Entrepreneurial Mice: Outwardly & Visibly

In an earlier blog I took a nip at the four factors of economic production. Here I add a fifth factor, the one suggested by Alan Greenspan during his pissed-off libertarian period. The good doctor proposed that to land, labor, capital, and entrepreneur we ought to add government, and observed further that of the five, only government is authorized to carry a gun. Greenspan’s lamentation was downright orgasmic to his fellow libertarians, to whom government, armed or unarmed, was the devil in disguise. Later, urged by the realities of his increased responsibilities, Greenspan abandoned his suspicions of government, and thus fell from grace with the Smithian “conservatives.” Nevertheless, laying aside the Chairman’s perfidious flip-flop, I will, in the remarks that follow, leave government where he placed it: in the guard tower overlooking the “circus ring” (or “prison yard” if you prefer) where lands, labors, capitals, and entrepreneurs struggle for balance (or dominance).

What we have here is a new way people might be able to think about economic things after they get clear about why they believe what they believe. I call this oration “outward and visible” because the views expressed here have a sort of objectivity about them. People can understand and discuss them without having to define terms and adjust to other people’s biases. Differences of opinion may still arise, but if I have written well, the differences will eventually give way to Reason.

When economists speak of land they typically refer to land (and/or rent) in the context of business ventures. They seldom refer to the land occupied by the houses and garages of home owners as business property. To the economist, private homes are commodities, things bought and sold, just like automobiles, washing machines, and chocolate bars. But look sideways – or as Mark Twain said, “through a glass eye darkly” – at the private home and you will see an enterprise just as much a business as the largest international corporation. The home owner has borrowed capital to invest in his home, he labors to maintain or increase its value, and he certainly has leased land as a part of the contract he signed when he purchased his home. Finally, the home owner took a significant risk when he contracted to buy his home, a gamble that clearly identifies him as an entrepreneur of the most fundamental sort. He is a risk taker.

The magic of free market capitalism joins all economic enterprises – including home ownership – into an inter-dependent network. The enterprises support each other with their products and services, sometimes directly, sometimes indirectly, and in doing so, develop a productive capacity much greater than would be possible if they each tried to do everything for themselves. The auto manufacturer, for example, depends on steel makers, plastics manufacturers, tire companies, insurance companies, the oil industry, and if the truth were known, practically every other industry. If General Motors attempted to provide all these supporting commodities and services for itself, chances are high that the cost of producing cars would be much higher. Even at the level of the great corporations, the division of labor leverages production.

All industries depend on labor, and in an ideal economy, all labor would be supplied by the enterprises collectively referred to as “home ownership.” Sociologists believe home ownership greatly enhances social stability, and common sense suggests they’re right. Consequently, land devoted to home-owning labor is much more productive than land beneath the feet of “vagabond” labor. It thus follows, also from common sense, that government, as an economic factor, should be going out of its way to encourage home ownership.

Many governmental actions toward this end appear to be aimed in the right direction, but sometimes those actions do not favorably compare with what government does for conventional enterprises. I have in mind the income tax deduction afforded home owners for the mortgage interest they pay to lenders. This deduction benefits the home owner, but only if the sum of all his deductions exceeds the amount of a fixed standard deduction. But the same tax code that limits the home owner’s interest deduction permits General Motors to deduct its interest payments without limitation. The code also permits GM to deduct all of its other operating expenses, without regard to a fixed limit. GM may, for example, deduct money spent to maintain its lands and land-like property. The home owner cannot make similar deductions. A thorough analysis of the federal tax code would reveal many more instances in which it treats corporations and home owning entrepreneurs differently, with the differences almost always favoring the corporations.

At first look, the differences in the way the tax code treats home owners and corporations would appear to be justified; corporate taxable income cannot be computed without deducting the corporation’s expenses. But this fact only accentuates the unfairness. The notion of a “gross income” from which operating expenses are to be deducted, applies to both corporations and home owners. But corporations -- and not home owners -- are permitted to deduct all their operating expenses. If the tax law treated corporations and home owners the same, home owners could deduct all their subsistence expenses, paying income tax only on monies spent for luxury items and savings. That is, the home owner would pay taxes only on his net income, same as the corporation.

Local governments also seem aware of the vital role of home ownership in the economy. Zoning laws strike me as the most common and beneficial manner in which local administrations become involved with home-owning entrepreneurs. But even here, the benefits of home ownership are not always kept in focus. The planning boards do their planning under pressure from elected boards of supervisors (or other ruling parties) to achieve objectives that sometimes lie in the wrong direction. The rulers here in Madison County, Virginia (where we have swinging bridges) just passed a binding regulation restricting land owners to “four-in-ten,” meaning that the owners of a plot of land have the right to divide their land into only four (or less) smaller plots in any ten year period. I’m reasonably convinced that by this act they seek to maintain the rural character of this beautiful part of the world, but who knows for sure? They may have been aiming to further what appears from others of their actions to be their primary purpose in governing – to minimize the number of kids moving into the county.

If you wonder why they would want to do that, well, think about it. The largest single slice of the county’s budget goes to the school system, and the cost of running the schools is proportional to the number of children to be educated. So these decentralized central planners, while they would challenge to a duel anyone who publicly branded them as socialists, see no problem in restricting an owner’s use of his land, employing pretty much the same sorts of controls (minus the firing squads) Hitler, Stalin, Mussolini and other notables of the socialist persuasion used to enforce their rules. I’m reasonably certain that similar purposes figure into the schemes of local planners everywhere. As one of the local bucolic characters might say, “Them damn commies is ever’where!”

But zoning laws have their uses. Nobody would want a slaughter house next door to their home, and most people would see the desirability of maintaining beautiful mountain vistas, or restoring the antique loveliness of an historic town. Those are values that supersede economic concerns. They constitute the essence of the nation's most fundamental purpose. The nation is not in business to make stuff, which is another way of saying, the nation is not about seeking economic balance. The nation is about creating circumstances that make it possible for people to be happy. If the rights of a person who wants to build a slaughter house have to be restricted in the public interest, the average citizen might well ask, “What’s the problem?”

Well, that is the problem! Every act of government involves an abridgement of freedom. Every tax constitutes an appropriation of property, every law, a restriction of individual desire. And every pistol-packing governmental tradeoff of protected rights for individual privilege virtually assures that some part of the citizenry will get nothing in return for the trade. Some people -- like those miscreants who want to build a slaughter house over your back fence -- will even be denied the free use of their money to develop a legal business. Perhaps it was not idealism that led Jefferson (or whoever) to utter that classic statement about the best government being the one that governs least. That line may have been spoken in recognition of the difficulty governments face when they are forced to make decisions that affect people’s protected rights. The government that governs least governs easiest.

Governing a people who are existentially free is a difficult task, especially when honestly undertaken.