breaks out, driving the value of the dollar to zero. In this (unlikely) event, Bitcoin and/or gold would be very valuable.

The dollar prices of gold and Bitcoin are volatile, but White points out that this actually represents uncertainty about the value of the fiat dollar. If the fiat dollar were certain to remain stable, then speculative demand for gold and Bitcoin would disappear. On the other hand, if gold were adopted as a monetary standard (a dollar = x ounces of gold), that also would eliminate speculative demand. Under a gold standard, the purchasing power of gold would be stable. It is unstable today because we are in a fiat money standard that seems fragile.

White notes that Bitcoin’s price is more volatile than the price of gold. He repeatedly blames this on the fact that Bitcoin’s supply is inelastic: it is fixed by an algorithm and cannot respond to price changes.

I did not find this argument persuasive. Gold supply is highly inelastic, also. That is because the stock of gold is large relative to what can be extracted from mines or jewelry in a year. Indeed, a highly variable supply is not desirable for a monetary standard.

I think that Bitcoin’s price is more volatile than gold because its speculative demand is more volatile. The participants in Bitcoin speculation are relatively few in number, so that the market is thinner. Third-party exchanges are much less well established. Speculators have little historical experience to go on, so that their expectations can change suddenly. Bitcoin’s potential to serve as a store of value in case of a fiat money collapse are much less certain than the potential for gold.

For more on these topics, see

Gold Standard, by Michael D. Bordo. Concise Encyclopedia of Economics. Competing Money Supplies, by Lawrence H. White. Concise Encyclopedia of Economics. “Can Cryptocurrencies Become Money?” by Nicolas Cachanosky. Library of Economics and Liberty, Nov. 1, 2021. Podcast episode Lawrence H. White on Monetary Constitutions. EconTalk.

As an individual, I find the present situation regarding fiat money to be challenging and disturbing. I am one of those who view present fiscal policy in the United States to be on an unsustainable course. To me, it looks as though at least some significant inflation is inevitable. To speculate in gold or Bitcoin, I would have to be confident that my outlook for inflation is higher than that of other speculators in those assets. If their outlook for inflation is more dire than mine, then they have already bid prices above the “right” level. So my own search for a stable source of value in an environment of fiscal recklessness is a never-ending challenge.


[1] Lawrence H. White. Better Money: Gold Fiat or Bitcoin?.

*Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012.

Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive.

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