- How did Gardner's actions match the description that Murray Rothbard gives to entrepreneurs and entrepreneurship?
Gardner is truly an entrepreneur. Professor Murray Rothbard describes an entrepreneur or a “capitalist-entrepreneur” as the person that invests in land and/or capital goods and uses these factors of production in the present for producing goods and services that will be sold in the future. The entrepreneur makes a profit if the rate of return he gets from this economic activity is greater than the prevailing general interest rates. This is brought about by his realization that capital or capital goods is “underpriced” or “undercapitalized” which means that they are not optimally utilized and that the market currently understates the “future rents” coming from these factors. Eventually the market will catch up to the entrepreneur thus eliminating his margins due to competition resulting in the return of the investment rate to the general interest rate (i.e. return on investment = general interest rate). In this case, Gardner recognizes that the boats were “undercapitalized” and therefore offered the service of linking the users and the owners thus creating a rate of return that is greater than the interest rate. He recognized the gap and acted on shifting the use of the boats from one productive process (outright rental) to another one (rental plus insurance) thus providing users a more valuable proposition (i.e. a greater discounted marginal value product).
- Was Gardner's establishment of this company closer to the Joseph Schumpeter view of the entrepreneur, or was it closer to Israel Kirzner's description? Please explain your answer.
According to Israel Kirzner, an entrepreneur is an “alert” individual that notices opportunities for profit. These opportunities come from previous failures (e.g. high selling prices) which the entrepreneur then capitalizes by buying very cheaply and then selling at a profitable margin. In Shumpeter’s view, the entrepreneur is a “disrupter” of an established equilibrium, an innovator that would provide a product or service that disrupts the norm but benefits the market ultimately. Based on these definitions, Gardner is both an alert individual and is a disruptor of the norm. The difference in the view is the concept of equilibrium, in Kirzner’s theory there is never equilibrium in the market, there is always a malfunction in the demand and supply of products that an alert individual will identify and then address whereas Shumpeter thinks otherwise. My opinion is that there is never equilibrium in the market and Gardner was “alert” enough to see the opportunity thus his firm is more aligned with the ideas of Israel Kirzner.
Raising Minimum Wages
The proposed bill is counter-intuitive to the concept of business competitiveness, in that the enterprise must produce at its most efficient levels to survive in the market place. In labor-intensive industries, the labor factor is of significant size that the increase in the minimum wages paid could create disruptions in the production process. Thus the answer to this particular question lies on the type industry that the Maryland General Assembly (MGA) satisfies. As an “assembly” labor is the most important factor of production. An increase in the labor rate will increase the overall economic benefits for the laborer but will ultimately bring down the competitiveness of MGA’s products from a total cost perspective. This is supported by economic theory as shown in the illustration below. The equilibrium between demand and supply for labor indicates a wage rate that is too low for suppliers of labor thus causing unemployment. The minimum wage is therefore that wage rate that employers are willing to pay and laborers are willing to take. Increasing the minimum wage of unskilled workers will result in the number of employment to fall for unskilled workers given that the unskilled workers are the least productive of the type of labor in the marketplace.
This is because all other wages must be increased to reflect the minimum wage increase which causes employers to choose whether to employ minimum wage workers (unskilled) or skilled workers. The effect of increasing wages therefore indicates a decrease in employment for mimumum wage workers, contrary to what is claimed by the Economic Policy Institute. However the case may be that the increase in wages for minimum wage employees is merely a substitution of costs, i.e. employers may do away with hiring of more personnel to give way to higher wages. Economic theory does not support employment quantity increase due to minimum wage increase.
Figure 1 The Demand and Supply of Labor
Carl Menger’s Theory of Good
According to Carl Menger and his “Subjective Theory of Value” a particular item is a good if it serves a particular use that is valuable for a particular party. In economic exchanges, the possession of a good does not provide units of satisfaction (utility) but instead provides both exchanging parties with individual satisfaction. In the case of the traveler, the possession of diamonds does not have any use for him since he is dying of thirst. The caravan has no particular satisfaction for excess water and will gladly trade it for diamonds. In both parties exchanged diamonds for water to achieve their respective purposes, then both gain from the trade. This fits into Carl Menger’s Theory of the Good because both parties are satisfied with the exchange and mere possession of the good by the original owner does not present any utility.
Price controls are government imposed restrictions. These restrictions manage what a producer can charge for a particular good or service and are levied by the government for to promote affordability during high and low production periods and to ensure minimum income for producers. Price controls could be a “ceiling” or the highest price that can be charged or a “floor” or the minimum price that can be charged. The position of the Council of Economic Advisors on the misuse of price controls for cattle raisers is correct. When prices are kept artificially lows (instead of allowing market forces to determine price and volume of demand and supply), demand may increase to the point where supply cannot fulfill demand’s requirements thus leading to shortages. This leads to the development of black markets where the prices of the goods that are controlled are higher than the controlled prices, as a reflection of the demand for it. If price controls are removed, the market forces would increase beef prices at an incredible rate that will ultimately shock the economy thus proving more detrimental than the purpose it was supposedly designed for.
Education versus Athletics
This question is a common misconception by people who do not understand the basic principles of economics. Firstly, it is true that athletes are paid more than public school teachers. However the facts indicate why this is so:
- Athletes are paid by private enterprises while teachers are compensated with money taken from people’s taxes
- The amount paid to athletes in the United States is about US$10 billion while the amount paid to public school teachers in the same period is US$173 billion
These two statements highlight why public school teachers are paid less than athletes. Athletes are possess very rare physical characteristics and perform duties of entertainment, a luxury to most everyone. Teachers are numerous in number because the skill of teaching is not uncommon and perform one of the basic human requirements, which is education.
The combination of the number of individuals and the type of purpose they are fulfilling rationalizes the salary gap. However, for Americans to think that an education is less valuable is simply wrong. Education is still, according to Nelson Mandela, the most powerful weapon that can change the world.
Galbraith, JK. 1952. A Theory of Price Control. Cambridge: Harvard University Press.
Ludwig von, M. 2013. The Human Action: A Treatise in Economics. Library of Economics and Liberty. Retrieved from http://www.econlib.org/library/Mises/HmA/msHmA17.html
Rockoff, H. 2013. Price Controls. Concise Encyclopedia of Economics. Retrieved from http://www.econlib.org/library/Enc/PriceControls.html
Schmidtt, J. 2013. The Effect of Minimum Wage Increases. Creative Destruction. Retrieved from http://gecon.blogspot.com/2013/02/effect-of-minimum-wage-increases.html
Vaughn, K. 1998. Austrian Economics in America: The Migration of a Tradition. Google Books. Retrieved from http://books.google.com.ph/books?id=zQx7fHjtOIUC&pg=PA142&lpg=PA142&dq=difference+between+rothbard+and+kirzner+entrepreneur+definition&source=bl&ots=oExKCiX5H8&sig=eP55FxPUw0t0L1Z-Z0ovG_lXgUk&hl=en&sa=X&ei=X_JDUcnHO4O9iAeDhIH4Dw&ved=0CEcQ6AEwBA#v=onepage&q=difference%20between%20rothbard%20and%20kirzner%20entrepreneur%20definition&f=false Retrieved on March 16, 2013