One idea threatens to bring an end to personal liberty combined with economic ruin. What is this single idea? Find out in The Great Utopian Delusion by Clarence Carson, Paul Cleveland, and L. Dwayne Barney. The new book, published by Boundary Stone, is now available and can be ordered at http://www.boundarystone.org/.
Hillary Clinton’s new proposal for changing the taxation of long-term capital gains prompted me to take a look back to see how capital gains have been taxed over the past 25 years. The tax treatment of long-term capital gains is illustrative of how the tax code grows, and shows why one should not expect tax simplification any time soon.
Back in 1990 the tax rates applied to long-term capital gains were the same as those applied to income derived from wages or dividends. Straightforward enough. And, in addition to its beautiful simplicity, there was no implication that one form of income is any better or worse than another. Income was taxed at the same rate, whether earned by backbreaking labor or because a stock went up in price.
During the period 1991 to 1997 long-term capital gains received a more favored tax treatment, with a tax rate of 15 percent or 28 percent applied depending upon the taxpayer’s total income. This basic approach has been utilized since, although the rates presently used are either 0 percent, 15 percent, or 20 percent (again, depending on income).
Clinton’s proposal last week was to add more tax rates, with the particular rate depending on the length of time the taxpayer holds the asset. Under the Clinton proposal those taxpayers in the highest personal income tax bracket will now face six long-term capital gains rates. For assets held less than two years the rate will be 39.6 percent, for two to three years the rate will be lower at 36 percent, and so forth, on down to a minimum of 20 percent. The low rate of 20 percent is suggested as appropriate for capital gains on those assets held longer than six years.
How Clinton determined the aforementioned rates for optimal social engineering purposes is somewhat unclear. Why 36 percent for assets held over two years, when 34.8 percent might be even better! And, are six rates enough? Perhaps a schedule with 10 or even 20 rates might accomplish the goal with far greater precision.
But arguing what might be the best tax rate schedule is not the purpose of this article. Deciding on the optimal number of long-term capital gains tax rates to most strategically direct investment in the U.S. economy is way too difficult of a problem for me. Thus I will leave those choices to the wise politicians capable of making such important determinations. My point is to illustrate how the tax code expands over time, and to contrast it with the elegant simplicity found in the law of tithing.
Of course, millions of Americans voluntarily pay a 10 percent tithe to their church. There is one and only one rate, and among the faithful there is little cheating. Further, there is no need for armies of lawyers and accountants. The applicable rule is simple: Pay 10 percent on your “increase.”
How come is tithing so straightforward and easily collected, and the tax code so complex and unwieldy? The obvious distinction is that one is voluntarily paid as a matter of personal choice, while the other is involuntarily extracted at the threat of imprisonment.
I am not going to suggest that the expanding and bewildering tax code could be “fixed” and work as smoothly as tithing by enacting a flat tax. Even with a flat tax folks will engage in all sorts of machinations to lower their taxable income. A flat tax might simplify one small piece of the tax code, but the issue of honestly determining and reporting income is the real snag. If people don’t want to pay taxes, there is no amount of IRS tax code that will close all the loopholes.
The conclusion I reach is that simplicity in taxation is only possible in a world where individuals pay taxes honestly and voluntarily. A similar idea can be extended to most forms of business regulation. Free enterprise will flourish if (and only if?) ethical and moral individuals voluntarily exchange one with another. When ethics and morality vanish governmental oversight moves in to fill the void. With regulation comes the threat of imprisonment, the use of force, cronyism, favoritism, and the heavy compliance cost of teams of bureaucrats monitoring mountains of paperwork.
So, can the tax code be simplified? More importantly, can free enterprise be saved? Perhaps, but the solutions may be found in the study of ethics and religion rather than in the social science of economics.
By Colin McGrath (with comments from Brian McGrath)
Imagine the next time you buy something, pulling out a piece of plastic and purchasing your item in the exactly the same way you would now use a credit or debit card. But in this case, there is an important difference. Now you are purchasing with a transfer of shares of a broad capital index fund instead of traditional dollars. For simplicity, suppose you and the seller are using the most familiar and widely held stock market capital index fund—SPYDRS (based upon the value of the 500 largest publicly held U.S. companies). Hence, you would be trading a small piece of these companies to the seller in order to accomplish your purchase instead of using dollars. There would be a small, agreed upon transfer out of your SPYDR account into the SPYDR account of the seller for whatever good or service you bought. If this kind of transaction became widespread it would redefine what we think of as “money” and would change the nature of trading, prices, and wealth holding. It would be simple but it would be revolutionary. It would result in a privatized, non-bank transparent monetary and exchange system free of government manipulation, control and exploitation and free of the intrinsic instabilities of a currently broken fractional-reserve banking system. How could it happen?
Imagine further a forward-looking discount brokerage firm that allows you to open a SPYDR equity account with trading privileges and then gives a trading SPYDR debit card to facilitate transactions. Obviously, your purchases could not exceed the balance of your SPYDR account, unless the brokerage firm was willing to extend a short-term SPYDR loan to you. Why would a brokerage firm be willing to facilitate such purchase transactions with essentially a SPYDR debit card? Simply because it could get a small fee from every such transaction. Moreover, if the practice grows, who knows where it might end. Hopefully, SPYDRs could grow to become the effective money supply of the whole U.S. economy and why not? Instead of using fictitious value of a government fiat money, or a speculative commodity money of little actual value in production, or an artificially scarce but intrinsically worthless cyber-money such as bitcoins, we would be using the most fundamental and valuable good of a market economy—ownership of a portion of the economy’s capital stock, the means of producing all goods and services. The business opportunity for any brokerage firm accommodating changes in ownership and custody of even a small fraction of such exchanges could be staggering.
Who would win from such a trading system? Clearly buyers and sellers or users. Instead of risking the erosion of value in fiat money (inflation) they would be using, as money, an asset that currently gains in value 6 to 7 percent a year in terms of purchasing power over consumption goods. Think about it. At worst, even if you just lazily accumulated balances of such a monetary good as SPYDRs, instead of using them just for exchange, you would just be steadily growing the value of your wealth over time. That is, exactly what you would be well-advised to hold in your IRA in any case. Brokerage firms would also be winners. By facilitating such exchange and providing custody for capital “money,” they would hugely expand the demand and holding of such assets and get a fee for every transaction they facilitated. Of course, the competition would be severe and the fees for such SPYDR exchanges would be expected to be driven to a very small fraction of what trading fees currently are, in fact logically driven by competition toward zero per exchange. They might only be applied by the purchaser’s brokerage firm because the seller’s firm would simply be gathering new assets. Just for attracting the scale of new assets and trading activity, a competitive brokerage firm could easily see its way to making exchanges from such SPYDR trading accounts costless to customers as a part of its larger profit-maximizing strategy. As the volume of capital-based exchange increased and became dominant, fiat money (dollars) would be an asset few people would chose to hold or accept in trade—thus the Federal Reserve Bank and the Government that covertly finances its purchases by printing worthless currency could be a loser. However, if being a government of (and taxing) a more prosperous, larger and more stable economy is worth something, then even the government could be a long-term winner from moving to capital as money.
This last point is worth expanding on just a bit. One of the most peculiar taxes imposed upon us is the so-called “capital gains” tax. It is a tax imposed on property and assets, including capital, that gain in value measured in a fiat currency such as dollars between the time they are purchased and sold. Of all taxes it is a particularly malicious, destructive, and dishonest tax. Observers have noted that, in a society in which the government imposes a capital gains tax, all affected private property will gradually and inexorably be owned by the government, or at least given out as rewards to those who vote for it. It is an amazing scam that the government imposes this tax in a way that gets us coming and going. First the government imposes a tax based upon a supposed “gain” in value of a good or asset that we own measured in terms of a unit of fiat money and then, of course, it controls the supply of fiat currency. Thus, if it feels it is not collecting enough capital gains taxes, it can simply inflate the currency generating a huge crop of fictitious and arbitrary capital gains. Clearly it makes no logical sense to have a capital gain in money itself. Thus, if capital becomes money, the fallacy of using the value of capital to measure capital gains or losses in other goods will immediately be made to appear a fallacious a concept as it actually is.
Any broad capital index could be used as the economy’s benchmark of value and medium of exchange. Why do we suggest SPYDRs? Simply because the S&P 500, while it doesn’t include all publicly traded companies, does account for about 95% of the total value of publicly owned stocks in the U.S. That’s enough to be a pretty good representation of the broad capital market. Moreover, at a time when the general public’s direct and indirect ownership of stock is widely considered to be too narrow (in the range of about 40%) limiting the wealth-enhancing return benefits of equity ownership to too few, what better way to broaden stock ownership than using capital as money—especially in an economy in which capital is increasingly replacing labor in production of goods and services. As the ownership of capital is enlarged and broadened, aggregate investment in the U.S. economy will increase. In the process the marginal return to capital will gradually fall toward the sustained growth rate of the economy, but as it does wealth will hugely increase due to capital price appreciation. To see why, revisit Chapter Five in our book, Capital as Money.
To those who are fearful of using capital as money when the capital market is so volatile, we offer the following argument. Remember that currently the market value of capital is measured in a fictitious and volatile fiat currency (dollars) which always carries inflation risk. Beyond this, the dollar valued marginal product stream expected to be earned by capital is reduced to a present value (stock price) by using a fictitious government/Fed-determined government bond interest rate that is manipulated by central bank policy. If the resulting value of capital were not volatile under this hare-brained scheme, it would be amazing. Now imagine that instead of dollars and fed determined interest rates, the broad real marginal product of average capital itself was the fundamental or benchmark rate of return, against which all others were measured. In such a world, the value of capital would probably not be volatile at all.
In fact, the real market-determined values of capital and consumption, at the margin, would determine the level of new capital good creation (investment) and the relative value of consumption goods versus capital goods as investors rationally pursue the consumption/investment trade-off that maximizes their expected long-term consumption path. Then the benchmark basic real rate of return that markets keep their eye on would not be some fictitious so-called “risk-free” rate of return on government bonds stated in fiat currency, but rather the real rate of return to investment or capital on average which would converge to the long-term rate of growth of the economy. The continuous comparison of whether to consume or invest at the margin (or consume now versus consume later) is exactly the genius of a free market at work. In such a transparent world, the price of output used for consumption versus the price of output used for investment or new capital would logically discipline each price, driving them toward equality. Serious or sustained overvaluation of either capital or consumption goods would be unlikely. As a result, the volatility of the value of consumption or capital expressed in terms of the other would be low.
If our economy transitions to using the exchange of broad capital shares as money, then it can be imagined that at first everything will still be valued in the fiat currency—dollars. This is, of course, what traders are familiar with. Trades and values of goods and shares will doubtless be stated in dollars. However, as the economy becomes more familiar with trading units of index shares for goods and services, this intermediate, unnecessary step will tend to disappear and prices and will tend to be more economically stated directly in terms of units of capital.
Recall the simple job characteristic paradigm I suggested last time. Unfortunately, the real world seems to be bearing this out. You have likely read that, during the current anemic economic recovery, middle wage to higher wage jobs have apparently been lost (interpret that as jobs that have a moderate to high price, but involve little creativity while they may be complex or routine—thus they are vulnerable to replacement by a machine or software). The fastest growing sector in new jobs by far is the fast food industry.
The Fast Food Industry
Here again is a sector of the economy that is currently fairly labor-intensive, but in which jobs are simple, lacking in creativity, and low price. Thus, it might seem a fairly low risk alternative for technological substitution of capital for labor. The fact that this is where the greatest number of jobs are being currently created is not lost on politicians. To them, it appears a good place to cultivate and capture voters by over-riding the market and offering rewards. That is the essence of “public choice theory.” The idea that politicians will tend to steal or expropriate from those who voted against them in order to reward those who voted for them. The problem is that when the market is subverted by politics, the consequences are often not what the political architects intended.
Currently, the Obama administration has attempted to attract attention by announcing its support for a minimum wage of $15/hour for fast food workers. At first glance, those of us with a weak foundation in the working of the marketplace, may applaud the idea of a guaranteed higher living-wage for fast food workers. Employers might look at it a little differently. With new health care mandates, higher cost unemployment insurance and, now, higher hourly wage costs for their employees as well, they may see the attraction of a new, alternative production technique. There are many ways to skin the cat of producing a burger and fries. Which one is preferred in a competitive marketplace? The one that minimizes total costs of production while making final consumers happy. Put bluntly, fast-food employers only chose a low-skilled, labor-intensive technique because the cost of labor was less than the cost of automating. Now, as a result of higher costs mandated by government or bureaucrats, that may have changed.
“We can substitute capital to achieve automated food preparation, increase touch screens for customers, and meet customers’ human interaction preferences with cheerful host/managers. These higher-skilled employees can then deal with any software and hardware problems that may arise. Moreover, they will be far friendlier and easier for customers to deal with than the mix of surly teenagers, early parolees, or inarticulate speakers we used to employ. Individually they will cost more,but we can get by with fewer of them. As a result, we can produce an improved product and experience for a customers with 1 or 2 employees per franchise, rather than the 8-12 lesser skilled employees we used to depend on.” Hence, an unintended consequence of $15/hour minimum wage in the fast food industry could be to sharply reduce jobs in that sector. Once again evidence that politicians don’t understand economics.
The more cynical amongst us may be forgiven for believing that politicians do understand the economic consequences of their policies, but they simply don’t care—the legislated minimum wage was just done for political effect – “window dressing” for the uninformed.
This outcome is kind of sad because many, if not most, fast-food workers were likely not planning on a long-term career in the industry. Rather, it was viewed as the available first rung of job experience. A chance to develop for low-skilled, entry level employees or teenagers, on their way to more lucrative careers. Consider the substitution of capital for labor in another low-skilled food sector.
Over the past 200 years technology has slowly replaced small farmers and farm workers in the U.S. and has changed the optimal economic scale of a farm. Although some agricultural activities are still labor intensive, the substitution of capital for labor will likely accelerate. Why? After all, described in terms of our three job attributes, farm work is typically fairly simple, uncreative, and lowly paid (the recent wage average in the U.S. is about $9/hour). A low average wage would tend to insulate this sector somewhat from immediate or accelerated technological substitution. However, there are indirect costs to employers. First, there are regulatory costs and the risk of legal sanctions against those who hire illegal immigrants as farm workers. For employers avoiding this risk is desirable. Especially as the bureaucratic complexity and indirect cost of hiring any worker in the U.S. economy steadily increases. Secondly, militancy and unionization of farm workers in order to demand better work conditions and pay will likely have the ironic effect of actually accelerating their replacement by machines and technology.
Development of GPS and computer guided tractors and farm machinery has reached the point where planting, fertilization, thinning and weeding, picking, and primary processing of many crops can now be accomplished by equipment that substitutes for unskilled or low-skilled labor. This machinery may be expensive but it is available. Its productivity is rising and its cost per unit of output is falling. Not surprisingly, the adoption of it is increasing. Final consumers know of farm-workers but in most cases they do not know or interact with them personally. Most employers of farm workers probably look on farm-workers as a necessary evil, required only so long as they can’t be profitably replaced by a cheaper, capital-intensive production technique.
The health sector in the U.S. is now morphing from an already heavily-regulated oligopolistic industry to one arguably now totally controlled and paid for (by us of course) through taxation by the government sector. Thus, health care is apparently on its way to becoming a sector where market forces will not be primary in determining supply, demand or production. That is, one with political criteria and mandates applied to its practitioners and beneficiaries. This change hasn’t been lost on the cottage industries of would-be new purveyors of health care to the patient. They were waiting in the wings ready to rise. For the most opportunistic of them, it is now raining soup. To the naïve patient, of course, it seems as though it’s all free—paid for by the government!
If you now incur an illness or injury, you are may be surprised and perhaps flattered by the size and scope of the “team” that is ready to deal with it. For example, let’s say you are suffering the after-effects of a concussion. You will likely encounter a psychologist, a social worker or sociologist, a physiatrist, a physical therapist, an occupational therapist, an activity therapist, a chiropractor, a neurologist, an ophthalmologist, a speech therapist and perhaps even a phrenologist, an acupuncturist or an herbalist. You might wonder why all these wonderful, well-meaning folks are necessary to work for you. Why is the “team” so large? They are here because they were able to elbow and winnow their way to a seat at the crowded table and because the government is not a particularly discriminating buyer with your money. Politicians, of course, realize they are buying votes and economic leverage, not services.
After dealing your team for a while, you may discover a sad fact. The actual communication level amongst the “team” may be surprisingly low as is the actual quality of the health care you receive. Missing, may be the sharply intuitive diagnostician or perceptive, bright physician we sometimes were lucky enough to have as our personal doctor. That person may still be there somewhere, or they may have gotten fed up and retired from the medical profession to develop real estate. Alas our national healthcare may appear to have boarded some non-market crazy train.
However, have some optimism and faith. This path toward national healthcare has been traveled by many other societies and the widespread discovery is that the market is not so easily suppressed. In fact, the term “non-market sector” may be one we should generally avoid. The “market” always tends to re-emerge in one way or another – especially in such a critical sector as health. If you have a minor injury or minor complaint, you likely deal with the irritating bureaucracy and the barrier of semi-competent practitioners. If you have a serious health problem, you seek out the “A-team” practitioners and specialists who are highly competent– insightful, creative, and expensive. The supply and demand for these folks will still be market-determined. Of course, the sad thing about a national healthcare system is that it will be more bureaucratic, clunky, and expensive than it needs to be. You will be paying for your healthcare at least twice.
To those who respect the working and efficiency of free, private markets, the replacement of drudgery, work, or jobs by technology is an inevitable and desirable outcome. It is the only way in which a society may enjoy an increase in productivity and its standard of living. Development of productive capital and its employment has unimaginably increased the output of a single human. Ultimately, all of us would like to be put out of the part of our jobs that is tedious, repetitive or physically hard. Most of us enjoy or prefer work that is creative, productive and well-compensated. Some of us who have worked in the past and taken risk to own productive capital, prefer to vacation. In common with our ancestors, “work” is something to be minimized in order to produce well-being and leisure.
Where government has politically intervened in this process, we usually have been saddled with an inferior outcome—where the public sector has sought to create “a village.” The story is familiar and dismal. The post office? About it, little needs to be said. The regulated communication industry? A bright spot, perhaps. Smart-phones and the internet stand as a shining example that regulation can sometimes be reversed and when it is the results can be fantastic. If that industry was still regulated as it was, we all might still be talking to each other on “princess” phones and the post office might still appear relevant.
Finance and banking? That sector along with much of the legal industry may define exactly what we mean by “stuffed shirt” purveyors of arcane information, otherwise of little real substance. We are close to the heart of those who subsist by getting “between the wallpaper and the wall.” When you think you might need the insight of one of these people, it seems a good time to “Ask Google.” Do you really need some financial advisor to churn your stock account or show you a simple, canned pie chart about how to allocate your assets for retirement? Read our book, Capital as Money, to get our view on the hardship wrought on the economy by central bankers, bankers and a seriously flawed, unnecessary system of money and credit. Do we need a private monetary system? More than ever. (Answer that question again, after you experience the fiat money inflation coming in the next few years—we currently have a relic of a Chairperson of the Federal Reserve who actually thinks that inflation is caused by “wage-push!” What’s next? More Japanese soldiers emerging from the jungles of the Philippines, convinced that WWII is still on?) Is private money technologically feasible? You bet!
Transportation? Improvement in computer technology has allowed us to use far fewer air traffic controllers than we needed before. We are in sight of the capability to remotely pilot most planes and vehicles. This technological capability may sharply reduce the risk of terrorism from that direction, at least, and could lead to more fruitful employment of the 55,000 individuals currently working within the TSA bureaucracy. How much longer does every car, taxi, bus, truck, or train have to be monotonously driven by a bored, numbed individual?
Education? Does your child benefit from the Department of Education and its political agendas? Along with its duplicate in all 50 states coupled with a public teachers’ union. Compare that to a market- driven system of private education, perhaps combined with vouchers? Which works better? You already know the answer. That is why, where it can, private or non-conventional delivery of primary education is growing by leaps and bounds. Do colleges, professors and their lectures have to be duplicated across the landscape or has the internet already created the capability for a better delivery system for most students? Again, you already know the answer.
The more sinister view of course is that education and health-care, for example, are currently two of the largest service sectors of the U.S. economy. If you can nationalize them, then you may be able to secure their loyalty toward incumbent politicians and political parties. This is a wonderful outcome for politicians trying to consolidate political power and influence. Effectively, it is socialism built one brick at a time, not for ideological reasons, but for pragmatic political ones. The problem is, of course, that the provision of services by non-market sectors is so inept that it always attracts market competition and replacement.
In the “normal” market case, advancing technology causes productivity to rise over time – that is a given amount of work or labor results in more output. Unlike this in a “non-market” sector we are likely to observe declining productivity—a baffling growth in jobs, work, and administrators coupled with a dismaying shrinking level of output. In fact, this is the best way to tell that you are looking at an emerging non-market sector. Low productivity is always used as a political excuse for the commitment of yet more resources, more employment, more controls, and more expenditure. Public education is a very good illustration. Spend more and get less. That’s because the primary goal of a political sector is typically lifetime employment and enfranchisement, not productivity. Get ready to hear the same argument for public healthcare.
The list of how occupations and work will evolve naturally goes on and on. So what determines what the public, the final consumer, gets? Within a free market, of course, the public gets exactly what it wants. The occupations that can be replaced by a machine or algorithm will be, if and only if that reflects the changing desires of the market. Human provision of labor and services will remain or grow in those areas where that is what final consumers prefer. What is the endgame of an increasingly capital-intensive economy? Doing what economists do worst (forecast), I hazard some guesses in the final segment of this blog.
Irrelevant labor—the concept seems impossible. After all, in the natural world, we observe two things about work. First, since it is necessary to survive, work must always be done (even the dullest coyotes must still catch rabbits). Secondly, work is something to be minimized subject to attaining a desired goal. Labor or work is a necessary evil. In fact, the entire progress of human civilization and science seems to be based upon making our efforts more efficient—that is, so more can be attained with less work.
Advances in our standard of living demand advances in productive laziness. That is, using our human ingenuity and intellect to produce more with less work. This probably began with the first caveman who started or captured a fire. Within the context of an economic “production function”, we think of capital, labor, and perhaps natural resources being combined in some production technique to produce a desired output. In such a setting what we think of as a useful technological advance is simply anything that allows a given input of human time and effort to result in more output—hence technology augments labor making the impact or effect of a given amount of labor greater. In this way technology increases the effective labor force—through more or better tools and/or more knowledge. Progress of humanity allows us to achieve a higher standard of living with less effort—even though we sometimes venture down useless cul-de-sacs of excessive bureaucracy or narcissistic technologies whose application seems to consume rather than to save time and effort.
In a free-market, all labor can find some place in the perfectly competitive market, no matter how modest its marginal product may be—so long as the wage it receives does not exceed its marginal product. This is all true and yet we also know that as technological advance occurs some occupations of labor are more vulnerable to obsolescence and technological substitution than others. Returning to our rabbit-hunting coyotes for example, suppose coyotes suddenly somehow developed guns. Then this technological advance would appear to make the labor of those coyotes who didn’t have them, or know how to use them, irrelevant. Yet even coyotes who didn’t have guns could still harvest rabbits less efficiently for their own subsistence using their old production technique of chasing and catching.
Given the advance of knowledge and its application (technology) some types of human labor are similarly on the competitive target range and are more vulnerable to technological substitution and competition than others. This should not surprise us because competition, including technological competition, is inevitably going to be attracted to where the returns are greatest or to where the cost of the labor being replaced is the largest. Technological advance, itself, is an economic good. It usually doesn’t occur by chance or coincidence. It is induced and attracted toward those applications and markets in which the return to innovation is the greatest. This also is a natural function of free markets at work—and creatively trying to minimize “work.”
I. A Simple Framework
I am going to suggest three simple characteristics that I think capture the likelihood of technological substitution for a particular task or type of “work”—think of a particular type of occupation. These are not the only attributes that could be used, but I think they are useful in illuminating the risk of substitution of capital or technology for your job. Let us measure different occupations by the following characteristics: complexity, creativity and price. By “complexity” I mean the detail, routine, or the number of steps that must be mastered to accomplish a particular job. By “creativity” I mean the degree to which judgment, insight, unique problem-solving, decision-making, original intellect and/or imagination is required to practice a particular occupation. “Price” simply means the current cost to the market which employs the occupation—the total wage or total compensation.
In the tradition of graphical economics, we could draw three axes in these variables with each attribute increasing as we move away from the origin—but don’t worry, even people as infatuated with graphs as economists find it difficult to draw three dimensional graphs. Instead, just think of the ordered triple of values (creativity, complexity, price) associated with different occupations and then let us consider some specific jobs. Of course these attributes are not necessarily independent of each other and they are somewhat subjective as they relate to different occupations. In addition, they may vary for a given occupation in how different individuals perform their work. You will already have inferred that this is important in a competitive marketplace. It is for the market to sort this out, not for our subjective conclusions or opinions. The best and simplest way to illustrate this framework is with some examples.
If there is a theme in our world of increasing ease of access to information, it is that the jobs that have survived based upon simple mastery of complexity, alone, are probably the most vulnerable to technological substitution. Put simply, practitioners of them are likely to be at risk of replacement by a machine or an algorithm. A subsidiary theme is that when governments, bureaucracies, or even private institutions (unions) enter the fray in order to “protect” such jobs with either good or bad intentions (given the byzantine agendas of politics, we’re not sure which)—they ironically often end up eliminating or destroying them.
Start with the most famous example that most of us are already familiar with. Consider assembly-line manufacturing, such as workers in an auto plant, circa 1970. In most cases, such jobs involved tedious, repetitive tasks. These individuals are doing what humans do rather poorly and should not have to do, mimic robots. Their job is routine, sometimes complex depending upon how many separate tasks they must master, and boring. Assembly-line workers do not interact with the final consumer of the automobile and are personally unknown to them. In terms of our three attributes, complexity could be low to high, creativity is intentionally very low and, if it should happen, is not appreciated or rewarded, and due to efforts of politicians or the UAW, the price may be viewed by their employers as quite high.
The outcome is by now an old story in U.S. manufacturing and has led to the replacement of most repetitive assembly-line jobs being replaced by robots or capital-intensive production techniques. In the limiting case, the only employees needed on an assembly line are production engineers, and perhaps software engineers—in order to make sure the machines are working properly. This revolution in the U.S. economy is reflected in the steady decline in manufacturing employment in the U.S. economy. It fell by 50% from 1970 to 2012. This caused the U.S. to be viewed as an economy in which manufacturing is dead, and de-industrialization rampant—with manufacturing and jobs apparently fleeing overseas to other economies that can exploit cheap labor, notably China. Despite articles to the contrary, this perception is categorically not true, as growth in U.S. manufacturing output has kept pace with the growth rate of overall U.S. GDP. U.S. manufacturing is healthy, semi-skilled manufacturing employment is not. Machines really have replaced labor in assembly-line manufacturing and thank goodness. Who wants these repetitive, tedious, low-paying jobs anyway?
As a recent related example, we are all familiar with using computers to print files as physical documents. A new technology referred to as “3-D printing” allows computer design files to be printed not as documents but as actual final products or “stuff” with no intermediate steps. You want a pair of shoes customized to your feet and tastes? Print them! Where do you print stuff? That depends on minimizing raw material and shipping costs, but in many cases it will pay to print or make final products physically closer to the final consumer.
There is potential bad news here for emerging underdeveloped countries and perhaps for the global shipping industry. In the past, underdeveloped economies have typically expected to earn their seat at the world economic table by offering a large pool of unskilled or low-skilled labor available for extremely low wages. As the cost of substituting capital for labor diminishes and capital-intensive production grows yet more efficient, the wage at which it is not worth replacing these folks with capital in manufacturing could be very low indeed—in fact lower than that required for their subsistence. Thus, finding a place in manufacturing or assembly for very low skilled workers is, for them, a dreary prospect. Moreover, as technology continues to advance, it is becoming drearier. All this, of course, is not a new problem. Read the 19th century legend of “John Henry,” for example. Who wants these machine jobs? Who wants to be a “steel-driving man” anyway! Aim the efforts of your low-skilled, but would be upwardly mobile work force in a new and different direction—one in which human interaction and human skills are desired and preferred by consumers. Aim them at becoming barristas or leaders of “hot yoga” classes. Have them become professional athletes or cage-fighters!
Speaking of that, let’s turn to the case of the cage-fighter. Now subjectivity creeps in, as it always does in the free marketplace. Some of us (including me), may say this occupation perplexes them by its very existence. In our (my) subjective view, creativity is low (individuals bash each other in the head until one of them succumbs), complexity is low (individuals bash each other in the head until…) but the market price is absurdly high because morons are always attracted to such blood sport spectacles (see, for example, the movie, Idiocracy). This kind of sneering at someone else’s preferred consumption choices is oddly common, even in societies that value freedom and free markets. To those who do value freedom, such diversity of tastes and preferences is the beauty of the free and continuously emerging marketplace. Many things are made and consumed that you would not.
The many who enjoy and are aficionados of cage fights hold a different view and would come out with very a different ranking: 1. Creativity— extremely high, perhaps off the scale, because cage-fighters must make rapid decisions using all of their mental and physical skills with partial information. Moreover, they accomplish this under uncertainty and faced with the direst of consequences. 2. Complexity-low you just need to be a good fast basher. 3. Price-high because people with the courage, ability, intuition, other mental attributes, and physical attributes required to prevail at this raw form of entertainment are very rare. You could, of course, replace cage-fighters with machines, but what would be the point? Their “humanness” is what their audiences identify with and are entertained by. Despite disparaging contrary opinions, cage-fighters, at least currently, win the argument with those, like me, who disparage them or their sport. Whether we like it or not, the free market rewards them handsomely. In fact, having rare physical or mental human skills and being fun to watch probably explains the employment and compensation of most athletes and celebrities.
This also raises an interesting and very optimistic point for the larger labor market. Humans typically like to personally interact with other humans in the provision of many services—unless those other humans have little in their personality or people skills to differentiate them from say a codfish or a wolverine. Hence, the familiar case of the Stanford graduate (we all know one) who has a degree in, say, communications, sociology, or political science, but who has become a barrista. For barristas, complexity is low, price is also typically low, but creativity is apparently quite high. Creativity in this case is reflected in the artistic flower patterns drawn on the top of our mochas, the lending of a sympathetic ear to customers, and the stimulating humor and conversation. This person may seem to be sadly underemployed. But don’t worry. With their imagination, general background, intelligence, and people skills, they will soon likely re-invent themselves as a major marketing force—perhaps becoming the CEO of the largest new “hot yoga” franchise in the region.
Another example that captures the desired humanness of services is the diet industry (physical fitness and beauty would be similar). If we were to “Ask Google” on our smartphones to provide us the simplest definition of a weight-reducing diet, we might well get something like:
1. Calories in = Calories out is the necessary condition to maintain one’s current weight. If calories in > calories out, then fat will accumulate. If calories in < calories out, then fat and weight will decline.
Therefore a successful weight-reducing diet starkly means reducing intake of calories (consume more water, eat more cardboard, eat less carbs, eat less fat, etc…) and/or increase calories spent (short of setting yourself on fire, burn more calories, live in a hypothermic environment, jog to Baltimore, etc…)
This advice may seem rather stark and heartless to most of us. Being social, many humans tend to enjoy pursuing “self-improvement”activities in groups and/or with gurus, coaches and cheerleaders. We also love novelty and the idea that we have somehow missed a less painful alternative. “You mean I can eat all the cookies I want as long as I don’t eat anything else? Sign me up!” “Let me get this straight, are you telling me that Oprah’s latest diet attempt is just celery and pudding? I’ve got to try that!” Thus, in the employment of savants in the diet service industry, creativity is high by demand, complexity is low, and price is fairly high depending, of course, on the creativity and appeal of the marketing effort.
II. “White Shirt” Jobs at Risk for Software Replacement
(Low creativity, high complexity, high price)
By now you will have gotten the idea that the occupations that are the most vulnerable are likely those in which complexity is high, creativity is low (decision-making, unique problem modeling and solving, imagination and the exercise of individual experience and insight are low) and perhaps by chance, inertia, or oversight the market price still remains high. This sounds suspiciously like the market for “stuffed-shirt” experts or formulaic practitioners in all fields—the advisors in many cases who have gotten a job out of making our own lives either less complex or, ironically, more complex and effectively made a niche for themselves “between the wallpaper and the wall.” In an “ask-Google” or “Wikipedia” world, the need for and admiration of “Trivial-Pursuit” experts is endangered and shrinking. At risk are many professionals who have found their niche by mastery of a body of arcane detail and going “by the book.” This includes, for example, many lawyers, doctors, pharmacists, engineers, desk clerks, agents, bureaucrats, accountants, bankers, brokers, professors, and investment advisors.
Ironically, when Karl Marx first attacked the “bourgeoisie,” he probably never dreamed that it would be the free market and the advance of information technology that would finally actually kill them. If this honestly sounds like your job, you’re right to be worried. You may be living on borrowed time. If you, or your competitor could actually write a software program (or ally with a programmer) to produce a “best practices” compendium of what you do that is actually easy for the public to use (not “user-friendly” in the sense that it is produced by computer geeks for computer geeks) then you should do it first to reap the profits (If your software includes the possibility of self-improvement by learning or “machine-intelligence,” even better). Either that or make sure you practice your profession in a way that is always insightful, imaginative and innovative—and it wouldn’t hurt to sharpen your “people’ and marketing skills. Write “Turbo-Tax” instead of remaining a simple accountant or an employee of H&R Block. Especially consider this advice if you are not by nature a “people-person.”
It is useful to remember that where human contact is direct, enjoyable, and preferred by the market, jobs can often do well, even in competing against software substitutes that already exist. Take, for example, the much maligned and under-appreciated travel agent. Long ago, this occupation was widely expected to disappear with the preponderance of travel bargain websites, with the availability of do-it-yourself trip planners and direct ticketing. Travel agent employment has certainly shrunk. That it still exists at all is testimony to the fact that there is still a market for individuals who remove the tedium of planning and booking your own trip, and who can offer personal service and imaginative suggestions and an attractive personality to those who don’t like to negotiate countless websites. In surveying the landscape of technological substitution, it is worth remembering that there are many things we could do for ourselves, but prefer not to.
Visit the website shown below to see my article on the ongoing substitution of capital for labor in production.
This is the third in a series of blogs devoted to studying the NCAA’s propensity to layer on an ever increasing number of rules. Similar to the Code of Federal Regulations, the rules published in the NCAA Manual grow at a startling rate. In this blog we will examine some of the specific bylaws found in the NCAA Manual in an attempt to give the reader an understanding of the kinds of nonsense our university compliance officers are now grappling with. For a reader with a strong stomach, the entire manual can be found and downloaded from the NCAA’s web site.
Bylaw 13 of the NCAA Manual is concerned with recruiting. It spells out in excruciating detail what sort of activities are and are not permitted when it comes to contact between a member of an institution’s staff and a prospective student-athlete. For instance, bylaw 13.1.9 says “[a]n institutional staff member may attend the funeral or memorial services of a student-athlete, a prospective student-athlete, or a member of the student-athlete’s or a prospective student-athlete’s immediate family, at which prospective student-athletes also may be in attendance, provided no recruiting contact occurs.” Now, it is hard to imagine that there are many institutional representatives who would frequent funerals for recruiting purposes, but evidently the mere possibility of such is sufficient to justify a bylaw prohibiting it. Another example of the specificity found in the manual is bylaw 126.96.36.199, which details the types of printed materials that an institution can provide to prospective student-athletes. To cite an example, if an institution sends a prospective student-athlete a postcard it “may not exceed 4 ¼ by 6 inches.” (bylaw 188.8.131.52 (j)). And, it may contain “an athletics logo on one side….and may include only handwritten information….on the opposite side when provided to the recipients.” But schools should be careful when mailing out those 4 ¼ by 6 inch postcards, as bylaw 184.108.40.206.1 indicates that “[a]n institution is not permitted to use express mail delivery services and may only use first-class mail or a lesser rate of service.” The 432 page NCAA Manual is chock full of specific directives of dos and don’ts of this sort and, of course, more are added each year. Such is how things trend when rule-makers run amok; rules always beget more rules.
In June of 2011 representatives of Boise State University (including one of the authors of this blog) appeared before the NCAA Infractions Committee as a result of an NCAA investigation that began three years earlier. A portion of the NCAA investigation focused on the Boise State football program (an episode that a Sports Illustrated writer dubbed as “CouchGate.”.)1 At issue were impermissible benefits received by prospective student-athletes who participated in NCAA-allowed voluntary summer conditioning workouts held on campus prior to the start of fall semester. The athletes participating in the workouts had graduated from high school and most had signed the NCAA’s National Letter of Intent indicating their commitment to attend Boise State University. But, even though an incoming student has signed a letter of intent, according to NCAA bylaw 13.02.11 the incoming student remains a “prospective” student-athlete up until the individual either attends classes or participates in a “regular” squad practice. Regular squad practices are confined to a strictly defined fall football season, thus giving rise to the desirability for voluntary conditioning workouts during the summer. The summer conditioning program is allowable by NCAA regulation, but is not considered a “regular” squad practice. So the new players arriving on BSU’s campus were technically still deemed to be “football prospects.”
In the case of the newly-arriving football players enrolling at Boise State University, the NCAA referenced violations of bylaw 220.127.116.11. This rule specifically prohibits an institutional staff member or “representative of its athletics interests” from arranging for a prospective student-athlete to receive “Free or reduced cost housing.” It is likely that the original intent of the bylaw was to prevent an institution from providing a star recruit with luxurious accommodations in order to gain a recruiting advantage over rival schools. However, once a bylaw is in place it is difficult to know where the line will or should be drawn. As a result, eventually the rule is pushed to the point of absurdity. At Boise State University the housing violations occurred when some of the new incoming football players crashed on couches or in spare bedrooms that were available in the apartments of their older teammates. In most instances the incoming student-athletes did pay a portion of the rent during the time they spent in the apartment, while in some instances they did not.
The final NCAA ruling was that the sharing of apartments between the new and returning football players was improper regardless of how much rent was paid. Certainly, this seems like an odd ruling. At issue was the assistance provided by the coaches to the prospective student-athletes. The NCAA’s Public Infractions Report2 (2011, p. 10, 11) states that “It would have been permissible for a prospect to contact a student-athlete on his own initiative and [make] arrangements to stay with the student-athlete. The concern here is that the coaches’ arrangement of housing with student-athletes enabled prospective student-athletes to save time, effort, and perhaps money.” Heaven forbid.
1See Stewart Mandell’s May 4, 2011 article in Sports Illustrated. Available online at http://sportsillustrated.cnn.com/2011/writers/stewart_mandel/05/04/pac-12-mailbag/index.html
2 The entire Boise State University Public Infractions report is available online at http://news.boisestate.edu/update/files/2011/09/NCAA_Public_Report.pdf
(image provided by 123rf)
Imagine you are back in the first or second grade and back on the playground again during recess. Let’s say that you and Jimmy and Suzy and Janie have created a very ephemeral unit for storing value, keeping score and trading amongst yourselves. In other words, a hypothetical money. Your imaginary, very abstract unit of account happens to be “butterfly kisses.” Laughable as they may be to others outside your game, to you they are very real. So real that the four of you jealously track and guard your inventory of butterfly kisses earned and traded—and amongst yourselves, you do indeed trade them for candy, playground rides, etc. To your group, at least, they clearly have real value.
One day, you come storming in to Ms. Sandusky with tears of self-righteous injury springing from your eyes. “What’s wrong?” She says with concern.
“Jimmy just stole 200 of my butterfly kisses from me. That’s what!”
Ms. Sandusky is understandably puzzled. “Stole your what?”
“My butterfly kisses. Janie, Suzy, Jimmy and I keep track of them, who owns them, and how they are traded on a hill of wet sand in the corner of the sandbox. It’s official. ‘Mt. Sand’ we call it. We write the amounts with a stick—or rather Janie does. She’s the only one we trust as our banker. She’s the only one allowed to use the stick. We don’t really use the butterfly kisses themselves. We just trade them among us for all kinds of things—like rides on the teeter-totter. I had 400 butterfly kisses and Jimmy stole from me by changing the 4 to a 2.”
“Oh you dear children!” Ms. Sandusky exclaimed. “How clever and imaginative of you. But I can make everything better. After all, butterfly kisses are just imaginary but wonderful. Everybody should have as many as they want.” She takes a moment to write something on a post-it. “Here you go. I just gave you 200 new butterfly kisses on this post-it and I made it official by signing it. Now don’t lose them!”
“But… You can’t just create them out of thin air. They’re valuable because they’re hard to get. If you can just make them up any time you choose, they don’t mean anything! That’s not fair!” (Your childish brain is dimly groping with the concept of scarcity being intrinsic to value)
“Now that’s quite enough from you young man. I’m trying to be nice. You take this post-it and go back out there and play nicely.”
So you and your friends apparently made two errors in your money system. First, you did not make sure that your system (Mt. Sand) for tracking ownership and exchange of your currency was secure. Secondly, your choice of an abstract, ephemeral money, while it has real recognized value to you is not widely understood or seen to have value by the appropriate controlling or regulating authority (Ms. Sandusky).
Sadly, the parallels to “Mt. Gox” and Bitcoins are obvious. One legitimate function of government is protecting the sanctity of voluntary trades and property rights. Nevertheless it appears that most governments appear puzzled and somewhat threatened by the rise of a private monies and, in particular, private digital currency. Why should their reluctance to recognize and enforce the real, trading value of Bitcoins be surprising? After all, the rise of a workable private currency threatens their lucrative monopoly on printing intrinsically valueless fiat money and deriving a counterfeiter’s rent from doing so.
One can only imagine the phone call…
“My account just got hacked into and fifty of my Bitcoins have been fraudulently transferred—stolen.”
“My Bitcoins! They are a virtual digital currency whose supply is cryptographically controlled—ultimately there will never be more than 21 million of them created over the next 40 years. They are currently used in trading for more and more things and the exchange and record of ownership is tightly monitored and controlled by the Bitcoin exchanges.”
“Evidently not that tightly controlled, Mr. Wilson, or yours would not have been stolen. Twenty one million you say? Wow, that seems like a lot! Say, I’m a little a fuzzy on this digital stuff. Is your ownership of Bitcoins kind of like wins at ‘Angry Birds?’ You can bet I’d be mad if someone stole my ‘Angry Birds’ wins!’
“No! ‘Angry Birds’ is just an imaginary game. Bitcoins are real! They are a real digital currency with a real trading value recognized by millions!”
“Wait now I got you, Mr. Wilson. You’re like that caller we got an hour ago who reported the theft of 9,615 of his likes for a comment he posted on ‘Facebook.’ He was real steamed too!”
“It’s not at all like that! Bitcoins are real, the ownership of them is real, and they have a real value in terms of the real goods they can buy!”
“Well if they’re real, if property has indeed been stolen, then can you describe one for me—so that I will know it if I see it?”
“Well you won’t see them, since they only exist in cyberspace, but I will give you the code that identifies one of my Bitcoins. Just a moment now, I have it somewhere… Ah! Here it is—“65//+#4139AB**\\\\b16hedgehog%$@@#1312^. Does that help?”
“You bet it does. That helps us a lot. If you give me the rest of your allegedly stolen codes, I can then hand you over to Ed. He heads up our new Digital Property Restitution Division. As a matter of fact—I hope you don’t mind—I’ve taken the liberty of letting Ed listen in on this call. What do you think Ed, can we help Mr. Wilson get his Bitcoins back?”
“Sure, Tom. If Mr. Wilson will be kind enough to give us all the codes using his current e-mail address, we can certify his report of them and e-mail them back to him. We’re good at that and we have the staff to handle it—just now they smartly clicked 10,000 likes for that poor guy who had his likes hacked and stolen from his ‘Facebook’ comment. We’re just here to serve.”
“What? This is ridiculous! You can’t just make up my Bitcoins! They were illegally hacked from my account. You’ve got to find who stole them, where they are, and get them back for me. I insist on the return of my property and the prosecution and punishment of the thief!”
“Whoa there! Hold your horses! Raising your voice isn’t going to help anyone. I don’t like you attitude Mr. Wilson. Ed and I are doing our best to help. I don’t know that we would know what your property is even if we saw it—and we’re not likely to see it. After all, cyberspace is a mighty big place! If I could offer you a suggestion. Next time why not let this be a lesson learned. Store your wealth in something real, in good old-fashioned U.S. dollars—legal tender and backed by the U.S. Government. Putting your money in something as solid as a rock would have avoided this whole problem.”
“You idiot! Federal Reserve notes aren’t real! They’re just a fiat money printed at the whim of the Government and the Federal Reserve. They’re just as abstract as Bitcoins. But unlike Bitcoins their supply is unlimited…”
Farfetched? Ominously, in current court cases concerning the fraudulent transfer or use of Bitcoins, arguments are already being framed by legal defenses that no crime has actually occurred because Bitcoins are not really money. Don’t get us wrong. We are sympathetic to all private money efforts (including Bitcoins) and we believe economies and private markets are more than ready for their introduction and the eventual replacement of the disastrous, de-stabilizing combination of government fiat monies coupled with fractional-reserve banking. The speed of exchange and record of ownership is technologically capable of supporting this evolution.
However, we prefer that the new, private money be backed by something of broadly recognized real value, aside from a hypothetical scarcity of cyber-money. That is why we prefer broad productive capital as the basis for exchange, valuation, and a store of value (for more detail read, Capital as Money, available from Amazon.com). While electronic records of capital ownership and exchange could conceivably be hacked and stolen (as, sadly, is also the case of anything else that has value), at least shares of productive capital and index ETFs are widely recognized by governments as property and the theft or attempted theft of them is recognized as a crime.
Athletics departments are devoting ever more resources to insure that the NCAA’s rules are being enforced, but judging from the number of NCAA investigations and sanctions the institutions’ efforts are largely futile. Given the impossibility of monitoring everything, most institutions walk a tenuous path hoping to avoid investigation. Moreover, in a world where everyone is guilty, competitors can attempt to prompt NCAA investigations in order to gain a competitive advantage.
The Association has so many bylaws that the thought of an investigation strikes fear into administrators. Given that membership is entirely voluntary, how can this happen? What is it that induces universities to voluntarily participate in an arrangement that many find to be burdensome? The economic theory of rent seeking provides some insight into the matter.
The cash generated by intercollegiate athletics in general, and college football in particular, is enormous. An appearance in a Bowl Championship Series (BCS) game is highly coveted, since the payoff from these games result in millions of extra dollars of revenue for the universities involved. Likewise, an appearance in the NCAA’s final four in basketball generates huge sums of cash for the participating institutions.
Besides the direct cash payments to the universities, indirect benefits take the form of increased sales of season tickets, concessions, and merchandise with school logos. Given the large amount of money on the line, the competition between universities for the best student-athletes is intense.
In a recent column on academic pretense, Thomas Sowell pointed out the “hypocrisy” of academicians and school administrators who are vehemently opposed to paying student-athletes.(See the article titled “Academic Hypocrisy” at http://townhall.com/columnists/thomassowell/2012/02/21/academic_hypocrisy/page/full/).
Head football coaches at major colleges normally receive annual salaries well in excess of a million dollars. Assistant coaches are also handsomely rewarded, as are athletic directors. But student-athletes are not allowed to share in the windfall arising from their work on the field. For the guys on the field, even a booster-bought snow cone is prohibited. In commenting on the various recruiting and other NCAA violations being reported, Taylor Branch (2011, p. 1) observed that, “the real scandal is the very structure of college sports, wherein student-athletes generate billions of dollars for universities and private companies while earning nothing for themselves.”1
In his article, Branch (2011) provided an excellent review of the history and development of the NCAA. Branch’s scathing portrayal of the NCAA is largely focused on the institution as a rent-seeking cartel: “The NCAA makes money, and enables universities and corporations to make money, from the unpaid labor of young athletes.” (2011, p. 5). The argument is a familiar one from the theory of rent seeking. In a competitive market, productive inputs (student-athletes) would tend to be paid a wage equal to the value of their marginal product. Prices of inputs would be bid up, thereby reducing the economic rents accruing to universities and their athletic departments. To capture more of the economic rents, universities join in a cartel (the NCAA) to enforce a list of rules and thereby prevent an all-out bidding war for student-athletes.
As with any cartel, once the rules and guidelines are in place there is strong incentive for any particular cartel member to cheat on the agreement. In the case of the NCAA, the cheating takes place when individual schools or their boosters offer impermissible benefits in an attempt to recruit and keep a star athlete. An individual school can benefit economically by offering something to entice recruits to enroll in their institution and play for their team. For this to work, competing schools need to toe the line lest an all out bidding war occurs. Predictably, when a rival school is caught red-handed in some sort of NCAA violation, there is a high level of righteous indignation and scorn brought down on the offending institution. Any discovered violation on the part of a competitor is generally regarded as a purposeful attempt to cheat on the system and thereby gain an advantage, and offended institutions expect the guilty school to suffer the harshest of penalties for such violations. By way of contrast, a school’s own violations are almost always explained away as the result of an inadvertent slip up—the “sort of thing that could happen to anybody really.”
The NCAA actively works at defining and enforcing rules against any form of compensation or benefit directed at student-athletes. But what constitutes illegal compensation aimed at attracting and keeping a star athlete? In attempting to answer this question the NCAA has developed an incomprehensible rule book. The next blog in this series will provide some humor by looking at some of the specific NCAA bylaws that are particularly asinine.
 See “The Shame of College Sports” Atlantic Monthly, October 2011. Available online athttp://www.theatlantic.com/magazine/archive/2011/10/the-shame-of-college-sports/8643/2/
Throughout time empires, nations, communities, institutions, and associations have come and gone. Some last for long periods of time while others flourish for a brief period before withering away. There are perhaps many reasons for the success and failure of human organizations, but one stands out to us as being crucially relevant: Laws, rules, and regulations tend to multiply over time resulting in top heavy organizations that eventually become detested by those living in subjection to them. Over the next several weeks we will explore this process by looking at the NCAA as an illustration of this tendency.
The NCAA provides an interesting case study to analyze the growth of a bureaucracy. Membership in the Association is voluntary, and the Association’s members are responsible for proposing and voting on any new rules. A new bylaw becomes binding only after it has been approved by the membership through its established legislative process. However, even though member institutions are allowed to participate in the development of new bylaws, a large and ever-growing number of malcontents are finding the NCAA and its rules and regulations to be overly burdensome.
The NCAA routinely investigates universities for violations of its rules governing the member schools’ athletic programs. Within the past several years it has investigated several high-profile football programs to see whether an “extra benefit” was received by either a student-athlete or prospective student-athlete. An NCAA investigation can result in violations and subsequent penalties placed upon the guilty institution if it is determined that extra benefits were provided to athletes. In the past few years the NCAA has investigated Auburn University, The Ohio State University, Boise State University, and the University of Miami to name a few.
On page 1 of its burgeoning manual (2013-2014), the NCAA states that its purpose for existence is the maintenance of a “clear line of demarcation between intercollegiate athletics and professional sports.” On page 4, it asserts that “student-athletes should be protected from exploitation by professional and commercial enterprises.” In its attempt to “protect” student-athletes from receiving any extra benefits, the NCAA increasingly attempts to micro-manage the lives of all athletes falling under its rule. Like the federal tax code, as time has gone by rules have expanded to the point of absurdity. For example, a particularly laughable NCAA bylaw (#16.5.2 (h)) asserts that “[a]n institution may provide fruit, nuts and bagels to a student-athlete at any time.” Following the passing of this bylaw, the question of whether or not cream cheese can accompany the allowed bagel was hotly contested in athletics’ compliance circles.
Today’s blog is the first of a series that will examine NCAA regulation from an economics perspective. The next one will examine the NCAA’s amateurism principle through the lens of public choice theory and rent-seeking. It will be argued that despite the lofty language found in the NCAA Manual, a primary goal of its legislation is to establish a cartel arrangement to insure that economic rents accrue to the university, coaches, and athletics administrators, rather than to the student-athletes who are doing the heavy lifting on the field. We will then look at the ever-growing list of rules and regulations promulgated by the NCAA in its attempt to insure economic profits (i.e., extra benefits) are not accruing to student-athletes. To accomplish this objective the NCAA endeavors to monitor and control an ever greater part of a student-athlete’s life; a task that is ultimately impossible. Due to the inability of any institution or athlete to fully comply with all the NCAA’s rules and regulations, every institution has violations—some discovered but many more undiscovered—on what is most assuredly a daily basis. Thus, when everyone is guilty, the decision to investigate and penalize any particular institution can appear to be arbitrary and capricious. The parallels between this and our bigger “prohibited everything” economy are obvious.
The growth of the NCAA into a bulky, overbearing establishment that is insufferable to many of its own members is not a new or an isolated phenomenon. There is and always has been a disturbing deep-seated human tendency for groups to evolve from simple associations into large and oppressive establishments, a trend which will be explored in this series of blogs. We may be our own worst enemies.