“Among the states which purportedly ratified the 16th Amendment, at least four of them have overturned state income taxation on the basis that earning a living is a fundamental right which cannot be taxed,” continues Hart. A tax on one’s wages is a form of slavery; it is literally a tax on a person’s right to exist.

- The Plunderbund’s Persecution of Phil Hart

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This is why the destruction of states’ rights was so devastating. Reasoning can pop up anywhere. A man who does not own his own labor is truly a slave.

The Subjectivist Revolution in Economics Continues

Humans act and they act purposefully: this is the axiom of action proposed by Ludwig von Mises, teacher of Hayek. From this he claimed that the whole of economics could be deduced. As Mises shows, in order to be, we act purposefully. Not being, we would not act, indeed we would not exist. We act upon satisfying our most urgent needs first, then our second most urgent needs, and so on a so forth, ranking our preferences, with the most urgent needs/demands being satisfied first, the least urgent, and the furthest away in time. From this hierarchy we derive the law of demand, the downward sloping demand curve, the law of diminishing marginal utility (see here for a good illustration) and on and on it goes. Lord Lionel Robbins in a masterful 1932 book, The Nature and Significance of Economic Science shows in very clear terms how all the laws of Economics are derived from the a-priori thought process.

To try to refute it, you cannot, as you act purposefully to do so. Just as Pythagoras’s Theorem is implied in the concept of a right angle triangle – and we knew about the concept of the right angle triangle before Pythagoras “discovered” his Theorem – so, too, do the laws of economics flow from the one irrefutable axiom that humans act purposefully. It is a bit like saying Darwin “discovered” the Theory of Evolution, when what he actually did was articulate it and find very plausible data sets to help explain it to the sceptical mind. Evolution was always there.

So What can this Axiom tell us About Entrepreneurship?

When we act, we choose to satisfy our most urgent needs first, and we forego other opportunities which form our subjective costs. Action implies a sacrifice: what opportunity you forgo is your cost, and what you hope to gain is more than your cost: this is your entrepreneurial profit. This entrepreneurial profit does not have to be measured in money; it can be the choice between going to the theatre or staying at home and watching a TV program.

The entrepreneur is someone who is good at generating entrepreneurial profit, not only for himself but in the way he/she can help many more others in achieving and consuming the results of entrepreneurial profit. He is more alert at spotting opportunities that will satisfy peoples most urgent needs in quicker and in better formats, and for this he is rewarded usually with more money for his efforts.

According to Jesus Huerta De Soto in his book called Socialismo Calculo Economico Y Funcion Empresarial” 1992 soon to be published in English by Edward Elgar in Association with the IEA and called: “Socialism, Economic Calculation and Entrepreneurship” 2010, there are six characteristic of the information and knowledge that the entrepreneur captures to use to provide better goods and services to all in society.

Knowledge is Subjective and not Objective and Scientific

I have just watched my local farmer bring in a grass crop frantically in 3 days as he assessed a window of opportunity for him to do so, since rain was coming. He could not send this up to a State planner to make a decision for him – only his local knowledge about this particular time and circumstance, and his informed intuition re the weather could lead to this decision. He has crop that he can sell now. A planner in Whitehall would neither have all the information necessary nor respond quickly enough to make this all happen.

Knowledge is Exclusive and Dispersed

In my farmer example, this knowledge about when to bring the crop in is exclusively his and resides in him alone.  In the same way, knowledge across the whole economy is broken up into little pockets of subjective knowledge held by millions of different people.

Knowledge is Tacit and it Cannot be Articulated

My farmer’s knowledge is tacit and in him, yet he probably cannot objectively articulate why he is doing it. Michael Oakeshott in “Rationalism in Politics”, 1962, gave us a very good example of a chef who is after all only following a formulaic procedure of putting together a recipe, so we should all be able to add X of this to Y of that and cook at 200 degrees for 10 mins, but the latent talent and know-how of a uber chef, such as Gordon Ramsey, will allow him to be a great chef – just as it will enable me, following those exact same instructions, to be a very average cook.

Entrepreneurship is Creative

There is no cost to an entrepreneurial idea, it is created ex novo. Bill Gates, when he created his first operating system, had his vision and his thought process, the idea, and then he got creating.  Profits are thus created new and from nothing.

The Creation of New Information

Each creative new act of entrepreneurship creates new information which is used by others to profit them as well. A new software solution created by the creative minds of Apple alerts all their users to new ways of doing things that benefit them in a quicker, faster and better way.

I recently had a conversation with a potential entrepreneur who has identified an abundant source of farm waste product that could be excellent for fish feed. If his business is developed, farmers will suddenly be made aware that what was once a cost to get rid of this waste product cannot be a source of revenue for him. Thus he will adapt his farming processes to now harvest this waste and costly product for profit. The fish farmers will eagerly await this new source of protein and adapt their newer and better buying accordingly.

The Transmission of Information

Although the price system is objective and allows the allocation of resources, the fish farmer does not need to know all the subjective information of the entrepreneur who has developed the new feed out of the farms’ waste, just that he can buy it.  Likewise, the farmer does not need to know the detail of how it is going to be made useful to the fish farmer. All this knowledge is subjective and the briefest communication of it happens to facilitate trade.

Entrepreneurship is the foundation of society in that it insures the co-ordination of individuals’ behaviours. Without it, society would not exist.

Competition and Entrepreneurship

There is always a competitive and  on-going process of rivalry and discovery as this society-wide coordination process happens. It is limitless and produces progress if left uninterrupted. It is the single most important process which units society and permits its harmonious advancement.

The Division of Knowledge v the Division of Labour

The division of labour as suggested by Adam Smith shows us how, in a pin factory, if people concentrate on certain tasks and specialise, more production happens. This is an objective measure. Underneath this, and prior to it, is the subjective division of knowledge. In-depth knowledge is held in widely dispersed formats, often tacitly, precluding its articulation across society; thus it is impossible for any one person body or machine or government department to know all of this information. Also, only tiny amounts need to be communicated to make coordination in society possible. So Huerta De Soto introduces a new concept into the body of knowledge concerning economics: the universal division of knowledge that exists as a deduction from the axiom that humans act and takes the subjectivist revolution started by Menger into our very understanding of the division of labour. He also moves man on from being the Robbinsian homo oeconomicus to the homo empresario. Acting man is entrepreneurship.

Once again Huerta De Soto has given some great new insights into economics in the field of economics. He has built on the shoulders of Adam Smith , Mises, Hayek and Kirzner to great effect to knock the objective division of labour off its pedestal and put in its place the division of knowledge. This is what Einstein did to Newton in physics. Both still have their place, but the latter being of more fundamental importance.

Sumo stable in Tokyo, Japan: you don’t need to be a superstar to use the Superstar Effect.

The following is a guest post by Cal Newport, MIT Ph.D and all-around whiz on competing against the odds.

His discussion — and suggested uses — of the “superstar effect” and corollary are mirrored in what I tell first-time start-up founders:

Most of the time, it’s not enough to be better. You need to be different.

Enter Cal Newport…

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Earlier this year, just 2,300 of 32,000 applicants to Stanford University were accepted — a rate of 7.2%, the lowest in the school's history.

The students who survived this screening are phenomenally accomplished. A quarter had SAT math scores higher than 780, and over 90% had high school G.P.A.'s above 3.75, which works out, more or less, to straight A's over four years of schooling. And these weren't easy A's: the average applicant to a top-tier university takes an overwhelming volume of demanding AP or IB-level courses. (Not surprising, considering that the Stanford admissions departments ranks the "rigor of secondary school record" as "very important" in their decision.)

If you eliminate recruited athletes and the children of the rich and famous from this pool — categories that receive special consideration — these numbers become even starker. In short, for the average, middle-class American high school senior, applying to Stanford is like playing the lottery.

Which is why Michael Silverman proves baffling.

When Michael, a student from Paradise Valley, Arizona, applied to Stanford, his G.P.A. put him in the bottom 10% of accepted students. His SAT scores fell similarly short. "Standardized testing isn't my strong point," he told me. Perhaps more surprising, Michael avoided the crushing course load that diminishes the will of so many college hopefuls, instead taking only a single AP course during the dreaded junior year. He kept his extracurricular schedule equally clean — joining no clubs or sports and dedicating his attention to no more than one outside project at any given time.

Michael's rejection of the no pain, no gain ethos surrounding American college admissions is perhaps best summarized by his habit of ending each school day with a 1 – 2 hour hike to the summit of nearby Camelback Mountain. While his peers worked slavishly at their killer schedules, Michael took in the view, using his ritual as a time to "chill out and relax."

Despite this heretical behavior, Michael was still accepted at Stanford. To understand why, I will turn your attention to a little-known economics theory that changes the way we think about impressiveness. To get there, however, we'll start at an unlikely location: the competitive world of professional opera singers.

The Opera Singer and the Valedictorian

Juan Diego Florez cemented his reputation as a top operatic tenor during a 2008 performance of Gaetano Donizetti's La Fille du Regiment. Among professional singers, Donizetti's masterpiece is known as "the Mount Everest of opera"; a reputation due, almost entirely, to a devilishly tricky aria, "Ah! Mes amis, quel jour de fete," that arrives early in the first act. The aria demands the tenor to hit nine high C's in a row — a supremely difficult feat. To avoid embarrassment, most performers resort to the far easier natural C.

Not Florez.

In his 2008 performance of Donizetti, at the Metropolitan Opera House, Florez hit all nine notes. The acclaim was so overwhelming that he was summoned back to the stage for an encore, overturning the Met's long-standing ban on the practice.

As a top opera singer, we can assume that Florez does well for himself financially (likely on the order of 5-digit paydays per performance), but not lavishly well. Put another way: he's well-off but not wealthy.

Then there are the superstars.

In 1972, a young tenor by the name of Luciano Pavarotti also made a name for himself performing Donizetti at the Met. Like Florez, he too hit the high C's. But there was something extra in Pavarotti's voice. The audience at the Met in 1972 did more than demand an encore from Pavarotti, they weren't content until he had returned to the stage seventeen times! In writing about Florez's 2008 performance, the New York Times noted: "If truth be told, it's not as hard as it sounds for a tenor with a light lyric voice like Mr. Florez to toss off those high C's…[I]n the early 1970's, when Luciano Pavarotti…let those high Cs ring out, that was truly astonishing."

In other words, both Florez and Pavarotti are exceptional tenors, but Pavarotti was slightly better — the best among an elite class. The impact of this small difference, however, was huge. Whereas we estimated that Florez was well off but not wealthy, when Pavoratti died in 2007, sources estimated his estate to be worth $275 to 475 million.

In a 1981 paper published in the American Economics Review, the economist Sherwin Rosen worked through the mathematics that explains why superstars, like Pavarotti, reap so many more rewards than peers who are only slightly less talented. He called the phenomenon, “The Superstar Effect.”

Though the details of Rosen's formulas are complex, the intuition is simple: Imagine a million opera fans who each have $10 to spend on an opera album. They're trying to decide whether to buy an album by Florez or Pavarotti. Rosen's theory predicts that the bulk of the consumers will purchase the Pavarotti album, thinking, roughly: "although both singers are great, Pavarotti is the best, and if I can only get one album I might as well get the best one available." The result is that the vast majority of the $10 million goes to Pavarotti, even though his talent advantage over Florez is small.

Once identified, The Superstar Effect turned up in a variety of unexpected settings, from the sales of books to CEO salaries. It was found to apply even in settings that have nothing to do with financial transactions. In a particularly compelling example, a researcher named Paul Atwell, publishing in the journal Sociology of Education in 2001, studied the Superstar Effect for high school valedictorians.

Atwell imagined two students both with 700s on their various SAT tests. The first student was the valedictorian and the second student was ranked number five in the class. Rationally speaking, these two students are near identical — the difference in G.P.A. between the number one and number five rank is vanishingly small. But using statistics from Dartmouth College, Atwell showed that the valedictorian has a 75% of acceptance at this Ivy League institution while the near identical fifth-ranked student has only a 25% chance.

In other words, in many fields, it pays disproportionately well to be not just very good, but the best.

Hacking the Superstar Effect

Taking a step back, we likely agree that it's an interesting finding that being the best has a hidden advantage. If reaping this advantage, however, requires becoming class valedictorian or honing a brilliant singing voice — both staggeringly difficult feats — it's doesn't seem all that applicable.

This is where Michael Silverman reenters the picture.

The details of his story reveal a crucial addendum that makes the power of the Superstar Effect available to most people. I call this addendum The Superstar Corollary, and it's here I turn your attention next.

I discovered The Superstar Corollary in an unlikely setting: the extracurricular lives of high school students. I was researching a book on students, like Michael, who get accepted to outstanding colleges while still living low-stress and interesting lives. During this research, I kept noticing the same trait in these teen-aged lifehackers: they had accomplishments that triggered The Superstar Effect, but which revealed on closer examination to not require a rare natural talent or years and years of grinding work.

For example, consider the details Michael's story. Starting as a freshman, he focused all of his extracurricular energies on a serial string of environmental sustainability projects. He started by submitting a model of a green house to a competition. This led him to discover that a local energy company offered a grant program for local high school students. He won a modest grant, and used it, with the help of a retired engineer from his hometown, to retrofit a golf cart to run on biofuels. Leveraging this success, he earned another grant which he used to install solar panels on his school's maintenance shed. This earned him press coverage, and the resulting Superstar Effect helped wow the Stanford admissions department into overlooking his borderline scores.

Notice that nothing about Michael's rise to stardom required a rare natural talent or overwhelming work load. His projects required, on average, less daily time investment than participating in a varsity sport. Yet, he was the best at what he did among all applicants to Stanford, and the resulting Superstar Effect earned him a disproportionate reward.

Michael wasn't alone in his success at hacking The Superstar Effect. Consider, for example, Maneesh Sethi (featured recently inTim's lifestyle design case study competition), who got into Stanford on the strength of having written a popular computer programming book, or Steve Schwartz, who got into Columbia by taking on the role of press officer for a student-run environment advocacy group. Both found uncontested niches that required only a reasonable amount of effort investment to conquer, but still triggered the full impact of The Superstar Effect.

I formalize this idea with the following corollary:

The Superstar Corollary
Being the best in a field makes you disproportionately impressive to the outside world. This effect holds even if the field is not crowded, competitive, or well-known.

In other words, becoming valedictorian or a sustainability guru both generate the same Superstar Effect, but the former is much harder than the latter.

The Superstar Corollary and Lifestyle Design

Let's move beyond high school students and broaden the applicability of this powerful idea. The Superstar Corollary hacks the neural circuity responsible for producing feelings of respect and impressiveness, yielding a huge return on effort invested. As detailed below, this makes it a perfect tool for lifestyle design.

For the employee seeking liberation…

Triggering The Superstar Effect in your employer provides a valuable bargaining chip when trying to inject mobility and flexibility into your work schedule. Employers don't mind upsetting hard workers, but they fear losing stars. The Superstar Corollary gives you an efficient route to this workplace stardom.

Imagine, for example, a programmer in a web development shop. The Corollary might inspire her to become a top contributor to some new, up and coming, open source technology. Becoming known as a world expert yields more impressiveness than if she had invested the same hours into simply working overtime on her existing projects.

To give another example, imagine an entry-level employee at a non-profit. By taking on responsibility for tracking the organization's web site visitors, and then mastering enough Google Analytics to present beautiful analyses to the board, the employee will be seen as the technology guru of the organization — a star who is helping them understand their audience in new ways. This aura of stardom outstrips what's achievable if he had instead invested his efforts only into being a conscientious, efficient, hardworking, and replaceable employee.

For the owner of a muse looking to increase his rewards-to-effort ratio...

For the post-liberation, muse-owning lifestyle entrepreneur, The Superstar Corollary provides a powerful tool for ramping up returns without ramping up the work invested.

Writer Chris Guillebeau, from The Art of Non-Conformity blog, provides a perfect example of the Corollary at work in a lifestyle business. Instead of starting yet another site offering generic lifehacking hints, Chris found an uncontested corner of his field to conquer. Specifically, he set out on a mission to visit every country in the world. The scope of this quest transformed him into a star among travel/lifehacking bloggers, and his site quickly become a lucrative success.

Applying The Superstar Corollary

Applying The Superstar Corollary in your own life can be tricky. Here are some ideas to facilitate this effort.

Idea #1: Sloganize.

To sloganize is to transform your conquest into an easy-to-describe and immediately interesting quest. For example, Chris Guillebeau, mentioned above, sloganized his conquest of the adventure travel writing by focusing on the catchy goal of visiting every country in the world. Similarly, in my above example of a web programmer mastering a new open source technology, she might sloganize her efforts by writing a definitive eBook on the subject. To say that she literally "wrote the book" on the technology gives the expertise extra power.

The power of sloganizing is clear: it maximizes the superstar impact of your conquest.

Idea #2: Apply the $1000 Wager Test.

Two years ago, I had a series of conversations with my friend Ben Casnocha about the possibility of writing an eBook. Both Ben and I had written and published successful books on the side, and we were exploring the idea of a guide on how successful part-time authors manage to juggle their full time job with their writing. Ultimately, we abandoned the idea. The problem: there wasn't enough to say. The part-time authors who have the easiest time writing books tend to be those who know enough about the industry to be confident in the success of their project. This confidence is what allows them to keep finding time in their schedules to write; fancy scheduling rules and productivity systems prove irrelevant.

This same observation carries over to the quest to conquer an uncontested niche in your field. To follow through you need confidence in your success; otherwise, your efforts will diminish over time, regardless of the complexity of your productivity systems or the fervor of the inspirational quotes you read. Here's a simple rule: If you're not willing to bet $1000 on your success within 6 to 12 months, then either your goal is quixotic or you don't know enough about the field yet. In both cases, you're not ready for the project. A blind adherence to the flawed idea that getting started is the most important step is best left to cheesy motivational speakers — winners make plays with confidence.

Idea #3 Follow Steve Martin's Brand of Diligence

In his memoir, Born Standing Up, the comedy superstar Steve Martin provides insight into his rise to prominence. I've written in-depth about his method, but perhaps the most important concept is Martin's redefinition of "diligence." He notes that diligence was crucial in his rise to comedic fame, but he's quick to redefine the term away from it's standard definition of "hard work applied consistently over time." To Martin, the key to diligence isn't the work applied to your pursuit, but instead the work you don't apply to other pursuits. He succeeded in reinventing comedy because he kept his focus on comedy, even when other, more shiny and interesting side projects presented themselves.

The same concept applies to The Superstar Corollary. When conquering your uncontested niche, it can be tempting to divide your attention. Here is where Martin's diligence is key. The bonus reward you get for being the best far outweighs any small benefit that a shiny new side project can provide. On the large scale, therefore, maintaining a relentless focus on your conquest maximizes your total overall reward.

Concluding Summary

We're wired to be disproportionately impressed with someone who is the best at what they do. This effect, however, is blind to the competitiveness of the pursuit. The writer who is traveling to every country in the world, for example, can earn as much attention as the Rhodes Scholar with a PhD in international relations.

Is there's an uncontested corner in your own working life where you could apply the Superstar Corollary to gain a huge return on investment?

About the Author:
Calvin Newport is author of How to Be a High School Superstar: A Revolutionary Plan to Get into College by Standing Out. He graduated Phi Beta Kappa from Dartmouth College in 2004 and earned a Ph.D in Electrical Engineering and Computer Science from MIT in 2009. Newport’s work and findings on student success have been featured on ABC, NBC, and CBS.

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Odds and Ends: Birthday Give-Back Results and Winners

You all are amazing human beings and should be so, so proud. The birthday give-back experiment raised more than $45,000 in a little over three days, which means $90,000+ to schoolkids in need, since I’m matching. This means you impacted more than 9,300 kids, and together we will impact closer to 20,000.

Check this image out — to put things in perspective, that’s about 20,000 people. Holy $#%&!

If you donated by midnight on Sunday, you should have received the following e-mail from Donorschoose.org:

Subject line: Gift from Tim Ferriss

Wow!

Thank you so much for celebrating Tim Ferriss’s birthday by supporting a classroom on DonorsChoose.org. This short email contains a gift, so please read all the way through.

Thanks to you, students will have the opportunity to take interesting field trips to amazing places, including sea research vessels and Shakespearean plays! The students you helped will have access to reading activities, word games, listening centers and — most important — books for improving literacy skills. Through the Great Give-Back Birthday, you have brought valuable resources to more than 8,600 kids [Tim note: this has since increased] – incredible!

Not only are you passionate supporters, but, as you know, Tim Ferriss has agreed to match your donations, bringing even more supplies to high need schools. But here’s the cool part: he wants to give it back to you! You get to decide where to put Tim’s money, whether in your hometown elementary school or into music programs across the country.

So please use the below $50 gift code from Tim Ferriss to select a classroom project of your choice on DonorsChoose.org. Just find a project that speaks to your heart and enter the code when you checkout. Your gift code expires on September 30, 2010, so don’t forget to fund a great classroom!

[UNIQUE CODE]

On behalf of all the students and teachers you have touched with this gift, thank you very much!

Your friends at DonorsChoose.org

P.S. Here is a note from Tim:

“You rock!!!

It’s hard to describe how amazed, overjoyed, and touched I’ve been by you all, and your selfless contributions to kids who need it most in our schools. PLEASE use your gift code! I suggest you either use it today (it just takes a few minutes), or put it in your calendar for this week so you don’t forget. It makes an incredible gift as well.

Just don’t forget to use it! Chances are, if you don’t use it this week, you will forget. I hope you enjoy it as much as I have enjoyed this incredible experiment. Wow.

All the best to you and yours — thank you, thank you, thank you,

Tim“

And that’s the damn truth.

But let’s not forget out prize winners (though I hope you all feel awesome after the experience, which you should):

The lucky winner of the round-trip ticket is Brian Brereton. Please contact amy-at-fourhourworkweekdotcom when you know your timing for the trip!

For the Maui Jim gift card and glasses, the winners are Ty Kroll (VIP gift card), Douglass Lodmell, and Jesse Walters. Please allow a week or so for them to arrive.

This has been the most wonderful birthday I could ask for. Thank you all.