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Wednesday, February 18, 2009 - 7:12pmSanction this postReply
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I enjoyed reading this article. It's a good clarification of issues that are frequently misunderstood or deliberately made muddy by journalists. Merlin, I know very little about "non-profit" organizations. I wanted to ask if you knew the history of this kind of business. I always assumed that there must be some kind of tax advantage or nobody would bother distinguishing themselves as a "non-profit". Is this right?

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Wednesday, February 18, 2009 - 8:28pmSanction this postReply
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Randy, I am far from an expert on non-profits. However, tax exemption is a key feature. The government deems they deserve it because they don't seek a profit and preform a "valuable public service." Many hospitals are non-profit and they get the status because they provide some free medical care. Churches, charities, and nearly all colleges are also prominant kinds of non-profits. In most cases contributions to them are tax-deductible to the donor, too. (The Atlas Center and The Ayn Rand Institute are non-profit educational organizations.)

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Wednesday, February 18, 2009 - 8:36pmSanction this postReply
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Randy,

Yeah, most non-profits are tax exempt. Their revenues must inure to some "public benefit," rather than to any owners, e.g., partners or shareholders.

Merlin,

======================
I say this is overwhelmingly the case for government subsidies. Politicians persist in subsidizing money-losing ventures, while proclaiming how catastrophic it will be if they donít or how much better it will be if they do.
======================

Academics will claim subsidies cure "market failures," which are basically said to occur wherever some market does not tend (or correct) to a more perfectly competitive market quickly and constantly enough. This is why we tend to see subsidies in highly imperfect markets, e.g., healthcare, energy, agriculture, etc. These markets have highly imperfect information, high barriers to entry, and high external effects.

This academic view is untentable under Objectivism, which (I think) rejects the notion that a market can "fail." So long as the market is rights-respecting, then it necessarily "succeeds" no matter the fluctuations in supply and demand.

Jordan



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Wednesday, February 18, 2009 - 9:53pmSanction this postReply
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Thanks Merlin and Jordan for that information.

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Wednesday, February 18, 2009 - 10:39pmSanction this postReply
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Jordan wrote,
Academics will claim subsidies cure "market failures," which are basically said to occur wherever some market does not tend (or correct) to a more perfectly competitive market quickly and constantly enough. This is why we tend to see subsidies in highly imperfect markets, e.g., healthcare, energy, agriculture, etc. These markets have highly imperfect information, high barriers to entry, and high external effects.
Whoa! Agriculture is a highly imperfect market?? I don't think so! According to contemporary economics, agriculture is the closest thing we have to a perfectly competitive market, and is often used in economics classes as a paradigm of that form of competition.

A perfectly competitive market is defined by four characteristics:

1) Firms sell a homogeneous product, such as wheat.
2) Firms are price takers, meaning that they have to accept whatever the prevailing market price happens to be, because there so many sellers, no individual seller can influence the price.
3) Firms can easily exit and enter the market.
4) Firms have perfect information.

Why this is called perfect competition is anyone's guess, because there's no real competition here. According to this model, firms don't compete on the basis of their products, because the products are exactly the same. They don't compete on the basis of price, because there is no attempt by any firm to raise or lower its price. They don't compete on the basis of gaining an advantageous position in the market (e.g., a monopoly), because no monopoly is possible; and they don't compete on the basis of gaining specialized or proprietary information, because every firm already has perfect information. There is in this version of competition, absolutely no rivalry, which is the very meaning of competition. So how could it be considered "perfect"? It doesn't even meet the definition of the word. The best one can say about it is that it's a perfect oxymoron.

Perfect competition not only does not exist anywhere in the economy; it cannot exist even in theory, except perhaps in some Alice-in-Wonderland fantasy. But that suits the critics of capitalism just fine, because they can then point to its absence as a way of showing that capitalism doesn't work the way it's supposed to.

Contrary to Jordan, subsidies in agriculture do not exist because there is imperfect information, high barriers to entry or externalities; they don't exist in order to improve competition. They exist, because of the farm lobby and the fact that it was traditionally thought that agriculture is the backbone of our economy and is at the mercy of the vicissitudes of weather and climate. That rationale is no longer plausible. Far from encouraging competition; subsidies interfere with it, because they prevent the better, more efficient farms from from gaining an edge over their less efficient rivals and thereby freeing up the latter's misallocated resources for a more productive employment.

Nevertheless, the doctrine of perfect competition persists in contemporary economics textbooks and university classrooms as some sort of "ideal" worth striving for, which does little more than give capitalism a bad name.

- Bill


(Edited by William Dwyer on 2/18, 10:42pm)


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Thursday, February 19, 2009 - 4:02amSanction this postReply
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Jordan wrote:
Academics will claim subsidies cure "market failures," which are basically said to occur wherever some market does not tend (or correct) to a more perfectly competitive market quickly and constantly enough. This is why we tend to see subsidies in highly imperfect markets, e.g., healthcare, energy, agriculture, etc. These markets have highly imperfect information, high barriers to entry, and high external effects.
Bill Dwyer replied:
According to contemporary economics, agriculture is the closest thing we have to a perfectly competitive market, and is often used in economics classes as a paradigm of that form of competition.
I agree and add to Bill's counter that a more likely rationale for subsidies, surely for politicians if not academics, is somebody's "need."

Edit: Speaking of subsidies: GM's Plan: Subsidize Our 48-Year-Old Retirees
And Obama wants to give unions even more power! 

(Edited by Merlin Jetton on 2/19, 5:16am)


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Thursday, February 19, 2009 - 11:39amSanction this postReply
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I very much agree with Bill's explanation for agriculture subsidies, and he's right that academics tout agriculture as one of the prime examples of a perfectly competitive market because it nearly is in every way except one big one. A perfect market has no external effects, meaning it doesn't significantly inform other markets. As Bill said, agriculture has been viewed as the "spine of the economy," as a vital "base" market that underpins a great many others. The idea is that if agriculture tanks, the rest of the economy will flounder. To that end, it is far from perfect, at least according to academica. (Aside, agriculture is also thought to be volatile on account of climate and weather, as Bill suggested, but I don't think volatility necessarily makes a market imperfect.) 

Jordan


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Monday, February 23, 2009 - 6:05amSanction this postReply
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This is an addenda to my article. I now believe adding the following would have improved it.

The morality of self-interest (or "self-regarding") is the moral underpinning of investment. The morality of altruism (as used by Rand, or "other-regarding") is the moral underpinning of subsidy.

I use "self-regarding" and "other-regarding" like they were used here.


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Thursday, February 26, 2009 - 9:52amSanction this postReply
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http://finance.yahoo.com/news/Obama-pulls-back-the-curtain-cnnm-14479642.html

Notice how Obama abuses the word "investment."

Male bovine waste.

Suppose I proposed to Obama that he give me $100,000 now and I pay him back $5,000 per year for the next 10 years. Do you think he would call that an "investment"?  Yet, this is the kind of deal, or worse, he wants with taxpayers on the $100,000 side.

(Edited by Merlin Jetton on 2/26, 11:25pm)


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Post 9

Friday, February 27, 2009 - 7:11amSanction this postReply
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Kimberley Strassel notices how Obama abuses the word "investment", too.
http://online.wsj.com/article/SB123569711858288917.html


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Post 10

Tuesday, June 23, 2009 - 2:47pmSanction this postReply
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This article from the LA Times reports on Obama's press conference today. Some was about the Iranian government's crackdown on demonstrators. Some was about health insurance, which included this "gem":
"If private insurers say the marketplace provides the best-quality healthcare -- if, as they tell us, they're offering us a good deal -- then why is it that the government, which they say can't run anything, is going to drive them out of business?" Obama said. "That's not logical."
That's some notion of logic. A health care consumer directly pays a very small part of the cost under a government-run plan versus a much larger amount under a private plan. Does Obama not know the meaning of subsidy and its economic consequences?


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