Entrepreneurship Can Succeed Where Politics Fails

I have always maintained that black markets are the best way to alleviate poverty. They are also proving themselves the best way to preserve freedom. Two interesting cases came to my attention last week alone, to illustrate beautifully how a little entrepreneurship does far more to defend life and liberty than all political action combined.

Make Your Own Medicine

High drug prices are a huge problem in the US. Because government grants monopolies to pharmaceutical companies, a pill that costs only 5 cents in India, costs $750 in the US. That’s a one and a half million percent difference in price. It also leads to stuff like EpiPens costing $600 dollars.

Politicians have been ranting about it. From Bernie Sanders to Donald Trump, everyone says that drug prices are too high. Advocacy groups have been telling Congress to lower drug prices. But none of that has yielded results.

In contrast, bio-hacker Michael Laufer has done far more to make life saving medicines cheaply accessible. He created the EpiPencil, a cheaper version of the EpiPen, which costs only $35. Laufer also has plans to launch what he calls the “Apothecary Microlab”, which is a chemical reactor costing $100. That, along with free recipes, would enable people to make their own medicines at home.

Now there are some risks to doing this. Medicines require chemicals to be mixed in a very specific manner and quantity. A few micrograms off could mean the difference between life and death. It is important to note that none of this is Laufer’s fault.

If the United States government could learn something from its Indian counterpart and stop supporting monopolies, drug prices would instantly come down and people could just buy them cheaply. The Food and Drug Administration was established to ensure that drugs are safe. Ironically, by backing pharmaceutical monopolies, they might just make drugs a lot more dangerous.

There are possible market solutions that will emerge, however. One is that cheap DIY testing kits could be made available to ensure that home made medicines are safe. Another alternative is that small scale, black market manufacturers could crop up in each locality, with the technical know how to test the drugs they produce.

Rendering Gun Control Useless

Defense Distributed founder Cody Wilson has been innovating in a similar spirit. The self-described “crypto-anarchist” is selling a milling machine, called the “Ghost Gunner”, for $1600. The machine allows the user to fabricate their own metal guns at home. Wilson says the user simply has to download open source design files onto their computer, and use a point and click interface to get started. No expertise required.

This also means serial numbers are not required (they are required only when selling guns) so users can evade detection by the government. Background checks, waiting periods, permits and paperwork cannot be enforced any longer. This will be useful not only in the US, but also in developing countries where the police are corrupt/ineffective, and people would rather defend themselves.

The machine itself cannot be regulated. In Wilson’s own words.

“It’s just as regulated as a hammer — so good luck, there’s nothing you can do,” he [Wilson] said. “It’s just a mill. It’s agnostic. It’s not like it’s specially designed for gun stuff, it’s just that we also write gun software for this mill that we make. So, by breaking up these components, there’s no way of getting in-between any of it and stopping it from proliferating.”

 

Contrast Wilson’s entrepreneurship with what the NRA does. The NRA is portrayed as the number one threat to gun control. That’s nonsense. It would interest younger people to know that for most of the 20th century, the NRA was the main advocate for gun control, and even helped draft the first gun control laws in America. Even today, the NRA can and does support gun control legislation when it feels like it.

Cody Wilson has, in four years, done far more to protect gun rights than the NRA has done in its entire history.

 

Business vs Politics

What makes Laufer’s and Wilson’s strategy more effective than political action? The main reason is that instead of pleading with politicians to do something, entrepreneurs just do it themselves, and innovate out of the mess. As Mike Munger also points out, it is better to ask for forgiveness than permission.

Had Laufer and Wilson lobbied government to allow their activities, they would have been flat out denied. Now that they have already done it and posted the know how online, it is impossible to put the genie back in the bottle. Government cannot do anything to control guns or keep drugs expensive for much longer.

It is also very profitable, as seen in Wilson’s case, meaning many more entrepreneurs will copy the business model and improve upon it. The approach of business is scalable and easily replicable, which makes it more effective than political action. That is why I trust a single entrepreneur over entire political lobbies to preserve freedom in society.

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What John Oliver Could Learn from Mises

I usually enjoy watching John Oliver’s show, Last Week Tonight, because it is funny and informative at the same time. His latest episode on corporate consolidation was, alas, not one of the best ones.

The segment has Oliver talking about how certain industries are being dominated by a handful of firms and how that is bad for consumers. He particularly focuses on the airline and telecommunications industries. So far so good.

Everyone agrees that a lack of competition in the market is bad. Oliver then goes on to blame a lack of regulation for this, and calls for more aggressive application of antitrust laws.

This reminded me of one of my favourite Mises quotes.

As a rule, capitalism is blamed for the undesired effects of a policy directed at its elimination. The man who sips his morning coffee does not say, “Capitalism has brought this beverage to my breakfast table.” But when he reads in the papers that the government of Brazil has ordered part of the coffee crop destroyed, he does not say, “That is government for you”; he exclaims, “That is capitalism for you.”

Corollary: Government regulation leads to calls for more government regulation to fix the problems created by previous regulation.

Mises wrote this outstanding paragraph right in the preface of his brilliant and insightful book, Interventionism: An Economic Analysis, which I recommend to everyone.

Oliver’s segment on corporate consolidation is a case in point. He takes a problem created by government, namely oligopoly, and calls for more government control to fix it.

Let us take the case of airlines. Why are there only four major airlines in the US? Robert W. Poole Jr., of the Reason Foundation, wrote way back in 2000 that the main obstacle to competition is the difficulty in obtaining gates at airports.

Large airlines sign long term leases with airport authorities, which gives them exclusive access to gates at airport terminals, shutting out competition from new entrants. It also gives airlines monopolies over certain routes. This, Poole shows, is due to the airports being government owned, and thus risk averse. A long term lease gives them a steady revenue stream.

He compares it with Europe, where airports are run privately. Since these airports are for profit businesses, they lease gates by the hour to individual airlines, thus preserving competition in the market.

More recently in 2016, David R. Henderson defended the merger of American Airlines and US Airways along similar lines, saying that the main constraint was gates, and not the number of airlines. He also pointed out that in Europe, foreign airlines were allowed to provide domestic flights, unlike in the US.

If a socialist cesspool like Europe has more, better and cheaper airlines, clearly a lack of regulation is not the problem.

This is not just restricted to airlines. Every monopoly or oligopoly that has been sustained over a large time period has been aided by government regulations and subsidies. For instance, there is the telecommunications industry, where government backs monopolies for firms like AT&T. The health insurance market in the US lacks competition because insurers are, among other things prevented from competing across state lines.

It is deeply troubling, then, that people blame free markets for problems created by government. As I write this on the eve of Mises’s birthday, I feel that there is an ever greater need to highlight the evils of government intervention; to direct people’s anger at the real source of trouble. During such times, brilliant minds like Mises will be sorely missed.

India’s Black Marketeers Will Save The Day

Black markets are the most under used tool for helping poor people. Black markets are often portrayed in a bad light by governments. They are untaxed, unregulated and therefore, it is argued, a hazard to public safety. A more sinister description often involves black markets being a cesspool of organised crime, overflowing with drugs and weapons, a source of income for terrorist groups.

Such portrayals are completely dubious. 90% of India’s workforce is employed in the informal sector, which includes everything from agriculture, to small scale manufacturing and services. A lot has been already written about how underground economies provide a source of income in developing countries, so I won’t focus on that. Instead, let us look at some other aspects of black markets.

India’s Black Market Schools

India’s public schools are infamous for their terrible quality. Teachers don’t show up, schools lack basic facilities such as toilets and drinking water. Not surprisingly, most children even in fifth grade can’t read. Even teachers don’t know what they are teaching. It is also natural that children drop out of such schools at alarming rates.

One would expect private schools to satisfy the demand for quality education. Under the Right to Education Act, government has imposed unrealistic requirements for starting a private school, such as having a fully stocked library, a playground, kitchen, separate classroom for every teacher and so on. Since real estate is very expensive, this cost would be passed on to parents if regulations were followed.

Entrepreneurs have found a simple way around this problem; just violate the regulations. They have started low cost private schools in their localities. The schools usually consist of a couple of rooms with chairs or benches, often in a rented space. The fees are incredibly low, Rs. 70-150 (~$1-2.5), per month, in rural areas and Rs. 200 – 600 ($3-10) in urban areas.

Since these are illegal, numbers are hard to come by, but one study estimates around 300,000 such schools in India. The teachers show up every day, and learning outcomes are far better when compared to public schools. Indeed, that is the only way to get parents to pay for these schools rather than sending their children to free government schools.

Millions of poor children have a shot at a better life thanks to these black market schools. Nobody in their right minds would call the entrepreneurs behind these schools criminals. Indeed, the only villain in this story is government, which regularly goes after and shuts down such schools. Thankfully, our heroic entrepreneurs are not deterred by such nonsense and continue to serve the poor.

Not Just Small Business

Black markets are not just limited to locals running small business. Big multi-nationals can engage in it as well. My favourite example of this is Uber. It violated all existing regulations on cabs, such as licence requirements and rates set by the government. It was banned in many states in India, and yet it bravely continued to operate.

When law enforcement was becoming too much of a problem, Uber found a brilliant technological solution to it, as Jeffrey Tucker explains. Greyball was a software that Uber used to detect bad actors. Whenever an undercover police officer would request an Uber cab in hopes of catching them red handed, the software would quietly cancel their request.

Uber’s participation in the black market provided millions of consumers with cheaper, better quality, and more reliable transportation. It also provided gainful employment to thousands of people, and helped bust taxi monopolies around the world.

A Superior Strategy

As opposed to political action, black markets are a superior strategy for advancing freedom and helping those in need. Imagine, for instance, that India’s school entrepreneurs never started their schools, but formed advocacy groups. After lobbying and pleading with politicians for decades, maybe, just maybe they would be allowed to legally operate schools. By that time, entire generations would have grown up without an education. By violating unjust regulations, they have improved the future of millions, and should be treated as heroes.

Indeed, people revere certain black marketeers. In 1930, the colonial government introduced a tax on salt production in order to protect the British salt monopoly. Mahatma Gandhi, and hundreds of his followers, marched to the village of Dandi in order to produce salt without paying the tax. After he did so, millions around the country joined him in the act.

Not even the Prime Minister would dare to call Gandhi a criminal, or an evil tax evader for participating in black market salt production. While we are on the topic of busting government backed monopolies, let us look at a similar event in recent times.

We economists have been speaking out against the taxi permit/medallion system for decades. No amount of newspaper columns or advocacy would move politicians. Within four years, Uber achieved what we could not.

When Uber showed no signs of backing down, the Maharashtra state government lifted the cap on the taxi and auto permits. Now there can be any number of auto-rickshaws and taxis, which will go a long way in busting their cartels. Let us hope that governments everywhere are forced to follow this example.

In an ideal world, all peaceful and voluntary interactions between people should be fully legal. Since that is not the case, it is far more effective to participate in black markets than to plead with government officials to change the rules. So the next time you feel like helping poor people or fighting for freedom, consider starting a business.

How to Help Farmers

Every time the media does an emotional story on farmer suicides or farmer protests, there are suggestions for what government should do. Usually these suggestions include more subsidies, price supports, and other forms of government intervention. There is one solution that is never mentioned, but is by far the simplest one.

To increase farmer incomes, it is necessary to reduce the number of farmers. The law of supply and demand tells us that when the supply of something is very high relative to demand, the price it can fetch is very low. The same law applies to farmers as well. Let’s look at some statistics.

In developed countries, on average, about 4% of the workforce is employed in agriculture. In the US, only 2% work in agriculture. Compare that with India, where almost 50% of the workforce is in agriculture. The farmer population of India exceeds the entire population of the US.

Saturation is ruining farmers’ incomes

Not surprisingly, farmer income is high in the US and Europe, due to lower supply, while a supply glut of farmers ensures that farmer incomes are very low in India. The average farm household in the US makes around $80,000 annually. In India, that number is just Rs 77,000 ($1,200) annually.

How does having too many farmers impact farm income? The main reason is that it hampers productivity. Because there are so many farmers, the average farm size in India is just a couple of acres, compared to the hundreds of acres in developed countries. Large farmers can reap the benefits (pun intended) of economies of scale. They can use tractors, elaborate irrigation systems and other techniques that would not be cost effective on small Indian farms.

As expected, the productivity of Indian agriculture is far lower than that in the west. Another reason why having too many farmers is bad is that it reduces the bargaining power farmers have, due to increased competition.

Now that we know how an excess of farmers causes misery to them, the question is why does India have so many farmers?

Why do farmers continue to farm with such low incomes?

Many of those farmers are not required, and could be more productive at other jobs, such as manufacturing. This disguised unemployment is a huge problem in India. In most other developing countries, people moved from agriculture to manufacturing, but not in India. Why?

The reason for that is the bad policies which are currently in place. Manufacturing in this country is hobbled by complex labour laws and other regulations, which creates a lack of job opportunities for farmers who desire to leave agriculture.

Next, farmers are not allowed to sell their land as they please. Government dictates that farm land may only be sold to other farmers. If a farmer wants to sell his land to an industrialist, he needs the government’s permission, which is difficult and costly to obtain. This creates a barrier to exit agriculture. There are also land ceilings, which limit the amount of land a single farmer can own, creating the aforementioned problem of small farm holdings.

The often praised minimum support prices (MSPs) have their role in the problem as well. They help only the large, politically influential farmers, from mainly Punjab and Haryana, while keeping the small ones just one bad harvest away from financial ruin. The repeated loan waivers similarly subsidise low productivity and keep farmer incomes low.

The Solution

The solution I am proposing might not be an election winning formula as loan waivers and MSPs are. From an economic point of view, however, it is the most simple and efficient thing to do.

Removing the regulations on manufacturing will create job opportunities for farmers wishing to leave agriculture. Next, the government should do away with subsidies, minimum support prices and loan waivers, since they incentivise unproductive methods of farming. Eliminating them would induce more people to seek manufacturing jobs.

Finally, it is essential to repeal the land ceilings and land use restrictions. When so many people leave farming, their tiny farms can be consolidated into fewer but much larger operations, benefiting from economies of scale and boosting productivity. Large farmers also have more bargaining power, enabling them to get better prices for their produce in the market, without needing government subsidies.

What is the main take away from all of this? It is that there are numerous good ways of helping farmers improve their situation in life. None of them involves more government interference. On the contrary, government officials need to stay out of the way and let market forces work.

Government, Not Automation, Destroys Jobs

A few weeks ago, road and highways minister Nitin Gadkari said that driverless cars would be banned in India in order to “protect jobs”. This kind of fallacious argument is nothing new. For the past year or so, newspapers have frequently had articles arguing that automation is to blame for job losses. Even intelligent people like Bill Gates have made outlandish suggestions such as taxing robots to compensate workers who will lose their jobs.

By doing a superficial analysis, one may indeed say that automation causes job losses. But on digging a bit deeper, one sees that bad government policies are the root cause for unemployment.

Circumventing Regulation

Take the case of driverless cars. Driving is not a high skill job. Low skilled workers are abundantly and cheaply available to do it. Why, then, is Uber so interested in developing driverless cars? It is because governments around the world have imposed costly regulations, or outright banned Uber to save the taxi cartels.

Never mind that this creates an immediate job loss for just Uber drivers. It gives Uber an incentive to invest billions in developing driverless cars to circumvent the burdensome regulations. This will ensure that all drivers will lose their jobs in the long run, including the taxi cartels governments are trying to protect.

Lant Pritchett, at the Centre for Global Development, wrote last month of a similar problem in the US. Workers from central and Latin America could easily do low wage jobs in the US. But minimum wage laws and immigration restrictions make labour artificially expensive.

That is precisely why Amazon is pouring billions into drones. In the absence of government intervention, it would be far cheaper to hire low skilled immigrants for delivering parcels. But since government won’t allow that, it is cheaper to use drones. Most delivery jobs in the US will be eliminated in the near future as a result of bad immigration policy. Policy which was, ironically, made to save those jobs.

Note the tremendous inefficiency this creates. The world’s scarcest resources, entrepreneurs and scientists, are working to economise the most abundant resources, namely low skilled labour. All of that entrepreneurial and scientific talent is being wasted due to bad government policies. Pritchett rightly laments that this makes it harder for poor people to escape poverty.

Pritchett’s observation is nothing new. In January, I wrote that even Karl Marx understood how technological progress is distorted when government tries to protect certain industries or occupations. A case in point is Indian manufacturing, which government tried to protect from foreign competition.

Countries at a similar level of development have labour intensive manufacturing which makes use of cheap labour. In India, the opposite has happened. Whatever little manufacturing takes place in the country is extremely capital intensive. Why did this happen?

Laws Are Expensive

Before 1991, government imposed extremely high tariffs on imports, to encourage domestic manufacturing. Manufacturing grew, but it became more capital intensive over the years, even though cheap labour was abundantly available. The explanation for this lies in India’s complex labour laws.

India has nearly 250 labour laws between the centre and the states. The cost of complying with these labour laws is so high that companies found (and still find) it cheaper to use machines than to hire people, creating the phenomenon of jobless growth.

All of this evidence points to just one culprit, when it comes to unemployment. It is not greedy corporations, and it is not automation. Ridiculously ill-conceived government policies are the sole reason that low skill jobs are dying an untimely death.

Trade Will Keep the Peace on the China-India Border

In what is becoming a tradition, Chinese troops have again crossed the border into Indian territory, this time in Sikkim. Indian and Chinese soldiers are facing off at the border, trying to see who blinks first.

As usual, politicians and people on social media are calling for a boycott of Chinese goods. Their idea is that we should punish China for this act of aggression. Such rhetoric is useful to score political brownie points, or garner likes and retweets on social media. It also makes no sense from an economic point of view.

Anybody who has ever gone shopping will point out the impracticality of boycotting Chinese products. A very large percentage of products in the market are made in China. Almost every electronic gadget, such as the computer I typed this on, is made in China. The most mundane of products, such as office supplies and kitchen utensils, are also mostly made in China.

There aren’t many locally produced alternatives that can compete with Chinese products at low prices. Government has made sure of that by imposing a labyrinth of regulations on manufacturing, resulting in lack of domestic production.

But forget for a moment the impracticality of the whole proposition. There is another good reason for not boycotting Chinese products.

If Goods Don’t Cross Borders…

A phrase often misattributed to the great French economist Frederic Bastiat says, “If goods do not cross borders, armies will.” This great insight has been proven true time and again. World War II was caused, in large part, by the protectionism and decline of global trade in the 1930s.

Better still, consider the example of India and China, before liberalisation. When the Indo-China war took place in 1962, both countries had closed economies. The governments had imposed high tariffs, preventing any trade from taking place between Indian and Chinese people. Sure enough, when goods were not crossing borders, armies did.

Now consider the opposite case. Market oriented reforms took place in China in 1978, and India in 1991. A major part of these was lifting of trade barriers. Since then, things have improved greatly. War seems highly unlikely. Even with these border stand-offs being a regular feature, no real violence takes place.

Why does trade bring peace? Because the Chinese know that they can get a lot of money by selling their goods in India, there is a huge opportunity cost to war, which was absent in 1962. Now in case of war, Chinese firms stand to lose a whole lot of profit.

Buy Even More Chinese Goods

The way to ensure peace and avoid conflict is to make war an even more costly proposition, for both sides. The government of India should get rid of all tariffs, quotas and trade restrictions. This would make Chinese goods cheaper, making the market for them even bigger.

Investing in India should be made easier. Complex labour laws and other onerous regulations on manufacturing should be done away with. As wages rise rapidly in China, Chinese firms are already looking to set up factories elsewhere.

India could be a great destination for those factories, generating jobs for many people, and also producing goods which might get exported back to China.

These steps would ensure that there is no incentive for conflict. If Xi Jingping decides he wants war, it would be Chinese factories that he would have to bomb in India. Chinese industrialists would pressure their government to maintain peace since they would stand to lose a lot of money otherwise.

If we want to avoid such border confrontations in the future, it would be wise to not boycott Chinese goods, but to embrace them even more fully, for if goods do not cross borders, armies will.

Uber, Ola and Lessons from the Apartheid Era

Black-cab drivers of London, and drivers of “black and yellow taxis” in Delhi have been petitioning the authorities to deny Uber and other ride-sharing companies a license renewal. That is, unless the companies pay their drivers a minimum wage plus benefits.

“What a great show of solidarity”, you might think. These drivers are seemingly trying to help their competitors. But are they really? To understand what they are really trying to do, we must look back at the apartheid era.

 

Eliminating Competition

Before the apartheid era in South Africa, when there were few labour protections and laws, blacks had little difficulty finding employment. Blacks were unskilled, so they offered to work for lower wages than their white counterparts. As a result, employers had little reason to discriminate against blacks, and in fact preferred hiring blacks over whites.

How could white workers have dealt with this issue? The obvious way would have been to accept lower wages to compete with blacks in the labour market. The other approach was to get the government to legislate blacks out of employment, which is what they did. Labour unions composed entirely of white workers lobbied the government for a minimum wage law.

By artificially setting a wage rate higher than the market rate for blacks, the government created unemployment among black people.

Given that they were paid more than the minimum wage, why did they lobby for it? It was to eliminate competition from black workers. And they did not even attempt to hide that fact. Gert Beetge, a racist and secretary of the Building Workers’ Union, said “There is no job reservation left in the building industry, and in the circumstances, I support the rate for the job (minimum wage) as the second-best way of protecting our white artisans.”

The South African Economic and Wage Commission also gave its valuable insight: “The method would be to fix a minimum rate for an occupation or craft so high that no Native would be likely to be employed.”

The economic principle behind this is very simple. If something becomes more expensive, people buy less of it. By artificially setting a wage rate higher than the market rate for blacks, the government created unemployment among black people.

Economist William Harold Hutt, in his book The Economics of the Colour Bar, blamed the minimum wage law as one of the main causes of injustice during the apartheid era.

In the United States, the Davis-Bacon Act was passed in 1931. The law required that all workers be paid the “prevailing” local wage, which was effectively decided by fully white labour unions, and higher than wages for blacks. Several lawmakers at the time spoke of “cheap coloured labour” competing with white labour. The law was again designed to remove blacks from the labour market.

 

History Repeats Itself

In London, taxi driver unions have been lobbying the local authorities to deny Uber a license renewal, unless it pays its drivers a minimum wage and offers paid leave. Now why would people driving black-cabs want to ensure a higher pay for their competitors? It’s not because they care about Uber drivers.

They just want to make it too expensive for Uber to employ drivers in London, thereby eliminating competition from Uber. Then these drivers of black-cabs will have a monopoly as they did before, and can continue charging high prices to commuters.

The only difference is that the unions are not explicitly saying this, and have managed to fool a few Uber drivers into joining their cause. It is interesting to note that the black-cab drivers began calling for better working conditions for Uber drivers before Uber drivers themselves.

They are trying to eliminate competition by making Ola and Uber drivers too expensive to hire.

The same thing has been playing out in Delhi. The Delhi Commercial Drivers’ Union has petitioned the Delhi High Court demanding benefits under labour laws for Uber and Ola drivers. This essentially means fixed fares regardless of supply and demand. They also want the companies to keep paying the drivers bonuses that they were paying initially, and to raise the minimum fare.

The union, like its British counterparts, consists mostly of “black and yellow taxi” drivers. They are trying to eliminate competition by making Ola and Uber drivers too expensive to hire.

The court has yet to decide whether or not Uber and Ola drivers are employees. Currently they are classified as independent contractors by the companies, and are therefore outside the ambit of labour laws. If the court declares them to be employees, Uber and Ola might have to raise fares, or stop operating altogether in Delhi. This will restore the “black and yellow taxi” monopoly and make life harder for commuters.

Let us hope that the authorities in London and judges in the Delhi High Court see these petitions for what they really are; not solidarity with fellow drivers, but an attempt to eliminate competition and create a monopoly.