Profit or loss is working to add more value, and seeing customers decide

Return on assets of US firms shows profit or loss offers on average little margin for error

Return on assets of US firms [1]

Profit or loss means buying low now and selling high later, using capital and labor to add value

The activities of the entrepreneur consist in making decisions. He determines for what purpose the factors of production should be employed.[2]

The capitalist-entrepreneur buys factors or factor services in the present; his product must be sold in the future. He is always on the alert, then, for discrepancies, for areas where he can earn more than the going rate of interest. The difference between the general interest rate and his actual return is his… profit…

Profit or loss measures net value added compared to all other value-adding

Every entrepreneur… invests in a process because he expects to make a profit, i.e., because he believes that the market has underpriced and undercapitalized the factors in relation to their future rents. If his belief is justified, he makes a profit. If his belief is unjustified, and the market, for example, has really overpriced the factors, he will suffer losses.

…profits are an index of maladjustment, but in a sense precisely opposed to that usually meant. …profits are an index that maladjustments are being met and combatted by the profit-making entrepreneurs. These maladjustments are the inevitable concomitants of the real world of change. A man earns profits only if he has, by superior foresight and judgment, uncovered a maladjustment—specifically an undervaluation of certain factors by the market. By stepping into this situation and gaining the profit, he calls everyone’s attention to that maladjustment and sets forces into motion that eventually eliminate it. [3]

Profit or loss is finally booked when customers agree to final prices and quantities

…entrepreneurs… are unconditionally and totally subject to the sovereignty of the buying public, the consumers.

The consumers by their buying and abstention from buying elect the entrepreneurs in a daily repeated plebiscite as it were. They determine who should own and who not, and how much each owner should own.

Each ballot of the consumers adds only a little to the elected man’s sphere of action. To reach the upper levels of entrepreneurship he needs a great number of votes, repeated again and again over a long period of time, a protracted series of successful strokes. He must stand every day a new trial, must submit anew to reelection as it were.

Profit and loss are the instruments by means of which the consumers pass the direction of production activities into the hands of those who are best fit to serve them.[2]

It is the consumers… who make the decisions for the economic system. The consumers, through their buying and abstention from buying, decide how much of what will be produced, at the same time determining the incomes of all the participating factors. And every man is a consumer.[3]

  1. Hagel, John, et al. 2016 Shift Index. The paradox of flows: Can hope flow from fear? Deloitte University Press, 2016, p. 26.
  2. Von Mises, Ludwig. Planning for freedom, and twelve other essays and addresses. 3rd ed., Libertarian Press, 1974, pp. 108-150.
  3. Rothbard, Murray N. Man, economy, and state with power and market. 2nd ed., Ludwig von Mises Institute, 2009, pp. 509-516.

Flat tax cuts government micromanagement, increases investment, unleashes growth

Individual wage-tax form shows that flat tax cuts government micromanagement

Figure 3.1 Individual Wage-Tax Form

Flat tax cuts government micromanagement

Direct compliance costs, both in filing and in buying expert advice, exceed $100 billion. Direct tax-planning costs—consulting with lawyers, accountants, purveyors of tax shelters, and financial planners—exceed $35 billion. Revenue lost to the Treasury due to evasion exceeds $100 billion. Distortions from pursuing tax-advantaged investments in the form of lost output may exceed $100 billion. Finally, the lobbyists who inhabit Washington’s K Street corridor probably cost the economy more than $50 billion. Total individual and corporate income taxes for the 1993 fiscal year (October 1, 1992—September 30, 1993) were about $625 billion.

Our flat tax is not an academic abstraction. We have designed tax forms, rewritten the Internal Revenue Code, and worked out all the practical details.

Flat tax cuts government unfairness to wage earners, increasing investment

Our proposal is based squarely on the principle of consumption taxation. Saving is untaxed…

Our flat tax… is designed to be fair from the start. It will insulate the poor from all taxation and will dramatically limit the taxation of wages and salaries, especially among those who are most successful and productive. It will pay for these tax reductions by imposing a sensible tax at a low rate on business income, thus raising the amount of federal revenue collected from businesses.

The current personal and corporate taxes tax wages heavily and business income lightly. The flat tax would reverse this inequity and benefit the great majority of Americans, whose income comes almost entirely in the form of wages. In comparison to the current personal income tax on wages, the flat tax would impose a lower burden on both low earners and high earners.

Flat tax cuts government complexity for wage earners

We believe that the simplicity of our system is a central feature.

The tax form for our wage tax is self-explanatory (see figure 3.1). To make the tax system progressive, only earnings over a personal or family allowance are taxed. The allowance is $25,500 for a family of four in 1995 but would rise with the cost of living in later years. All the taxpayer has to do is report total wages, salaries, and pensions at the top, compute the family allowance based on marital status and number of dependents, subtract the allowance, multiply by 19 percent to compute the tax, take account of withholding, and pay the difference or apply for a refund.

Those who believe that life would grind to a halt with the loss of deductions for interest and charitable contributions need to consider how they would alter their lives the morning the flat tax took effect. They would fire their lawyers and accountants and instead seek advice and information on sound economic investments.

Flat tax cuts government complexity for business people

It is not the purpose of the business tax to tax businesses. Fundamentally, people pay taxes, not businesses. The idea of the business tax is to collect the tax that the owners of a business owe on the income produced by the business.

All a business’s income derives from the sale of its products and services. On the top line of the businesstax form… goes the gross sales of the business—its proceeds from the sale of all its products. But some of the proceeds come from the resale of inputs and parts the firm purchased; the tax has already been paid on those items because the seller also has to pay the business tax. Thus, the firm can deduct the cost of all the goods, materials, and services it purchases to make the product it sells. In addition, it can deduct its wages, salaries, and pensions, for, under our wage tax, the taxes on those will be paid by the workers receiving them. Finally, the business can deduct all its outlays for plant, equipment, and land. (Later we will explain why this investment incentive is the right one.) Everything left from this calculation is the income originating in the firm and is taxed at the flat rate of 19 percent.

Business would be expected to run a tighter ship with the much higher returns that a 19 percent rate affords over current high rates. Tickets for box seats at baseball stadiums, club memberships, business travel, company cars, and a host of other business outlays that incorporated and unincorporated firms regularly purchase would now cost the owners of that business eighty-one cents of after-tax income, rather than the current sixty cents.

When flat tax cuts government, it unleashes growth

We project a 3 percent increase in output from increased total work in the U.S. economy and an additional increment to total output of 3 percent from added capital formation and dramatically improved entrepreneurial incentives. The sum of 6 percent is our best estimate of the improvement in real incomes after the economy has had seven years to assimilate the changed economic conditions brought about by the simple flat tax. Both the amount and the timing are conservative.[1]

  1. Hall, Robert E., and Alvin Rabushka. The Flat Tax. Hoover Press, 2007.

Initial property rights come from showing up in force, and developing your claim

California gold rush miners with pistol showing illustrates the origins of initial property rights

California gold rush miners, with pistol showing [1]

In the most general sense, ownership rights are “the expectations a person has that his decision about the uses of certain resources will be effective.”

Initial property rights require first showing up

The discovery which started the famous gold rush was made on Janu­ary 24, 1848…

…the rigors of the voyage to California, whether by boat or foot, killed many potential miners before they reached the gold fields, eliminat­ing all but the strongest.

…several wealthy individuals residing on the east coast financed mining companies to go to California. On average, these com­panies consisted of forty to fifty persons who were to mine gold as a group and share it with their financial backers remaining in the states. Well documented accounts of these companies reveal that most did not survive as a group long enough to reach California. Those that did, soon dis­banded, forsaking their original agreement and each individual worked for himself.

…there were no federal laws regulating the private acquisition of exclusive rights to mineral lands.

…even had there been prior legal con­straints… most of the local and federal law enforcers in California deserted to the gold fields.

“Two companies of regulars, every day diminishing by desertions, that cannot be prevented, will soon be the only military force in California…”

By the end of August, 1848, the number of miners was estimated at somewhere between 5 and 10 thousand. …after the famous rush of 1849 which brought people from nearly every country in the world, the population was thought to be over one hundred thousand and, within two more years this figure reached a quarter of a million.

…the first miners… found gold bearing land to exist over an area three hundred miles long and one hundred miles wide along the western foothills of the Sierra Mountains.

Initial property rights require developing your claim

…theory implies that the total amount of homogeneous mining land will always be divided evenly among the competing miners. …individuals holding more productive land will get less land than others whose holdings are not so productive. 

Each time a new deposit was discovered, a group of miners would rush to the site and form a new district through explicit contract. It is estimated that between 1848 and 1866 there were nearly five hun­dred independent mining districts established, each with its own unique distribution of land among the contracting parties.

“The first workers on the bar had taken up claims of a generous size, and soon the whole bar was occupied. The region was full of miners and they came pouring down upon the river, attracted by the reports of a rich strike, until their tents and campfires presented the appear­ance of a vast army. Those without claims far exceeded in number the fortunate ones. A miners’ meeting was called to make laws. Majority ruled in a mining camp in those days, and it was voted to cut down the size of claims to forty feet. The claim owners were powerless to resist, but had to admit to the fiat of the majority. The miners were then registered in the order of the date of their arrival upon the bar, and in that order were allowed to select claims until all were taken. Even then there was a great crowd of disappointed ones.”

In these contracts, it was provided that each individual was to get a parcel of land of specified size. As long as the miner worked this parcel, called a “claim,” at stipu­lated intervals, he had exclusive rights to the land and all the gold con­tained.

Using a pick and shovel in temperatures approaching 100 degrees, washing dirt in rivers formed from melting glaciers, subsisting on a diet of questionable nutritional content and living in unsanitary conditions quickly destroyed the weak and the sickly.

Initial property rights require showing adequate force

…every mining district had provisions for punishing claim “jumpers” and excluding outsiders in their bid for some of the already claimed land.

Walls were not constructed around claims nor were jails built.

…the miners did not hire specialists in force to help them maintain their exclusive land rights.

…weapons such as cannons or rockets were not used in the gold fields.

The pistol, which nearly every miner wore, was the primary instrument for maintaining exclusivity.

While some men probab­ly could use the gun with greater accuracy or speed than others, I suspect that the variance in ability was not large. The six shooter was not called “the equalizer” for nothing.

…the assumed and observed vari­ance in the ability to use force was insignificant, so all observed distribu­tion patterns were attributable only to differences in land values.

Initial property rights come from taking risk and adding value; they aren’t given up lightly

…the initial allocation is not a random process…

…any reallocation pro­gram which assigns to individuals less wealth than they could have through the use of their own force will be a costly failure.[2]

  1. Arrival of the Watertown Boys: Letters from John C., 17 Feb. 2011, Accessed 15 Apr. 2017.
  2. Umbeck, John. “Might makes rights: A theory of the formation and initial distribution of property rights.” Economic Inquiry 19.1 (1981): 38-59.

Better ideas take over in the 1930s, giving everyone a free lunch

General Motors Futurama visitors at the 1939-1940 New York World’s FairGeneral Motors Futurama visitors
at the 1939-1940 New York World’s Fair [1]

When better ideas take over, they add more value than the sum of the capital and labor inputs

A rough measure of the technological and organizational progressivity of an era is how much more rapidly output grows than a weighted average of the growth of labor and physical capital (structures and equipment). That difference, or residual, represents the growth of total factor productivity.

This chapter examines the years 1929-41 in the United States…

…output rose very rapidly… almost entirely as the consequence of the growth of total factor productivity.

Total Factor Productivity  annual growth rates in the US for 1873-2010

Double digit unemployment for more than a decade represented a terrible waste of human and other resources, and untold hardship for the millions of people out of work.

And yet the Depression years were also a triumph of American ingenuity, inventiveness, and hard work. What I have called the country’s Great Leap Forward…

Better ideas take over in the 1930s in processes and materials

…the 1930s were… a great age of process and materials innovations.

  • The 1930s… saw the tail end of the revolution in factory layout and design that had produced such extraordinary TFP gains in manufacturing between 1919 and 1929 (over five percent per year). That revolution involved replacing systems for distributing power internally within a factory.
  • Machinery became larger… …capital and operating costs per unit of output dropped when capacity increased.
  • …topping techniques used the steam from high pressure boilers to heat lower pressure boilers.
  • More generally, throughout industry, exhaust gasses from stacks were used to preheat air to improve combustion, preheat materials for subsequent fabrication, or generate steam…
  • Improvements in thermal efficiency also benefited from attention to low cost but often high payoff investments in insulation.
  • Similarly, modest investments in instrumentation yielded big efficiency gains, facilitating automatic process control, which lengthened the life of equipment, and reduced downtime and maintenance costs.
  • Better treatments extended the life of wooden railroad ties from eight to twenty years.
  • Stainless steel reduced oxidization on railway cars, while chrome plating lengthened the lives of tools and moving parts. Carbon steel blades had to be removed and resharpened after cutting 60 feet of plastic. A tungsten carbon alloy blade could cut 10,000 feet without refitting.
  • Quick drying lacquers reduced the time needed to paint a car from more than three weeks in the early 1920s to a few hours, with consequent reductions in inventory costs.
  • During the 1930s mechanical refrigerators moved from a “bleeding edge” product to a mass production and mass consumption item.
  • In 1928 the Dupont Corporation lured Wallace Caruthers away from his laboratory at Harvard to Delaware, where he began to develop blockbuster new materials including neoprene and nylon. Caruthers… committed suicide in 1937…

Better ideas take over in the 1930s in transportation

The other major source… was spillovers in transportation and distribution resulting from the  buildout of the surface road network.

  • Railroad productivity soared, in part because of institutional and organizational changes involving freight interchange…
  • …there was enough production during the Depression to replace every truck and bus on the road in 1929 at least once, and add millions more to the transportation system. These newer vehicles were, on average, larger, more powerful, and more reliable.
  • …cars were much improved. Radios, heaters, and four wheel hydraulic brakes were now standard. Automatic transmission, power steering, and more powerful engines became options. Tires moved from the narrow profile high pressure products of the 1920s – reflecting the birth of the automobile in the bicycle industry, to the low pressure balloon tires upon which most of us roll today. Vehicles were streamlined and more aerodynamic, with headlights and trunks incorporated into the body rather than addons.
  • In 1936 Donald Douglas introduced the DC3 – arguably the world’s most famous and successful aircraft (it had a starring role in the closing scenes of the movie Casablanca, alongside Humphrey Bogart and Claude Rains). …all US aircraft that saw major service operation in World War II were already on the drawing boards (“substantially designed”) in December of 1941…[2]

  1. Field, Alexander J. A great leap forward: 1930s depression and US economic growth. Yale University Press, 2011.
  2. Field, Alexander J. “Economic Growth and Recovery in the United States: 1919–1941.” The Great Depression of the 1930s: Lessons for Today, edited by Nicholas Crafts and Peter Fearon, Oxford University Press, 2013, pp. 358-394.

Ellis Island mass immigration let in people who were ready to work, but still looking

The Immigrant's Track Through Ellis Island

The Immigrant’s Track Through Ellis Island
A. Immigrants landed from barges enter by these stairs.
B. Surgeon examines health tickets.
C. Surgeon examines head and body.
D. Surgeon examines eyes. Suspects go to left for further examination.
E. Female inspector looking for prostitutes.
F. Group enters and sits in pen corresponding to ticket letter or number.
G. Inspector examines on twenty-two questions.
H. Into special inquiry court.
I. Stamping railroad ticket orders.
J. Money exchange and telegraph office.
K. To railroad pen.
L. To New York pen.
M. To the ferry and New York.
N. Telegraph office.[1]

Armed, on the one hand, with the Public Charge Law of 1882, which excluded those who seemed like invalids or paupers and, on the other hand, with the Anti-Contract Labor Law of 1885, which excluded those who seemed like they came with a promise of work, federal administrators quickly assumed the task of erecting an elaborate inspection apparatus for individuals seeking to enter the United States.

These two contradictory laws, developed in different historical circumstances, operated with equal legal force on Ellis Island, as inspectors selectively admitted immigrants who seemed able-bodied and defenseless.

“To get the fullest grasp,” Brandenburg explained in his book, “we must become immigrants ourselves and re-enter our own country as strangers and aliens.” Disguised as “Italian,” then, this peculiarly self-reflexive journalist convincingly documented aspects of passing through Ellis Island.

Much of the legal work of Ellis Island occurred aboard the ships that took immigrants across the Atlantic. On board, Brandenburg recounted how federal law required ships’ manifests to match precisely the name of every immigrant who appeared before inspection or the United States authorities would “exact a fine of $200.”

Likewise, immigrants began rehearsing the federal inspection process on the ships. Not only did those who had already been to the United States tell stories about inspection to others on board, but prior to sailing some had prepared written rehearsals that they consulted in transit: “I saw more than one man with a little slip of notes in his hand carefully rehearsing his group in all that they were to say when they came up for examination.”‘

At first, inspectors thought the two “were dagoes all right,” but they grew suspicious at Brandenburg’s wife who, as one inspector claimed, was “the first woman I have ever seen in the steerage with such well-kept finger-nails.” Clean finger-nails drew attention, because they upset the inspector’s expectations of Italians as dirty people, and so her fingers suggested that she was perhaps trying to attract attention – the kind of attention allegedly sought by prostitutes.

On Ellis Island itself, the couple experienced little trouble passing through immigration controls: “Our papers were all straight, we were correctly entered on the manifest, and had abundant money, had been passed by the doctors, and were properly destined to New York, and so were passed in less than one minute.”

Brandenburg’s account reveals how inspection effectively encouraged each immigrant to appear meek, yet able-bodied in front of inspectors enforcing contradictory laws. In other words, inspection favored those who appeared defenseless and duty-minded.[2]

  1. Brandenburg, Broughton. Imported Americans: The Story of the Experiences of a Disguised American & His Wife Studying the Immigration Question. Stokes, 1904. pp. page facing 227, 227.
  2. Anthes, Louis. “The Island of Duty: The Practice of Immigration Law on Ellis Island.” New York University Review of Law & Social Change 24 (1998): 563-600.