Entrepreneurship Archives • Outliers Academy

Entrepreneurship

Possible Limit of human endurance found

By Guest Post June 8, 2019

by James Gallagher

The ultimate limit of human endurance has been worked out by scientists analysing a 3,000 mile run, the Tour de France and other elite events.

They showed the cap was 2.5 times the body’s resting metabolic rate, or 4,000 calories a day for an average person.

Anything higher than that was not sustainable in the long term.

The research, by Duke University, also showed pregnant women were endurance specialists, living at nearly the limit of what the human body can cope with.

The study started with the Race Across the USA in which athletes ran 3,080 miles from California to Washington DC in 140 days.

Competitors were running six marathons a week for months, and scientists were investigating the effect on their bodies.

Resting metabolic rate – the calories the body burns through when it is relaxing – was recorded before and during the race.

And calories burned in the extreme endurance event were recorded.

The study, in Science Advances, showed energy use started off high but eventually leveled off at 2.5 times the resting metabolic rate.

The study found a pattern between the length of a sporting event and energy expenditure; and that while running a marathon may be beyond many, it is nowhere near the limit of human endurance.

Marathon (just the one) runners used 15.6 times their resting metabolic rate
Cyclists during the 23 days of the Tour de France used 4.9 times their resting metabolic rate
A 95-day Antarctic trekker used 3.5 times the resting metabolic rate

“You can do really intense stuff for a couple of days, but if you want to last longer then you have to dial it back,” Dr. Herman Pontzer, from Duke University, told BBC News.

He added: “Every data point, for every event, is all mapped onto this beautifully crisp barrier of human endurance.

“Nobody we know of has ever pushed through it.”

During pregnancy, women’s energy use peaks at 2.2 times their resting metabolic rate, the study showed.

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Business

The Real Costs of Company Perks & Benefits

By Guest Post May 1, 2019

By Elizabeth C. Tippett

Companies offer all sorts of benefits and extras to attract the most favored workers, from health care and stock options to free food. But all those perks come at a price: your freedom.

There’s a reason labor historians call these perks “welfare capitalism,” a term that originated to describe company towns and their subsidized housing, free classes and recreational activities. Like government welfare, offering any benefits that people come to rely on is also a convenient vehicle to mold their behavior.

And just as Henry Ford sought to transform auto workers through a generous though invasive profit-sharing program, today’s employers also use perks to influence our behavior in subtle and not-so-subtle ways.

The dark side of corporate perks

You might think of compensation in terms of your hourly wage or salary. Companies see it differently.

Back when I drafted employment contracts and policies as an employment lawyer, companies tended to think in terms of “total compensation,” which also included commissions, bonuses, stock options and sometimes benefits like medical insurance and vacation. And that’s where they stand to influence behavior.

Under state and federal law, companies aren’t allowed to mess around with your hourly wage. A company can’t dock an entire day’s pay if you show up five minutes late. Or issue paychecks only once every six months.

However, that’s not true of other types of compensation. Lawyers like me attach all sorts of policies and restrictions on these benefits as a way to influence worker behavior. The aim of such policies generally ranged from a modest goal like getting you to work harder to making it painful to leave for a competitor.

For example, companies such as Facebook, Dropbox, and LinkedIn have offered free food, but it’s not necessarily for employee well-being. It’s for the bottom line. And if your employer offers a gym, free dry cleaning or – heaven forbid – a nap pod, don’t assume it’s an act of charity. As former Zillow CEO Spencer Rascoff observed, perks of this sort mean “that employees are expected to work very long hours and not leave the office too often.”

On the other end of the spectrum, benefits can be laid out in a way to encourage sought-after employees to stay longer. Stock options are typically earned slowly over four years, an especially valuable tool in Silicon Valley, where workers are prone to jumping ship. Vacation never seems to accumulate fast enough for new workers to take holidays off.

Even signing bonuses – purportedly a rewarded for starting a job – are sometimes structured where you have to pay it back if you leave in the first year or two.

The author speaks with Lewis Maltby, president of the National Workrights Institute, about how your boss can legally control what you do outside of work.

Company town, corporate control

But as I learned recently while researching a book about how companies – with some help from courts – exert control over workers, it gets a lot worse. It turns out there is a rich history of employer experimentation with benefits as a behavior-modification device.

Benefits, particularly those that employees deem necessary or exceptionally valuable, enable employers to exercise surveillance over workers and demand behavioral change in ways they could never do through threats alone.

Historically, company housing sat at the sweet spot of valuable and necessary.

If you were operating a new mine in the early 20th century and there was no housing or transportation nearby, you likely had to provide housing. But like stock options or paid vacation today, once companies started offering it, they couldn’t resist the urge to meddle.

For example, company towns commonly restricted the consumption of alcohol, according to historian Angela Vergara. Pennsylvania coal companies even included a provision in their leases requiring workers to move out within 10 days if they went on strike. Not only would the prospect of eviction weigh heavily on workers’ decision to unionize, companies could use the vacated housing for strikebreakers.

And although Henry Ford is famous for paying his workers US$5 a day – an extravagant wage at the time – that’s only half the story. Ford actually paid his workers a wage of just $2.50 day.

The other $2.50 was a profit-sharing dividend. To qualify, a worker had to submit to a home inspection by Ford’s sociological department and allow inspectors to interview his family and friends. Reasons a man might fail such an inspection included debt, having a wife that worked outside the home or being an immigrant who did not speak enough English.

Ford also had an honor roll for employees with the best inspection scores, but even that status was precarious. According to company notations, one worker was booted off the roll for “selling real estate.” Another was dropped for being “drunk” and having a “Polish wedding.”

The author talks to professor Angela Vergara about how company towns sought to influence worker behavior.

Health care and cellphones

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Culture

Stop Idolizing Hustle Culture And Do This Instead

By Guest Post April 30, 2019

by Celinne Da Costa

Whenever you find yourself rushing through life, take a step back and ask: “Why the rush? What am I actually working towards?”

Are you familiar with “the hustle”? It goes something like this…

You wake up. Check your phone. Brush your teeth, go to the toilet, and check your phone again. You get ready for the day. Maybe you go to the gym, do your meditation routine, or check your email… or all of that. You rush to your job or coworking space, where you spend the day working and scarfing down meals in between meetings. When you finally “finish” work (because let’s be real, you’re checking your email after-hours anyway), you go meet a friend or spend the evening watching Netflix or another activity that will help you relax. You go to sleep and do it all over again the next day.

It’s exhausting, but hey, at least you got sh*t done. You’ll get your break someday… right?

I used to think that this type of routine was exclusively reserved for people stuck in 9-5 jobs, and that’s why I quickly ran away from corporate. Since starting my own business a few years ago, I realized that this was not the case.

It seems that everywhere I go, people are suffering from the “hustle culture” pandemic. By hustle culture, I mean the collective urge we currently seem to feel as a society to work harder, stronger, faster. To grind and exert ourselves at our maximum capacity, every day, and accomplish our goals and dreams at a lightning speed that matches the digital world we’ve built around ourselves.

Don’t get me wrong, working hard is important. Being raised by a single immigrant parent who rose out of poverty and worked hard to build a better future for our family, I first-hand witnessed the value of being persistent towards your dreams, never giving up, and constantly striving for a better life. We can’t sit around expecting for our circumstances to improve without putting in the work and effort.

With that being said, I’m seriously questioning whether hours clocked in equals output produced. In both the corporate and entrepreneurial worlds, I’ve watched people run around like chickens with their heads cut off, rushing from one meeting to another, feverishly checking off tasks, and not making time for much other than work or other “productive” activities. Needless to say, under these circumstances, self-care becomes an afterthought.

This attachment to the hustle is doing us more harm than good. Just this year, Americans have hit record-high levels of stress, anxiety, and anger: 55% of Americans report feeling stressed about their lives, which is 20% higher than the global average. Working too hard is costing us our mental and physical health on so many levels.

It makes me wonder, how much of our work is genuinely productive, and how much of it is an addiction to being busy?

I’ve been experimenting with this in my business this year: I’ve worked 40+ hour weeks, as well as 15 hour weeks. I’ve noticed that there is actually little correlation with the hours that I clock in versus the money that I make. In fact, I’ve made twice as much income working half the time enough times to convince me that it’s not about the quantity of hours I’m putting towards my business, but rather the quality.

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Business

Henry Hazlitt in the Long Term: Politics is too important to be taken seriously.

By Guest Post April 27, 2019

By Bob Luddy

The following article is based on my recent lecture at the Mises Institute in Auburn, Alabama, entitled: “Henry Hazlitt’s Long-Term Economic Thinking: Foundation of Entrepreneurial Excellence.” Here I will explore morality as Hazlitt’s foundational theme in economics.

Henry Hazlitt is considered to be one of the best financial journalists of the 20^th century.“He was a giant in financial journalism,” as Jim Grant pointed out in his 2014 Mises Institute lecture entitled “Hazlitt, My Hero.”

Aside from his journalism, Hazlitt was a prolific writer who summed-up economics in “one lesson” in 1946.

Economics in One Lesson was based, in part, on Frederic Bastiat’s essay, What Is Seen and What Is Not Seen, and delves into the importance of aspects of the economy that are never spoken about, because they never happen. Hazlitt goes one step further, summing up economics not simply as a series of transactions with hidden implications, but in terms of long-term effects outliving the short-term effects of every economic principle or policy.

Hazlitt wrote more than twenty books and was the principal editorial writer on finance and economics for the New York Times for twelve years and was a columnist for Newsweek for twenty years. His writing was thoughtful, incisive, and influential. And he played a significant role in supporting, introducing, and explaining the ideas of Ludwig von Mises and Friedrich Hayek.

Though incisive, Hazlitt’s opinions were still subject to criticism. He opposed many popular government initiatives in his day: The New Deal, the Bretton Woods Agreement, and the Marshall Plan. This opposition led to his departure from the New York Times and contributed towards ending his twenty-year-long collaboration with Newsweek.

Henry Hazlitt enabled readers not only to think clearly but correctly. As Hazlitt’s departure from thatNew York Times indicates, organizations and government demand compliance with existing ideas and punish critical thinkers. Hazlitt’s economic thinking was revolutionary, but his thoughts on morality were paramount.

In his book, The Foundations of Morality, Hazlitt defines morality as “not the subordination of the ‘individual’ to ‘society,’ but the subordination of immediate objectives to long-term ones.” As in his understanding of economics, he realized that the long-term interests of the individual would serve the long-term interests of society.

These long-term interests of the individual depend on social cooperation. As he points out: “Social cooperation is the foremost means by which the majority of us attain most of our ends.” (The Foundations of Morality, p. 13.)

These important principles are often lost on our society today. The challenge for entrepreneurs and leaders is to focus on the long term, in spite of tremendous pressure to think only about the short term.

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Apprenticeship

Preparing Learners for the Uncertain Future of Work

By Guest Post April 10, 2019

By Katherine Prince

Continuous learning, cultural awareness, change expertise, adaptable and effective communication and the ability to learn from failure. These are just some of the capabilities that participants in KnowledgeWorks’ convenings on the future of work identified as being important for graduates. Finding resources to solve problems, time and project management, reflective leadership and a sense of responsibility to the broader community also promised to help all young people thrive no matter what future of work emerges.

That question – what future of work will emerge – is unanswerable, making it critical to help young people, along with other education and employment stakeholders, plan for multiple possible futures. From today’s vantage point, we can identify two critical drivers of change shaping the future of readiness for further learning, work and life: the rise of smart machines and the decline of full-time employment. But we cannot yet know what extent of technological unemployment we will face or how much support individuals will have in navigating the changing employment landscape.

A New Foundation for Readiness

In the face of such uncertainties, stakeholders need to help people develop our uniquely human attributes along with developing flexible skills that we can apply across settings. Putting social-emotional skill development at the center of learning promises to help individuals develop the foundation necessary to navigate uncertainty throughout their lives. The new foundation for readiness shown below illustrates how redefining readiness from the inside out – focusing on human development rather than attempting to prepare learners for any particular future of work – can provide a platform for future success.

This new foundation for readiness is grounded in the human qualities that are most central to our relationships with one another and which are most difficult to code. Social-emotional skill development will need to be supported in integrated ways alongside the mastery of content and the application of skills and knowledge to specific contexts. Education institutions will need to balance supporting learners in preparing for their first-careers while also helping them develop the adaptability and resilience needed to navigate the changing economy and the ways of thinking necessary to address complex problems.

Flipping Education’s Focus

Establishing a new focus on feeling and relating will help education institutions and systems align with a future of readiness in which foundational skills and practices will be more important and enduring than specific content or job- and task-related skills.

For K-12 education, flipping the focus of learning to whole-person development could mean that:

Curriculum needs to be inverted, with core social-emotional competencies shaping the design of inquiry projects and the school and classroom rituals that anchor the learning climate and culture.
Students need to be grouped in new ways to follow flexible learning pathways.
Classrooms need to become more fluid and open, enabling new ways of structuring learning.
School schedules need to be transformed to allow for more interdisciplinary collaboration, deep reflection, and personalized learning.
Educators’ roles need to be reconfigured to focus less on content or grade specialization and more on foundational skills and practices, as well as on interdisciplinary, phenomenological or challenge-based learning.
Community partners need to become key assets for introducing new kinds of learning experiences that stretch students’ comfort zones and expand their aspirations.
K-12 schools and districts need to explore where and when it may be more appropriate for them to serve as brokers, rather than direct providers, of learning experiences.

At the postsecondary level, institutions might need to:

Focus more on supporting deep personal development as well as context- and discipline-specific skills and knowledge.
Diversify offerings and business models, with a multitude of formats and structures engaging learners and increasing access.
Contribute to student-driven and student-designed ecosystems of support that evolve over time and reflect students’ strengths, weaknesses, and needs.
Help students plan for both their careers and their lives and respond to changing conditions.
Enable learners to weave in and out of learning experiences as their career development needs dictate.
Collaborate more extensively with workplace partners.
Shift the focus of faculty professional development toward supporting students’ development of foundational skills and practices and attaining ongoing learning related to relevant workplace skills.

Strategies for Redefining Readiness

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Accounting

@davygreenberg Explains the High Cost of Expertise

By Guest Post March 28, 2019

By Suzanne Lucas

Davy Greenberg summed up the feelings of a lot of us out there who make our living offering services directly:

The tweet went viral (with 36,000 retweets and 123,000 likes at this writing) and evoked a lot of emotion. This is something a lot of us can relate to.

Because I freelance, I’m always talking with new people for potential jobs. Often the conversation goes like this:

Potential client: I need someone to do A, B, and C by next Thursday.

Me: Okay, I can do that for you. It will cost $300.

Potential client: Great!

But sometimes the conversation goes like this:

Potential client: I need someone to do A, B, and C by next Thursday.

Me: Okay, I can do that for you. It will cost $300.

Potential client: What???? I budgeted $25 for this!

Me: Okay. Best of luck to you!

Potential client: I could get someone on Fiverr to do this for $25!

Me: Okay. That sounds like a great idea!

Potential client: Can you do it for $25?

Me: Nope.

Potential client: But I really like your writing!

Me: Thank you. It will be $300.

There are plenty of people who will do what I do for less money. There are people who do what I do for more money. The question is, are you getting what you pay for?

Often, in creative fields (which Greenberg works in) people expect that because anyone can write a paragraph, take a picture, or sing karaoke, the people who do it professionally are really doing it as a hobby and it should be free or at least close to free. Because you do it for fun, we must be doing it for fun.

People don’t generally think, “Gee, my doctor loves medicine! That’s why she went to medical school! She should take my appendix out for free!” It’s a ridiculous proposition.

Professionals in all fields spent decades perfecting their crafts. Just because they can do something quickly, doesn’t mean they aren’t worth the money.

I pay my accountant what seems to be an exorbitant fee to do my taxes each year, but I don’t complain. Why? Because my taxes are complicated as income is earned across two continents and multiple currencies and are partly in English and partly in German. Could I do it myself? Probably, but while she can do my taxes in a couple of hours, it would take me a week’s worth of labor–if not more, and I couldn’t guarantee they would be correct. When you look at it that way, happily paying her bill is the way to go.

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Business

How to Start a Business: A Step-by-Step Guide

By Guest Post March 21, 2019

by Bennett Conlin

Talk to any entrepreneur or small business owner and you’ll quickly learn that starting a business requires a lot of work. Generating a business idea is a great starting point, but an idea doesn’t become a business without effort. Some budding entrepreneurs understand the effort necessary to create a business, but they might not be familiar with the many steps required to launch a business venture. If you’re willing to put in the effort to build a business, you’re going to want to know the steps needed to reach your goals. Tasks like naming the business and creating a logo are obvious, but what about the less-heralded, equally important steps? Whether it’s determining your business structure or crafting a detailed marketing strategy, the workload can quickly pile up. Rather than spinning your wheels and guessing at where to start, follow this 10-step checklist to transform your business from a lightbulb above your head to a real entity.In this article…

1. Refine your idea.

If you’re thinking about starting a business, you likely already have an idea of what you want to sell, or at least the market you want to enter. Do a quick search for existing companies in your chosen industry. Learn what current brand leaders are doing and figure out how you can do it better. If you think your business can deliver something other companies don’t (or deliver the same thing, but faster and cheaper), you’ve got a solid idea and are ready to create a business plan.

“In the words of Simon Sinek, ‘always start with why,'” said Glenn Gutek, CEO of Awake Consulting and Coaching. “It is good to know why you are launching your business. In this process, it may be wise to differentiate between [whether] the business serves a personal why or a marketplace why. When your why is focused on meeting a need in the marketplace, the scope of your business will always be larger than a business that is designed to serve a personal need.”

Another option is to open a franchise of an established company. The concept, brand following, and business model are already in place; all you need is a good location and the means to fund your operation. Regardless of which option you choose, it’s vital to understand the reasoning behind your idea. Stephanie Desaulniers, director of operations and women’s business programs at Covation Center, cautions entrepreneurs from writing a business plan or worrying about a business name before nailing down the idea’s value.

“Many people think they have a great idea and jump into launching their business without thinking through who their customers will be, or why these people should want to buy from or hire them,” Desaulniers said. “Second, you need to clarify why you want to work with these customers – do you have a passion for making people’s lives easier? Or enjoy creating art to bring color to their world? Identifying these answers helps clarify your mission. Third, you want to define how you will provide this value to your customer and how to communicate that value in a way that they are willing to pay.”

During the ideation phase, you need to iron out the major details. If the idea isn’t something you’re passionate about or if there’s not a market for your creation, it might be time to brainstorm other ideas.

2. Write a business plan.

Once you have your idea in place, you need to ask yourself a few important questions: What is the purpose of your business? Who are you selling to? What are your end goals? How will you finance your startup costs? These questions can be answered in a well-written business plan.

A lot of mistakes are made by new businesses rushing into things without pondering these aspects of the business. You need to find your target customer base. Who is going to buy your product or service? If you can’t find evidence that there’s a demand for your idea, then what would be the point?

Conducting thorough market research on your field and demographics of potential clientele is an important part of crafting a business plan. This involves conducting surveys, holding focus groups and researching SEO and public data. A guide to conducting market research can be found on our sister site, Business.com. It’s also a good idea to consider an exit strategy as you compile your business plan. Generating some idea of how you’ll eventually exit the business forces you to look to the future.

“Too often, new entrepreneurs are so excited about their business and so sure everyone everywhere will be a customer that they give very little if any, time to show the plan on leaving the business,” said Josh Tolley CEO of both Tribal Holdings and Kavana. “When you board an airplane, what is the first thing they show you? How to get off of it. When you go to a movie, what do they point out before the feature begins to play? Where the exits are. Your first week of kindergarten, they line up all the kids and teach them fire drills to exit the building. Too many times I have witnessed business leaders that don’t have three or four pre-determined exit routes. This has led to lower company value and even destroyed family relationships.”

A business plan helps you figure out where your company is going, how it will overcome any potential difficulties and what you need to sustain it. A full guide to writing your plan can be found here, and when you’re ready to put pen to paper, these free templates can help.

3. Assess your finances.

Starting any business has a price, so you need to determine how you’re going to cover those costs. Do you have the means to fund your startup, or will you need to borrow money? If you’re planning to leave your current job to focus on your business, do you have money put away to support yourself until you start making a profit? Find out how much you’re going to need.

Experts generally agree that startup businesses often fail because they run out of money too quickly before turning a profit. It’s never a bad idea to overestimate the amount of startup capital you need, as it can be a while before the business begins to bring in sustainable revenue. Additionally, don’t overspend when starting a business. Understand the types of purchases that make sense for your business and avoid overspending on fancy new equipment that won’t help you reach your business goals.

“A lot of startups tend to spend money on unnecessary things,” said Jean Paldan, founder and CEO of Rare Form New Media. “We worked with a startup that had two employees but spent a huge amount on office space that would fit 20 people. They also leased a professional high-end printer that was more suited for a team of 100 (it had keycards to track who was printing what and when). Spend as little as possible when you start and only on the things that are essential for the business to grow and be a success. Luxuries can come when you’re established.”

If you need financial assistance, a commercial loan through a bank is a good starting point, although these are often difficult to secure. If you are unable to take out a bank loan, you can apply for a small business loan through the Small Business Administration (SBA) or an alternative lender.

Startups requiring significant funding upfront may want to consider an investor. Investors can provide several million dollars or more to a fledgling company, with the expectation that the backers will have a hands-on role in running your business. Alternatively, you could launch an equity crowdfunding campaign to raise smaller amounts of money from multiple backers. Crowdfunding has helped numerous companies in recent years, and there are dozens of reliable crowdfunding platforms designed for different types of business. It’s not challenging to find a good option for your business should you elect to launch a crowdfunding campaign.

You can learn more about each of these capital sources and more in our guide to startup finance options.

4. Determine your legal business structure.

Before you can register your company, you need to decide what kind of entity it is. Your business structure legally affects everything from how you file your taxes to your personal liability if something goes wrong.

If you own the business entirely by yourself and plan to be responsible for all debts and obligations, you can register for a sole proprietorship. Be warned that this route can directly affect your personal credit. Alternatively, a partnership, as its name implies, means that two or more people are held personally liable as business owners. You don’t have to go it alone if you can find a business partner with complementary skills to your own. It’s usually a good idea to add someone into the mix to help your business flourish.

If you want to separate your personal liability from your company’s liability, you may want to consider forming one of several types of corporations. This makes a business a separate entity apart from its owners, and, therefore, corporations can own property, assume liability, pay taxes, enter into contracts, sue and be sued like any other individual. One of the most common structures for small businesses, however, is the limited liability corporation (LLC). This hybrid structure has the legal protections of a corporation while allowing for the tax benefits of a partnership.

“Corporations, especially C-corporations, are especially suitable for new businesses that plan on ‘going public’ or seeking funding from venture capitalists in the near future,” said Deryck Jordan, managing attorney at Jordan Counsel.

Ultimately, it is up to you to determine which type of entity is best for your current needs and future business goals. More details about the different business structures can be found here. If you’re struggling to make up your mind, it’s not a bad idea to discuss the decision with a business or legal adviser.

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Apprenticeship

Patent Education Buys Time and A Foundation for Financial Rewards

By Guest Post March 8, 2019

by Clare Donovan

Meaningful innovation education exposes kids to this vital element.

I love watching the rise of makerspaces in schools. More and more students have access to 3D printers, kid-friendly coding programs, and other great technical tools. This investment in STEM project-based learning means that students with all kinds of learning styles are directly engaged in issues critical to their future.

But there’s a key ingredient missing. When you give students access to awesome tools and the freedom to design, what happens when they hit on something great? Most often, that’s where the project stalls. In the business world, that’s when a patent comes in.

Teaching patenting concepts at a young age is not only feasible, but I believe it’s a way to help women and other underrepresented groups play a bigger role in tech.

Tinker While You Learn

At the Future of Education Technology Conference in Orlando, Fla., I saw some amazing curricula and technology demos [Ed. note: Clare spoke there]. Schools have a huge selection of tools to teach engineering to young students.

Engineering, however, is only one component of the innovation process. Creativity, business and the law also play a critical role. Patents motivate people to invest in the arduous process of inventing by giving them economic ownership for continued development. For a startup, a patent buys you time to do the hard work of bringing your idea to life. Patent education is an important ingredient in helping kids become real-world problem solvers.

Patent education also lays a foundation for financial rewards in the workplace. The U.S. Patent and Trademark Office finds that wages in patent-based industries are 74% higher than other verticals, and this premium is growing. This is according to the USPTO’s latest update to “Intellectual Property and the U.S. Economy.”

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Business

Why Bastiat Deserves to Be in the Pantheon of Great Economic Theorists

By Guest Post March 8, 2019

By Donald J. Boudreaux

Frédéric Bastiat (1801-50) is known today among economists—if he is known at all—as at best a brilliant polemicist. An economic theorist he most certainly was not—such is the common opinion.

I believe this common opinion to be mistaken. To explain why first requires a discussion of the nature of a theory.

A Theory Is a Story

As I tell students in my Principles of Microeconomics courses, a theory is a story that assists us in making better sense of reality. And a theorist is a storyteller who offers this assistance.

A story that explains the price only of bread is not a proper theory of prices, even if it is highly believable.

Stories, of course, differ in their believability. A story that explains, say, the Industrial Revolution as being the result of new knowledge imparted to us by aliens from another galaxy is completely unbelievable. Some other, more believable story is called for—one, say, that features a change in people’s attitudes toward commerce and innovation.

But for a story to deserve to be called a theory requires that it also be generalizable.

In economics, supply-and-demand analysis is a general account of how prices are formed and change. It’s not a story about the formation of the price of only one item, such as bread. It’s an outline for telling believable stories about the formation of all prices—from the prices of toy planes to those of jumbo jetliners, from the wages earned by motel maids to those earned by Tom Hanks. A story that explains the price only of bread is not a proper theory of prices, even if it is highly believable.

To be generalizable, a story whose creator wishes it to be regarded as a serious theory must make that story abstract. Being abstract, however, makes the story—standing alone—barren. As such, it engenders no understanding of the physical or social world. But it proves itself to be a good theory if, when relevant details of reality are added to it, those of us who encounter this story go, “Aha! Now I understand reality better than I did before!”

The core purpose of all theories is the creation of improved understanding. A theory that does not cause those who hear or read it to go, “Aha!” is worthless.

Bastiat the Theorist

And so we return to Bastiat. He’s one of history’s most brilliant tellers of economic stories. This fact, I’m convinced, justifies calling Bastiat a great economic theorist.

Who can read Bastiat’s satirical portrayal of sunlight as an unfairly low-priced import and not go, “Aha!”

Consider Bastiat’s famous 1843 “Petition of the Manufacturers of Candles.” In this short essay, Bastiat radiantly conveyed economists’ understanding that artificially contrived scarcities make the general population worse off even if they increase the wealth of a small handful of individuals. Who other than the most benighted protectionist can read Bastiat’s satirical portrayal of sunlight as an unfairly low-priced import and not go, “Aha! Of course, inexpensive imports that ‘flood’ into a country no more impoverish that country than does the light sent to us free by the sun!”

Another example is Bastiat’s even-shorter essay “A Negative Railway.” Here Bastiat revealed the flaw in the argument of a gentleman who insisted that if a railroad connecting Paris to Bayonne were forced to have a stop at Bordeaux, the wealth of the French people would be enhanced. The hapless target of Bastiat’s brilliance based his conclusion on the correct observation that forcing trains to stop at Bordeaux would increase the incomes of porters, restaurateurs, and some other people in Bordeaux.

Yet Bastiat didn’t settle for drily noting that, after paying these higher incomes, railways and their passengers would have less money to spend on goods and services offered by suppliers in locations other than Bordeaux. Instead, Bastiat followed the proposal’s logic in a way uniquely revealing: If forcing trains to stop at Bordeaux will increase the total wealth of the people of France, so too will the total wealth of the people of France be increased if trains are obliged to stop also at Angoulême. And if also at Angoulême, then the French will be enriched even further if a third stop is required at Poitiers. And if at Poitiers, then at each and every location between Paris and Bayonne.

Bastiat revealed the proposal to be flawed by showing that, if its logic were sound, the railway that would do the most good for the French people is one that is nothing but a series of stops—a negative railway!

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Accounting

Why Does Amazon Pay $0 in Federal Income Taxes?

By Guest Post February 22, 2019

by Tyler Cowen

Amazon is valued at nearly $800 billion, yet the company reportedly paid $0 in federal income taxes last year. Why?

The main reason Amazon as a corporate entity does not pay much in taxes is because the company so vigorously reinvests its profit. The resulting expensing provisions lower their tax liabilities, in some cases down to zero or near-zero.

That is, in fact, the kind of incentive our tax system is supposed to create, and does so only imperfectly, noting that many economists have suggested moving to full expensing.

(NB: You can’t hate both share buybacks and profit reinvestment!)

Amazon pays plenty in terms of payroll taxes and also state and local taxes. Nor should you forget the taxes paid by Amazon’s employees on their wages. Not only is that direct revenue to various levels of government, but the incidence of those taxes falls somewhat on Amazon, which now must pay higher wages to offset the tax burden faced by their employees.

Check out the Foundtation for Economic Freedom

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