ENTR 301: Principled Entrepreneurship & the Free
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ENTR 301: Principled Entrepreneurship & The Free Enterprise System Russell S. Sobel, Ph.D. Professor of Economics and Entrepreneurship Baker School of Business The Citadel ENTR 301 Outline Level Section IV: Principled Entrepreneurship, Crony Capitalism, and Unproductive Entrepreneurship • Part 10: Legal Plunder, Crony Capitalism, and Unproductive Entrepreneurship What is ‘Coercion’? Voluntary exchanges and actions make both parties better off, and are socially productive. Coercive actions do not….they violate human rights, and make at least one party worse off. But what is the definition? • An action is coercive if the other party is willing to devote resources to making you worse off if you don’t comply. Bastiat’s The Law Frédéric Bastiat (1801-1850) Bastiat: Production vs. Plunder “Man can only derive life and enjoyment from a perpetual search and appropriation; that is, from a perpetual application of his faculties to objects, or from labor. This is the origin of property. But also he may live and enjoy, by seizing and appropriating the productions of the faculties of his fellow men. This is the origin of plunder.” “Now, labor being in itself a pain, and man being naturally inclined to avoid pain, it follows, and history proves it, that wherever plunder is less burdensome than labor, it prevails; and neither religion nor morality can, in this case, prevent it from prevailing. When does plunder cease, then? When it becomes more burdensome and more dangerous than labor.” His argument… step 1 So in Bastiat’s view: Individuals trying to better their own situations will either produce or plunder to get ahead depending on whichever gives the ‘highest rate of return’ (benefit relative to cost) Bastiat: Rights & The Role of Government “If every man has the right of defending, even by force, his person, his liberty, and his property, a number of men have the right to combine together to extend, to organize a common force to provide regularly for this defense. Collective right, then, has its principle, its reason for existing, its lawfulness, in individual right...” “Nothing, therefore, can be more evident than this: The law is the organization of the natural right of lawful defense; it is the substitution of collective for individual forces, for the purpose of acting in the sphere in which they have a right to act, of doing what they have a right to do, to secure persons, liberties, and properties, and to maintain each in its right, so as to cause justice to reign over all.” His argument… step 2 So in Bastiat’s view: the government (e.g. ‘the law’) is to protect individuals from being plundered by one another, by punishing plunder and making it more difficult than labor. Bastiat: Types of Plunder BUT in Bastiat’s view there are two types of plunder: • ‘extralegal plunder’ and ‘legal plunder’. “extralegal plunder, such as theft, or swindling, is defined, foreseen, and punished by the penal code” So in Bastiat’s view the job of government is to eliminate extralegal plunder Bastiat: Legal Plunder What about Legal Plunder? “…as the force of an individual cannot lawfully touch the person, the liberty, or the property of another individual—for the same reason, the common force cannot lawfully be used to destroy the person, the liberty, or the property of individuals or of classes.” “But how [do we identify legal plunder]? Very easily. See whether the law takes from some persons that which belongs to them, to give to others what does not belong to them. See whether the law performs, for the profit of one citizen, and, to the injury of others, an act that this citizen cannot perform without committing a crime.” Legal Plunder & Rent Seeking So ‘legal plunder’ is the term Bastiat uses to describe it when people use the power of government to enrich themselves at other people’s expense. It is closely related to the concept of ‘rent seeking’ – which is defined as the expenditure of resources (lobbying, etc.) to secure these unearned benefits through government. What to do about ‘legal plunder’ [when you identify a law that is legal plunder…] “Abolish this law without delay; it is not merely an iniquity—it is a fertile source of iniquities, for it invites reprisals; and if you do not take care, the exceptional case will extend, multiply, and become systematic.” “No doubt the party benefited will exclaim loudly; he… will say that the State is bound to protect and encourage his industry; he will plead that it is a good thing for the State … to spend more, and shower down salaries... Take care not to listen to this… for it is by… these arguments that legal plunder becomes systematized.” “When, therefore, plunder is organized by law, for the profit of those who perpetrate it, all the plundered classes tend… to enter in some way into the manufacturing of laws…. either they may wish to put an end to lawful plunder, or they may desire to take part in it.” What to do about ‘legal plunder’ “…legal plunder… there are only three solutions… • 1. When the few plunder the many. • 2. When everybody plunders everybody else. • 3. When nobody plunders anybody. Partial plunder, universal plunder, absence of plunder, amongst these we have to make our choice. The law can only produce one of these results.” “The delusion of the day is to enrich all classes at the expense of each other; it is to generalize plunder... legal plunder may be exercised in an infinite multitude of ways…. tariffs, protection, [subsidies]… taxation, [labor wage and benefit laws]” “…taken as a whole, with what they have in common, … takes the name of socialism.” Baumol’s Unproductive Entrepreneurship Every society has a large number of potential entrepreneurs— creative individuals. Not all choose to employ their talents to open new businesses in the marketplace. There are alternative activities an entrepreneurial individual may choose to pursue. They allocate their talents to where they receive the highest return. Entrepreneurial individuals can choose to devote their labor efforts toward either private-sector wealth creation, or securing wealth redistribution through the political and legal processes. This decision is influenced by the corresponding rates of return—or profit rates—of these alternative activities. Institutions providing for secure property rights, a fair and balanced judicial system, contract enforcement, and effective limits on government’s ability to transfer wealth through taxation and regulation, reduce the profitability of unproductive political and legal entrepreneurship. Under this incentive structure, creative individuals are more likely to engage in the creation of new wealth through productive market entrepreneurship. Positive vs. Negative Sum Activities “Positive Sum” activities are those that benefit both parties (+/+) so result in an overall + for society. --> Productive Entrepreneurship “Zero Sum” activities are those that benefit one and hurt another in offsetting amounts (so +/- = 0). “Negative Sum” activities are those in which the harm (-) is greater than the (+). Many seemingly zero sum are actually negative sum if resources are spent to secure the transfer. --> Unproductive Entrepreneurship “Flyers Enjoy Free Flying as Airport Tries Get Federal Grant” (12/28/08) by Jeff Schrock (The State Journal) BRIDGEPORT - The plane had arrived and was waiting, so were the hundreds of avid airplane fans who showed up in line to enjoy a day they would never forget. "I walked into my grandpa's house, and he looked at me and said are you ready for a plane ride on Sunday?" said Gaje Brown. "I said we're going on a plane ride and he said 'yeah.' I was pretty excited." Officials from the North Central Regional Airport arranged a day of continuous free flights. A Boeing 757 from Newark, New Jersey, the largest plane to ever land in West Virginia, was brought in to take passengers for 30 minute sightseeing flights. The airport is trying reach 10,000 passengers for the year so it can receive a larger airport program grant. "Hopefully we achieve the numbers necessary for the 10,000 passengers that we're looking for. That's the difference in a $150,000 to $1,000,000." said Ron Watson, president of the Benedum Airport Authority. "My wife signed us up for it and we figure the kids never flew before so we brought them along." said Chris Myers of Clarksburg. The airport says they expect Sunday's plane rides to push them over the number of passengers. But they say they don't have the official numbers yet. Why it is harmful… Unproductive entrepreneurship results in a loss to society (negative sum) because the resources used to capture the transfer have an opportunity cost… They could have been used for a productive purpose. Crony Capitalism Crony capitalism - A situation where the institutions of markets are maintained, but the allocation of resources, and the profit and loss of businesses, are determined by political decision making rather than consumer purchases and market forces. To a large degree, the activities of business firms are directed and controlled by government spending and regulation. In turn, many of the business firms will use contributions and other forms of political support to compete for government favors (i.e., rent seeking). Economic Freedom and Productive Entrepreneurship Research shows for states and countries: Higher levels of economic freedom mean more productive entrepreneurship and less unproductive entrepreneurship (and vice versa). It changes the relative rates of return to the two activities (legal and political plunder vs. production) Tying it all together…. So, the difference in the measured rates of ‘entrepreneurship’ isn’t really due to there being large differences in the number of creative people. The difference is in whether creative people go into wealth-producing productive entrepreneurial activities or into unproductive activities.