Profit vs. Nonprofit

Natalie Scholl writes,

AEI’s Values and Capitalism program just released a new book titled “Entrepreneurship for Human Flourishing.” In it, the authors, Chris Horst and Peter Greer, argue that entrepreneurial businesses, “which sustain productive development long after charitable giving dries up,” are the real engine of true human flourishing. Here, Horst and Greer answer a few questions about the book.

In a number of posts, I have argued that we should raise our estimate of the moral standing of profit-seeking enterprises relative to that of non-profits.

Break up California?

Tim Draper’s proposal.

“It’s important because it will help us create a more responsive, more innovative and more local government, and that ultimately will end up being better for all of Californians,” said Roger Salazar, a spokesman for the campaign. “The idea … is to create six states with responsive local governments – states that are more representative and accountable to their constituents.”

…But the plan has raised bipartisan hackles across the state, and opponents say it stands little chance of gaining voter approval. If it does win the support of voters, it must still be passed by Congress, which opponents say is also unlikely.

This may be the best hope for those of us who want better, less-intrusive government. Governmental institutions need to be broken up into smaller parts, both in size and scope. Narrowing scope means having different units of government for education, transportation, trash collection, etc.

Boudreaux on McCloskey

He writes,

Until the 17th century, those who earned their living through trade were the Rodney Dangerfields of their eras: they got no respect. Merchants and other people operating on the supply side of commercial activities and transactions were tolerated. But they were viewed and spoken of with contempt. Unlike warriors who dirtied their hands honorably (namely, with blood), traders dirtied their hands dishonorably (namely, with profit). Unlike the nobility who got their riches honorably (namely, by idly collecting land rents), merchants got their riches dishonorably (namely, by actively trading). Unlike the clergy who won their rewards honorably (namely, by pondering the eternal), the bourgeoisie won their rewards dishonorably (namely, by responding to what Hayek later called “the particular circumstances of time and place”).

In the same symposium, Joel Mokyr writes,

Corruption is the institutional dog that did not bark. It is perfectly reasonable to think of a hypothetical world in which predatory rent-seeking by a powerful elite could have expropriated the profits of innovative entrepreneurs in the Industrial Revolution, as was traditionally done in the medieval world. Instead, the British aristocrats who ruled the country in the 18th century let the entrepreneurs have their way and pocketed the capital gains on their real estate holdings and the interest on their railway bonds. Organizations such as the rent-seeking monopolies, set up in the age of mercantilism (think of the East India Company or the Bank of England), were either dismantled or turned into public institutions. Slowly but certainly rent-seeking institutions were weakened. By 1850 or so the country was as free of it as any nation had the right to hope for.

How then to think of the “ideas vs. institutions” debate? Oddly enough McCloskey and Acemoglu-Robinson both seem committed to a “one-or-the-other” mode. But it is not so. Institutions rest on beliefs. If we have rules against the sale of narcotics, it is because someone in power believes that such drugs are socially bad. When those beliefs change, the institutions (hopefully) adapt. Adaptiveness requires meta-institutions that can change the rules when beliefs and/or circumstances change. Britain’s great success between 1750 and 1914 rested on the existence of such meta-institutions. When needed, Parliament set up a committee that researched and investigated matters ad nauseam and then changed the rules. Slowly, and perhaps not always quite perfectly, British formal institutions adapted. But the same was true for private-order institutions: the rather sudden rise of country banks in the second half of the 18th century illustrates the high degree of adaptiveness of private-order British institutions

The Case for Skepticism

About a book by sociologist Duncan Watts, I write,

Watts’ book can be regarded as an extended argument in favor of what I might term Epistemological Skepticism about Social Phenomena, or ESSP. Those of us with ESSP believe that we should be skeptical about how much we can know with certainty in the fields known as the social sciences. We may learn things that are true for a majority of cases under specific circumstances. But we are less likely to find perfectly reliable, broadly applicable laws comparable to those found by physicists.

Further Remarks on Nonprofits

I am thinking of the huge nonprofits that are dominant local economic enterprises, like UPMC or Washington U.

1. They are non-profit for tax purposes, but otherwise they behave like businesses. Administrators are well paid. They engage in business strategy, including mergers and expansions.

2. They exploit their non-taxable status, particularly in taking over land. You have a comparative advantage in building on land if you don’t pay real estate taxes.

3. Their CEO’s (or equivalent) have a lot of power, because they are not answerable to customers. I have said many times that a non-profit is like a for-profit except that it must satisfy donors rather than to customers.

Pre-commitment and Private Cities

On this post, a commenter writes,

By the way, one way to solve certain coordination / collective action problems like this – “I’ll only do it if I know a lot of other people like me are also going to do it.” – is through the ‘Kickstarter’ mechanism.

…offers people the ability to pre-commit to purchase the items, but only if there are enough other precommitments. One pays nothing until the number of other commitments reaches the target subscription, and at that point the commitment becomes binding, the money is transferred, and the product produced and shipped.

The problem of filling up a new private city could perhaps be solved with some clever variation of this mechanism, but there would also be the issue of how to enforce the commitment to migrate. In this way, you could come up with a new private city business plan that includes taxes, services, and selective demographic criteria, and test the demand curves. Putting aside questions of legality, one could even try the nightclub model and discriminate with regard to pricing (like ‘ladies’ night’) to bring in people who have a special ability to attract other desirable residents who would be willing to pay a lot extra in taxes to subsidize the residency of those attractors, whom they wish to live around.

Some remarks:

1. Wasn’t there an attempt several years back to have libertarians commit to moving to the same state (I believe New Hampshire) to try to make it more libertarian?

2. Cities price-discriminate plenty today. Think of subsidies to professional sports teams.

3. I think the way to run the kickstarter city project would be to have people state conditions for moving and conditions they would help satisfy if they moved. (“I would move if there are at least two good yoga studios and at least 200 single professional men aged 30 to 40. I would help satisfy a condition about the number of physicians, the number of single females age 30 to 40″ etc.) Everyone puts down a large deposit. Your deposit is refunded if your conditions for moving are not met. Otherwise, you either move or forfeit your deposit.

Private Cities, Continued

On this post, Patri Friedman commented,

Think about the famous “double size, increase infrastructure cost by only 85%” rule for cities. So roughly every 16x size increase halves cost. You are trying to compete with established, funded incumbents who are easily 256x bigger than you and thus with 1/4 the infrastructure costs. And with high transaction costs for their customers to leave.

I think that the last sentence, concerning transaction costs of leaving, is interesting. I am not sure what the equilibrium would like if you brought those costs to zero.

Suppose that a big challenge with creating a new city is that the value is in the people there. This creates a Catch-22. You cannot convince me to move to a city until I know there are people there with whom I want to interact. And there won’t be people with whom to interact until you convince people to move to the city.

If there were zero transaction costs in changing cities, then you might get me to try a city before I am sure that it has enough interesting people for me. However, if I know that there are zero transaction costs to changing cities, then when I see interesting people in a city I may not be confident that they will stay there. So what do I do in that case?

I think that in that scenario, cities would behave like dating bars. Such bars tend to surge in popularity until they suddenly lose clientele.

Private Cities

Mark Lutter makes the case for them.

What if…there exists a system of governance that could provide an alternative to the morass of public interest which stagnate change in cities today? What if these cities could not only provide local public goods, but also institutional change to jumpstart economic growth? I argue that private cities could do just that.

Pointer from Don Boudreaux.

I am puzzled as to why we have not seen more private cities emerge. You would think that large investors, developers, or venture capitalists would try them if there were a profit opportunity. Some possible answers:

1. Cities must emerge naturally. You really cannot start a good city from scratch.

2. It is too difficult to acquire the land to start a private city.

3. Existing governments will not allow private cities the freedom to operate.

Financial Stability, Regulation, and Country Size

Lorenzo writes,

Something that is very clear, is that “de-regulation” is a term empty of explanatory power. All successful six have liberalised financial markets–Australia and New Zealand, for example, were leaders in financial “de-regulation”. If someone starts trying to blame the Global Financial Crisis (GFC) on “de-regulation”, you can stop reading, they have nothing useful to say.

Pointer from Scott Sumner.

The deregulation story amounts to saying that we know that regulation can prevent a crisis, but a crisis occurred, therefore there must have been deregulation. In fact, the risk-based capital rules that I have suggested helped cause the crisis were at the time they were enacted viewed as regulatory tightening, to correct flaws in the regime that existed at the time of the S&L crisis. The deregulation that did take place was intended to reduce bank profits by making the industry more competitive, not to increase profits or risk-taking.

Lorenzo’s post mostly beats a drum that I have been beating, which is that government tends to get worse as scale increases. He writes,

It is generally just harder to stick it to folks (either by what you do or what you don’t do) in a way that doesn’t get noticed in smaller jurisdictions. (Unless jurisdictions are so small they fly under the media radar but are big enough to be semi-anonymous–urban local government in Oz has a bit of a problem there.)