Feb 232013

Some many years ago, I interviewed for a job in Vienna. The individual whom I was to replace was an Englishman bedecked in an aura of weariness that Englishmen wear so well, like a comfortably wrinkled suit. He told me that he had come to admire the Austrians for their marketing genius, what with having convinced the world that Beethoven was Austrian and Hitler was German.

I was reminded of this recently, in a discussion about socialism, during which it stuck me that socialists exhibit a similar genius.

It is much less inflammatory to call someone a socialist than it is to call someone a terrorist, a racist, or even a statist, even though tens of millions of humans have died in the name of various brands of socialism, whereas the victims of terrorism number in, perhaps, the tens of thousands.

This is not to excuse any brand of collectivism—be it tribalism, nationalism, ethnocentrism, or boosterism—but it should be unexceptional to declare it worse to kill 20 million than to kill 3,000.

To put this to the test, utter the name Pinochet and then the name Lenin during an argument over politics and note the differences in reactions. Pinochet is credited with killing about 3,000 individuals; Lenin, millions. And yet, university students can write term papers on Lenin that are generally supportive of Bolshevism, whereas the same—mutatis mutandis—is not true of Pinochet.

Better yet, socialists have convinced a great number of individuals that some salient difference exists between ‘right-wing’ national socialism and fascism and ‘left-wing’ international socialism and communism. Both Hitler and Stalin engaged in systematic genocide; so, that does not distinguish them. Nor do secret police, purges, the suspension of fundamental human rights, etc.

About the only policy difference between ‘right-wing’ and ‘left-wing’ socialism is that under ‘right-wing’ socialism individuals retain title to property, and under ‘left-wing’ socialism private property is abolished, and everything belongs to the state. Under both systems, the disposition of property is dictated by the central authority’s agents.

Under fascism in Mussolini’s Italy, the farmer owned the cow, and an agent of the state dictated whether the cow was to be milked or slaughtered, and how the resulting products were to be distributed; under communism in Castro’s Cuba, the state owns the cow, and an agent of the state dictates whether the cow is to be milked or slaughtered, and how the resulting products are to be distributed.

And yet, here we are, surrounded by individuals who are emboldened to speak of Marx, Lenin, and Castro with a warmness that one would be surprised by, if the subject were Hitler, Mussolini, or any 20th Century Latin American military dictator.

This is relevant today, because this false distinction is used to silence critics of statist policies.

For example, on the one hand, critics of ObamaCare who decry it as socialistic—meaning, implicitly, left-wing socialism—can be shown to be incorrect, because The Mandate that requires US residents to transact with commercial insurance firms under penalty of a ‘tax’, the non-payment of which would be a felony, is not the same thing as nationalization. No nationalization, no socialism; QED.

On the other hand, if someone correctly describes ObamaCare as fascistic—not totalitarian, racist, or genocidal, but in the sense of a government policy that puts the needs of the nation above individual rights, as determined by a very few individuals who wield supreme power—as Whole Foods CEO, John Mackey has done, the backlash is swift.

Check, and mate. It isn’t socialism. You cannot call it fascism.

Rather than address the substance of the criticism, the message of the backlash is more akin to whipping the little boy who dares to point out that the emperor is wearing no clothes or the dog that exposes the scare little man behind the curtain pretending to be a wizard.

This obsession with trivial distinctions between ‘right-wing’ and ‘left-wing’ collectivism that statists use to distract the conversation from substantive issues puts individualists at a rhetorical disadvantage.

Call a statist a statist, and one is perceived as shrill; call an individualist an individualist, and it comes across as meaning something benign, like not keeping up with fashion trends or maybe listening to unpopular music.

Call a socialist a socialist, and one might inspire a discourse on the moral superiority of the proletariat over the plutocracy. Call a fascist a fascist, and the knee-jerk assumption is that one means that the other party is a murderous racist.

We are left with relatively unfamiliar terms, like ‘corporatism’ or the ungainly neologism ‘crony capitalism’, neither of which captures the essence of being compelled to dispose of one’s property according to the dictates of individuals who do not bear personal cost for their decisions.

Little is to be done about this situation, other than to be aware of it, to recognize it when it happens, and to avoid being distracted by activists’ misdirection.

Invest accordingly.

Prof. Evans

Feb 132013

The graph below is the standard, textbook depiction of the effects of a minimum wage on the labor market.

Hardly anyone ever states explicitly what is meant by the quantity of labor, and the tacit assumption is that it refers to hours worked. Considering that the labor theory of value was abandoned except by Marxists and other cranks nearly a century-and-a-half ago, this is a dubious assumption.

However, the graph above is fine for general, broad-brush discussions.

Think of quantity as the number of employees, the number of hours worked for hourly wages, or whatever.

The dotted line in the middle that rises from L* is the market-clearing quantity of labor. This means that the number that choose to work equals the number that employers want to hire at the wage indicated. At any wage below the market wage, fewer choose to supply labor than employers choose to hire (labor shortage); and any wage above the market wage, more choose to supply labor than employers choose to hire (labor surplus, aka unemployment).

Offer 10¢ per hour, and hardly anyone will show up for work. Offer $10,000 per hour, and surgeons, nuclear physicists, and talk show hosts will quit their jobs to come work for you.

If one set the minimum wage at $10,000 per hour, then not only those willing to work for the market wage would be closed out of the labor market, but those willing to work for $9,500 per hour would be closed out.

This process is multiplied by automation.

A half-century ago, about half of the working population in the USA was involved in manufacturing and distribution; today it is a bit less than 10%, and the total value of goods manufactured in the USA continues to exceed the total value of goods manufactured in China.

American factories no longer need an army of proletarian meat-that-talks, when robots are more accurate, don’t organize labor unions, and do not demand insurance and retirement benefits.

It is such a shame that we have so few political rulers who understand basic corporate finance. Instead of increasing employers’ cost of labor, policy makers should be doing everything they can to decrease employers’ cost of labor, if their goal is to reduce unemployment.

If one wants to institute populist policies—and I am not saying that one should, only if—then one would do better to focus on the lower end of the income statement than on the upper end.

Income Statement
+ Gross Sales
- Variable Costs (supplies and materials)
- Fixed Costs (rent, payroll, insurance)
- Depreciation or Mark-to-Market Adjustment
- Interest
= Earnings Before Tax (taxable profit)
- Tax (some percentage of taxable profit)
= Net Income (after-tax profit)

If one raises the minimum wage, one increases Fixed Costs, thereby reducing Earnings Before Tax, and potentially making it negative. In such a situation, the natural response for managers is to reduce the scope of the firm, to automate, or both, and lay off as many workers as is feasible.

Better to let the market determine the appropriate wage rate and to increase the corporate income tax—since it is paid on before-tax profit—and use the additional proceeds to fund transfers to workers. That way, the firms’ executives would have an incentive to increase the scope of the firm, in order to increase Net Income to its previous levels before the tax increase.

Granted, this would create an incentive for firms to relocate to lower-tax jurisdictions, but that’s the sort of thing that one must accept, if one insists on instituting populist policies.

At the very least, the effects of the corporate tax would be known and predictable—X% of taxable profit—rather than hit-or-miss increases in payroll costs caused by the arbitrary political fiat of a minimum wage.

Invest accordingly.

Prof. Evans

Feb 052013

My expertise is in the field of Finance and Economics education, and not in the field of Criminology. I do not pretend to understand the underlying psychological and sociological causes of criminal behavior. However, I can identify a business opportunity when I see one.

Amy L. Solomon, a Senior Advisor to the Assistant Attorney General in the Office of Justice Programs at the US Department of Justice, wrote in the National Institute for Justice Journal (207, June 2012):

[N]early one-third of American adults have been arrested by age 23. This record will keep many people from obtaining employment, even if they have paid their dues, are qualified for the job and are unlikely to reoffend.

Granted, arrest does not always lead to conviction, and conviction does not always lead to incarceration, but the likelihood of getting called back for a second job interview drops by 50% for those whose background checks turn up an arrest. Those who have convictions or—Heaven help them—incarcerations on their records might as well forget ever being reintegrated fully into mainstream society, it seems.

Also, having an arrest record—just arrest, not even conviction or incarceration—can result in being denied entry into some countries, including US citizens who try to visit Canada.

Even more tragic, the effects are not uniform across the population.

One recent study estimates that 25 percent of African Americans born after 1990 will witness their father being sent to prison before their 14th birthday.

Imagine, for a moment, that you were born into a poor family living in a crime-infested part of town. Imagine, further, that you made some kind of mistake as a teenager—say, you were caught selling marijuana, possessing an unregistered firearm, or standing lookout for a local street gang—and you wound up going to jail. Mind, you never injured anyone; you were arrested for committing a victimless crime. You’re no angel, but you’re not a real danger to anyone, either.

While in jail, you would be distracted from advancing your education and developing the behavioral habits of mainstream society. Upon release, you would be behind your peers in school, perhaps you would feel angry and betrayed, and you would have developed a demeanor appropriate to surviving in jail and in a neighborhood populated by others with biographies and résumés similar to yours. Chances are that you would use illegal recreational drugs to take the edge off.

Now, you are barred from many jobs and from renting an apartment in all but the seediest neighborhoods, and you have no credit history. Nonetheless, you must eat and find shelter.

This is the day-to-day reality of a distressingly large proportion of the US population. For billions of humans outside the USA, the situation is only marginally better, regardless of criminal history.

What is a single individual to do about a problem this large, and—much more fundamentally—why would anyone who is not a Mother Teresa even want to bother?!?

A Proposal

As it turns out, someone has identified this niche and is doing something about it.

Defy Ventures [is] a yearlong, MBA-style program that [Catherine] Rohr created to teach former inmates how to start their own companies… Defy Ventures has raised more than $1.5 million in donations and pledges from VC firms, hedge funds, businesses, and private foundations.

We at Pecuniology.com propose to work with police departments, judges, parole boards, and charities, to provide Business education to those who have criminal histories and those at risk. This is based on the idea that, if one is a business operator, then one does not have to face the specter of drug tests and background checks.

As we demonstrate on this website, we are carving a niche for ourselves that involves the development of tutorials and practice utilities for students in Business disciplines.

This is a call to anyone who would like to incorporate our work into their programs, especially those who cater to the disenfranchised, worldwide. We have completed the proof-of-concept phase, and are using what already is available in a large government university. The next stage involves rounding out the Pecuniology.com offerings, so that they largely automate instruction, leaving facilitators on the ground free to focus on the specific and particular needs of face-to-face interactions.

Please share this with anyone who might be interested.

Invest accordingly.

Prof. Evans