Thursday, September 04, 2014

Riding Down the Cost Curve: Shale and Oil Sands Extraction

The eyes and minds of engineers can't look everyone at once. Every engineering project has an opportunity cost measured by the fruits of alternative engineering challenges left unexplored.

One reason Saudi Arabian policy kept the price of oil around $25 a barrel was to discourage investment in alternative energy:
Beginning in the mid-1970s and during the years that followed, Saudi Arabia, as the de facto leader of OPEC generally worked to keep oil prices low normally in the $18-$22 per barrel range.  Fearing that high oil prices could hurt global growth, reduce demand for Saudi oil by encouraging conservation and alternative energy development... (Journal of Energy Security, December 14, 2011)
For the last eight or so years oil has been over $80 a barrel, and sometimes significantly over. At these higher prices energy firms small and large have invested billions of dollars developing hydrocarbon deposits that were too risky and costly when oil was selling for under $50 a barrel.

Billions have been invested in energy research projects, from genetically modifying algae for oil production to hydraulic fracturing and horizontal drilling.

The shale gas and shale oil boom of the last eight years is part of this story. It wasn't one or two inventions that launched the shale production boom but dozens and then hundreds of small innovative advances to speed the drilling process, more accurately follow shale seams further and further, lower extraction costs, reduce and recycle water and chemical use and costs, and improve transportation and processing. Each month drilling speeds and yields increase slightly, as costs fall and the estimated size of recoverable hydrocarbons increases.

Here is a recent snapshot of the story in Texas from the Wall Street Journal:
One of the state's oldest oil fields, the Permian Basin in West Texas, is booming again, thanks to advanced technologies such as hydraulic fracturing and horizontal drilling. And Permian oil output shows no signs of stopping at its current 1.7 million barrels a day.
Not far from the Permian Basin (by Texas standards) is Eagle Ford, a large south Texas shale gas and oil play. Eagle Ford oil production is projected to hit 1.5 million barrels a day this month, up from 358 barrels a day in just 2008!  I draw the 358 number from this May 2014 Motley Fool post:
The Eagle Ford’s expansion has played out at a remarkable pace. In 2008, output from the entire field consisted of a single Petrohawk well which produced 358 barrels of oil equivalent per day, or boepd. Today, Eagle Ford output now tops one million boepd.
To put that figure into perspective, only six other fields in the world have ever hit that one million barrel milestone. And based on projections by Benteck Energy, production is expected to surpass 1.5 million boepd by 2018.
The 8th "Jaw-Dropping Fact" may be that the 1.5 million a day predicted for 2018 arrived in 2014. Each year oil production in Eagle Ford has grown significantly faster than predicted the year before.

An even bigger story of hydrocarbon extraction technology can be found in Alberta, Canada in the vast oil sands. An amazing story in  The Economist  (Sept. 6, 2014explains a range of new extraction technologies being developed for oils sands extraction. Already over half of Canadian oil sands extraction no longer the requires massive open pit mines (shown in the picture). Instead, for 53% of oil sands production, steam is injected deep underground to melt the oil and push it to the surface.

Other oil sands extractions technologies mentioned in the article:
  • Suncor, an Alberta firm, found that adding oil-based solvents to steam increases recovery while reducing the amount of water that has to be heated by 15%. Suncor will begin commercial production within a year ...
  • Imperial Oil, based in Calgary, has replaced steam altogether by injecting solvents under high pressure but at much lower temperatures ...
  • Suncor began building facilities in Alberta to test melting bitumen with microwaves. It will insert a microwave-transmitting antenna into a horizontal borehole with the circumference of an arm but the length of a football pitch. ...
  • Germany’s Siemens is developing a system that floods a thick copper cable with an electrical current to create an alternating magnetic field to melt bitumen ...

Sunday, February 02, 2014

Costs and Benefits of Immigration in Texas and California

Welfare state programs and business regulations distorted the immigration process for California in ways very different from Texas. Texas government policies are more open to enterprise and its booming economy is putting latin american immigrants to work. Welfare is harder to qualify for in Texas and enterprises are easier to start and expand.
It is important to separate the consequences of immigration from the consequences of dysfunctional U.S. immigration policy (and distorting state welfare and business regulation).
New competition benefits consumers,but can challenge or hurt existing producers. Immigrants are producers in the labor market and where they compete with existing producers–American workers–they challenge and can hurt both unskilled workers and high-skill tech and engineering workers.
But the challenge part matters too. Imported cars from Japan challenged U.S. car companies to improve their cars. Many U.S. firms met the challenge of imported goods and improved to regain market share and also export. The tens of thousands of immigrant workers employed by U.S. firms helps them compete overseas, and that helps U.S.-born workers in those firms.
And now U.S. companies like Boeing, Ford, Apple, Dell, HP and others are global with goods and services produced by a mix of U.S. employees plus employees and subcontractors overseas. Plus Honda, Toyota, VW and other foreign car companies invest billions and employ hundreds of thousands of U.S. workers, engineers, and designers.
Robert Guest’s “Borderless Economics ” is I think one of the most compelling discussions of the dynamics of the new global economy.
The benefits to the U.S. from immigration and from outsourcing is one part of the story. But the benefit of immigrant entrepreneurs returning home to energize China’s and India’s economy is another major benefit. Hundreds of millions have been helped overseas by the return of inspired entrepreneurs trained at American and European firms. And these now wealthier producers and consumers in China, India, Brazil and Mexico now buy more goods and services from American companies and workers.
All that said… I must agree that a combination of crummy schools and corrupt government in Mexico and other Latin American countries shapes new immigrants, legal and illegal who come to the U.S. to live and work. Crummy schools and corrupt governments in the U.S. make matters worse.
Someone noted that we don’t need to make a wall around the U.S. but instead to make a wall around the welfare state. Over the last couple years, I’ve been recommending the Krieble Foundation’s Red Card proposals. They argue that Mexican working in the U.S. now and those who wish to come should apple for a worker visa Red Card that provides documentation and insurance, but not access to welfare programs.

Tuesday, January 28, 2014


Imagine a World in the State of Texas...

Notes from a talk given to the New York City Junto.

To illustrate that the world is not in any meaningful way overpopulated, Julian Simon, author of The Ultimate Resource, noted that if everyone in the world
moved to Texas each person would still have about 1,800 square feet of living space. Enough room for a family of four to live in an average size house with a front and back yard.

Since Julian Simon made these calculations for his book The Ultimate Resource the world's population has grown. I recalculated this with the estimated 2001 world population of 6 billion and in talks to high school students cited square-feet per-person at 1,500, which still leaves 6,000 square feet for a family of four (a still comfortable 60 by 100 foot lot).

But over the years in presentations to high school students, I have been peppered with objections and questions: "What about roads?" and what about parks, lakes, shopping malls, etc. Students ask practical questions. If I say everyone in the world could live in Texas, they want to know how.

Why not take their questions seriously? The free-market system has an astonishing ability to respond to the unexpected, from everyday shifts in demand to hurricanes and other disasters. Imagine if everyone in the world woke up tomorrow and decided they wanted to live in Texas. Could markets coordinate the efforts and ingenuity of millions of entrepreneurs and businessmen in building the necessary infrastructure, homes, apartments, etc.?

Or what if aliens land and force everyone on Earth into Texas (perhaps after blowing up the White House as in the movie Independence Day). The aliens in Independence Day were pretty stupid. They expended enormous energy blowing up the world's major cities. If they wanted earthlings out of the way in order to developing mining operations on Earth, they might have been better off moving the world's cities to Texas.

So, how could market forces allow humanity to adjust to such a forced relocation? This isn't an entirely science fiction question. A meteor could strike the Earth and do a similar amount of damage.

An Atlantic Monthly cover story, "The Great Climate Flip-Flop" claimed a quick ice age could arrive, according to recent geological evidence (like this winter, only forever). The article claimed an Atlantic Ocean conveyer-belt moving warm water north and cold water south could be suddenly disrupted. Temperatures in Europe would drop dramatically, since Northern Europe is warmed by the Gulf Stream. In just a few years northern Europe would be too cold to grow food (which would, at least, save the European Union billions in farm subsidies). The article further claimed armies would be marching around to conquer farmland in the south. But markets could coordinate mankinds adjustment to a sudden ice age just as markets could coordinate adjusting to everyone in the world living in Texas.

An ice age would spur rapid adjustments around the world as farming various crops relocated to new regions. Food prices would rise initially which would be hard on poor countries and not such a big a deal for rich countries. In fact most of the poorest countries are in hot regions, and their climate for farming could improve.

When disasters strike, whether hurricanes, earthquakes, floods, droughts, or meteors, government response is to declare national emergencies, freeze prices, and sometimes suspend the rule of law: suspend the very market forces that provide the resiliency to respond to sudden and unexpected changes. Markets provide the information about relative scarcity and prices provide the incentives for millions or billions of people to coordinate their responses. F. A. Hayek's great article "The Use of Knowledge in Society" uses a disaster to tell its story of the power of prices and market. It starts with a flood in a copper mine in Chile… (click here for article online).

So the importance of explaining how markets help society deal with emergencies is to help inoculate people against government "emergency measures" the next time a disaster strikes.

A separate reason why this kind of thought experiment is useful follows from the distortions caused by decades of interventionist immigration policies in America and around the world. When libertarians argue for open immigration and for the U.S. to remove immigration barriers, a difficult issue is the practical one of adjustment from the status quo to a free system. People respond to calls for ending U.S. immigration restrictions by saying that if we opened the borders now, millions of immigrants would flood in from Mexico and South America, and tens of millions might quickly travel here from China and India. How could markets handle that?

Well, that many wouldn't "flood" in, but if they did markets would adjust, and most people, Americans as well as others around the world, would be better off for it. The point of economic analysis and population-oriented thought experiments is to illustrate why and how.

Another reason to spend time with futuristic scenarios is to promote understanding of the optimistic perspective on technology, on market economies and on people. Most of the problems people associate with "over" population or population growth are really problem caused by the lack of the rule of law, clearly defined property rights, and enforceable contracts.

Problems in New York City like high rents and a shortage of housing have their origin in long-standing rent controls, housing regulations, and other government interventions that restrict new housing. Traffic congestion and a creaky, cranky transit system is caused by government's mismanaged monopoly roads and mass transit. So the main congestion problems of daily life in New York City would be solved with private property, enforceable contracts and open markets.

The problems of daily life in west Texas are not so easily solved. West Texas has lots empty land--empty of people. Even the cattle are lonely. Across tens of thousands of square miles of often beautiful scenery, are few cities and towns. West Texas cities like Lubbock, Amarillo, San Angelo and Midland are like oases in the desert.

Texas is a better place in 2010 with 25 million people than in 2000 with 21 million people, or 1980 with 14.2 million or 1960 with 9.6 million or 1900 with 3 million. I simply argue Texas would be a better place still in 2015 with 6 billion people living free and living large.

Moving to Texas

Aix-en-Provence in the south of France is a beautiful place. I've had the pleasure of visiting there for talks the Summer University and Institute for Economic Studies-Europe seminars for college students. The city is beautiful and densely populated. Narrow cobblestone roads run between six- to eight-story apartment buildings, most with shops on street level. The main street through town, a marvelous wide boulevard feature fountains and endless cafes. If I were building a housing development and tourist attraction in Texas I would invite thousands of stone masons and other construction workers to build this part of paradise in a freer state in a for-now freer country.

Imagine a new governor of Texas was a very ambitious man. Imagine him not satisfied with being governor of Texas but with visions of being Governor of the World! He has limited powers as Governor, but his reach is further limited since so many of the world people don't even live in Texas. 

If he were to appoint me his advisor, I could help him govern the world. What would most attract the world's people to Texas?  Freedom. In Texas, freedom is a stronger tradition than in most of the country. For one thing the federal government owns very little land in Texas, unlike the rest of the country and especially the west were the federal government owns 50% of the land. Texas came into the union as a sovereign state, so most land stayed or became private property.

I would advise the new governor of Texas to visit Las Vegas. Have you been there lately? It is not just a place for gambling. It is becoming a place for tourists as well. Perhaps Las Vegas looked at a map of the U.S. twenty years ago, noticed many Indian reservations, and expected stiff competition for future gamblers.

But Las Vegas seems like an odd place for a tourist destination, unless you have never seen a desert before. The nearby mountains are beautiful at sunrise and sunset. But like Aix-en-Provence, the tourist attraction is not the countryside, it is the city and it's buildings and shops and boulevards and people.

Las Vegas now has buildings and shops and boulevards to attract tourists. You can visit Venice, Paris, New York, Ancient Egypt and Rome. In the Venetian you can ride in a gondola to the piazza and sit "outside" in the cool midday air sipping cappuccino. P.J. O'Rourke says it has everything Venice does, except the stink.

The Paris Casino has a mini-Eiffel Tower great breads from French pastry shops and buffets of fine French foods. Many of the workers are from french-speaking Romania however, so lack the skill of delivering an authentic French insult.

So I would try to impress upon the Governor of Texas the brilliance of this strategy of inviting the world's great cities to Texas.

First we would have to assure investors that Texas would have the population to fill millions, even billions of new homes and apartments. And for that Texas could apply, as Iowa has, for a waiver from federal immigration restrictions. Iowa's population dropped nearly 5% from 1980 to 1990. Restrictive immigration policies have contributed to the reduced population in hundreds of midwestern cities and towns. So Iowa and many other less-populated cities, including many in update New York are trying to attract more immigrants.

In Texas we would need hundreds of billions of dollars in housing construction and infrastructure in order to accommodate billions of new immigrants. The good news is that there are hundreds of millions of really poor people in the world who are looking for work. They don't know it maybe, but they are really looking for freedom, and looking for freedom to work in all the wrong places. They should look in Texas. They should have cards that read "Have Poverty; Will Travel."
So new Texas World cities could be constructed with world labor. Texas is a big enough place, and with enough coastline, I would recommend establishing Charter Cities and Startup Cities along the Texas coast. New port city to compete with Galveston and Houston. The new charters could be based on those that have worked so well for Hong Kong and Singapore, still among the freest city in the world. Let Hong Kong investors finance this new city and port. And they could easily find millions of people to begin construction. In fact, construction could be financed in part by the impoverished chinese immigrants themselves. In 2000 the going rate for getting to New York illegally from China was around $40,000. Offer Texas citizenship to anyone investing $40,000 in this new Hong Kong, Texas. Ten million Chinese immigrants would bring 400 billion investment dollars to Texas. That should be enough to get things started.

Of course, most impoverished Chinese people don't have $40,000. They borrow it confident they will be able to find work in New York City and other thriving U.S. cities, save enough in a few years to pay back their transport creditors.

In and around new Texas Startup Cities would be factories and farms providing jobs and food. Elsewhere in Texas would be New Bombay and New New Delhi, maybe along new hi-tech corridors like I-35 between Austin and San Antonio. Millions of highly educated and English-speaking people from India would bring inexpensive programming skills as well as hundreds of other skills to Texas (while their parents run the motels).

Americans have long liked to believe they are a special people, somehow uniquely capable and deserving of the stunning wealth created and enjoyed in America. But it is liberty that is unique to America and the western world of the last couple hundred years. Rose Wilder Lane tries to describe this astonishing force of nature, the power of free people in the beginning of her book, The Discovery of Freedom:

Opportunity Cost

One of the interesting things about Texasworld is the boost in worldwide growth rates that Texas freedom could ignite. Academics and comentators get excited when they average growth rates in China of 7% or 8%. But every Chinese immigrant to the U.S. enjoys an individual economic growth rate of maybe 1000% the first year: from $100 a month income to $1,000 and then maybe another 100% the second year to $2,000 a month.

Chinese people moving to the U.S. can be a more effective a way to boost prosperity and economic development than shipping capital to China.

Perhaps the greatest loss of human prosperity over the sixty years was the billion Chinese locked up in China under communist rule. How many billions of hours of creative human endeavor were lost? How many hundreds of millions of lifetimes of business acheivement and entrepreneurship lost? How many tens of millions of lifetimes stolen from engineering development, medical research and scientific discovery? We should reflect not only on how miserably these billion plus Chinese people have lived under Communist rule but also how much the world lost when these minds and bodies were mostly isolated from the world.

China could have easily followed the course of Singapore in 1950. The president of Singapore was also a communist, but he inadvertantly deregulated the Singapore economy and discovered the benefits of markets. Chinese in China could have had the same per capita income as Chinese in Singapore, Hong Kong and Taiwan.

This gives us a sense of what would result from liberating hundreds of millions of Chinese not over the next decades as China hopefully liberalizes, but over next two or three years with entrepreneurial Chinese people living free in Texas. The first generation of hard labor and long hours can offer their children (plural!) advanced educations as engineers, research scientists and entrepreneurs. (Everyone time I chatted with workers in Chinese restaurants when I lived in Houston, they were working on engineering degrees at area colleges.)

My Texasworld presentation outlined these and other preliminary ideas on market responses to possible global emergencies, and looked at the technologies for growing food and producing energy for vastly high population densities, in Texas, in New York or on the Earth in general.

Tuesday, December 17, 2013

From Poland to Peru: Black Markets, Parallel Societies

by Gregory F. Rehmke

"This movement should create a situation in which authorities will control empty stores, but not the market; the employment of workers, but not their livelihood; the official media, but not the circulation of information; printing plants, but not the publishing movement; the mail and telephones, but not communication; and the school system, but not education."  Solidarity's Wiktor Kulerski on Poland's parallel society (written while in hiding).
[This essay was first published in 1987 in Econ '87 and was later reprinted in theInternational Society of Individual Liberty's Freedom Network News.]
Dozens of countries around the world hold parallel societies--one on the record, obeying government regulations, paying taxes, following orders, and the other off the record and underground. Often, individuals keep one foot in each world and learn to play by two sets of rules.
In Poland and Peru free societies are flourishing--off the record. Poland's underground may lead to an anti-Communist revolution [it later did, of course]; Peru's black markets may hold the answer to Third World poverty. Two world-class problems solved with one stroke. Maybe.
The "second society" in Poland has a long history. Operating in parallel to the legal economy, it has provided products from refrigerators to books to dozens of other goods consumers want, but which the legal economy seems unable to provide.
When Polish authorities imposed marshal law in 1981, they pushed the Solidarity movement underground. Pamphlets began to appear in Warsaw calling for the "self-organization of society." Polish dissident Adam Michnik, in his book Letters from Prison and other Essays, says, "Our unofficial life is our authentic life," and called on his fellow Poles to act as if they were free. Many Poles acted out their freedom by joining any of the hundreds of private enterprises that make up Poland's diverse black markets.
Long before Solidarity, Polish authorities had quietly relied on black markets to produce goods and services their planned economy could not. In doing so they let loose a whole new set of incentives. As Poles earned profits from these private enterprises, they learned the benefits of economic freedom, even in its severely limited form. Over time black market enterprises grew in scope and complexity, and have crossed over into political life through private publishing firms.
In universities, banned books by free-market economists are turning up on assigned reading lists. Seven major underground publishing operations have--among them--translated and printed works by Alexander Solzhenitsyn, George Orwell, Milton Friedman, Ayn Rand, and others.
The Polish government is not alone in its worries about growing black markets and demands for political freedom. The Economist reported on "The Stirrings of Yugopluralism" (February 21, 1987 p. 45), in Yugoslavia. Aged Eastern Bloc leaders are caught between growing "second" societies underground, and Gorbachev's calls for economic and political reform above ground.
But black markets are a much wider phenomenon than those known in communist countries. Black markets arise wherever government regulation makes voluntary economic activity illegal. And virtually every government does that to some extent.
Black markets in the Third World
Although U.N. officials and other development experts are blaming corruption and black markets for hampering economic growth in the Third World, David Osterfeld, a fellow of the Institute for Humane Studies at George Mason University, sees it differently.
Osterfeld argues that Third World corruption is fundamentally different than in western societies. "In the West," Osterfeld says, "the market is the basic social institution within which business is conducted. Corruption here takes the form of payments to public officials in return for licensing restrictions, tariffs or other policies or practices that shield businesses from competition… In contrast, throughout the Third World the state rather than the free market is the basic social institution. Their corruption often takes the form of payoffs to public officials, or other illegal measures, designed to obtain permission to enter the market. Hence, in contrast to corruption in the West, which reduces competition. Third World corruption tends to increase market competition."
Osterfeld cites China's absence of labor markets as an example. Without such markets, Chinese managers hire peasants illegally to meet production quotas. Fancy bookkeeping hides their wages, but such illegal workers are estimated to make up 25-50 percent of China's entire industrial work force.
In some western countries though, individuals have launched their enterprises completely outside the system. Take Peru, for example.
Peru: where black is informal
Hernando De Soto is in favor of black markets. So is Mario Vargas Llosa, the famous Peruvian novelist Llosa's major New York Times Magazine article on De Soto, "In Defense of the Black Market" (February 21, 1987), argues that because government bureaucracies are the problem in Peru, black markets are the solution.
In his new book El Otro Sendero ("The Other Path"), De Soto describes the "informal" economy that has arisen because the "formal" economy is tightly bound by thousands of regulations. Llosa explains "In Peru, there are more than 500,000 laws and executive orders governing even the simplest of daily living needs. Given that burden, illegal solutions are all that remain." Peru's informal economy forms a vast parallel society, operating next to but largely independent of the legal Peruvian economy.
In 1980, De Soto founded the "Institute for Liberty and Democracy" to study the phenomenon of black markets in Peru and around the world. Black markets are often criticized as competing unfairly with legal firms (since they rarely pay taxes). But De Soto found that entrepreneurs turned to black markets to avoid regulations more than taxes. Endless regulations protect the wealthy and established firms from competition. Llosa explains that the real problem is the state "whose Byzantine legal system seems designed to favor those already favored and to punish the rest by making them permanent outlaws. The informal market is actually the solution to the problem: the spontaneous and creative response of the impoverished masses to the state's inability to satisfy their basic needs."
How extensive is Peru's informal economy? According to Llosa and De Soto, over 400,000 people in Lima, Peru's largest city, are directly supported by the commercial black market. The informal economy has invested more than $1 billion in transportation (in Lima 95 percent of public transportation is in the hands of the informal economy). Half the population of Lima lives in houses constructed by the informal economy, which between 1960 and 1984 spent $8.3 billion on housing, while the government spent only $173 million. The black market businesses of the informal economy are not only far more efficient than their regulated and government counterparts; they utterly dominate much of the Peruvian economy.
But why doesn't the government face up to the reality? Why not deregulate the economy and thus make legal the thousands of enterprises that, in reality, keep the Peruvian economy operating. De Soto calls the problem "mercantilism," a word that describes an economic order based on detailed government control of the economy, in partnership with established businesses.
De Soto says that though the Peruvian government defends its taxes and regulations on the grounds of social justice, and claims to redistribute wealth from rich to poor, the reality is very different. Llosa explains "Redistribution, which is supposed to mean the taking of money from the elite to give to the poor, actually involves the concession of monopolies or favored status to the elite, who depend on the good graces of the state--which, in turn, is dependent on the elite… While the nation's wealth remains concentrated in a small minority, the interests of the majority are largely ignored."
De Soto's Institute for Liberty and Democracy, with 40 full-time employees, provides studies to document the effectiveness of black markets in solving economic problems and to expose the true nature of Peru's legal economic problems and to expose the true nature of Peru's legal economic system, "De Soto's studies strip away any pretensions anyone may have about the validity of the mercantilist system. This system, he shows with devastating accumulation of data, is not only immoral but also inefficient. Within it, success does not depend on inventiveness and hard work but on the entrepreneur's ability to gain the sympathy of presidents, ministers and other public functionaries--which usually means his ability to corrupt them."
Peru's mercantilistic economy, like Poland's communist economy, is based on privilege. Instead of all people being equal in the eyes of the law, their laws look first for the mark of status--one's family or party membership decides which set of rules apply. But black markets are based on equality before the unwritten laws of the market. Informal markets are open to men and women of all races and religions. Wealth accumulates through production, and labor is rewarded according to the combined and voluntary valuations others place on one's labor in the marketplace. Peru's informal economy grows ever more efficient, its formal economy is the stagnant clone of ten dozen other impoverished Third World countries.
Poland and Peru offer a strange vision of the future. An unauthorized future that no authorities anywhere seem willing to accept. These growing free economies may--at any moment--be crushed by new "reforms" designed to stamp out "corruption," and establish purer socialist or communist ideologies. Just as the Cambodian economy was crushed by the idealistic Khmer Rouge in 1975.
Or, they may continue to evolve toward freedom. Political freedoms grow from the economic freedoms practiced daily in black market activities. These parallel free societies may over time gain strength and stability as their command economies fade. The authorities in Poland and Peru may eventually be left with only bare shelves, unproductive firms, unread newspapers, and empty schools. And their own endless and unenforceable regulations.
Afterword (August, 2001)...
Communism fell, but informal economies still flourish. For the latest work by Hernando de Soto, see the review of his recent book on the Laissez-Faire Books web site: The Mystery of CapitalAlso recommended, this Forbes article on De Soto's work, "Waking Dead Capital" (sign in required)]

Monday, December 09, 2013

Did Ebenezer Scrooge Dream a Better Life for Himself?

George C. Scott brought Charles Dickens' Ebenezer Scrooge to life in the 1990s on a television special. Scott played Scrooge as a competent and thoughtful businessman who finds both Christmas and philanthropy a waste of time and money. His eyes are opened through a series of nightmarish dreams. Dickens' story and the various movie and cartoon versions are offered today as indictments of greed and business as well as celebrations of the joys of family, Christmas, and giving to those less fortunate.

Looking at this classic story through a market-process lens illuminates lessons about work, choices, and charity very different from the usual anti-business take on Scrooge. And we can write our own last chapter to the story that lets Scrooge live a happier life without compromising his business principles.

I would argue that a better, though less dramatic, interpretation of the story is simply that people—especially successful businesspeople—can get too wrapped up in their work, and lose touch with the rest of their lives. Engagement in civil society brings many unexpected and hard-to-quantify pleasures. Philanthropy can be satisfying to the giver as well as helpful to the receiver.

The story begins with Scrooge successful in business but having let his personal and social world fade. He long ago let his love relationship drift away and deep down regrets it. After a difficult childhood, he gradually gained a kind of comfort in solitude and emotional isolation. As is usual in novels and movies, nothing positive is said or implied about his work. No glimmer of understanding that he must be providing a valued service in order to stay in business and accumulate savings. But we can agree that focused businessmen like Scrooge can lose track of their family and social lives and find themselves years later wealthy but alone.

Second, the story features an interesting, if subtle, attack on government welfare. Scrooge is asked to donate to a relief fund. He answers that he pays taxes for just such purposes. Why don't the homeless go to existing poor houses or to prisons he asks? The private-relief fund-raisers ask him if he has ever seen the government relief houses. Scrooge answers no, he hasn't. He is responding reasonably and so are they.

Tax-supported relief houses give the emotionally-distant Scrooge an excuse not to take personal responsibility for the poor. He has already paid, he claims, through his taxes. He uses government-funded welfare agencies as an excuse to avoid supporting private relief agencies. With no state-run poor houses in England, he might still have said: "Bah, Humbug!" and  “free-ride” on donations of others. That is, he might free-ride (an economics term) by relying on others to donate to help beggars. Scrooge would benefit from beggar-free streets without spending a dime on donations (he is greedy in the story, after all).

Few of us enjoy seeing and dealing with homeless people begging on the street. Scrooge could well have been drawn into private relief just to keep beggars out of his way. Still a selfish motive, but one that would require helping others in order to help himself. He could have invested in enterprises that create job-expanding opportunities that help the unfortunate or unwise to get back on their feet. Consider too that Scrooge's current business, speculation, could very well be helping the poor more effectively that any charity he might choose to support (more on this possibility below).

Had Scrooge invested in a job-training firm, for example, he could carry business cards promoting his job-training services to helpfully put in the cups of beggars. In this way he could have helped the needy and profited as an investor in training-services at the same time (perhaps naming his enterprise Scrooge Training Services or Scrooge University). Many for-profit as well as nonprofit organizations provide job-training services and generate income through job-placement. The poor learn skills and pay a portion of their later salaries back to the job-training/job-placement organizations.

My great-great-grandfather, Dr. Thomas Guthrie helped start the Ragged Schools for Children in Scotland and England. He went to the Scrooges of his day (the 1840s) and convinced them to contribute. The Ragged Schools started in Scotland and grew gradually. Andy Murray, in his Ragged Theology blog explains the first Ragged School and its inspiration:
The first or ‘original’ ragged school in Edinburgh was established in 1847 in a small room on the Castle Hill.  The main building that was eventually used is now part of Camera Obscura and the open bible can still be seen above the door with the words ‘Search the Scriptures’ (John 5 v 39) engraved on it.  Guthrie says that the inspiration for the ragged school movement was from John Pounds of Portsmouth (1766-1839).  Pounds was a dockyard worker who at the age of 15 fell in to a dry dock and was crippled for life.  As he recovered he taught himself to read and write and became a cobbler.  Pounds started to teach local children to read and write free of charge.  He also taught them carpentry, how to cook and how to repair shoes while offering them food and shelter at the same time.  (Source.)
There were 192 Ragged Schools in
operation at its peak with 20,000 destitute children attending each year. An estimated 300,000 attended overall, from 1840s to 1880s. The English government apparently saw the Ragged Schools as unwanted competition to their poor houses and new government-funded schools, and they drove the Ragged Schools out of business. (Students apparently preferred the industry-training they received as part of their education at the Ragged Schools. The UK government went so far as to sue to force students out of Ragged Schools and into government schools. Glimpse this fascinating story here (see section: "Tensions with the state system").

Because Scrooge feels he has already discharged his obligation to help the poor (thanks to state-mandated poor-house welfare), he loses touch with that part of the world. He doesn't bother looking into the management and operation of poor houses because their tax-funding insulates them from private reform. And he knows he wouldn't be allowed to withhold his taxes if he found them badly managed.

Had he been choosing among private alternatives he would have had an incentive to investigate how his money was used. He doesn't do much investigation after being saved, in the George C. Scott version. He just gives a big donation to the private relief effort he refused the day before. But even so, he will surely take an acute interest in that private relief project after donating a huge sum to it. He would be angered as well as embarrassed if the relief effort he supported turned out to be ill-managed or a fraud.

Scrooge, thanks to tax-funded poor houses, is less likely to be drawn into civil society philanthropies that might have opened up his life (and he might have been less in need of spiritual shock-therapy).

His very skeptical eye would be a valuable service for private charities, as he seems to understand that good intentions matter less than good results. He would probably be a better trustee of a private charity than his "do-gooder" nephew, for example.

George C. Scott's Scrooge notes with disapproval his nephew's offer to overpay
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Cratchit's son. Scrooge understands that overpaying for a young person's first job can have negative consequences. It breaks the connection between a person's productivity and their pay. It confuses charity with wages in the mind of both the employee and employer.

The intricate dance toward “just” or market wages not only pits each worker against others willing to take on a job, it pits each employer against all others willing to pay higher wages. When employers get greedy and try to hold wages below the marginal earnings each worker brings the firm, other employers have a profit opportunity if they can hire that worker away.

Smaller earnings from each of a hundred or a thousand workers can add up to far more than large earnings from a dozen. Henry Ford earned far less profit per worker and per car sold than did Henry Royce. But in the end, he did okay. As they say, there's a fortune to be made at the bottom of the pyramid.

The push for labor services leads employers into a bidding war that narrows the gap between what workers earn for firms and what they are paid. Competition for workers is frustrating for employers who hire and train new employees only to find them lured away by competitors. 

The explanation for Bob Cratchit’s low pay is likely his limited skills, responsibility and productivity at the firm of Scrooge and Marley. In fairness to Mr. Cratchit, it may not be his fault that Scrooge has been holding on too tight and not delegated enough. Marley may have offered Scrooge more opportunities to learn and share responsibilities at the firm than Scrooge had so far given Cratchit. Either could be blamed, but it seems reasonable to find fault with the side most capable of changing the situation: the boss.

Seeing the Ghost of Famine future 

Some are visited by the ghosts of terrible futures that never happen, but might have. Imagine Ebenezer Scrooge dreaming a terrible famine would soon strike. Perhaps nightmare tariffs on imported grain coupled with bad harvests in England drive corn prices beyond the reach of the poor and spread famine across the land. Famines in Scrooge’s time were not rare and he would have lived through one in his youth. The Europe-wide famine of 1816/17 followed poor harvests across Europe and the general destruction of the Napoleonic Wars. Crop yields in Western Europe fell 75 per cent triggering wide-spread famine and death.

For a businessman like Scrooge, such a vision might lead to careful review of weather news across Europe as harvests approached. News of potentially bad harvests would be a reasons for taking a major investment position. Early on in the movie George C. Scott’s Scrooge visits the city grain exchange to do some business. He holds out for a higher price for corn in his warehouse, and is accused of hurting the poor through his greed. But is holding out for higher prices really hurting the poor? Yes and no.

His “hoarding” or speculating on grain does raise the price today. But it also has the consequence of pushing prices down in the future. Scrooge has seen a vision of scarcer grain and higher prices in the future (otherwise he would sell at today’s prices). He is raising the price of grain for the poor (and everyone else) today, in exchange for lowering the price in the future. If his vision proves true, he will have performed a service for society by pushing all to conserve now a resource that will be more scarce in the future.

The businessmen in the movie claim Scrooge is raising grain prices for the poor today by holding back supply. These less-visionary businessmen may lack the weather information Scrooge could have gathered. Or they may just wish to buy Scrooge's corn at lower prices either to help the poor today or to help themselves. How can we know they would pass these lower prices on to consumers? Perhaps they would just pocket gains from below-market prices themselves. In any case, I will argue that raising prices now can in fact help the poor. (How is that for a Scrooge-like claim!)

Speculators like Scrooge are time-shifters. Whether or not inspired by ghostly visions, they trade goods through time. Scrooge fills his warehouse with corn then turns the dial on a time-machine to transport them to the future. It is an expensive and risky enterprise. Who knows what the future will bring? Such businessmen make informed guesses, they speculate about the future. If they are right, their fourth-dimension transportation system earns profits, even after paying rent on warehouse space and interest on money tied-up over time. If they guess wrong they lose their investment. And after too many wrong guesses, both Scrooge and Cratchit would be looking for new work.

Across Europe, in old city-centers, you can often find the grain exchange building. Here sellers and buyers of grain would gather each day to buy, sell, and speculate. Farmers are just one part of working agricultural markets. Weather and harvests are hard to predict. Grain can be stored for some time, though at a cost. Grain prices embody the collective guesses of hundred or thousands of people about what the future will bring for the supply and demand of grain. Prices change each day as news of hundreds or thousands of events small and large filter into the buyers, sellers, and speculators on the grain exchange.

Steam powered ships opened vast lands in American and Argentina to supply grain the Europe. And steam-powered railroads allowed Ukraine to become a bread-basket to the world. Transportation costs dropped gradually, then rapidly through the 1800s. Low-priced grain from the America's "flooded" Europe, leading European landlords, the landed Aristocracy, to lobby Parliament for tariffs on imported grain. The landed Aristocracy of the time favored "fair trade" not free trade. Lower grain prices led to lower rents on their farmland.

Scrooge was neither a landed aristocrat born with a silver spoon, nor a farmer, nor a manufacturer. How did Scrooge happen to have the corn in his warehouse in the first place? Economists argue he is performing a service by warehousing corn and releasing it when demand is strong. In the movie he is presented as being greedy and pushing prices higher, thus hurting the poor. But by aiming to make profits speculating on corn, his early purchase pushes prices slightly up and encourages conservation now. By speculating in corn he is a visionary. He guesses that in the near future, current plentiful corn supplies will turn scarce. Those lulled by relatively low corn prices to use it casually today would regret it later--but by then it would be too late. Only by taking action before the shortage can some of today’s relative plenty be set aside for tomorrow.

No one can really see into the future and know what corn, oil, or copper prices will be next week, next month, or next year. No one can know the future, but professional speculators invest time and resources to make educated guesses. When they are wrong, they lose their own money, but when correct they make money by better coordinating consumer behavior through time. The warning from a Ghost of Famines Future alerts speculators to act today. Consumers angry now at rising prices benefit in the future when Scrooge’s warehoused corn is released, easing the shortage and stabilizing or lowering the future’s higher prices. Scrooge profits by coordinating consumption through time.

Yet, interestingly, his actions also generate incentives that can eat away at his potential earnings. By warehousing corn and pushing prices higher now, he not only signals conservation by consumers, but also new production and transport from more distant lands. Higher than expected prices signal farmers to work to expand output and bring new land into production. These behavior changes caused now by Scrooge’s purchases and warehouse will take time to bear fruit. So when the future shortage and perhaps famine arrives some farmers will have expanded production without ever having seen a ghost themselves. Scrooge’s vision and visionary action signal invisibly through higher prices today that high or higher prices are expected in the future.

Such “excess” grain production does not help Scrooge profit, in fact it will lower his potential gains as the expanded harvests come to market. Still, Scrooge could not expect to feed all of London from his warehouse. He will profit enough and his speculating will have spurred production (as well as conservation). And the ghost of possible famine will fade in the face of both grain sources. All this happens invisibly through changing prices, contracts, and private property.

Back to Cratchit, Wage Rates, & Responsibility

Many have been written on the economics of A Christmas Carol. But some I think hit a sour note by attacking Cratchit as incompetent and painting the early Scrooge as a hero. We have the luxury of writing our own postscript to the story, one where Scrooge gains some friends, socializes some, and continues to run his business profitably. In our free-market postscript, Scrooge can take an active interest both in supporting well-run and effective charities, and in agitating for government to shut down poorly-run poor houses.

After his conversion, Scrooge gives Cratchit a raise, doubling his salary. Does that mean he was just exploiting him earlier or that Cratchit was not particularly competent and now gets charity? No, I think the raise can be seen as a very reasonable decision, part of Scrooge's change of heart, that he wishes to give Cratchit more responsibility at the firm. Scrooge met his own mortality in his dreams that night. He dreamed himself standing before his own grave. Mortality creeps up quietly on all of us and perhaps more suddenly on busy and successful businessmen. With no board of directors to push for a "succession plan" for the firm of Scrooge & Marley, he had avoided the issue.

Scrooge likely didn't pay more earlier because he hadn't given Cratchit enough responsibility to enable him to be worth more. With Scrooge’s change of heart, higher pay would go hand in hand with higher productivity from Cratchit, which would follow from additional responsibilities. Scrooge will need to free up time, after all, for board meetings at the various nonprofits he will be asked to join (word of unexpected large donations gets around fast in the nonprofit community).

Consider too that giving Cratchit more responsibility and more knowledge of the business could significantly raise Cratchit's income-earning ability for the firm. Scrooge might make higher profits from a better-paid Cratchit.

It could be claimed that Cratchit is incompetent, but nothing indicates bad work habits in the movie, apart perhaps from showing up late to work one day--but that could be blamed on the overlarge and unexpected turkey Scrooge himself donated the day before. The audience, unfortunately, sees only the seemingly arbitrary nature of pay. Bosses can apparently double someone's pay if only spirits scare them half to death in nightmares (something politicians and labor unions have tried to do ever since).

So I recommend George C. Scott’s A Christmas Carol to students. Maybe it's not as fun as the Mr. Magoo’s cartoon version, but older students can find deeper lessons in the story.

Gregory Rehmke is a writer and economic educator based in Seattle. He is the coauthor (or "with author) of The Complete Idiot's Guide to Global Economics, and directs Economic Thinking, a program of the nonprofit E Pluribus Unum Films. More information at


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Anonymous said...
I didn't understand the concluding part of your article, could you please explain it more?
Gregory Rehmke said...
I am not sure what further to explain of the conclusion. I would recommend the movie Hobson's Choice, with Charles Laughton, to give a sense of how wages rise.

If employees like Cratchit are capable, and productive, then they earn income for their employer. If the employer chooses to pay them less than the marginal income they bring the firm (or to otherwise mistreat them), employees can leave to search for new employment at higher wages.

In Hobson's Choice, an overbearing employer mistreats employees and his grown daughters (who also work for him). They can try to persuade the boss to pay higher wagers (or grant shorter hours), but ultimately, then can leave to work for others or to start their own firm.

It is their productivity, their ability to create value for customers that is their claim to be compensated or to start a successful enterprise.

Hope this helps explain the concluding part of my article.

This essay by F. A. Harper, "Why Wages Rise" also explains the economic forces that push wages up (or down):
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Tuesday, December 03, 2013

Hydraulic Fracturing Causes Irreversible Environmental Damage.

It is true that hydraulic fracturing causes irreversible environmental damage. But also true that the damage is thousands of feet down, well below the water table. Gravel pits cause irreversible environmental damage blasting, digging, and moving rock, as do all open pit and underground mines. Beavers cause hard-to-reverse environmental damage when they fell trees and build small dams. Butterflies callously push air around, disrupting their local air ecosystems. And environmentalists cause environmental damage when they fly to conferences around the world, or just drive to downtown meetings or protests. Every act of creation causes “damage” in shifting around resources.
All such damage is irreversible in the sense that you can't step into a stream in the same water twice. The world flows forward and though environmental changes can usually be restored they can't be reversed. Each restoration project consumes additional resources. Ecosystems left alone after an intervention develop along a new path that is better or worse only in the eyes of outside observers.
The question to all these concerns should be: “how much damage, and to whom?” Damage to one ecosystem creates openings and opportunities for new adjusted ecosystems. Pinprick blasts deep underground move rock around, allowing oil and natural gas to flow. What's left after is new and different, but not better or worse. Maybe tiny microbes are blasted, or maybe they move in and multiply after the blasts.
Maybe Mole Men will be awakened by the million hydraulic blasts...
Every fire since the dawn of time has caused irreversible environmental damage. Blame Prometheus.

Wednesday, July 31, 2013

Preston Tucker: A Generation Too Late

With the Tesla Motors Model S the latest cool car of the future, it's worth looking back at past cars of the future, and the regulatory barriers past entrepreneurs have struggled with.

Ask your parents or grandparents about the Tucker '48. After World War II everyone wanted one of these sleek new cars of the future--but only fifty people ever got one. George Lucas and Francis Ford Coppola bring this story to screen in Tucker: The Man and His Dream. The movie dramatically illustrates the dangers of a mixed economy, with its meddling bureaucrats and myriad behind-the-scenes "arrangements" between politicians and businessmen. Central to the idea of free enterprise is the freedom of entrepreneurs to bring new competition into any industry--freedom to succeed by offering consumers a better product, and the equal freedom to fail. But though most businessmen claim to support free-enterprise, far fewer favor new competition in their own industry.
"Creative Destruction" is the phrase economist Joseph Schumpeter used to describe the innovation and competition in a free economy (see "MTV & capitalism's creative destruction" in Econ, fall, 1987). Preston Tucker was a visionary, innovator, and entrepreneur. His vision was of an automobile on technology's cutting edge, incorporating an aluminum engine, independent suspension, fuel injection, disc brakes, seat belts, and other innovations not seen outside the racetracks of his day. Many remember the Tucker'48 for its middle headlight that turned with the steering wheel.
Entrepreneurial vision by itself is not enough, and Preston Tucker needed financing to turn his dream car into reality. From the very beginning Tucker ran into stiff opposition from the Securities and Exchange Commission (SEC), an agency of the federal government. Even his first sales of franchises (the right to sell future Tucker automobiles, if and when they were produced) brought an SEC investigation. Tucker complained that selling dealerships wasn't the same as issuing stock, but the SEC investigated anyway.
The SEC later caused costly delays in approving the initial Tucker stock offering. By selling stock in Tucker Corporation to the public, Tucker was inviting them to join his enterprise, to become part-owners and accept the risk of ownership--by sharing the profits of success, or the losses of failure. Funds raised from dealership and stock sales provided the money to design and build the first Tucker'48s.
But the SEC never stopped its harassment of Preston Tucker. The established auto industry didn't want new competition, and their "Senator from Detroit," Homer Ferguson, led the battle to crush Tucker Corporation. Further energizing the investigation of Tucker was SEC Commissioner Harry McDonald, also from Detroit. Regional SEC Chief Thomas B. Han apparently hated Tucker, and was relentless in his efforts to bring him down. The SEC may have spent more money investigating the Tucker Corporation than the Tucker Corporation spent designing and building the "car of the future."
Tucker: a Man and His Dream is the story of a dream extinguished by politicians and government bureaucrats who worked hand in hand with servile newspapers, corrupt journalists, and probably the big three automakers--Ford, General Motors and Chrysler. (How historically accurate is the movie in presenting the political and economic events of Tucker's venture? See notes below and links to separate articles.) Tucker's story sounds a warning we would do well to heed--40 years later--as today's politicians call for new federal direction of investment in the American economy, and the SEC continues its long running campaign against Drexel Burnham Lambert and Michael Milken (author's note: this was originally written in 1988. Government prosecutors succeeded in driving Drexel out of business and putting Michael Milken in jail. Unjustly, in my opinion.).
Preston Tucker was not alone
The actual role played by Ford, GM, and Chrysler lobbyists in putting Tucker out of business is a question for historical research. American history offers many examples of congressmen and federal regulatory agencies protecting established companies from new competition. In a true free enterprise system, firms can only head off new competition by producing quality products efficiently, and keeping prices down. Had the Tucker Corporation survived, the Big Three automakers would probably have, decades earlier, adopted many of the Tucker'48's new technological and safety features.
The federal alphabet agencies have a long history of suppressing competition. The Interstate Commerce Commission (ICC), for example, according to many history textbooks, was set up to protect the consumer from the economic power of the railroads. That is how the government publicized the ICC, both then and now. Yet the original ICC legislation was drafted by railroad industry lawyers. The ICC was actually designed to protect established railroads from cutthroat competition"-- that is, competition from the Preston Tuckers of the day. [2]
In economics this is called the "capture theory" of regulation. The idea is that no matter how well-meaning a new regulatory agency is, before long the agency is "captured" by the industry it was designed to regulate. [3] The Federal Aviation Authority (FAA) was supposed to protect consumer safety by regulating the airlines. Instead, the FAA protected established airlines from competition--and virtually no new airlines were approved by the FAA from its founding until deregulation under the Carter administration.

Government by decree
Tucker biographer Charles T. Pearson explains the political economic system Preston Tucker had to battle, and entrepreneurs still battle today; "During the Roosevelt Administration there developed a system of government by decree, under which even minor officials practically made and enforced their own laws. In practice, it was reversion to an almost feudal form of government, in which heads of departments and bureaus became little dictators!'4 One of these "little dictators" was Wilson Wyatt, head of the National Housing Agency (NHA).
Launching a major enterprise stretched Tucker's business skills to the limit. He was stretched still further defending his enterprise from Wilson Wyatt and the NHA.
After World War II, the government disposed of many of the manufacturing facilities built during the war. Tucker, as the movie showed, bid for a giant empty plant in Chicago and an the right to lease it from the War assets Administration (WAA). But Wyatt's NHA tried to reverse the WAA decision and award the plant to the Lustron Corporation to build prefabricated housing. While Tucker was defending his private-sector financing efforts from ongoing SEC attacks, Wyatt had already lined up $12 million and $52 million government loans for Lustron from the Reconstruction Finance Corporation (RFC), the federal investment agency created during the New Deal. Tucker was drawn into this complicated political battle, which before it was over involved five government agencies. [5] Tucker fought back the only way he could, by finding politicians motivated and able to fight Wyatt, Senator Ferguson, and the others arrayed against him.
--- [Editor's Note: Reader Ed Moore emailed the following correction to my story. I received an earlier email arguing my account of events was inadequate (okay, actually he said it was just wrong). Anyway, here is Mr. Moore's email:
I realize that this article was written fourteen years ago. But its current posting on the web requires some response--especially since Lustron's story is far less well-known than Tucker's.
Wyatt had been rejected by the RFC for a $52 million dollar loan for Lustron Corp.--the company that Wyatt was trying to get the Chicago Dodge plant for.
I would also be careful quoting Coppola's movie since it is does contain some creative liberties that are not factual--if you watch the movie, the characters claim that Lustron was awarded the plant. This is not true. According to Senate committee hearing records, Wyatt's claim on the Chicago Dodge plant was rejected and also quashed Wyatt's hopes of getting money from the RFC for Lustron. Wyatt immediately resigned in protest.
As a matter of fact, Lustron was not awarded a loan until June 1947 and a plant in Columbus, OH.
Actually Tucker and Strandlund (Lustron's president and founder) probably had much in common as both had a dream of delivering a product that far exceeded in quality and vision what was currently being offered to consumers and both ran up against entrenched forces that desperately wanted to see their failure.]
On May 28, 1948, just when Tucker Corporation began to turn the corner with both its manufacturing challenges and financing difficulties, the SEC and the justice Department launched a dramatic new full-scale offensive. The SEC leaked news of an internal report it said would blow Tucker Corporation sky high. The leaks seemed aimed at influencing a then impaneled grand jury, which soon called for an indictment--and Tucker was dragged into court. Though the charges were later shown to be mostly fabricated by the Justice Department and the SEC, the damage was done. [need footnote here to support this claim.] In those pre-Watergate days the public had far more faith in its public officials, and Tucker's reputation and company were ruined.
In the movie, Tucker himself delivers a dramatic final summation to the jury. His speech echos the theme of Robert Higg's article "Crisis and Leviathan" in Econ Update, September, 1988--that the growth of cozy government/business relationships in America threatens both liberty and prosperity.
Actor Jeff Bridges, as Preston Tucker, shares his vision of America:
"When I was a boy I read about Edison, Ford, the Wright brothers. They were my heroes. Rags to riches wasn't just the name of a book. It was what this country was all about.
"We invented the free enterprise system, where anybody, no matter who he was, where he came from, what class he belonged to, if he came up with a better idea for anything, there was no limit to how far he could go.
"But I grew up a generation too late, I guess. The way the system works now, the loner, the crackpot, the dreamer with some damn-fool idea that ends up revolutionizing the world, well, someone like that is squashed by big business before he knows what hit him. The new bureaucrats would rather kill a new idea than let it rock the boat.
"If Benjamin Franklin were alive today, he'd probably get arrested for flying a kite without a license.
"We're all puffed up with ourselves right now because we invented the A-bomb and we beat the daylights out of the Nazis and the Japanese …but if big business closes the door to the little guy--you, me--the little guy with new ideas, we've not only closed the door to progress and hard work, we've sabotaged everything we fought for. We might just as well let the Japanese and the Germans walk in here and tell us what to do. What's the difference? If new ideas can't be allowed to flourish, then we've just exchanged one set of rulers for another. Right?" [6]
And one of the jurors quietly mutters: "Right!"
Retreat to the old world
In the old world, before American free-market economy developed, entrepreneurs needed the blessing of the state to survive. Kings granted monopolies to manufacturers, and subsidized enterprises they favored.
The two world wars partially returned the American economy to that age (see David Boaz' "The Moral Equivalent of War"). Preston Tucker's story illustrates the result. In his biography of Tucker, Charles Pearson lays bare the injustice of the system, as he compares the government's persecution of Tucker with its subsidies of industrialist Henry Kaiser.
Like Tucker, Henry Kaiser set out to build automobiles, but Kaiser had both the government's blessing and the government's money. Charles Pearson observes: "While Tucker was being tried [in court], Kaiser applied for and got a heavy RFC loan to develop and tool new models…"[7] Stock in Kaiser's automotive enterprise, says Pearson, "never paid a dividend, yet when the company failed there was no public investigation of what Kaiser had done with $54,000,000 of stockholders' money, why he needed more money, or where the car was he had promised when he sold his stock!" [7] Step by step Pearson compares Henry Kaiser's enterprise with Preston Tucker's. [click here for link]. The best man didn't win.

[For a contrasting view of the events and economics of Preston Tucker's enterprise, see…]
1. See, for example, "History Defalsefied" chapter 2 in Henri Lepage's, Tomorrow Capitalism, Open Court, 1982; The Incredible Bread Machine, World Research Inc., San Diego, 1974, Burton Folsom, Entrepreneurs vs. the State, 1987 (available from Laissez-Faire Books, New York, NY); also see Robert Wiebe, Businessmen and Reform; James Weinstein, The Corporate Ideal and the Liberal State
2. Gabriel Kolko, Railroads & Regulation, 1877-1916, Princeton Univ. Press, 1965.
3. George Stigler, "The Theory of Economic Regulation" Bell Journal of Economics and Management Science, Spring. 1971.
4. Charles T Pearson, The Indomitable Tin Goose:Preston liicker, a Biography, Pocket Books, 1960, p. 79.
5. Ibid., p. 77.
6. Robert Tine, Tucker: The Man and His Dream, Pocket Books, 1988, pp. 179-180.
7. Pearson, p. 205.
For further reading on the SEC, see The SEC and the Public Interest by S. Phillips andi. Zecher, MIT Press, 1981. For more on Preston Tucker see "A Tucker Memoir: A Dream as Bright as Its Chrome;" New York Times, September 18, 1988, (in Forum), by Philip S. Egan, author of the forthcoming Design and Destiny: The Making of the Tucker Automobile. Also see "Three Men and a Car," Autoweek cover story on Preston Tucker, July 4, 1988.

[From the October, 1988 issue of Econ, a publication of the Reason Foundation.]