Bryan Caplan  

Return to Neptune, I: Incidence

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As I've said before, the conversation sparked by Rod Long's Cato Unbound essay has been rididulously lively.  Now I'd like to append a few points that - as far as I can tell - no one else has made.  (Please point out any blind spots in the comments). 

I shall start with the problem of incidence.  I might be reading Rod uncharitably, but analysis of who ultimately benefits and suffers from government policy seems naive.  He argues, for example, that government support for corporations allows them to survive despite blatant inefficiency:
Those who have worked in such environments know from their own experience how completely clueless the highly paid upper managers tend to be about what is actually happening, and how much of the firm's success depends on workers simply ignoring the insane directives from above and doing what needs to be done. When those with such experience hear free-market advocates assuring them that their daily experience is just how things would continue to be in a free market, they are likely to conclude "so much the worse for free markets." But in fact they should conclude that something artificial is propping up these hierarchies...
But does this really make sense?  Suppose, for example, that the government made corporations tax-exempt.  Would this actually benefit corporations?  In the short-run, yes.  But these short-run profits would encourage the formation of more corporations - and the dissolution of non-corporations.  This process would continue until corporations earned only a normal rate of return.  Even with favorable tax treatment, corporations based on "insane directives" would still go bankrupt.

This doesn't mean that differential tax treatment is harmless.  When you encourage less efficient forms of business, you reduce production, and the world gets poorer.  But the primary victims of these inefficiencies aren't small businesses; they're consumers - the ultimate inelastic resource.

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Gary Rogers writes:

I would venture to say that Roderick Long has never worked for a profit making company in his life. His entire premise seems to be based on the mistaken idea that companies make money by default and the only reason one company succeeds over another is through some form of exploitation. I have heard this argument often but it is no more true than arguing that sports teams only win by cheating. In fact, both succeed through hard work with no secrets to their success. Success in either case involves putting together a talented team, working hard and not fearing competition. Though Mr. Long seems to believe otherwise, a good team is not going to be overtaken unless the competition proves to be extremely capable or willing to work very hard. The thing many people fail to recognize is that making money is difficult and can easily be made impossible through bad regulation and/or too many taxes. There is no money tree or financial well that companies can go to, even though Hank Paulson seems to be trying to make one.

This is not a difficult concept, but it is essential to understanding how our economic system works. I looked at Mr. Longs bio and am surprised that he could be so lacking in the basics. I hope I just misunderstood what he was trying to say.

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