Market Process Blog

Economicsts often argue that education needs to be produced or subsidized by governments to be because it has public goods characteristics and there are positive externalities or spill over effects that lead to inefficient production in the private sector. Private schools however continue to exist in the market place. An additonal argument against private schools is that they are too expensive for most families.

Yet well before the Progressive Era of the 1920s, the New Deal’s expansion of a government safety net in the 1930s, and the 1960s War on Poverty. Milton Hersey in 1909 opened up a private school with the commitment of educating children with social of financial need. Below is the mission of the school.

The mission of Milton Hershey School remains true to the ideals upon which it was founded more than 90 years ago: In keeping with Milton and Catherine Hershey’s Deed of Trust , Milton Hershey School nurtures and educates children in social and financial need to lead fulfilling and productive lives.

Today, Milton Hershey School is a cost-free, private, coeducational home and school for children from families of low income, limited resources, and social need. The School is funded by a trust established by Milton S. Hershey and his wife Catherine. Milton Hershey School offers a positive, structured home life year-round and an excellent pre-kindergarten through 12th grade education. Our vision focuses on building character and providing children with the skills necessary to be successful in all aspects of life.

Before the Wealth of Nations Adam Smith wrote The Theory of Moral Sentiments his work on moral philosophy. In it Smith talks about the conceit of government leaders, what Friedrich Hayek later called the “Fatal Conciet.” Below is one of my favorite quotes from the The Theory of Moral Sentiments

The man of system, on the contrary, is apt to be very wise in his own conceit, and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests or the strong prejudices which may oppose it: he seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on earily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

Some general, and even systematical, idea of the perfection of policy and law, many no doubt be necessary for directing the views of the statesman. But to insist upon establishing, and upon establishing all at once, and in spite of all opposition, everything which that idea may seem to require, must often be the highest degree of arrogance. It is to erect his own judgment into the supreme standard of right and wrong. It is to fancy himself the only wise and worthy man in the commonwealth, and that his fellow-citizens should accommodate themselves to him, and not he to them. It is upon this account that of all political speculators sovereign princes are by far the most dangerous.
The Theory of Moral Sentiments, Part VI, Section II, Chapter 2

Robert Ekelund and Robert Hebert authors of one of the best selling History of Economic Thought Textbooks write about the contributions of Adam Smith to economics. These contributions are not all to original thought but to the development of the discipline.

“Adam Smith is today considered the father of ecnomics because he was above all a system builder. There is evidence that he began to construct a general system of analysis two decades before the publication of the Wealth of Nations, and the outlines of that system were clearly visible before 1776. Smith’s system combined a theory of human nature and a theory of history with a peculiar form of natural theology and some hardheaded observations of economic life. … Smith’s acomplishments in the field of ecnomics not only tended to render economics a serious and separate discipline of scientific inquiry but also the marked the beginning of what is called the classical period in economic thought.”

I thought I would continue with some thoughts on Adam Smith as we continue with Adam Smith Week. The whole point of the invisible hand is to suggest that it is self-interest that motivates individuals. This has become a corner stone for economists understanding of individual behavior. Yet, I have always been more partial to the following quote from the Wealth of Nations as an even better and more obvious statement of this concept.

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 necessities but of their advantages.
The Wealth of Nations, Book I Chapter II

Today begins the Initiative for Public Choice & Market Process’ first annual Adam Smith Week. In the spirit of the week I thought I would start the blog off this week with a quote from the most important document written in 1776. No, not the declaration of indepence, but An Inquiry into the Nature and Causes of the Wealth of Nations. In particular, Adam Smith’s most famous quote the concept of the invisible hand.

“Every individual…generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
The Wealth of Nations, Book IV Chapter II

George Will has an intersting article in the Washington Post on the good intentions of regulation. An iteresting paragraph that caught my eye.
Five months after enactment of TARP, a plan for unfreezing the credit system remains, like Atlantis, rumored but unseen. Twelve months after the government brokered the marriage of Bear Stearns and J.P. Morgan Chase, the government is recapitalizing financial institutions that the market has said should be shuttered. Lawrence H. White, economics professor at the University of Missouri at St. Louis, denies that financial institutions ever were “unregulated.” Hitherto, such institutions were “regulated by profit and loss”:

I don’t understand all the outrage over AIG’s paying bonuses to executives after the company received government bailout money. Today there are going to be hearings before Congress so the politicians can act outraged. It’s $165 million… out of the $170 BILLION AIG has received. That’s about a tenth of one percent of the bailout money given to AIG. And it’s a tiny amount of the overall amount of spending that we’ve done in recent months – how many TRILLIONS?

What was everyone expecting AIG to spend the money on? Overtime pay to workers trying to regain the confidence of the public? The politicians didn’t know that these types of firms often pay bonuses? And what about the administration saying that they had been tracking where the money was being spent. Government really isn’t looking too competent here; they’re just throwing money away. Let these companies go bankrupt. Not only would the executives not get bonuses, they’d lose their jobs. Why save them from that?

Representatives for the administration have said that they can’t prevent the payments from being made, since they’re contractual obligations. Yet, they’re more than happy to suggest that judges should be able to change contracts individuals have with mortgage companies – to lower the interest rates and balance on the loans. (George Will made this point on This Week last Sun.) It would seem like we may be on a slippery slope, with government now selectively enforcing contracts.

Unfortunately, but fortunately for government, all of this is likely to result in the public wanting more government control. Everytime some “wasteful spending” is identified for a bailout recipient, politicians will be asked to step in to stop the waste. Where will it end? With government determining where every dollar was spent? Why not just have government take-over all insurance and financial services firms?

All of this spending is waste, so why are we worried about a few dollars here and a few dollars there?

Does Mark Samford, Governor of South Carolina, understand the permanent income hypothesis? Samford wants to take part of the stimulus money form the federal government and use it to pay down the state debt. He has been accused of not considering the needs or hardship of his constituents, but maybe his thougths are guided by economic theory. The explanation of the permanent income hypothesis is below.

Permanent income hypothesis
Over their lives, people try to spread their spending more evenly than their INCOME. The permanent income hypothesis, developed by MILTON FRIEDMAN, says that a person’s spending decisions are guided by what they think over their lifetime will be their average (also known as permanent) income. A sharp increase in short-term income will not result in an equally sharp increase in short-term CONSUMPTION. What if somebody unexpectedly comes into money, say by winning the lottery? The permanent income hypothesis suggests that people will save most of any such WINDFALL GAINS. Reality may be somewhat different. (See LIFE-CYCLE HYPOTHESIS.)

Even animals understand that if you treat your labor poorly you will not be able keep them from leaving your employment, or in this case make your employer leave you.

“Monkey ‘kills cruel owner with coconut thrown from tree’ The animal – named Brother Kwan – found the work tedious and strenuous but Mr Janchoom refused to let him rest, dishing out beatings if he refused to climb trees.
It is believed that the monkey eventually snapped, and targeted his owner from a high branch with one of the hard-skinned fruits.

The global economic contraction has caused some governments to dabble in policies long considered vanquished. Some have raised tariffs and other barriers to trade. In a paper released today, Daniel Ikenson, associate director of Cato’s Center for Trade Policy Studies, writes, “Despite some episodes of backsliding, the world is unlikely to witness a significant departure from the trend toward trade and investment liberalization that has been evident since the end of World War II.”

Ikenson notes the apparent consensus among economists, scholars, and journalists that an outbreak of protectionism would be devastating to prospects for economic recovery, but writes, “Although some governments will dabble in some degree of protectionism, the combination of a sturdy rules-based system of trade and the economic self interest in being open to participation in the global economy will limit the risk of a protectionist pandemic.”