Archive for December, 2015

Robert Salvino on entrepreneurship and public policy — transcript of video interview

Wednesday, December 30th, 2015

Interview conducted at Rockford University by Stephen Hicks and sponsored by the Center for Ethics and Entrepreneurship.

Hicks: Hi. I’m Stephen Hicks. Our guest today is Professor Robert Salvino, who teaches Economics and Entrepreneurship at Coastal Carolina University in South Carolina. He spoke with us today on entrepreneurship and public policy. robert-salvino

One of your initial themes was the importance of entrepreneurship as a driver of the economy. Innovation, business startups, employment, and so forth. And you were pointing out what we actually do know about entrepreneurship. What are the traits that go into entrepreneurial success?

Salvino: Right. When we think about entrepreneurship, we think of a very positive-oriented type of person’s behavior, somebody who is a problem-solver, who sees obstacles and is already thinking about ways to get around those obstacles and accomplish things in spite of barriers that might seem to be very big for the rest of us.

Hicks: Right. And then the question then is: if we want to encourage entrepreneurial behavior, what kind of institutional framework is going to make that happen — or retard it? In your lecture, you made a distinction between a more active approach to public policy, when government is trying to foster entrepreneurship by picking winners and losers, so to speak, and a more indirect approach, where the government sets very general conditions within which entrepreneurship can flourish. What is the difference between these two approaches?

Salvino: An active public policy approach would be literal programs, if you will, that would maybe subsidize start-ups. If you start a small business, there will be credits that will be given to you or job training will be provided, or these types of things, trying to get people to start things. A passive approach to public policy would simply just to allow things to happen. So, have a very favorable business climate in the first place without somebody having to check the regulations and licenses and requirements and see what kind of things they could do. And maybe if you are in this type of industry, you can get better subsidies or things, so, taking that away and letting things just kind of run their course.

Hicks: So the argument there is: you take away particular types of policies, and you create an environment in which entrepreneurship will flourish. Whereas the other is to have that plus particular programs directed to stimulate entrepreneurship. In your talk you also in passing contrasted some regimes around the world that seem actively to discourage entrepreneurship. North Korea is an example. And then the example of cellphones was very striking. What was that?

Salvino: Just a few years ago, Eric Schmidt with Google and, I believe, Josh Cohen went to over to North Korea. They’ve got a book coming out that talks about technology and its role in the spread of prosperity and the changing of oppressive regimes. Just a few years ago, you were not allowed to have a cellphone in North Korea without some sort of authorization. The majority of population did not have a cellphone. Then, they later allowed a million people in a very large country to have a cellphone, but it was a controlled cellphone.

Hicks: If we try to evaluate, then, the two entrepreneurship-friendly approaches, where we assume that entrepreneurship is a good thing and we want to foster it, how do we evaluate whether a more active hands-on government fostering of entrepreneurship works better than a more relaxed government approach?

Here you took us through some history, asking us to look at some of the great entrepreneurial success stories, Google, Apple, AT&T earlier, Standard Oil, and so forth. What is the lesson that we learn from those examples, on your reading?Steve_Jobs_Headshot_2010-CROP

Salvino: Right. Those companies, those technologies — nobody would ever predicted the emergence of these new industries. Ford Motor Company, you would not have been able to identify a group of people whom might have been more likely to be successful. Try to take a group of people from MIT and put them in a room and say: ‘create the next big thing’. People like Steve Jobs and Bill Gates — nobody would have ever identified them as people likely to create the things that they did.

Hicks: So the argument there is just having a culture in which creative, innovative people can do what they want to do, you’re going to get entrepreneurship. And then on the negative side, you had examples like Solyndra, where active public policy trying to promote certain kinds of entrepreneurship blows up in our faces with a huge price. Stay more with that one.

Salvino: Solyndra was, I believe, awarded about $500 million in subsidies through the federal government because they were in a favored industry working in green technologies. And Solyndra went bankrupt within, I believe, a couple of years of forming. If the company, a start-up, had able to get private investors to back them to the tune of $500 million, it’s very unlikely they would have gone bankrupt in two years. So, the difference is between what went into the development of a company like Solyndra versus a company like Apple.

Hicks: Okay. Are we able to step back and cite statistics and say that here is the more relaxed, entrepreneurial-friendly environment, and in that environment, you get a certain number of entrepreneurial successes — Apple, Google, and so forth — but that we’re also going to have a whole lot of failures?

Salvino: Sure.

Hicks: Contrasting that with a government that is more hands-on and tries to pick entrepreneurial winners and losers, they are going to have a lot of failures, but they also have some winners. Are you able to quantify the relative success rate of those two approaches?

Salvino: I haven’t looked at that in my research, but I think if you look at it just from a theoretical perspective and think about resources that are invested in any and each of those, certainly you are going to have many, many failures in the private market with experimentation. But the difference would be the amount of leverage of that investment and the people who suffered as a result of that. If it truly is a market process, the spread of failure is not going to have the negative impact on all of society that something like many Solyndra-type things would.

Hicks: Okay, so we have one 500 million dollar failure that has to be put against then 500 one-million dollar failures, and so forth.

Salvino: Exactly. It is spread throughout the whole system.

Hicks: Now, you also had one particular example of public policy that seemed more indirect, and that was health insurance, where this is not directly intended to have an impact on entrepreneurship or not. But for various other reasons health insurance is a desirable goal, so the government wants to encourage the greater provision of entrepreneurship. But, nonetheless, indirectly it has an impact on entrepreneurship as the example you presented. How does that work?

Salvino: Okay, if we talk of a different types of entrepreneurs, a self-employed individual as one type. So, employer-provided health care as it emerged over time took years and years to grow and become kind of cemented into our culture as an expectation of a good job were good benefits. And so the rate of self-employment just seems to, over the same period of time, been about cut in half. And so, there is a real cost to acquiring Barack Obama, Chris Gronethealth insurance on your own in this independent market versus when you are with a large company. When you are with a large company that provides the benefit, there are direct policies that make it easier for a large company to provide the benefit to the employee. And so there is a hurdle that is created there, whether it was intended or not.

Hicks: Okay, so the way this works then is health insurance is a desirable thing for individuals. Government creates a policy that encourages employers to provide health insurance for employees. That makes employment with a company that’s providing health insurance more attractive than self-employment, so self-employment rates go down.

Salvino: Right. That’s kind of the idea that I have looked at and to see if there is a causal relationship between the two. Certainly, we can see at least anecdotally this idea that we place a very high premium on benefits. There was a survey done a couple of years ago throughout the world asking adolescents what do they want when they become adults. And most of them said they want a good job with good benefits. So this has been cemented into our culture.

Hicks: Okay, then public policy responds to that directly.

Salvino: And public policy responds and, in some cases, has helped propel that idea, that expectation.

Hicks: Scaling out then: your proposal was that we should have the more indirect, passive approach to public policy by creating general conditions within which entrepreneurs are free to innovate and experiment. What are those general conditions that you think work best?

Salvino: So, for example, just a sound monetary system that allows us to make long-term contracts and have an idea or expectation of what interest rates are going to be, what the rate of inflation might be, and how that affect us. Property rights, so that when we go into an organization, we form a corporation, we conduct business, we know that our rights are protected and that there is a judicial system that is going to help us solve disagreements and such things. Contract enforcement is another example of an institution that helps. When contracts are not going to be enforced, individuals, investors, or entrepreneurs may be very leery of forming partnerships with people that they may not know very well.

Hicks: You gave the example of China, part way through, as a very striking example. One of things we’re interested in is wealth creation. And wealth creation certainly is an important value if we are already comfortable. Nonetheless, we would like to be more prosperous and make sure our kids are more prosperous.

But wealth creation is important when we think about poverty and places in the world that are still ridden with poverty. You mentioned China as a very striking example. In the last generation, something happened that has never happened before in human history, namely, half a billion people were lifted out of dire poverty into a basic minimum standard of living. Can you track China’s success in doing so to public policy changes in China? And if so, what do you think those were?

Salvino: Right. If you go to China a generation ago, we think of China as a communist country. And still today people associate China with communist regime. But it is going in a different direction than many developed countries in the world. It is kind of backing down from that and going from a completely communist institution to state capitalism. Maybe it’s state-directed capitalism with capital ownership, but still it’s a step in the opposite direction, towards allowing markets to flourish more than previously had. And if we think about it from the perspective of our country, many American businesses over the past generation have put operations in China. And over the period of a generation it has become easier for these businesses to operate in China, to maintain their own property rights.

An individual came and spoke to a group of business leaders in South Carolina a couple of years ago and talked about an operation when they first went into China. In order to start their company they had to give away majority ownership of this subsidiary in China, so they were very leery to do that. And over the past few years, that went away to where they were not any longer required to give away that type of ownership of their company. And as more companies have been able to go into China, not having to give up certain of those property rights, more companies will go in there and conduct business. So there are jobs created in China by American companies and other companies throughout the world. And over a generation that has been one factor, I would say, that has helped to alleviate some of their problems.

Hicks: So China is moving in the right direction?

Salvino: Right, they are moving in the right direction.

Hicks: Thank you for being with us today. Interesting material.

Salvino: Thank you.

[The original video interview with Dr. Salvino follows.]

CEE Review: Uber, Cuba, and Freedoms Small and Large | Microloans don’t solve poverty | Hollywood’s terrific story about Wall Street, and more

Monday, December 21st, 2015

News and Opinion

brazil-cell-phonejpgWhy Latin America Is the Next Big Mobile Battleground. Knowledge@Wharton.

Chinese the most dishonest, Japanese and British the least, study finds. South China Morning Post.

Microloans Don’t Solve Poverty. FiveThirtyEight Economics.

A classic on the individuality of trade values: 26-year-old Montreal man barters a single red paper-clip all the way up to a house in 14 trades. CBC.

Don’t Confuse Uber’s Impact With Its Legal Status. Business Ethics Highlights.

Uber, Cuba, and Freedoms Small and Large. Stephen Hicks at Everyjoe.

Uber-Logo-Vertical-DarkRevolutionary steel treatment paves the way for radically lighter, stronger, cheaper cars. Gizmag.

Hollywood has long been ambivalent about Wall Street. Finally, it has found a terrific story to tell about finance. The Economist.

Are we becoming a nation of freelancers? Mercatus Center.

5 Veteran Freelancers Reveal Their Best Negotiating Tips. The Freelancer.

Announcements

Branson-opportunityDoing Business‘s annual report on regulation around the world.
“Analysis of the Doing Business data for the past 12 years shows encouraging signs of convergence toward best practices, as lower-income economies have improved more in the areas measured by the report than high-income economies that started with a fairly strong regulatory framework when Doing Business was first launched in 2003. Among the areas measured by the report, starting a business has seen the most improvements. In 2003 it took an average of 51 days worldwide to start a business; by 2015 this number had been more than halved, to 20 days.

“Since its launch in 2003 the Doing Business report has inspired hundreds of regulatory reforms worldwide. In the past 12 years more than 2,600 reforms have been recorded globally in the areas measured by the report.” Read the Doing Business 2016 annual report here.

Idea“The best executive is the one who has sense enough to pick good men to do what he wants done, and self-restraint to keep from meddling with them while they do it.” Theodore Roosevelt

See you next time with our digest of new and interesting items in entrepreneurship, ethics, and political economy. Here are the previous editions of CEE Review.

Entrepreneurial Education conference — Call for Papers

Thursday, December 17th, 2015

Entrepreneurial Education conference

apple-176x100Sponsored by the Center for Ethics and Entrepreneurship
Rockford University, Illinois

Call for Papers

The Center for Ethics and Entrepreneurship will be hosting a conference at Rockford University, March 13-14, 2016, on Entrepreneurial Education.

On the Entrepreneurial side of the phrase: We live in entrepreneurial times. From the work demand side, there is increasing proportion of employment within entrepreneurial firms and a slow upward trend in the number of startups. From the work-supply side, younger people of this generation express higher levels of aspiration to start their own businesses or to work within entrepreneurial firms. Increasing globalization and liberalization also mean that the entrepreneurial trends are not only regional or national.

On the Education side: How can we best help younger people become entrepreneurial—either to prepare them for creating their own businesses, or to be entrepreneurial within existing firms, or as freelancing artists, writers, and musicians? If the traditional model of education—students sitting in straight rows of desks and all doing the same work at the same time following the directions of an authority figure—does not prepare students for entrepreneurism, then what should we replace it with?

We also live in a time of dissatisfaction with the dominant forms of education, with many complaints about stagnant or declining outcomes, bureaucratization, demoralization and worse, especially in poorer neighborhoods.

And we live in times of disruptive education technologies—from simple email and online chat to pre-packaged podcasts and video series to robust online MOOCs and more.

Putting all of the above together, how do we answer this question: What should entrepreneurial education look like?

Submissions

Please send 200-word proposals to CEE@Rockford.edu, attention Stephen Hicks and Jennifer Harrolle, by January 20, 2016.

Acceptances will be made by January 25, 2016.

burpee

This conference will be made possible in part by support from the John Templeton Foundation.

CEE Review: Are American sports leagues socialist? | 40 most exciting innovations of 2015 | The great sushi craze of 1905, and more

Monday, December 7th, 2015

News and Opinion

nfl-socialistAre American Sports Leagues ‘Socialist’? Business Ethics Highlights.

Beyond Bailouts: What is Cronyism? Mercatus Center.

Mapped: The World’s Fastest Growing Cities. Visual Capitalist.

The 40 most exciting innovations of the year. Tech Insider.

The Dangers of Taking Too Much Money Too Fast. Kauffman Founders School.

For all creators: The Painter’s Primer: A Survival Kit. Linea.

What I Learned from Four Years Working at McDonalds. Medium.

How Indians Defied Gravity and Achieved Success in Silicon Valley. Forbes.

The Great Sushi Craze of 1905. Eccentric Culinary. And of course you’ll want to read Part Two.

The largest container ship in the world was launched this year. The Panama Canal expansion is scheduled to open next year. It will double the Canal’s capacity. See our interview with Panamanian entrepreneur Surse Pierpoint, who operates out of Panama’s Free Trade Zone.

Amazon-20-yearsIdea: “For me life is continuously being hungry. The meaning of life is not simply to exist, to survive, but to move ahead, to go up, to achieve, to conquer.” Arnold Schwarzenegger

See you next time with our digest of new and interesting items in entrepreneurship, ethics, and political economy. Here are the previous editions of CEE Review.

David Henderson on Seven Myths of Free Markets — Transcript

Tuesday, December 1st, 2015

Interview conducted at Rockford University by Stephen Hicks and sponsored by the Center for Ethics and Entrepreneurship.

Hicks: I am Stephen Hicks, here at the Center for Ethics and Entrepreneurship with Dr. David R. Henderson, an economist visiting from the Naval Postgraduate School in Monterey, California.david-henderson

Dr. Henderson is the author of many books and articles, notably The Joy of Freedom, a semi-biographical exploration of economic themes and his career. Also The Concise Encyclopedia of Economics, a widely-used textbook in economics available both online and in print. Dr. Henderson was here today to speak on the seven myths of free markets. Actually, on seven myths of free markets, leaving open that there might be more.

You mentioned that economics has the moniker, the dismal science, but people don’t often know the actual origin of that. What is the story there?

Henderson: Yes, and the origin is fascinating. The way most people or most economists who think of themselves as informed think is that it came from Thomas Robert Malthus because he was dismal. He thought, two-hundred years ago in his essay on population, that agricultural output could grow only arithmetically and that population would expand exponentially, and, therefore, we would have mass starvation. That turns out not to be the reason at all. The term was coined by Thomas Carlyle, a British anti-capitalist author in the early 19th century. And his objection to economics — you have to remember, economics was dominated by very free-market economists at the time, two-hundred years ago — that those free-market economists who dominated economics strongly opposed slavery. So Carlyle is saying economics is dismal because economists oppose slavery.

Hicks: You then proceeded to the topic about the seven myths with respect to the free market, how people think and evaluate free markets. This is important because it leads to lots of policy issues here. We can run through the seven. The first one ties into Carlyle’s anecdote that free markets, in some sense, promote racism. What do you think about that one?

Henderson: Yes, that’s the myth. And, in fact, free markets undercut racism. This is the typical case people think of when they think about markets and racism. Think of a white employer who is faced with the chance of hiring a black employee who is productive, but because this employer is racist, he says, ‘No’. Free markets make him bear a cost for that action because if he gives up the chance to hire a productive black employee he gives up the potentially profitable opportunity. It doesn’t mean he won’t do it, but it does mean that it will make him bear a cost, and, therefore, the employers who come to get bigger market share are the ones who are the least racist because they are making out best financially. And that, then, gives an incentive even to racist employers not to care as much.

Hicks: Okay, so the less racist employer will hire the black employee, get the productive worker, and then will have a competitive advantage against the less tolerant employer.

Henderson: Exactly. And, in fact, governments were the ones that promoted racism. And the example I mentioned in my talk was street car companies, which one-hundred years ago in the South, were required by law to segregate by race. They had been segregating, but they had segregated smokers from non-smokers. And they were required, instead, to segregate by race, and they fought those regulations tooth to nail until the government got harder and harder on them and they finally gave up.

Hicks: What you call the second myth is the standard slogan, “The rich get richer under free markets and the poor get poorer under free markets.”John_D._Rockefeller_1885

Henderson: Right, and it’s half-truth. The rich get richer, the poor get richer, and in between get richer. And what I would point out is that, if you look at what Rockefeller, the richest man in the world one-hundred years ago, he had stuff that all but our very poorest people have. College students with very little money have cellphones, but he didn’t have that. He couldn’t fly very many places for most of his life. He couldn’t telephone people from most of his life. And then, even more important, if he got sick he couldn’t use penicillin or any other drugs because almost no other drugs existed. And that was key.

Hicks: So, the rich get richer and the poor get richer as well under free markets. Other standard criticism is the dynamic of free market capitalism is to lead to monopolies, and monopolies have various economic pathologies. What about that one?

Henderson: Yeah. Actually, free markets break down monopolies, and the reason is that, when there is a monopoly, the monopoly is making money. Those high profits attract new entrants into the industry the way honey attracts ants. And so, monopolies under free markets tend to be temporary until some better competitors or better product comes along. And an example is the Blackberry, which now is being displaced by the iPhone. What’s interesting is that the Federal Trade Commission was suing Apple for a while on the grounds that they were dominating and whoever gets there first dominates. Well, that’s absurd, because the people who get their first were Blackberry.

Hicks: Okay, fair enough. Capitalism or free markets are bad for the environment. Another myth?

Henderson: Another myth because, in fact, what’s bad for the environment is socialism, because no one has an incentive to care for the environment under socialism. Property is not privately owned, so no one has an incentive to care for it. I have a chapter in my book, The Joy of Freedom, entitled “The Environment Owned and Saved”, and the idea is that if you own something you tend to take good care of it. And, imagine we can get in time travel and travel around the world, what we will find is that in 1990, before the former Soviet countries had a chance to develop out of socialism, you saw pollution. You saw lakes that were destroyed. The Soviet Navy had dropped nuclear waste in the ocean on purpose. If you go to Africa in this time travel, you find that the countries that have the strictest poaching laws are losing the most elephants. But the ones that have poaching laws and also allow the local villagers to share in the benefits from the tourism that elephants give rise to, those villagers have an incentive to then watch out for poachers, and those elephant populations are growing.

Hicks: So, the time travel argument is kind of an historical argument. If you look at the nations that are more socialistic, the environmental record is terrible. In the more free-market countries that have property rights, the environmental problems are either solved or less severe.

Henderson: Yes, solved or less severe is completely accurate.

Hicks: Okay. Free markets lead to war. Another standard one?

Henderson: Yeah, in fact, trade promotes peace because part of free markets is free trade across borders. And if two countries have a lot of trade they have an incentive not to make war. It was interesting that when there was the big conflict between the United States and China in the first couple of months of the Bush Administration, when the Chinese forced a U.S. Navy plane down, and they were held prisoners for about a week to two weeks, the multinational corporations went to Bush and said, “however you resolve this, don’t do it by making war, because China is a great trading partner and we want to keep that going.” And it was resolved. And, in fact, these two economists found that the larger the interaction or the larger the amount of trade between two countries, the lower the probability of conflict is.Henderson-Joy-of-Freedom

Hicks: Interesting. Another myth you call the “Stinginess myth.” Capitalism and free markets are all about money, about getting money, hoarding money, being like Scrooge, and so, those nations are stingy compared to more benevolent modes of organizations.

Henderson: There are two reasons why that’s a myth. The first is that the more economic freedom we have over time, the wealthier we become. The wealthier we are, all other things equal, the more generous we are. The other part is that when governments come in and try to be generous with other people’s money — which, by the way, is really a contradiction — they crowd out private individuals’ actions in that area. So, one reason that Europeans aren’t nearly as generous as we are — and it isn’t mainly wealth because the wealth differences isn’t that huge — is that the government does so many things for people that it never occurs those people to do it for others. So when we have any kind of a natural disaster or whatever, there is this huge outpouring of help, in money, in goods, in food, clothing, time spent, and so on. The economists which looks their nose down at American audiences even admit that we’re the most generous nation in the world. We give on average one weekly paycheck a year to charity, 2% of our income. The average person that volunteers, and the majority of us do volunteer, spend at least four hours a week in voluntary activities. That’s unheard of in most of Europe.

Hicks: The seventh myth on your list had to do with employer/employee relations, with the dynamic being kind of zero-sum. The employers have the upper hand and bargaining power, so free markets allow employers to dominate and not treat their employees properly.

Henderson: Right. That is a myth, and the reason is worker mobility. Within a certain community workers have choices of jobs, and even more important, they have a choice of moving to another community. Railroads, when they came along in the 19th century, made that much easier. And so, what really gives rise to worker power is mobility. Now, it is true that unions can bargain for a higher wage — and they were successful in doing so — but that doesn’t help workers in general. That gives higher wages to the employees who were lucky enough to keep their jobs, but at the higher wage, employers employ fewer people. Those people put out of work because of the unions’ high negotiated wage go elsewhere. They drive the wage down slightly elsewhere by being in that non-union sector. So the main effect unions have on workers is a wash, and it’s essentially a distribution of wealth from the non-union workers to the union-workers.

Hicks: Let me ask one question in conclusion. Why do we think these myths are so widespread, if indeed they are myths? You did present a lot of historical data, a certain amount of economic analysis that seems relatively straightforward. What’s the power that these myths have still?

Henderson: First of all, I think they are still taught in school. I think most schoolteachers don’t know they are myths. Second, there are now groups with strong incentives to push these myths because they want their particular, special deal. They want to have this restriction on capitalism, or they want that monopoly power. And so they push the idea that a free market is dog-eat-dog and all that kind of stuff. So, it’s a combination of bad education and incentives of people to propagate the myths.

Hicks: All right, thanks for being with us today.

Henderson: Thank you.

[The original video interview with Dr. Henderson follows.]