Wednesday, August 30, 2006

"But, who's going to run this thing?"

For many, the assumption is that only government can run a school system. But why is government the assumed solution to the problems that it alone creates?

Most of us don't want government running any operation since we know intuitively, and have seen empirically, that government operations fail to produce efficient results. Simply look at the former Soviet republics or review the operations of any state agency. Yet, many continue to advocate for government in education. Why?

The following is a reponse to a listserve post from a gentleman posing questions regarding who would run the schools if they were privatized. His line of questions are more statements of his belief in a government solution than a true attempt to gain additional knowledge.


Your questions are similar to those posed almost two decades ago by citizens of the former Soviet Bloc as they faced new lives of freedom. When you ask these types off questions, you are not thinking "out of the box." Your questions are central-planning-centric in that you ask questions that are laced with doubts; doubts that lead to the response that the solution can only be realized through government planning. Your weakness is your refusal to believe in the free market that makes the wonders of this world possible, including this listserve.

When the internet exploded a decade ago, were we asking, "But, who is going to run this thing?" Sure, some asked that question simply because they sought government control over all forms of information, others because they feared change. The rest of us marveled at the ingenuity of the entrepreneurs who continue to improve the delivery of information and entertainment. No planning required

When you no longer ask your questions, you will find your answer.

note: Tom was correct in his use of the term "moron." I sit as a moron on a school board since I have no knowledge as to the real solution that will improve education for our future students. That knowledge is not available to me as a member of a government bureaucracy, though it is available to entrepreneurs who seek it. In addition, I cannot calculate whether the decisions I make will satisfy the desires of the consumers. It is the calculation question that destroys centrally-planned endeavors. Books by FA Hayek will explain the knowledge issue while books by Mises will explain the calculation issue. These books can lead to "out of the box" thinking if you are willing to let go of your current biases.

Jim Fedako
Member, Olentangy Board of Education
Skype: antipositivist

Sunday, August 27, 2006

Peirce has my vote

Bill Peirce and I share views on a lot of issues. Though I recognize that Peirce as governor will not solve all of the state's problems in one jump, having him in office will spring Ohio in the right direction.

From Bill Peirce:

I approach all public policies with the vision of a truly free world of the sort that v. Mises described as the ultimate goal. My specific platform will not get us there in one jump, because the existing mass of federal, state, and local regulations is so complex and the people have been so conditioned by statism that they have to learn to be free. I will use every opportunity to cut spending, cut taxes, and decrease government intrusions into personal and business decisions.

Bill Peirce
Libertarian Candidate for Governor

Friday, August 25, 2006

Fooled again!

How we are fooled sometimes. PT Barnum spoke the truth when he talked about a fool born every minute, and this appears to be my minute.

You see, I ran for a seat on the Central Committee of the Delaware County Republican Party because I thought that Ken Blackwell was a true small-government candidate. I supported his campaign financially because I believed what he said, although I apparently missed what he truly meant in his speeches and campaign literature.

Read the healthcare plan below and guess whether it's from Blackwell or some lesser socialist. Hint: It's Blackwell's plan.

In addition, Blackwell has transportation and energy plans that sound like they are a blend of Corporatism and Mussolini Fascism. Anytime you combine business sectors and government bureaucracies nothing good can result. I had always believed the conservative wing of the Republican Party understood this, now I realize that I am wrong once again.

The Blackwell campaign shows why FA Hayek, Nobel Laureate in Economics, stated that he could never call himself a conservative. The philosophy of the Right has blended with the Left, and now they're both statist fighting over whose central plan works best.

Spending reductions? Tax cuts? Please, you can't reduce spending and cut taxes when you truly believe that government provides the solutions.

Oh, and by the way, I'm in the market for a new gubernatorial candidate. Let me know if you find one on the horizon.

My Plan relies on five keys to success:

Government Reform: The Blackwell Plan will create a five member appointed Commission to coordinate healthcare policy and expenditures and supervise the numerous state agencies involved in the healthcare industry as well as Ohio's Medicaid Program.

Covering the Uninsured: The Blackwell Plan will create a new program called the "Buckeye Health Connection" which will work to provide health insurance to uninsured Ohioans by matching uninsured individuals with private health insurance coverage and facilitate (not replace) those relationships.

Medicaid Reform: The Blackwell Plan will work to address remaining issues reported by the Ohio Commission to Reform Medicaid; namely the creation of a separate Medicaid agency, the modernization of Medicaid's information systems, the establishment of a consumer-directed health care model for Medicaid clients, adequate funding for a complete audit of the Medicaid program, a more consumer-focused approach to clients in our long-term care programs which would enable them to have more control over the care they receive, and lastly ensuring that manipulation of eligibility for Medicaid not be used as a method of exercising fiscal control over the program.

Pharmacy Management: The Blackwell Plan will propose a statewide drug purchasing pool for all programs administered or financed by state government and will recommend pursuing affiliation with one or more of the existing state consortiums to include states already actively managing their pharmacy expenditures.

Insurance Reform: The Blackwell Plan will immediately increase the age a young adult can remain on a family insurance policy to 29, begin to strengthen health purchasing pools by allowing new forms of consumer-directed health care products, including health savings accounts.

Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946

Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946, Benjamin M. Anderson, available at, is a wonderful exposition on government interventionism during that 30-year period. The book captures the litany of policies, laws, regulations, etc., that proved to be folly; an evil folly at that.

As I read about the financial machinations committed by various governments, I couldn't help wonder if those holding political power even recognized that the average American simply wanted to trade goods and services for money in order to purchase desired items. Let's face it, people want to trade, and they will trade despite governmental attempts to stop them - witness the black market in the former Soviet Union.

The farmer raises eggs but needs shoes while the cobbler makes shoes but needs bread, so they can only trade goods and services in an indirect manner; they need money. Or, stated correctly; they need money that will hold its value.

Federal Reserve inflation causes the farmer to fear letting his eggs go for the paper dollar. The reason being that he has no way of knowing the value that the dollar will hold tomorrow when he heads to the market to purchase the shoes he desires. This is most obvious during periods of high inflation and loose money, such as The Great Depression.[1] Had the US simply held to the gold standard and stopped inflating, people would have quickly adjusted to the situation and begun trading once again. The decade-long financial downturn would have ended much earlier, as previous depressions reveal.

Get government out of the financial markets and allow us to trade as we desire. The result will certainly be an improving economy and a brighter future.

I highly recommend Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946.

[1] We are currently in a period of high inflation that is beginning to manifest itself in the real estate market, similar to the technology stock market in the 1990's.

Thursday, August 24, 2006

The wage gap the feds will never try to solve

Latest post by Jim Fedako

"Here’s an easy way to double your salary: Go to work for the U.S. government." That's right, government employees receive an average compensation twice that of the average private-sector employee. Don't hold your breath for the commission to investigate this wage gap.

Wednesday, August 23, 2006

No need to fear, he only looks like Che (a slight resemblance) sells a number of t-shirts that have photos and slogans from the founders of the Austrian School of Economics. One prominent founder is Eugen von Boehm-Bawerk, an astute economist and a cool mug-shot. Boehm-Bawerk wrote classic treatises on economics that influenced Ludwig von Mises. I personally recommend Basic Principal of Economic Value.

Oh, yeh ... intellectually speaking, he is as far away from Che as is possible.

For additional reading, try Interventions are always losers.

Regulations, expense, and lost freedom

This article explains the results of government interventionism at all levels.

A Wonderful World of Parrillas
by N. Joseph Potts
[Posted on Monday, August 21, 2006]
[Subscribe at email services, tell others, or Digg this story.]

This is a story about a barbecue. In the South Florida back yard of a friend who had invited me over for dinner, I saw a most unusual barbecue, but what I learned about it from its owner informed me about a lot more than barbecues.

It hinted at the incredible power of freedom — the freedom of people to trade with each other, over distances and across borders. A freedom that has always throughout my life and the life of everyone else alive today been throttled, bled, and interfered with by government, for government. If it hadn't been, this would be no story at all. It would be everyday routine.

continue reading ...

Free books to download

Go to Gary North's web site to read excellent books on the Bible and Christian thought. Not only are the books interesting, challenging, and timely, they really are free.

Or, go to for a host of free books on Austrian Economics and the free market. You can read, or download and read, all the classics, including Human Action and Man, Economy, and State. Enjoy them all.

Saturday, August 19, 2006

Is the district really excellent?

Ohio's state-mandated tests purport to show student abilities relative to state academic standards, the test scores are hence a true measure of student achievement and knowledge. In addition, as an aggregate score, the tests are supposed to show the educational outcomes - product - of Ohio's school districts. At least that's the spin.

As a member of ODE's Grade 4 Writing Content Advisory Committee, I have been involved in the creation of state test items. I know firsthand that the tests do not reveal what they claim to show. When a district gets a high report card score and designation, it doesn't follow that high achievement really occurred. But don't take my word for it; go to the gatekeepers and third-party evaluators for a second opinion.

Olentangy is a state-designated excellent school district, but what does that really mean? According to the latest High Transition Report from the Ohio Board of Regents, 37% of Olentangy graduates attending one of Ohio's public colleges or universities required remedial course work. In addition, ACT - the organization that produces the ACT assessment - provides districts with a College Readiness Report [1] that shows only 36% of Olentangy graduates were prepared for college in all four subjects analyzed (English composition, algebra, social science, and biology).

Both the reports should be reason for pause when celebrating the district's state designation of excellence, especially in light of the district's mission statement and failed AYP status. These report should also be reason to pressure the board and administration for better performance. Tax dollars and student futures are on the line.

[1] ACT does not make this report available on its web site, but you can request a copy of the original from the district.

Thursday, August 17, 2006

Not meeting AYP. Significant?

Absolutely. When a district has adopted the mission to facilitate maximum learning for every child, every group of students had better perform at least above the state minimum academic standards. Keep in mind that districts are not held to the 75% pass rate for AYP calculations; the state-created, federally-mandated, AYP standards are actually much lower[1]. And, at least for Olentangy, the district's performance with regard to certain subgroups has been lacking for years.

Before you state that some of these subgroups have a history of low-performance and the Olentangy district performed as expected, download the data from ODE and see for yourself how many districts with much less resources saw subgroup scores much higher than those attained by Olentangy. The issue is not with the subgroup, the issue is the failure to satisfy the heart of the mission statement.

Missing AYP in 2006 should not shock anyone. Sadden? Yes. Shock? No.

Funny how missing AYP never made the district's self-congratulatory dispatch regarding results from the latest state report card. Swept under the rug I suppose ...


[1] In school year '07-'08, the AYP threshold will ratchet up once more. This means the AYP standard will increase above the current standard Olentangy failed to meet.

Wednesday, August 16, 2006

Improved state report card scores: What do they mean?

I like to say that my swimming times would have won Olympic Gold, if only I swam in 1952. Just as times in swimming have improved each year, scores on state-mandated tests have also been improving over time. The question one has to ask when reviewing district scores: Were the tax dollars spent by your district worth the improvement when even the average district is improving at a significant rate? Based on simple probability, half of the district certainly implemented programs of little merit. So, average improvement does not necessarily show improved programs or wisely-spent tax dollars. Average improvements may simply be a reflection of what happens naturally over time; result improve.

Coming soon

I didn't buy my property to enhance your property value. An essay on home ownership, property rights, and supposed externalities.

Also coming soon

An Austrian School of Economics response to Education and Capitalism: How Overcoming Our Fear of Markets and Economics Can Improve American Schools, Herbert Walberg and Joseph Bast, editors, 2005 Hoover Institution Press.

Monday, August 14, 2006

My response to a great article from George Reisman

George Reisman posted a great article on In Mining for the Next Million Years, Reisman addresses the fallacy of a world running out of energy and minerals.

My response:

Great article. One point that is sometimes missed is that capital is required to access those minerals. Even the minerals that coat my hand when planting trees are not easily extractable. Go farther underground or deeper into the oceans and the need for capital goods to extract minerals becomes obvious. The real problem is that though we fear that we are running out of minerals, such as oil, we look to government to tax profits and capital from investments in mineral-producing sectors. A pathetic response to the problem, but the only one than can make it so that we live the paraphrased quote from O'Neill, "it is horrible to be dying of cold with oil so near."

Sunday, August 13, 2006

A great weekly news magazine

Read World magazine for a Christian perspective on the news. Every media source has its own bias, so chose the bias that fits with your views. And since there are no "R" rated photos or stories, you don't have to be embarrassed leaving a copy around for kids and guests to review. The magazine contains nothing other than the national and world news reported from a Christian perspective. Refreshing, indeed.

Tuesday, August 08, 2006

The Freedom to Reject the Best

The Freedom to Reject the Best
by Jim Fedako
[Posted on Tuesday, August 08, 2006]

Digg it!

A new study suggests that private schools are not inherently better than public schools. Surprised? Enough people were such that the study, funded by the US Department of Education, has created a stir in the education arena, as well as in the national news. But I want to argue that the results are meaningless, and for reasons not having to do with the methodology employed in the study.

The authors of Comparing Private Schools and Public Schools Using Hierarchical Linear Modeling analyzed math and reading scores of nearly 7,000 public schools and more than 500 private schools on the 2003 National Assessment of Educational Progress at the fourth and eighth grades. NAEP was the chosen assessment tool since it is considered to be the national achievement test and is used to assess student academic performance against national standards.

Though the title sounds impressive, the findings simply suggest a conclusion. Nothing has really been proven and no new truths exposed. I could begin by questioning the whole concept of empirical studies that suggest this or suggest that. I could ask, "What truths have been brought to light by any study that is couched in such a vague qualifier?" I could attack all the assumptions that went into the model and then list those that did not. Had I gone that route, I hopefully would have raised enough doubt in the reader that the study would be discarded as worthless.

But the real error here is more philosophical than empirical. Studies such as these simply show that a deeper ill exists, a malaise caused by government interventionism.

Consider Consumer Reports

The popular magazine reviews consumer goods based on a proprietary set of standards. They test, analyze, test, analyze, etc., until they are satisfied as to the quality of the products under review. CR then assigns individual product ratings and notes one product as a best buy. Though most Americans accept CR's results as being of excellent quality, the noted best buy is not usually the market best-seller. Yes, I will occasionally look at CR prior to purchasing a good, but I almost never buy the best buy. I agree that the CR results are scientifically valid based on their standards, but that doesn't mean I am in the market for the scientifically valid, CR best-buy product.

Though it may only last six months, I want the new hairdryer complete with the latest features, bathed in the hottest colors. That's my choice. My preference rank for features and colors is above that for durability. Who is to say that I am wrong? In a free market, anyone. But, they cannot force me to act otherwise.

What would happen if Consumer Reports had legislative and regulatory authority akin to government? We would all be forced to purchase the best buy and we would all spend our lives unsatisfied. On the surface it sounds great to have a leading research organization controlling the market for "the general good and welfare," but consider your own actions vis-à-vis CR's best buys.

The same holds for a government-run education system. Even if the federal government mandated a set of standards that were scientifically valid according to the DOE national outcomes, the set of standards and outcomes would not be the standards and outcomes most Americans would choose as acting individuals.

Scientific research can create goods that are bigger, smaller, faster, slower, etc. But just because research can create the good doesn't mean that there is a market for it. No one wants a hypodermic needle that is rougher, wider, longer, etc. The superlatives associated with improvements and innovations from scientific research are not always desired by consumers.

In education, the best that DOE could be is a truly benevolent authority. It could gather the nation's greatest thinkers to divine standards of education outcomes and employ the top psychometricians, statisticians, etc., to create assessments that are mapped to those standards. At its hypothetical best, this brain-trust would simply function as CR does in the products market. The assessments would be scientifically valid and could rank achievement and note the educational best buy — based on the arbitrary set of DOE standards. But parents and students, as well as community members, teachers, and radicals, etc., would be unsatisfied; just as the consumer would be unsatisfied having to always purchase the CR best buy.

So, what's the solution? Simply, let the market reign. [1] A free market system of education would create for those who seek different options a system that encourages the implementation of the spectrum of educational choices — best viewed as experiments, just as each new product, service, store, etc., is a market experiment. The successful experiments become the market standard that new entrepreneurs seek to surpass.

These choices would involve all aspects of education — including pedagogies, methodologies, etc. — which would afford all parents the ability to satisfy their desires for their children's education. Each idea would be evaluated by the parent, the education consumer, ex ante over the summer according to individual preferences and ultimate goals, and once again ex post at the end of each school year.

Parents would choose their standard of results and they would seek out entrepreneurs who would then hire teachers and administrators that could deliver the parents' vision. The entrepreneurs would purchase products to implement the vision and the science community would be engaged to improve old products and innovate new ones — all due to the market pressures of the freely acting parents, the consumers. This is the proper direction of improvements and innovations, from the consumer back to the scientist, engineer, researcher, etc.

The standards set by the parent would drive the research that would deliver the product, not the reverse. [2] Currently we have a system where the standards are set by a myriad of governments and agencies — standards no one wants or agrees with — and we have a spectrum of research whose real goal is to drive the standards and grab the tax dollars.

There are scientific winners in the field of the delivery of quality, basic education, such as Direct Instructions, etc., but we know a significant number of parents, teachers, and administrators don't give a hoot about reading, writing, and arithmetic. They want affective learning — the feel-good, Progressive educationist-babble currently in favor — and long for the ideal child, the product of the latest version of Trotsky's proletarian paradise .

I disagree with them, but their solutions may actually end up being correct, or they will fail. Only a market can show whether a solution is right or wrong.

That said, we have to keep in mind that Consumer Reports creates valid ratings that we mostly ignore, and we are all better off because we continue to make our own choices. Our individual wants drive improvements and innovations to provide for our greater satisfaction. Why should education be any different?


Jim Fedako, a former professional cyclist who lives in Lewis Center, OH, is a member of the Olentangy Local School District and maintains a blog: Anti-Positivist. Send him mail. Comment on the blog.


[1] The free market is the only economic system where we can disagree yet live peacefully. My wife likes Coke while I prefer Pepsi. In fact, I'd rather drink a glass of baking soda than a glass of Coke (OK, a little hyperbole for effect). Due to the free market in soft drinks, my wife and I can live happily ever after. Under interventionism, or plain socialism, the fight becomes which bland flavor will be served by the scowling apparachik wearing a faded Babushka. Choose freedom every time.

[2] Certainly a scientist could act as an entrepreneur prospector and create a product even though no current desire exists. But if they fail to meet future needs, they will suffer financial loses. The current system does not discipline the scientist since government purchases the product whether the education consumer wants it or not.

Sunday, August 06, 2006

The market strikes again

Latest blog post:

Digg it!

Once again the capitalists, entrepreneurs, petty-bourgeois, and associated travelers exploited those in need of goods; they ripped me off by selling school supplies at an outrageous price. These profiteers recognized the increased demand for education wares as school fast approaches so they acted just as the interventionist predicted; they lowered priced, outrageously. Oh, well, I guess that means that they actually acted opposite of what was predicted.

Regardless, they still are evil, aren't they? I just purchased a pack of 60 pencils for less than $1.50. Of course, these criminals simply used this price as a tactic to get me into their stores where they forced 10-cent note pads, cheap binders, etc., into my hands. Yes, the saving continues.

If you happen to see your state Attorney General, let him know of the evils that lurk in a free market system - it happens every year around this time. I'm certain he'll be outraged and put a stop to this nonsense.

The Green(back) Thumbs of Welfare

Some of us are taxpayers while others are tax-recipients. Ludwig von Mises long ago describe the real class structure of modern society: Two classes exist, those who pay the taxes and those who receive them. This link takes you to some of the biggest tax-recipients of Delaware County - and they are not the unemployed hucksters we normally read about.

Imagine getting close to $100,000 per year from the federal government, almost $1 million over the last ten years. Not a bad way to make a living. We keep paying and they keep cashing. Some of these farmer have such a tough life.

Go to the Environmental Working Group's Farm Subsidy Database to learn more ...

Friday, August 04, 2006

Charter schools and fixed costs

From a pure economic standpoint, if you can't reduce fixed costs after the reduction of a student, that student did not contribute to fixed costs.

The term fixed cost can be used to describe short-term obligations (e.g. salaries, leases, etc.) and long-term capital expenses (e.g. bond repayments, etc.). Since a district's general fund does not include the capital costs associated with a building, and because the charter funding debate is always centered on school district's general fund and operating expenses, I will only focus on short-term obligations.

A school board must approve the district's annual appropriation before the start of the fiscal year (beginning July 1). The initial appropriation can be a temporary measure, with all districts having to approve a permanent appropriation measure by the 1st of October. Even though the permanent appropriation measure can be modified throughout the school year, the initial appropriation measure reflects the likely general fund expenditures for the school year.

Each district in Ohio bases its budget on projected student enrollment (ADM). The process to estimate actual enrollment is difficult and subject to error. If a district miscalculates its ADM, it usually cannot make midyear corrections since districts typically don't hire additional teachers or RIF excess teachers during the current school year.[1] Districts can correct enrollment projection errors when approving the subsequent year's budget, but once set, a budget and its associated contracts create short-term fixed costs for the current school year.

What does the opening sentence mean in light of what we have just discussed? It's simple, there are fixed costs based on the current budget, but those costs are short-term and may not even be associated with the student who transfers to a charter school.

Example: Assume an elementary has 600 students and a child moves into the district after the budget was approved and then subsequently transfers to a charter school. In this instance, here is no way to reduce fixed costs since the current budget has already been set. Though costs cannot be reduced, state basic aid flows out of the district to the charter along with the child. [2] To understand the impact of this transfer, one has to go back in time to the point where that child entered the school. Upon enrollment, overhead costs were already fixed so the school did not incur additional fixed costs due to that child. Therefore, at the margin, no fixed cost can be attributed to that child, whether on the way in or way out of the school.

Fixed costs can be attributed to the student whose enrollment brings about a new section, school, etc. If a district loses enough students that it can reduce staff or close an elementary, the fixed costs of associated with the section or school can be wiped from the books.

Suppose a student caused the need for a new third grade section, the marginal fixed cost associated with the child are the costs of operating an additional section; new teacher contract, etc. Subsequent third grade students result in no additional fixed costs and only minimal operating costs since the section is already available with empty seats. If the subsequent students transfer to a charter school, no fixed costs can be reduced since no additional fixed costs were incurred due to their enrollment - the operating costs automatically disappear. When the child that caused the opening of the new section transfers, the fixed costs associated with the child can be wiped from the books since the section, teaching position, etc., are no longer needed.

In Ohio, when a district opens its doors to more students than planned, it sees a revenue gain. The district's operating costs were fixed by the budget, so each new student provides approximately $5,400 in additional state funding aid while only creating slightly more operating costs; for water, paper, etc. Low estimates create a financial bonus.

High estimates, conversely, create financial distress. In such situation, costs were fixed by the budget yet the district loses approximately $5,400 for each student that doesn't arrive as planned.

These hardships are not the result of charter schools; they are purely the result of poor planning by the district. Student populations change over time as students move into and out of districts, change to and from private schools, and choose or return from home schooling. None of these other movements of students are criticized like charter school enrollment, but there is no real difference between them; all cause an increase or decrease of $5,400 for each student over or under enrollment projections.

In fact, some of these movements are cheered. Districts encourage their students to enroll in colleges and universities through post-secondary enrollment options (PSEO), as well as encourage students to attend alternative schools such as the Columbus Zoo's Zoo School. Each of these activities cause state funds to leave the district, yet there are few critics of such school options.

Part of the confusion comes from the presentation of state basic aid on the Ohio Department of Educations SF3 form. The forms leaves the impression that the state funds on a per student basis at the state share percentage [3]. In addition, districts also believe that fixed overhead costs are apportioned out to students equally. As shown above, these are absolutely not the case.

The confusion is also due to districts not understanding the effects of changes over time. In the subsequent year after an outflow to charters or other situations, districts can reduce administration and staff in order to recoup most of the fixed costs. That said, some costs, such as the need for a board of education, superintendent, treasurer, and at least one teacher, educational service personnel, etc., are truly fixed but are minimal compared to property tax revenue being generated locally.


[1] District's approve teacher contracts that provide teachers with an implied right to work. My district's negotiated agreement spells out the specifics by which the district may apply reduction in force (RIF) to terminate a teaching contract. The agreement states that the district cannot reduce staff midyear.

[2] Keep in mind that this analysis deals mainly with the expense side of the charter issue. As has been shown before, charter schools do not reduce local revenue. The only funding that leaves the district with the student who transfers to a charter school is the approximately $5,400 that the state earmarked for that student. The district received an additional $5,400 when the child entered the district and "lost" the same $5,400 when the child transferred to the charter school. The net result is a wash in revenue due to the child. No money was actually lost.

[3] The SF3 includes a state share percentage figure that many assume is the percentage by which the state funds the marginal student. This is not the case. After the charge-off - 23 mills times recognized valuation - has been met, the state funds each marginal student at the full basic aid amount, approximately $5,400.

Interventions are always losers. blog post

One truism has never been successfully challenged: Government interventions lead to a less efficient, less well-ordered society.

In his important book, Basic Principles of Economic Value, Eugen von Böhm-Bawerk develops, among other important concepts, his basic law of prices and includes a footnote that is both intriguing and worthy of exploration.

In the narrative associated with the footnote (p. 119), Böhm-Bawerk develops his law of prices (pp.107-129) by using the now-standard chart of subjective values of a group of horse buyers and sellers. Chart 1 (reproduced below), shows that five horses will be bought and sold at a market price somewhere between $210 and $215.

Notice that in the market range of $210 to $215, not all horses are sold since some sellers value their horse more than the established market price (sellers 6, 7, and 8). In the footnote, Böhm-Bawerk reorders the values so that the sellers’ valuations are in descending order similar to the buyers’ set of values (chart 2 below). He then notes that if the buyers and sellers sought out each other in this manner, all available horses would have been sold. This intriguing situation is worthy of further exploration since it is always important to investigate the possibilities of a government helping-hand with regard to the market.

A question arises: If government intervened to coercively pair buyers with sellers in the manner that the chart in the footnote details (chart 2 below) and forced exchanges based solely on the pair at hand’s valuations (e.g. Buyer 1 and Seller 8, Buyer 2 and Seller 7, etc.), ignoring an aggregate market price, would the society of horse buyers and sellers be better off?

First, we have to look at how value is increased through voluntary exchange and then apply that knowledge to the intervention.

Value has a subjective magnitude. Individuals participate in voluntary exchanges if and only if they expect ex ante an increase in subjective value ex post due to the exchange.

Based on the market established in chart 1, Buyer 1 will exchange with Seller 1 at some price between $100 and $300. Regardless of the price, an increase of $200 is recorded to subjective valuations of this two-person society since the buyer values the horse $200 more than the seller; while the buyer and seller simply split the cash based on the agreed upon price.

The pre-exchange valuations show the buyer holding $300 in cash with the seller holding a $100 horse. Should the price have been $200 for the exchange, the buyer now has a $300 horse and $100 in cash while the seller has $200 in cash. This shows a $200 increase in subjective valuation.

Any other price for the horse simply moves cash from one holder’s account to the other; buyer's to seller's, or visa versa. The money price has no effect on the increase in the subjective valuation to the buyer over the seller of the exchanged horse. The money price only affects the decision to exchange or hold, money prices do not change valuations subjective to the individual actors.

The aggregate valuation increase for the larger society as detailed in chart 1 is calculated by summing the valuations of the more-capable buyers – those able to purchase a horse on the market – and subtracting from that total the summed valuations of the associated sellers. In the example, the aggregate increase due to the exchanges is $570.

What would be the aggregate increase to society due to a government intervention that coercively paired buyers with sellers?

Using chart 2, sum the valuations of capable buyers and subtract the sum of the valuations of the associated sellers. In this instance, there are eight buyers and sellers. The result, an increase of $435, shows that the coerced exchange reduced the aggregate subjective valuation gain.

More horses were sold but less value was created. This intervention, like all government interventions, is a net loser.

Moreover, and more importantly, the losses due to the coerced exchanges are not found only in the hypothetical market created by Böhm-Bawerk, the loss of subjective valuation occurs regardless of the make-up of the market. In addition, this can be extended to show that government cannot tax valuation "left on the table" [1] and increase the aggregate subjective valuation since all government would be doing is reducing cash-holdings through taxation. The subjective valuations remain what they are regardless of the exchange price.

Additionally, if government would then use the cash generated through taxation to subsidize exchanges that would not have occurred naturally in the market, the aggregate net valuation would suffer a loss – just as it did under a coerced exchange – and the cash-holdings would be reduced by the inefficiencies of government.

Based on a superficial analysis, coerced exchanges appear to lead to greater satisfaction. Aren’t more horses traded? Isn’t more cash passed between buyer and seller? The answer is yes to both. However, the unseen is as important as the seen. On the surface, government appears to be a market catalyst for good, while the hidden results proves that interventions lead to a loss of value and cash-holdings.

Governments opt for the seen as their continued power is based on trumpeting their interventions of the obvious; governments then blame the final results, lost values and cash-holdings, on someone or something else altogether.

Yet, this is exactly what government does when it alters the normal actions of individuals through taxation or other coercive forces, such as subsidies, etc. Nothing good results simply because nothing good can result from coerced changes to the free market.


[1] Valuation “left on the table” is value external to the exchange, viz. the subjective value Buyer 1 assigns to the horse, $300, that is that is greater that the market price, between $210 and $215 in this instance. Some suggest that government should levy a tax of either $90 or $85 respectively so that the value the buyer attributed to the horse is paid in a combination of market price and taxation. The belief is that this combination would capture all value generated by the exchange. As noted above, government simply decreases the aggregate valuation and cash-holdings of society through such interventions.

Jim Fedako [send him mail], a former professional cyclist who lives in Lewis Center, OH, is a member of the Olentangy Local School District and maintains a blog: Anti-Positivist.


Chart 1

Chart 2

note: refer to blog posting for chart 2.

Tuesday, August 01, 2006

Quality is a Market Notion article:
Quality is a Market Notion
by Jim Fedako

For generations, products have advertised themselves as "new and improved." We are too quick to dismiss this phrase as a promotional boilerplate. The market really does generate unrelenting improvements in our living standards. Meanwhile, the public sector is forever promising to improve its services and products but every attempt creates only conflict and eventual stalemate.

For example: the proposed solution to the ills of public education is for government to raise the quality of teachers by increasing salaries and certification requirements. The belief is that a better workforce will lead to better educational outcomes and an improved economy.

Of course the adjective better has no agreed upon definition. Every pressure group and political faction has its own definition of better. Mostly these disparate definitions contradict each other. Regardless, the call for better continues to grow louder each election cycle.

There are perceived ills in the free market too — not ills in the same sense as discussed above, but ills in that all consumers have wants that are unmet. The argument for better can be applied to any sector of the economy. Better factors of production are always sought since acting man desires improvements in consumer goods; improvements that are reflected in increased selection and quality, as well as lower price.

In this case, the adjectives better, improved, and increased can go undefined since they are subjective value judgments of each individual consumer. No one needs to define them in literal terms; the actions of consumers define those terms as ends that are either satisfied or unsatisfied. More importantly, acting man does not need government bureaucrats or commissions to codify such terms for quality. The entrepreneur knows he matched the market definitions of better, improved, and increased simply by looking at his profit-and-loss statement at the end of each accounting cycle.

That better factors are not simply added to each and every recipe — the directions for producing desired goods — is explained in one simple word: scarcity. Scarce factors have to be correctly employed in the production of the most sought-after ends. Any other application leads to accounting losses and financial ruin for the entrepreneur.

Entrepreneurs have more solutions to the unmet wants of man than capital goods. Capital goods are required in the creations of factors of production, which are themselves required in the production of consumer goods. Using resources to produce goods other than those most wanted leads to economic losses, as does using goods inefficiently to produce most-wanted goods. Consumers buying and abstaining from buying along with double entry bookkeeping provide guidance for the allocation of factors of production.

The socialist utopian belief that the burden of scarcity can be lifted with the correct utilization of current capital and factors of production is still prevalent. The line of thought goes that once the altruistic and omniscient bureaucrat grabs the reigns of the economy and guides the factors to their correct application, scarcity will fade away and the Land of Cockaigne will appear on the horizon.

But this is not reality. Scarcity will always be with us as long as man's desires exceed his ability to satisfy them. Of course, once scarcity is lifted, once all desires are met, society will meet the same fate as the ants in an Uncle Milton's Ant Farm: it will quickly die off.

At any given point in time, each factor is limited. Successful entrepreneurs recognize this and direct scarce resources to the most pressing needs. Government, on the other hand, recognizes no concept of scarcity. It only sees one side of the equation, or only one result of its actions. Government functions counter to Hazlitt's admonition to see the unseen; to look for secondary effects of any proposed action.

It's important to employ resources and factors where they will have the greatest effect. The successful entrepreneur would not use a high-quality diamond in a simple industrial process when a low-quality one would work fine. A CEO would not place his or her CFO in the company cafeteria to run the register simply because a $10 cash-versus-sales shortfall was being reported on a daily basis. To employ a highly skilled and hence scarce resource to chase the odd $10 would be wasteful and inefficient.

Human qualities are indeed scarce resources. No one would suggest that Joe Paterno would be most efficiently employed as a high school junior varsity coach. Would Joe Pa be effective? Of course he would. Would it be the best use of such a quality resource? Of course not. Many less experienced coaches could achieve the same result, though those same coaches could not generate Joe Pa's lifetime college win record.

The same goes with other scarce resources. Would Mises have generated the greatest bang for the buck teaching eighth grade economics? Would the resource known as Bill Gates be most efficiently employed as a ninth grade business teacher? How about Einstein as an AP physics instructor? It depends on who you ask.

The socialist utopians truly believe that a Mises, a Gates, or an Einstein would be most efficiently employed in the classroom. They have no concept of scarcity of human qualities and have adopted Trotsky's vision of all men rising to the height of Goethe and beyond. A utopian's fantasies do not allow him to see the world as it is. His epistemology is invalid so his beliefs and conclusions are errant.

Mises said that only a handful of any generation has the abilities to advance economic knowledge, and indeed he was correct. But to coerce the best and brightest to become primary and secondary teachers is to rob future generations of essential knowledge. The same can be said of the use of tax dollars to guide such geniuses into the primary and secondary classrooms by raising the incomes of teachers above their marginal product.

The unhampered free market correctly allocates resources to their best use. Interventionism changes the allocation so that resources are applied to uses that are not beneficial to a society. Government loves to create roadblocks to entry into fields of choice.

Raising teacher certification standards above that required by the desires of man simply creates shortages where none should exist. Attracting the best and brightest with too-high salaries — salaries above their marginal product — or by creating shortages (real or perceived) succeeds only in raising the cost of education; it does nothing to solve the ills of a government-run education system.
Because of this, education is best left in the hands of the free market. Under a free market, the allocation of scarce human qualities and knowledge will be matched to the desires and wants of man. Public school math teachers, gym teachers, librarians, etc., would be paid exactly what they produce; no more, no less.

Should the desire for knowledge garnered in a ninth grade business class exceed that of the desire for faster and cheaper personal computers, Gates would find his most remunerative employment in the classroom. Otherwise, keep the Miseses, Gateses, and Einsteins of the world out of primary and secondary classrooms, and keep government out of education. We will all be better off.