Konzervatívny inštitút M. R. Štefánika s podporou Nadácie Tatra banky organizoval dňa 7. apríla 2014 v Bratislave ďalšiu prednášku v rámci cyklu prednášok CEQLS. Našim hosťom bol Michael C. Munger, profesor ekonómie a politológie pôsobiaci na Duke University (USA). Viac informácií nájdete na www.konzervativizmus.sk. More information at www.institute.sk

1. THE “CHARACTER”
OF PROFIT AND LOSS:
ENTREPRENEURIAL VIRTUES
JUAN PABLO COUYOUMDJIAN
ESCUELA DEL GOBIERNO
UDD (SANTIAGO DE CHILE)
MICHAEL C. MUNGER
PPE PROGRAM
DUKE UNIVERSITY

2. CICERO, DE OFFICIIS (BOOK III, CHAPTER
15)
Quintus Scaevola, the son of Publius, when he asked to have the
price of an estate that he was buying named once for all, and the
seller had complied with his request, said that he thought it worth
more, and added a hundred thousand sesterces.
There is no one who would say that this was not the act of a good
man; but men in general would not regard it as the act of a wise
man, any more than if he had sold an estate for less than it would
bring. This, then, is the mischievous doctrine, — regarding some men
as good, others as wise…

3. TWO ARISTOTELIAN/THOMISTIC CONCEPTS
Virtue--a habit of right action, cultivated as an intentional product of
reasoned reflection, in a social setting. Right action balances
between vices, which are deficiencies or excesses of the particular
virtue. (Liberality is a virtue, lying between parsimony and
prodigality).
Character--a collection of traits of a person, both in terms of visible
actions and the internal motivations that cause those actions.
Character results from the repetition of choices in a variety of
settings, as a product of right reason. Virtues are individual habits of
right action; character is the overall set of virtues and vices exhibited
by a person.

4. STANDARD STORY
• Mandeville: Private Vices, Publick Benefits
• So, entrepreneurs (for example) are vicious (act out of the
vice of self-interest), but we should allow the vice because
of the good consequences market action can have for the
public good

5. TWO KINDS OF “ENTREPS ARE VICIOUS”
ARGUMENTS
1. Intent--Entrepreneurs act out of self-interest. To be sure,
profit-seeking might in principle have good consequences, but
these are incidental to the narrow selfishness of the pursuit
itself. Virtue as a character trait is a habit of right action,
cultivated as an intentional product of reason. To be good, on
this account, a person must intend good, rather than produce
material benefits as a side-effect. Not harmful, but not virtuous.
At best, following Aquinas, something to be tolerated, even
promoted, but not virtuous. (Thanks to Dr. Karen Vaughn)

6. TWO KINDS OF “ENTREPS ARE VICIOUS”
ARGUMENTS
2. Exploitation--Profits are per se exploitative and
illegitimate. The successful entrepreneur, judged on the
merits of commercial activity, must earn positive profits.
But then only an unsuccessful entrepreneur could possibly
be innocent of exploitation. If virtues are features of
excellence in character, this implies a contradiction: One
could be an excellent entrepreneur, and make profits, or
one could be virtuous, and go bankrupt, but never both.

7. ENTREPRENEURSHIP
Israel Kirzner (distinguished for me by Boettke):
(1) Optimization: Convergence toward
(though never fully achieving) a “single
price.” Arbitrage.
(2) Alertness: “Seeing around corners”
Alertness and profit-seeking is a discovery process, but at a higher
level than prices. Prices work out the value of existing resources;
profits reveal the values of products/resources that exist only in the
imagination of the entrepreneur.

8. STEVE JOBS
“You can't just ask customers what they
want and then try to give that to them.
By the time you get it built, they'll want
something new.” (Inc., 1989).
“But in the end, for something this complicated, it's really
hard to design products by focus groups. A lot of
times, people don't know what they want until you show it
to them.” (Business Week, 1998).

9. PROFIT
• Distinguish “profit” and “rent-seeking”
(Profits: mutual benefit; rents are transfers; rent-seeking is
resources consumed in securing transfers…)
• Both result in accounting profits. But the underlying action
depends on whether you hire more engineers, or more lobbyists!
• If exchange is (eu)voluntary, and the person making
the exchanges earns part of the surplus, and that is intentional,
the result is mutual benefit.

10. Profits and Rent-Seeking
Profits: The excess of revenues from selling a
product after costs are subtracted. If the exchange
is voluntary, each person buying the product must
think s/he is better off. Entrepreneurs seek profits,
and therefore try to create value.
Rent-seeking: A competition for an artificial prize or
benefit created either by (a) taking money from
taxpayers and trying to "give it away" or (b) a
restriction on competition that allows an artificial
increase in prices for products sold. Political
entrepreneurs seek rents. No value is created.

12. “THEOREM”
Ifpart:
Exchanges are euvoluntary
Profits are the excess of revenues over costs in a market without
artificial constraints
Then part:
Entrepreneurship is always virtuous. It is the habit of alert seeking
of exchange opportunities, embedded in a character of forbearance
of rent-seeking opportunities.

13. How Do Markets Choose?
How Do Polities Choose?
In economics, things happen at the margin. The majority is
always wrong. (JK Galbraith)
What does that mean? Consider three mechanisms for
motivating and choosing…
Markets: Profit Test
Rent-seeking: Rent/Subsidy Test
Politics: Appeal to the Median Voter

14. Markets “Choose” Using Price
• Signals, information about scarcity
• Incentives, when combined with private ownership
• Absence of price system/information is a big reason
that "real" socialism has always failed, everywhere it
has been tried.
• Conversely, even welfare states can be fairly successful,
if they rely on theprice system. They use prices and
private property for production, and then have a
welfare state system financed by taxes. Relatively little
public ownership of production in Norway, Finland,
Denmark, Sweden (Volvo, Ericsson, Nokia)

15. Three Stories: Profits and Virtue?
• The Itinerant Padre
• The Verger
• The Mancgere

16. The Itinerant Padre

17. The Verger

18. The Mancgere

19. The Mancgere
The roots of the English word “monger,” a common merchant or
seller of items are quite old. In Saxon writings of the 11th
century, described in Sharon Turner’s magisterial three-volume
History of the Anglo-Saxons (1836), we find a very striking
passage where a merchant (mancgere) defends himself on
moral grounds.

20. The Mancgere
“I say that I am useful to the king, and to ealdormen, and to the
rich, and to all people. I ascend my ship with my merchandise, and
sail over the sea-like places, and sell my things, and buy dear
things which are not produced in this land, and I bring them to
you here with great danger over the sea; and sometimes I suffer
shipwreck, with the loss of all my things, scarcely escaping
myself.”
“What things do you bring to us?”
“Skins, silks, costly gems, and gold; various
garments, pigment, wine, oil, ivory, and orichalcus, copper, and
tin, silver, glass, & suchlike.”
“Will you sell your things here as you brought them here?”
“I will not, because what would my labour benenfit me? I will sell
them dearer here than I bought them there, that I may get some
profit, to feed me, my wife, and children.”

21. Entrepreneurship
What is an entrepreneur? “A person who organizes and operates a
business or businesses, taking on financial risk to do so.”
What is a political entrepreneur? A political entrepreneur uses government
funds in business, which greatly reduces any financial risks to the
“entrepreneur.”
So, an entrepreneur might make iPods, selling a product to consumers for
full price. A political entrepreneur might make solar panels, in effect
“selling” the product to the government, because of the subsidies. The
whole point of the subsidies is that—without the bump from taxpayers, at
gunpoint—nobody would buy the product.
Not only do political entrepreneurs lobby to receive federal
funds, they often work to pass laws that hinder their competitors. Thus,
political entrepreneurs, one could argue, are really not entrepreneurs at
all. In most respects, they resemble government bureaucrats. Their
“research and development” teams aren’t scientists, but lobbyists.

22. Profits and Rent-Seeking
Market entrepreneurs are those who build their businesses with
private funds, using either their own money or funds from
investors. They succeed by giving the public useful goods or
services at a good price. They hire engineers and salespeople, to
sell to people.
Political entrepreneurs, on the other hand, lobby government
officials to award federal funds to their business enterprises.
They hire lobbyists, to sell to Congress.
Which group benefits society the most?

23. In the early 1800s, the great technological innovation of
the day was the steamship. First working steamship
was…built by John Fitch, in 1787. He got a patent in 1790.
http://vimeo.com/48744782#
You have likely learned it was Robert Fulton. Fulton's boat
was the first commercially successful steamship. In 1807,
Fulton and some investors built the first commercial
steamboat, the North River Steamboat (later known as the
Clermont), which carried passengers between New York
City and Albany, New York. The Clermont was able to make
the 150 mile trip in 32 hours. This compared favorably to 2
days by horse-drawn coach, because the steamship could
also carry a large amount of heavy cargo.

24. Robert Fulton--entrepreneur when he used steam power
to provide quick/cheap transport. But he became a
political entrepreneur when he got a monopoly from NY
legislature to carry all steamboat traffic in NY thirty years.
Fulton insisted that his monopoly meant that no one else
could ferry passengers to New York City from neighboring
states, but an enterprising businessman named Thomas
Gibbons wanted to break Fulton’s monopoly.
In 1817 Gibbons hired young Cornelius Vanderbilt to run
steamboats between Elizabeth, New Jersey and New York
City. On the mast of Gibbons’ ship, Vanderbilt hoisted a
flag that read: “New Jersey must be free.”
For 2 months, Vanderbilt defied capture as he speedily
transported passengers and lowered fares. Too fast!

25. The actions of Gibbons and Vanderbilt led to the landmark
Supreme Court case Gibbons v. Ogden (1824), in which the
Supreme Court struck down the Fulton monopoly: Only
the federal government, not the states, could regulate
interstate commerce.
Cornelius Vanderbilt went on to develop his wn steamship
company, and once again, he had to compete against a
government subsidized political entrepreneur, Edward
Collins. Collins’ company eventually went bankrupt, after
wasting millions of tax-payer dollars. Vanderbilt’s line
proved to be faster, safer, and much cheaper for
consumers. Once again, the government had tried to pick
a winner in a new business enterprise and had failed.
Vanderbilt is the classic example of an entrepreneur,
a market entrepreneur.

26. The career of Cornelius Vanderbilt shows us what to
expect from market entrepreneurs. He was born on
Staten Island, New York, in 1794. His great-great-
grandfather had immigrated in 1650 as an indentured
servant, and by the time Cornelius was born the family
operated a ferry in New York Harbor. Cornelius quit school
at age 11 to work on his father’s boats and began his own
ferry service five years later. In 1817 Thomas Gibbons
hired him to run a ferry between New Jersey and New York
City.

27. Profits and Rent-Seeking
Profits: The excess of revenues from selling a product after
costs are subtracted. If the exchange is voluntary, each
person buying the product must think s/he is better off.
Entrepreneurs seek profits, and therefore try to create
value. (Vanderbilt)
Rent-seeking: A competition for an artificial prize or
benefit created either by (a) taking money from taxpayers
and trying to "give it away" or (b) a restriction on
competition that allows an artificial increase in prices for
products sold. Political entrepreneurs seek rents. No value
is created. (Fulton)

28. "PROFIT TEST"
• Are more people willing to pay, a sufficient amount, to cover
the costs of production and distribution?
• Is this a "good" thing? Consider the….

29. The All-Time Greatest Product!
• The. Pet. Rock.

30. Gary Dahl: Pets are too much work. So Pet Rocks
(1975) were ordinary gray stones bought at a
builder's supply store. They were marketed like live
pets, in custom cardboard boxes, complete with
straw and breathing holes for the "animal." The fad
lasted about six months, ending after a short
increase in sales during the Christmas season of
December 1975. Although by Feb 1976 they were
discounted due to lower
sales, Dahl sold 1.5 million
Pet Rocks and became a
millionaire.

31. A thirty-two page official training manual titled The
Care and Training of Your Pet Rock was included, with
instructions on how to properly raise and care for one's
new Pet Rock (notably lacking instructions for
feeding, bathing, etc.). The instruction manual was the
real product: it was full of gags, puns and jokes. It
contained several commands that could be taught to
the new pet. While "sit" and "stay" were effortless to
accomplish, "roll over" usually required a little extra
help from the trainer. "Come," "stand" and "shake
hands" were found to be near-impossible to teach, but
"attack" was easy: Throw it hard.

32. The owners also found that potty-training their pet
rocks was fairly simple, given that they were, in fact,
rocks. Dahl's biggest expense was the die-cutting and
manufacture of the boxes. The rocks only cost a penny
each, and the straw was nearly free. For the initial run
of booklets, Dahl had a printing job for a client and
"tacked" the pet rock booklet onto the main job. This
resulted in a batch requiring only a cut and trim, at
almost no cost except some labor.
Dahl made a small fortune. But a lot of people sued
him for "patent infringement" or stealing their idea.
Seriously.

33. 2001 Update: Handy USB,
Added Functionality

34. How do Decide?
• If firms have to make positive net revenues, after costs, or
"profits"…
• What do politicians or political choices need?
• The middle, but a particular kind of "middle."
• The mean, or average?
• The mode?
• The median?
THE MEDIAN

35. In the late 1950s, MITI (the
Japanese Ministry of International
Trade and Industry) decided to
rationalize and streamline the
Japanese automobile industry.
The goal was to realize economies
of scale in design and production,
and increase the number of cars
that Japanese companies would
export to the U.S. and elsewhere.

36. It was decided that just two
auto companies (Toyota and
Nissan) would get government
financial support. All other
companies were told that they
should direct their energies to
motorcycles, or blenders, or
perhaps those new televisions.
Costs would fall as each
company produced more cars.
The logic was undeniable: fewer
producers, lower costs.

37. But there was one strange loner,
named Soichiro. He was an odd
prickly person, and wouldn't
listen to MITI, or anyone else.
Soichiro's company sold
excellent high-performance
motorcycles, and he thought his
engines and manufacturing
procedures would work well in
automobiles. In 1959, in spite of
the bleating of MITI, Soichiro's
company introduced the S360
sports car.

38. Today, you have likely heard of the company led
by an oddball, a guy who refused to comply with
the dictates of the central authority. By the mid
1950s, the company had come to be known by
Soichiro's last name…

39. Two Steves
In 1976, there were two Steves, in a garage. One worked for
Hewlett-Packard, and the other for Atari, in California. The Atari
guy, Steve Jobs, had the garage, and the two Steves worked on a
revolutionary machine. Or so they hoped. Near the end of 1976
the Steves, Jobs and Wozniak (the HP guy), released into the
market a metal box attached to a TV screen, and tried to charge
$666.66 for each one. The contraptions were called Apple I's.

40. Apple
Suppose we had taken a vote at that point on this
"personal computer" thing. Most people would
have guessed that there was no future in these
silly, overpriced boxes. ($666.66 is more than
satanic; it is also $2,350 in 2006 dollars. This for a
paper weight with no fixed memory and 16k of
RAM.) No government agency would have funded
the thing, unless Jobs / Wozniak were also big
campaign contributors. And no grass roots wave of
support, since no one even knew who the Steves
were or what they were trying to accomplish.

41. Apple
But Jobs and Wozniak were out at the extreme of
opinions about computers and the future. They
moved out of the garage in 1976, and in 1980 they
rolled out the $3,495 Apple III (that's about $9,000
today!). Clearly, this company had no future. Of
course, they had not received, or risked, any public
money, so it was no one's problem but theirs.
Their hunch, their money, their loss.

42. Apple
Then, the Steves held a public stock offering of
stock later in 1980. And against all
expectations, they became instant
millionaires, selling 4.6 million shares. That's a lot
of shares; is Median Joe a risk taker, after all? Not
really; suppose that each sale was for just one
share, to 4.6 million people. That would still mean
that more than 97% of the U.S. population thought
the stock was a bowzer. And in fact just a few
people bought any shares at all, though these few
oddballs bought heavily, making a "yes" bet when
everyone else was betting "no."

43. Apple
Then, the Steves held a public stock offering of
stock later in 1980. And against all expectations,
they became instant millionaires, selling 4.6 million
shares. That's a lot of shares; is Median Joe a risk
taker, after all? Not really; suppose that each sale
was for just one share, to 4.6 million people. That
would still mean that more than 97% of the U.S.
population thought the stock was a bowzer. And in
fact just a few people bought any shares at all,
though these few oddballs bought heavily, making a
"yes" bet when everyone else was betting "no."

44. Losers: The conventional wisdom
Business editor at Prentice Hall said, in 1957: ""I have
traveled the length and breadth of this country and talked
with the best people, and I can assure you that data
processing is a fad that won't last out the year."
Microchip invented 1968--engineer at IBM's Advanced
Computing Systems was puzzled: "But what ... is it good
for?"
Ken Olson, founder of computer giant DEC (1978): "There
is no reason anyone would want a computer in their
home."

45. Let's give DEC's Olson his due: He was right, in a
very unimportant way. For years, few did want
home computers. If we had put it to a vote,
computers would have lost, with more than 95% of
population voting "no."
But we didn't vote. We left it up to the individuals
at the extremes. By 1985, only 5% of American
households had voted "yes," with people having
some kind of access to personal computers.
In economics, the margins matter.
In politics, the middle matters.

46. Finally, in 2005, 25 years after the margin recognized
the value of PCs, the majority changed its mind.
More than 60% of households had at least one
computer, with more having access at work or
libraries. Those who bet "yes" on personal
computers early on, won. And eventually most of the
rest of us came along, free riding on the correct
guess. None of the skeptics had to risk anything on
the success of the computer, and were free to wait
until all the up-front costs of development were paid
by others. And had PCs flopped, none of the skeptics
would have lost any money. It would just have been
"I told you so!" time.

47. Three Ways to Choose
• Markets, profit test, allocate based on price. Lots
of mistakes, but encourages innovation.
Operates at the margin.
• Political entrepreneurship, rent-seeking. Allocate
based on subsidies, lots of mistakes, rarely direct
resources toward productive uses (if different
from profits). Best you can hope for is guess
what will be profitable.
• Democratic choice: Median voter. Operates at
the middle, never at the margin. Sharply
discourages innovation.

48. PROBLEM: SUSTAINABILITY
Owner/manager has fiduciary duty to earn accounting
profits. Can a manager of good character behave virtuously,
if rent-seeking opportunities are available?
Depresssed share prices, stockholder lawsuits, market for
mangers, increase accounting profits.
Hostile takeover, replace virtuous managers with rent-
seekers.

49. CONCLUSION?
Perhaps disturbing….Vicious behavior by corporations, bad character of
corporate managers is actually a government faiure!
Simple calculus problem: if there are opportunities for rent-seeking (price
controls, barriers to entry through increased accounting regulations,
tariffs/quotas, artificial licensing requirements, etc.), then the rational manager
will equate the marginal profitability of investing in engineers and lobbyists.
Rent-seeking will always be grater than zero for the rational manager.
This is true whenever the state offers rent-seeking opportunities. So the REAL
question is this:
Can politicians be virtuous? Can the members of the legislature demonstrate
good character and forbearance in service of “publick benefits”?