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Lean Startups and Capital Ownership

April 23, 2014 in Economics

By Matt McCaffrey

In the last few years, there has been a big emphasis in entrepreneurship on “lean” startups. Being lean basically means avoiding unnecessary costs early in the development of a new venture, thus minimizing waste and reducing the negative effects of uncertainty. For example, a common lean strategy involves using consumers to test a limited run of an unfinished product in order to furnish data before going to market. This allows the firm to gauge the likelihood of success before committing resources to full-scale production, which is expensive and uncertain.

The conventional wisdom, which in some ways is just economic common sense, is that a new firm should stay lean for as long as possible. Yet one implication that is sometimes drawn from the lean approach is that capital ownership is a negative for early-stage entrepreneurs, because in some ways owning capital narrows a firm’s strategic options, both economically and geographically. Lean ideas are especially popular in high-tech industries (where they originated), which are more likely to be driven by ideas and lines of code than intensive investment in plant and equipment.

The lean philosophy may then hint at some interesting questions for Austrian economists. For instance, if it is true, as many Austrians have emphasized, that entrepreneurship requires resources (and especially capital goods), how would economists respond to the claim that successful entrepreneurship doesn’t or shouldn’t require capital assets (at least in its early stages)?

In fact, I think there may be some important common ground between the lean view and the Austrian one. First, even the leanest firm needs to start somewhere, with some kind of capital (even if it’s just a computer in the entrepreneur’s garage). The problem for lean firms isn’t whether to own all potentially useable capital goods or none of them, but which capital assets to own. In other words, running a lean startup involves careful thinking about the boundaries of the firm. Lean startups are not completely without capital, it’s just that their strategy is to avoid buying it until it makes the most sense; that is, not to expand the boundaries of the firm until absolutely necessary. Being lean is therefore an example of the kind of economic calculation and judgment that Austrians emphasize is at the core of entrepreneurial decision making (including decisions about firm size).

Furthermore, the decision to be lean can work for or against …read more

Source: MISES INSTITUTE

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Limited time offer! 3 courses for the price of 1

April 23, 2014 in Economics

By Daniel J. Sanchez

SPECIAL LIMITED TIME OFFER: Enroll in “Basics of Economics: Government Intervention” (formerly titled “How Government Wrecks the Economy”), which is the third and final course in Robert Murphy’s Basics of Economics series, before the first lecture (April 24, 5:30 pm Eastern) and also receive free enrollment in the archived versions of the preceding two courses in the series: Action and Exchange and Introduction to the Free Market. That’s 3 courses for the price of 1, and a complete series of 20 lectures covering all the basics of sound economics from the ground up! And you’ll have permanent access, so you can go through the lectures, readings, and quizzes at your leisure. No need to do anything other than sign up for the upcoming course, and we’ll enroll you in the other two courses.

…read more

Source: MISES INSTITUTE

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Further to Julian Adorney on the Maximum Wage

April 23, 2014 in Economics

By Hunter Lewis

It is worth recalling that Congress during the first Clinton administration passed legislation limiting cash compensation for CEO’s of public companies to $1 million. The result was that compensation swung to stock options. This in turn encouraged CEO’s to borrow in order to buy in company stock, which helped stoke the subsequent stock market bubble.

When the accounting profession then sought to rein in the use of options, which at the time did not have to be treated as corporate expenses, several congressmen and senators, Joe Liberman in particular, publicly threatened them with legislation that would take away their authority over options.

The actions of the Fed were far more important in creating the stock market bubble that subsequently popped in 2000, but Congress certainly made it worse with its unwise legislative interference with executive compensation. This was just one more example of government fixing, manipulating, or nudging prices that should be set by the market, that is, by consumers.

…read more

Source: MISES INSTITUTE

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Piketty and Capital

April 23, 2014 in Economics

By Peter G. Klein

Further to Hunter’s remarks: Piketty understands “capital” as a homogeneous, liquid pool of funds, not a heterogeneous stock of capital assets. This is not merely a terminological issue, as those familiar with the debates on capital theory from the 1930s and 1940s are well aware. Piketty’s approach focuses on the quantity of capital and, more importantly, the rate of return on capital. But these concepts make little sense from the perspective of Austrian capital theory, which emphasizes the complexity, variety, and quality of the economy’s capital structure. There is no way to measure the quantity of capital, nor would such a number be meaningful. The value of heterogeneous capital goods depends on their place in an entrepreneur’s subjective production plan. Production is fraught with uncertainty. Entrepreneurs acquire, deploy, combine, and recombine capital goods in anticipation of profit, but there is no such thing as a “rate of return on invested capital.”

Profits are amounts, not rates. The old notion of capital as a pool of funds that generates a rate of return automatically, just by existing, is incomprehensible from the perspective of modern production theory. Robert Solow, in a glowing review of Piketty’s book, states: “The key thing about wealth in a capitalist economy is that it reproduces itself and usually earns a positive net return.” But this is nonsense from the point of view of microeconomics, entrepreneurship, uncertainty, innovation, strategy, etc.

Much of the excitement around Piketty’s work deals with his estimate of the long-term rate of return on capital, and how this compares to the long-term rate of economic growth. I hear from third parties that Piketty’s calculations (the early work was done with Emmanuel Saez) are thorough and careful, and I have no reason to doubt the empirical part of the book. But it seems like a pointless exercise to me — I don’t know what the underlying constructs even mean.

Of course, there are many other issues related to the interpretation of these data and what they mean for social mobility, fairness, etc. For example, there may be much more vertical movement than Piketty’s admirers admit — few people remain in one part of the income distribution all their lives. And most Americans are capitalists, with some of their financial wealth invested in equities through their retirement portfolios. So the link between (say) stock-market performance, rents on land and natural resources, and interest returns and the distribution of financial wealth among …read more

Source: MISES INSTITUTE

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Sen. Rand Paul Appears on Fox's The Kelly File with Megyn Kelly – April 22, 2014

April 23, 2014 in Politics & Elections

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Source: RAND PAUL

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Sen. Rand Paul Appears on Fox's On the Record with Greta Van Susteren – April 21, 2014

April 23, 2014 in Politics & Elections

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Source: RAND PAUL

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Another Medium of Exchange?

April 23, 2014 in Economics

By Mises Updates

From Jeff Deist:

An important but overlooked story is Walmart’s recent announcement that it will offer cheap store-to-store money transfers.  Given the ubiquity of Walmart stores (which are large and strategically located), this development represents a real threat to the existing wire-transfer industry.

But what if Walmart reduced or eliminated the transfer fee, provided the transmitted funds could be spent only at Walmart?   Why not create some kind of Walmart scrip?

This is nothing more than an extension of retail store gift cards, or existing scrip programs such as Disney Dollars. But since virtually everything one needs to live (other than luxury type goods) can be purchased in Walmart stores, its scrip might begin to circulate among the public (as casino chips do to a limited extent in Las Vegas).  And while Disney Dollars might seem silly, they actually appreciate in value, unlike Federal Reserve Notes!

…read more

Source: MISES INSTITUTE

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Piketty Gets It Wrong

April 23, 2014 in Economics

By Michael D. Tanner

Michael D. Tanner

For those who believe in the redistribution of wealth, the hero of the hour is Thomas Piketty, the French economist whose book Capital in the Twenty-First Century provides a serious critique of inequality in modern capitalist economies and warns that market economies “are potentially threatening to democratic societies and to the values of social justice on which they are based.” To remedy this, he argues for a globally imposed wealth tax and a U.S. tax rate of 80 percent on incomes over $500,000 per year.

The Left has been rapturous. In the last two months, Piketty’s book has been cited more than a half-dozen times by the New York Times, something that has happened with no other book in recent memory. Paul Krugman hails it as “the most important economics book of the year.” Martin Wolff, in the Financial Times, lauded it as “an extraordinarily important book.”

Instead of berating capitalists, we need to make it easier for workers to join their ranks.”

Capital in the Twenty-First Century is well researched and contains much useful information and some important insights. But it is not unflawed. Some of the problems are technical — Piketty tends to underestimate the elasticity of returns on capital — but more are deeply philosophical. Piketty takes the evilness of inequality as a given, ignoring the broader question of whether the same conditions that lead to growing wealth at the top of the pyramid also improve material well-being for those at the bottom. In other words, does it matter if some people become super-rich as long as we reduce poverty along the way? Which matters more, equality or prosperity?

To cite just one example, Piketty devotes considerable effort to criticizing the rise of inequality in China over the past three decades as it has adopted market-oriented policies. But he largely glosses over the way those policies have lifted millions and millions of people out of poverty.

Piketty’s proposed “solutions” are equally problematic. He seems to believe that “confiscatory taxes” (his term) can be imposed without changing incentives or discouraging innovation and wealth creation. Piketty’s solutions would undoubtedly yield a more equal society, but also one that was remarkably poorer.

Still, Piketty makes some important points. In particular, he notes correctly that returns on capital nearly always exceed the return on labor. With capital held by a relatively narrow group, therefore, rising inequality is inevitable. Moreover, with the wealthy …read more

Source: OP-EDS

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Amending Justice Stevens: How and Why We Shouldn't Change the Constitution Like This

April 23, 2014 in Economics

By Ilya Shapiro

Ilya Shapiro

It’s generally not a good idea to review a book you haven’t read. Not because you can’t get away with it—although it’s harder than even the all-too-common method of reading the introduction, conclusion, and bits-and-pieces along the way—but because it does a disservice to your readers. It’s also pretentious: I, writer/pundit, am much too important to bother reading this sniveling little tract.

Justice Stevens’s amendments package leaves much to be desired.”

Which is why I’m not going to review Justice John Paul Stevens’s new book, Six Amendments: How and Why We Should Change the Constitution. It’s beencovered enough—and panned from both the left and right—such that I both get the gist and wouldn’t have anything new to add.

Instead, I’m going to review the actual amendments he proposes (controversially) in his book. Three of these are structural: (1) requiring state officials to enforce federal law; (2) doing away with political gerrymandering; and (3) eliminating state sovereign immunity. The other three relate to individual liberties: (4) excising the Second Amendment’s protection for the right to armed self-defense; (5) allowing Congress and state legislatures to limit the money people can spend on election campaigns; and (6) outlawing the death penalty.

Let’s take them in order:

1. The “Anti-Commandeering Rule” (Amend the Supremacy Clause of Article VI) This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges and other public officialsin every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding.

This amendment would reverse two important Supreme Court precedents—New York v. United States(1992) and Printz v. United States(1997)—to give the federal government the power to deputize state and local officials to enforce federal law. This is a terrible idea because it would end state sovereignty such that states would be required to create Obamacare exchanges and enforce federal laws regarding immigration, marijuana, and much else. Say farewell to federalism!

2. Political Gerrymandering — Districts represented by members of Congress, or by members of any state legislative body, shall be compact and composed of contiguous territory. The state shall have the burden of justifying any departures from this requirement by reference to neutral criteria such …read more

Source: OP-EDS

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Powerful Force Teaching Students the Very Essence of Being Americans

April 23, 2014 in Economics

By Nat Hentoff

Nat Hentoff

During the continuously explosive debates about education reform and teacher evaluation, no mention has been made by the media in all its forms of a persistently effective national teaching force in enabling college students to know how to become self-governing Americans for the rest of their lives.

Nor have I previously identified the Foundation for Individual Rights in Education as not only a foremost civil rights and civil liberties leader, but also as an educational leader in truly Americanizing American colleges — an education American students almost never get in their classes.

I have, of course, often cited another such tirelessly liberating educational force, John Whitehead’s Rutherford Institute. However, I focus now on the future impact of FIRE being primarily responsible for the first ever U.S. state, Virginia, to bring full college students’ First Amendment rights to all outdoor areas of university campuses there instead of tiny “free speech zones.”

Nor is FIRE finished helping the Bill of Rights take root in more colleges as it works to guarantee all such students the right to a lawyer when charged with offenses — as it has already successfully accomplished in North Carolina.

Instrumental in the first two victories, as well as the current Virginia campaign, is Joe Cohn, FIRE’s Legislative and Policy Director.

To get a full sense of how Cohn operates, here he is on another James Madison-style expedition, this time to my home state of Massachusetts, as he writes legislator Sen. Michael Moore and Rep. Tom Sannicandro in support of a bill to provide “university students facing serious, non-academic disciplinary charges the right to be represented by an attorney.”

Here is what Joe Cohn starkly told those legislators about what is happening to students there charged with “theft, harassment, assault, drug and weapons possession, stalking and rape.” Until this bill is passed, Cohn said, students “will continue to be forced to represent themselves — alone — against experienced and professionally trained deans, administrators and university attorneys in proceedings that fail to guarantee core components of the rights of due process …

“The stakes,” he continues, “are very, very high; the result of these hearings dramatically change the course of these students’ lives … Some institutions may allow a lawyer to attend the hearing, but prohibit them from participating in the proceedings. Others ban attorneys altogether. The universities, on the other hand, are free to send as many attorneys as they wish to prosecute the student.”

Yet …read more

Source: OP-EDS