Dec 292013
 

Paul Krugman, who won the 2008 Nobel Memorial Prize in Economic Sciences for his work in Economic Geography, was at it again in December 2013, in yet another of his anti-Bitcoin rants in the Opinion pages of the New York Times: “Bits and Barbarism” (22 December 2013).  It is unclear why something with a total value of about 5% of Carlos Slim’s personal portfolio so upsets him, but Bitcoin has a hold on his imagination that borders on obsessive.

Normally, I prefer not to create any incentive to drive traffic to the trolling of attention-princesses, but this one is so rich with absurdity that it calls for point-by-point rebuttal.

Krugman begins by conflating goldbugs with bitcoiners, and then mocking them, as a neoprog welfare statist might conflate collectivist neocons with individualist libertarians as ‘right-wingers’.  Specifically, he sees anyone who is concerned with the prospect of inflation in the foreseeable future as an environment-destroying throwback to the days of swashbucklers and buccaneers.

“But gold prices, while down from their recent peak, are still three times what they were a decade ago…” in very large measure due to the inflationary policies that Krugman has cheered on.  On the one hand, he ridicules the notion that inflation is a problem, and on the other he provides evidence of 11.6% annual inflation, using the USD price of gold as a proxy.  For both to be true, he must believe that 10-15% inflation is nothing to worry about; pity the pensioner on a fixed income.

“Bitcoin is a digital currency that has value because… well, it’s hard [for me] to say exactly why [without directly addressing what it is that gives it value]…”

Like government fiat and gold, bitcoins are fungible, durable, portable, and divisible.  Like gold and unlike government fiat, bitcoins are scarce.  Unlike both government fiat and gold, bitcoins are transmittable from any computer or smartphone with Internet access, and one can digitally sign documents with a bitcoin wallet and embed a hash of the signed document into the bitcoin blockchain.

Unlike gold, which has very little intrinsic value beyond jewelry—The Bling Theory of Value—Bitcoin provides a decentralized financial infrastructure that is immune from the kinds of political manipulation that have led to housing bubbles, hyperinflations, and other asset bubbles since government fiat replaced gold-backed national currencies in the early 1970s.

“…but for the time being at least people are willing to buy it because they believe other people will be willing to buy it.” This, of course, being the defining characteristic of an asset, as opposed to a consumption good.  With this statement, Krugman tacitly dismisses all financial markets along with global wholesale trade and distribution.  After all, my local grocers are willing to stock their bins with fruits and vegetables because they believe other people will be willing to buy them.

“It is, by design, a kind of virtual gold.”

The passage in Satoshi’s paper to which this assertion refers reads:

The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.” (p.4 §6)

The operative phrase here is “is analogous to“.  It is a metaphor; a model, as it were.  As an economist, Krugman should understand that models are simplified extractions of reality used to render the salient points of a complex concept rhetorically more palatable.  One might as well dismiss the entire body of Krugman’s work on economic geography because he did not possess the huge tracts of land that so occupied his imagination, but only brooded over from afar.

“And like gold, it can be mined: you can create new bitcoins, but only by solving very complex mathematical problems that require both a lot of computing power and a lot of electricity to run the computers.”

That is not how gold is mined.  One mines gold with shovels, pickaxes, and other sundry bits of base metal.  As for Bitcoin ‘mining’, the new bitcoins are rewards for being the first to solve a fiendishly difficult mathematical puzzle after confirming a batch of recent transactions. It is a game of skill, and not a scavenger hunt.

As for his mental excursion to Iceland, it is very difficult for the Icelanders to export the abundant hydrothermal energy with which that land has been blessed and cursed.  Unlike oil, it is not easy to transport steam by supertanker.  Better to convert it to electricity in place and use it to produce aluminum and bitcoins for export.  Far from being a waste of energy, it is an ideal use of a resource that otherwise might lie fallow.  Krugman’s argument screams in favor of concentrating bitcoin transaction confirmation—aka, ‘mining’—in Iceland!

“The third money pit is hypothetical.”  Here, ‘hypothetical’ is a polysyllabic term that means something akin to ‘cherry-picked’.

“[Keynes] went on to point out that the real-life activity of gold mining was a lot like his thought experiment. Gold miners were, after all, going to great lengths to dig cash out of the ground, even though unlimited amounts of cash could be created at essentially no cost with the printing press.”

By this logic, why bother with the printing press?  Why not simply adopt sand or seawater as money, both of which can be had in the seemingly limitless quantities of government fiat?  If Krugman truly does not see the difference between a good that is durable, portable, divisible, fungible, and scarce from one that can be produced in seemingly unlimited supply, then it is very difficult to see how he managed to pass undergraduate Economics 101.

“Keynes would, I think, have been sardonically amused to learn how little has changed in the past three generations.”

Keynesianism prevails predominantly in the USA and the UK, and it is not very influential elsewhere in the world.  Krugman’s lament is provincial and suggests that he believes that the USA’s 4% of the world’s population is representative of the great mass of humanity.

With regard to his swipes at gold, he seems to operate under the misconception that national currencies are still backed by gold.  Otherwise, why obsess about it so, in a discussion of money in general and bitcoins in particular?  (Never mind that bitcoins have no connection, other than occasionally metaphorical, with gold.)

Whether Keynes would be amused to learn how little has changed since the severing of national currencies’ ties to gold in the early 1970s is a matter of speculation.  However, Krugman is right that modern inflation rates would have been unthinkable a half-century ago.

In 1971, Pres. Nixon initiated a 90-day price freeze in the USA, in response to inflation rates that had risen to a high of 6% per year, and seemed to be stuck at a devastatingly high rate of 4% per year!

“So why are we tearing up the highlands of Papua New Guinea to add to our dead stock of gold…”

If Krugman disapproves of gold mining, then he should not join with others to tear up the highlands of Papua New Guinea to add to his and their dead stock of gold.  As to why, the answer is so simple that even an economist should understand it: expected benefits exceed expected costs.

“…even more bizarrely, running powerful computers 24/7 to add to a dead stock of digits?”

The answer is so simple that even an economist should understand it: expected benefits exceed expected costs.  More to the point, though, why does this bother him so?  One similarly could argue against collecting comic books, listening to what passes for popular music these days, or spending one’s days writing attacks on Bitcoin. Aside from traffic to his New York Times Opinions, what does Krugman gain from misrepresentations? Alternatively, what does Bitcoin threaten that is precious to him?

“[I]nflation in advanced countries is clearly too low, not too high.”

Apparently, Krugman does not live on a fixed income, and he does not have to deal with the erosion of the currency’s value.  Four decades ago, an inflation rate of 4% per year was justification for a price freeze in the world’s presumptive bastion of capitalism.  Today, Krugman brushes off 10-15% per year as clearly too low.

If Bitcoin succeeds as the foundation of a global financial system that is accessible to anyone in the world with a smartphone, even with its tendency to increase in value over the long run, it will repudiate the foundation of Krugman’s Keynesian faith, and that is what all his trolling and ranting seems to be about. Otherwise, just let us run our little experiment in peace.

Invest accordingly.

Prof. Evans

Dec 112013
 

In response to my earlier “The Miami Century,” a reader asks:

I would appreciate your view on Bitcoin / cryptocurrencies and the US regulatory framework and law makers. Most innovation in finance during this decade most likely takes place in virtual currencies and related areas. Do you see any major hurdles for Miami coming from the regulators and law makers?”

The short answer is that the future is unknowable, but it is not unimaginable. No one knows what the future holds, but it would be odd for US regulators to let Bitcoin develop further, if their plan were to shut it down.

If Bitcoin really is the Next Big Thing, as I called publicly 19 March 2013, American regulators and legislators are going to be loath to see this market migrate to Panama, Singapore, and—Heaven help us all!—China.

The USA is home to the New York Stock Exchange, Space X and Virgin Galactic, Microsoft and Apple, Facebook, Google, Amazon, Linus Torvalds, and Silicon Valley; and the Americans like it that way.

They’ll want Bitcoin and crowdfunding to be centered here, as well.

US officials’ three main concerns in this context are tax evasion, money laundering, and terrorism financing.

  • Tax evasion could be put to rest by changing the focus of taxation from things that are easy to hide—e.g., income, virtual assets, offshore trusts, etc.—to things that are hard to hide, like cars, gasoline stations, ports, wholesale consumer goods, buildings, and land.
  • Money laundering similarly could be put to rest by ending the War on Drugs, and the pendulum seems to be swinging in this direction.
  • If one believes the actual statistics on this, terrorism is less of a real-world concern than lightning strike, slipping while bathing, or texting while driving. Considering that the vast majority of successful home-grown terrorists in the USA have been white guys, people in the USA are growing weary of jumping at every brown shadow.

For this reason, I am watching the 2014 Congressional elections and the 2016 general election in the USA very closely. I expect that the news will be either very, very good or very, very bad for Bitcoin. That I remain in my native South Florida after having lived all over the USA, in Western Europe, and in the Caribbean over the past embarrassingly many decades, is evidence of my cautious optimism.

With regard to Miami specifically, for good or ill, we South Floridians have a well deserved reputation for having a healthy disdain for Anglo-Saxon formalisms. If Bitcoin is going to flourish anywhere, this is one of the most likely regions in the world. We are not great engineers, but you should see us move people, cargo, and money around!

We already have a strong and growing Bitcoin market between here and Argentina, Brazil, and Venezuela, which have currency controls. It is increasingly common for Latin American programmers, graphic designers, and website developers to ask foreign clients to pay them in Bitcoin, so that they can carry their savings with them, when they come up here to visit friends and family and to go shopping.

TL;DR: Invest in South Florida Bitcoin startups that focus on international trade, and make sure that the principals speak Spanish, update their passports, and have filled their vaccination cards, in case you want to relocate them in a hurry.

Invest accordingly.

Prof. Evans

Jun 282013
 

Much talk about Bitcoin centers on the claim that it represents some kind of existential threat to the US dollar (USD) specifically, fiat currency generally, and maybe even the nation-state as a social institution and organizational structure. Considering that the total value of Bitcoin in circulation today, in June 2013, is approximately USD 1.25 billion, or 2% of Carlos Slim’s personal portfolio, one might easily conclude that Bitcoin fanboys are drunk on their own fumes and perhaps getting just a little bit ahead of themselves.

Deflating Inflation Fears

As I have pointed out before:

In general, and all other things held constant (or, as we say in the business, ceteris paribus), prices can rise for three reasons: demand increases (e.g., an auction or a popular restaurant), supply decreases (e.g., lower efficiency, war, or natural disaster), or the number of units of currency increases faster than the rate of increase of goods and services (inflation).”

If it fulfills even some of its potential, then Bitcoin could mitigate USD inflation, by increasing the economically relevant supply of available goods and services via the reduction of transactional friction, especially across borders and among the unbanked.

As things stand, a consumer in Suburbia is restricted to local merchants who will accept fiat cash and equivalents, stored-value cards, or cards tied to the banking system, on the one hand, and to online merchants who will accept stored-value cards, or cards and online derivative services tied to the banking system, on the other hand. That’s pretty much it.

Many of the payment systems that are tied to the banking system are either expensive or impossible to use across borders. This means that the supply of goods and services available to the Suburbian consumer is constrained by legacy and political inefficiencies in the international banking system.

The World’s Second-Largest Economy

With virtual currencies generally and Bitcoin specifically, consumers in Suburbia can buy goods and services from suppliers in Outland that hitherto have been out of reach, meaning that they effectively do not exist from the Suburbian perspective. While this might seem trivial to a Suburbian whose entire economic life is spent, as it were, in Suburbia, it is a daily headache for Outlandish suppliers and consumers, who comprise a rather significant economic force.


G’won… Click on the video!

For example, it is very difficult for local hotel operators in much of Latin America and the Caribbean to accept credit card payments directly from foreign guests as deposits prior to travel. This means that the foreign guests will tend to stay at hotels run by large international chains, putting the local hotels at a severe disadvantage. If a hotel operator in Latin America or the Caribbean accepted Bitcoin, even if only for the initial deposit, then anyone in the world could make reservations easily, and the effective worldwide supply of hotel rooms would increase.

This same story can be told for as many goods and services as one can imagine: coffee from small-scale roasters in Central America, small-label hot sauces from sub-Saharan Africa, local distilled spirits from the Caribbean, textiles from Southeast Asia, crafts from pretty much everywhere, personal services, software development, graphic design, world music, etc.

Before one dismisses the total value of small-scale global trade, one should consider that during the 2012 presidential campaign, Pres. Obama raised tens of millions of dollars in small-sized contributions, and that 83% of the world’s population lives outside the OECD. This same e pluribus magnum power of large quantities of small transactions is the driving force behind crowdfunding, which also can be facilitated globally much more easily with Bitcoin than with legacy options.

In the video above, Robert Neuwirth refers to the worldwide informal economy as the world’s second-largest economy. And, they don’t have bank accounts, credit cards, or access to capital markets, but they do have mobile phones, many of which can run Kipochi, even if they do not have smartphones that can run a Bitcoin wallet.

Ponder that for a moment, before reading further.

Somewhere in Nairobi, some street vendors are carrying more powerful financial technology in their pockets than 90% of the Suburbians reading this have in their whole houses.

Fear, Uncertainty, and Doubt

Bitcoin could essentially conjure into existence for Suburbians the goods and services produced by 5.75 billion potential trading partners in Outland that currently might as well be in some parallel universe. In so doing, the USD/stuff ratio (i.e., price level) could fall, even if the numerator (USD money supply) continued to grow at historically unprecedented rates, so long as the denominator (cool stuff from Outland) were allowed to grow even faster.

That’s right, widespread Bitcoin adoption could mitigate inflation! Those who claim the opposite assume that Bitcoin will supplant the USD for existing transactions, and that the two payment media will vie for shares of a fixed-sized pie, like two dogs fighting over a bone, which is silly. Chinese refinery operators are not going to buy Saudi Arabian oil with Bitcoin any time soon, as the percentage savings would be less than trivial. The USD will continue to function where legacy systems work well, and Bitcoin could open markets that have never existed before, if allowed to.

One concern that one comes across with distressing frequency is that tax collection might be made more difficult, if large numbers of Suburbians started transacting in Bitcoin, but there are alternatives to income taxes that can be as progressive as policy makers want them to be, including a national land tax based on assessed value, luxury goods taxes, automobile taxes based on sale price, etc., and tax collectors still can demand that all taxes be paid in local fiat and charge a conversion tax on Bitcion exchanges into the local currency. These suggestions should not be mistaken for a paean to the social welfare state, but merely as evidence that the taxation critique of virtual currencies is a red herring. Similarly, concerns about money laundering and terrorist financing are overblown, especially given the existence of Bitcoin’s publicly available blockchain, which records every Bitcoin transaction that has every been cleared and every Bitcoin user—including law enforcement and taxation agents— has access to.

Setting aside the red herrings, straw men, and other knee-jerk overreactions from luddites, the real issue is how Bitcoin can grease the wheels of small-scale global commerce, thereby removing the vast amount of friction from transactions across borders… which could ease inflationary pressure on the USD.

There’s Nothing to Fear but Fear, Itself

Should bankers be afraid of Bitcoin? Absolutely not! They can earn from the exchange into and out of Bitcoin, serve as escrow agents for Bitcoin users who prefer not to keep their holdings under a proverbial mattress, they can facilitate Bitcoin loans, use Bitcoin as a reserve asset, etc.

Should regulators be afraid of Bitcoin? No more so than any other commodity. In fact, perhaps even less so, seeing as how commodity markets are largely unregulated; it is the commodity derivatives markets that are regulated, and Bitcoin is a commodity, like gold, oil, or wheat, and not a derivative, like an option or a future. Now, if people start issuing options and futures contracts on Bitcoin, the of course regulators will have quite a lot to say.

Should law enforcement agents be afraid of Bitcoin? Hardly! The blockchain that memorializes every Bitcoin transaction for posterity can be read into a database and sifted every way imaginable using Big Data techniques. Also, it is remarkably easy to set up a sting operation with Bitcoin, which already seems to be happening.

Should tax collectors be afraid of Bitcoin? Perhaps, if their goal is to tax Bitcoin-denominated transactions that do not intersect with the banking system. However, anything that touches the banking system directly is recorded in accordance with banking regulations, and anything that touches the banking system indirectly is likely to drag the tax evader’s fingerprints through the blockchain, which is available to all without a subpoena.

Welcome to the 21st Century

Bitcoin is part of a larger transition away from the capital/labor economy to the service/knowledge economy. Welcome to the Age of Decadence, where disruptive innovations in engineering, entrepreneurship, and entertainment are announced with mind-boggling frequency. If government legislators and regulators clamp down on the work of frighteningly intelligent and disobedient young men and women, then that work will go to where it is tolerated, even if not embraced, per se, thereby impoverishing the populations that the governments are supposed to serve, protect, and represent.

Skype and Twitter are making a joke of national telephone monopolies. Remote collaboration tools are making a joke of immigration restrictions, and thus labor regulations. Free and open source software and hardware development tools are making a joke of patent and copyright regimes. The only way to stop or even slow this process would be to disconnect your country from the Internet, and, seriously, do you really want to do that?

Some legislators and regulators will try to shovel back the tide, and their people will be held back, as were the people of the USSR, Ghaddafi’s Libya, the military dictatorships that once reigned in Latin America, and Burma, Cuba, and North Korea today. Other legislators and regulators either will embrace or at least tolerate the inevitable change, and their people should fare well. Yet others will strike some middle path, with varying results.

What US officials in the Federal Reserve, the US Treasury, the Department of Homeland Security, the Internal Revenue Service, etc. do is anyone’s guess. It is obvious from my comments here what my hope is, and I continue to live in the USA.

If there are any Hortons in Congress… yop.

Invest accordingly.

Prof. Evans

May 042013
 

“It’s a sad dog that won’t wag its own tail.”
—Southern Aphorism

In this spirit, I must share an anecdote that provides very strong support for my long-standing admonition to learn how to write software and program yourself out of a job, rather than wait until someone else does it for you, because if it can be automated, then it will be automated.

I began developing the practice utilities at Pecuniology.com in response to students’ requests for practice tests in the Managerial Finance courses that I teach. Previously, I distributed paper copies of sample numerical questions from old exams, and every time typos snuck in when I was not looking. No matter how careful I thought I was, I inevitably grabbed a version that had errors in it that were different from the version that I had distributed in the immediately preceding semester, and the cycle of duelling typos never resolved.

Over the years, the typos reproduced and mutated in a manner that had me afraid that I might wake one morning to find that they had evolved into something particularly virulent and maybe even achieve self-awareness.

Finally, a couple years ago, after having told nearly two thousand students over the better part of a decade that they should learn how to write software and program themselves out of jobs, rather than wait until someone else to did it for them, I decided to program myself out of a job. I’m not there yet, but I learned recently that I am closer than I had suspected, and that doing so has improved my teaching performance dramatically.

In a fit of frustration and in a mood to show off a bit, I followed my own advice to solve whatever problem annoys you the most, and converted those contemptible paper printouts into the first version of the online practice utilities linked to above.

During the first semester, students and I identified errors and omissions that, once corrected stayed corrected, and the flood of emailed pleas for help just prior to exams fell from a firehose to a trickle. This is in large measure, I since have learned, because I took the time to incorporate randomly generated values into the problems. In essence, anyone, anywhere in the world can create seemingly infinite variations on the questions posted, just by clicking the Reload button.

In response to the few cries for help that I do receive, I tend to post my replies in this Blog area, and respond more often than not with the URL of the post that addresses the question, along with exhortations to practice, practice, PRACTICE. When a student asks for further clarification, I edit my follow-up response into the existing post.

Shortly after I integrated those sets into my classes, I noticed a dramatic improvement in my students’ test scores and subsequently cranked up the pressure by asking more realistic (read ‘harder’) questions. For the Advanced Managerial Finance class, which we hold in computer labs, I have my students build spreadsheets that replicate each of the practice utilities and use those to answer some sample questions.

The first time that I was asked to teach Principles of Managerial Finance—one of the handful of dreaded required courses that all students in the College of Business must pass—online, I cringed at the thought of my students suffering in solitude, armed with only a textbook and the accompanying publisher-produced practice questions that are more about solving dense and clever puzzles than about preparing for a career of drafting business plans, seeking investment, and managing working capital accounts.

I envisioned each of them cowering in the dark by the light of a kerosene lantern, in a dank and fetid shack with the wind howling, panthers screaming into the night, and alligators banging their massive tails on the kitchen door—we’re in South Florida; that kind of thing can happen from time to time—as they tried to make sense of some of concepts that run exactly counter to virtually everything that their high school teachers and most politicians have told them most of their lives, like the promise of a benefit in the future is worth less than an actual benefit now, you will not necessarily be rewarded for bearing risk, there is a cost for every benefit, and the future is unknowable although it is not unimaginable. That, and we say it with algebra.

Thus were born the videos on the page that links to the utilities above. As I type this, that page is still as ugly as someone else’s baby pictures, and in one of them I had a cold when I recorded the voiceover. And, you know what? The kids love it.

I know this, because I just received my student survey results from the online section that just ended a couple days ago, and my scores are a thing to be envied. This is not because of any special treats that I hand out, as—and I hesitate to post this—I was horribly distracted this semester, and I had thought that I was largely AWOL. I half-expected them to burn me in effigy and call for my public humiliation. (I exaggerate, but only for effect.)

Granted, I make it a point to respond to email within 24-48 hours, but sometimes a four-day weekend turns into a one-week turnaround time (yes, inexcusable!). However, when I was remiss, students turned in their frustration to each other for help, and the vast majority of the time, a classmate directed the questioner to one of my videos or blog posts.

I am fast becoming the Andy Warhol of Business education, whose art is streamlining the creative process to the point where my own hand never touches the end product. And, with Direct Deposit, I don’t even have to endorse and cash the checks. (Again, I exaggerate, but not all that much.)

Here’s the kicker: I use the same exams, albeit with different numbers, in the classroom and online, and my mean scores and distributions are insignificantly different from each other! I very nearly have achieved the Holy Grail of ensuring that my online and face-to-face sections are as closely aligned as is possible.

So, to repeat, if you teach Business, especially Accounting, Economics, or Finance, learn how to write software and program yourself out of a job. Alternatively, contact me and have me do it for you. Seriously.

Invest accordingly.

Prof. Evans

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 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


Dec 192012
 

17 December 2012, the San Francisco Chronicle had a story—”Solar Power Adds to Non-Users’ Costs“—that provides background for a very good Microeconomics test question:

Q: Under what circumstances can the combination of a decrease in demand and an increase in supply lead to an increase in prices?

The short answer, of course, is, “When government interferes with the market process.”

If you are required to show your work, here’s what you do:

First, note that the own-price demand elasticity for electricity tends to be low for most consumers, meaning that one tends to consume the same quantity, seemingly regardless of the price. For example, one would not expect someone to throw open the windows in the middle of summer, with the air conditioner turned to its lowest setting, if the price of electricity fell substantially. More likely one would continue to consume electricity at approximately the same rate and use the cost savings on something that had a higher own-price elasticity of demand, like those things that collect in one’s shopping cart at Amazon.com, but one rarely gets around to ordering for delivery.

You can illustrate it this way:

Vertical Demand Curve in Equilibrium

Fig. 1 : Vertical Demand Curve in Equilibrium

This is very similar to the textbook Supply & Demand graph, but with the Demand curve at the same quantity demanded for every price. (Of course, this is not realistic for all prices, and the real world is not so well-behaved. Such is the nature of economic models.)

As indicated in the article above, the increase in solar panels being installed on the roofs of residential and commercial buildings in California is causing a decrease in overall demand for conventional electricity.

In an unregulated market, we might illustrate it this way:

Vertical Demand Curve with Shift in Demand

Fig. 2 : Vertical Demand Curve with Shift in Demand

As the demand decreases, due to the existence of solar-powered substitutes, price tends to fall.  In an unregulated market, executives and shareholders in waning industries receive signals in the form of accumulating inventories—unsold output—that they either should reduce their prices, reduce their output, or both.  If the trend continues—as happened with sailing ships, tools for making whale oil, steam locomotives, buggy whips, etc. in earlier generations—the executives and shareholders receive signals that they should consider whether liquidating and reallocating their existing resources might be more profitable than clinging to a dying firm or industry.  (Schumpeter referred to this as ‘creative destruction‘.)

However, in a regulated market, suppliers and regulators agree on a price and fix it ex ante.  Typically, the price is below the equilibrium, at least in the first iteration, so that consumers will be happy and express their gratitude to the politicians who oversee the regulators.  (This sometimes is referred to as ‘the iron triangle‘ of regulation, and it is related to the concept of ‘regulatory capture‘.)

We can illustrate it this way:

Vertical Demand Curve with Regulated Price

Fig. 3 : Vertical Demand Curve with Regulated Price

Here, the regulated price (Pr) is below the equilibrium price that would clear the market, but is at least as high as is needed to generate sufficient revenues to cover the costs of production.  The executives and shareholders of regulated firms generally are rewarded for their cooperation with monopoly rights in the form of franchises that grant them the exclusive right to serve a particular geographic region.

The firm’s total revenue is illustrated as area of the pink rectangle below, which is price * quantity.  It is possible that a firm’s executives and shareholders might want to increase output, so that the firm could sell the excess into neighboring markets, but the jurisdictions of most regulated industries do not adjoin jurisdictions where competitors are unregulated.  Most likely, every neighboring territory is served by a different monopolist franchisee.

Vertical Demand Curve with Regulated Price / Total Revenue

Fig. 4 : Vertical Demand Curve with Regulated Price / Total Revenue

Returning to Fig. 2, as solar panels reduce demand for conventional electricity, the demand curve shifts to the left.

Vertical Demand Curve with Regulated Price and Demand Shift

Fig. 5 : Vertical Demand Curve with Regulated Price and Demand Shift

Because the electricity providers’ prices are fixed by regulation, and they have very high fixed costs, they are loath to lower their prices.  In fact, the fixed costs of maintaining a capital base that consists of indivisible centralized facilities, power lines, poles and waterproof underground conduits, substations, and other large and expensive infrastructure can vastly exceed the variable costs of fuel and peak-time labor, and these large fixed costs are the primary drivers of the price that suppliers and regulators agreed to previously.

Now, with a smaller consumer base, the utility operators have fewer customers to divide their fixed costs among.  In order to arrive at a rectangle with the same area as the pink one in Fig. 4, given that the utility operators not only cannot force consumers to buy conventional electricity, but are required to buy the excess electricity produced by the owners of the solar panels.  In other words, the suppliers are doubly pinched, and their only savings are in the form of electricity purchased at full retail from their customers, accompanied by a relatively slight decrease in variable fuel costs.

The only viable alternative in this situation is for the operators of the regulated conventional electricity utilities to petition the regulators for a price increase to be passed along to the remaining conventional electricity consumers.

Vertical Demand Curve with Regulated Price / Price Increase

Fig. 6 : Vertical Demand Curve with Regulated Price / Price Increase

Considering that solar energy becomes more economically viable, when its primary competitor—conventional electricity—becomes more expensive, the rising prices in this scenario create an incentive for even more consumers to adopt solar energy, thereby shifting the demand curve even further leftward toward zero… creating yet more upward price pressure.

And, in this way, regulation creates an environment, in which a decrease in demand can lead to an increase in price.

Invest accordingly.

Prof. Evans

Nov 152012
 

3 November 2012, Clayton Christensen, whose earlier works I have found inspirational and illuminating, published an article in the New York Times—”A Capitalist’s Dilemma, Whoever Wins on Tuesday“—that starts with a reasonable premise, and veers hopelessly off course.

To Wit: “Whatever happens on Election Day, Americans will keep asking the same question: When will this economy get better?”

Fair enough. That is a very reasonable question, and it is a very reasonable expectation that Americans will keep asking it.

So far, so good.

Then, we get this:

“The Fed has been injecting more and more capital into the economy…”

<facepalm>

The Fed has been pumping more and more money into the economy. The value of money is measured by the ratio of units in circulation to the value of stuff. If the number of units in circulation increases faster than the quantity, value, or both of stuff, then prices rise.

Capital is the long-term means of production: drill presses, trucks, robots, etc.. The Fed doesn’t have any of that, and Fed governors are not in a position to command others to make such things available.

The Fed lends money to the US Treasury, buys toxic assets from commercial banks, and regulates banks. It isn’t a hardware store.

Now, if one is sitting on a lot of money that one can convert into capital assets, then one might adopt the financier’s habit of referring to that money as capital, but one should avoid conflating fiat inflation with the means of production.

“And yet cash hoards in the billions are sitting unused on the pristine balance sheets of Fortune 500 corporations.”

Firms are supposed to keep pools of cash as a kind of self-insurance policy against slow economic times. We call this ‘working capital’. When the future is even scarier than normal, the prudent thing to do is to hold more cash. The ‘Fiscal Cliff’, Pres. Obama’s political rhetoric expressing open disdain for those who are wealthier than he, the unknowable effects of Obamacare, the ongoing transition away from a capital/labor economy toward a service/knowledge economy, and the specter of another decade of ‘Bush’s war’ are enough to render all expectations of the future little more than random bets and wild guesses.

And, no one gets fired for playing it safe. So, until things settle down, executives play it safe.

“Billions in capital is also sitting inert and uninvested at private equity funds.”

Does Prof. Christensen believe that fund managers have piles of big, canvas sacks with dollar signs on them, filled with cash… like Scrooge McDuck or the dapper little fellow from the Monopoly™ game?!?

The money is invested somewhere, most likely US Treasury debt, because the US Treasury has a reputation of always paying its debts… even if it has to print more money to do so. In these highly uncertain times, the safest bet is the safest bet.

“Empowering innovations create jobs, because they require more and more people who can build, distribute, sell[,] and service these products.”

Sadly… no, no, no, and no.

Build: Factories are increasingly automated, and when meat-that-talks is needed, one hires labor where it is cheap; i.e. Latin America, Southeast Asia, and increasingly Sub-Saharan Africa.

Distribute: DHL, FedEx, UPS, already have that pretty well covered.

Sell: Amazon.com.

Service: What is that? Throw it away and buy a new one.

“[T]he Toyota Prius hybrid is a marvelous product.”

Except that [o]nly 35 percent of hybrid car owners bought a hybrid again when they purchased a new vehicle in 2011.

“‘[E]fficiency’ innovations… almost always reduce the net number of jobs…”

This one is spot-on. It is unfortunate that Christensen did not make it the centerpiece of his analysis.

“The economic machine is out of balance and losing its horsepower. But why?”

Peter Drucker answered this question in Post-Capitalist Society, which was written nearly twenty years ago, and reads today like a play-by-play account of what happened in the 1990s and 2000s.

[Reread the sentence above, click on the link, and buy the book. You can thank me later.]

Also, the total value of goods manufactured in the USA continues to exceed the value of goods manufactured in China.

The scorpion’s sting is in the tail. Toward the end of the article, Christensen states, “We can use capital with abandon now, because it’s abundant and cheap. But we can no longer waste education, subsidizing it in fields that offer few jobs.”

No one knows where the ‘jobs’ of the future will be. Social engineering always fails. In the 1960s, it was plastics; in the 1980s, software development; in the 1990s, Dot.Com… No one knows what it will be next decade.

“[T]he [capital gains tax] rate should be reduced the longer the investment is held — so that, for example, tax rates on investments held for five years might be zero — and rates on investments held for eight years might be negative.”

It might have made sense a century ago, when technology changed slowly, to make it costly to change plans quickly in response to new information, but Christensen’s advice in a highly dynamic—even chaotic—integrated global economy would create an incentive to keep sub-optimal plans running beyond their use-by dates.

“Federal tax receipts from capital gains comprise only a tiny percentage of all United States tax revenue.”

This suffers from two fatal flaws. 1) The universe does not end at the US border. 2) If capital gains represent a trivial portion of the federal budget, then eliminate the cost of collecting and enforcing them and call for their repeal. Leave the money in the owners’ hands, rather than seize it at gunpoint, if it is hardly worth collecting.

“It’s true that some of the richest Americans have been making money with money — investing in efficiency innovations rather than investing to create jobs. They are doing what their professors taught them to do, but times have changed.”

Indeed, times have changed, but that does not mean that this time is different, as Christensen seems to assume. We are in the latter stages of a transition as profound as the 18th Century Industrial Revolution, from a capital/labor division—in which semi-literate proletarians drive industrial machines—to a knowledge/service division, in which skilled workers are the ‘capital’ and are not interchangeable.

However, the wealthy will invest where they expect the greatest opportunities are, as has been the case since the Renaissance a half millennium ago. When princes, presidents, and parliamentarians create uncertainty, the wealthy will hunker down and wait until circumstances stabilize.

Christensen started with the premise that the president and the Fed do not have the power to fix things, and then concluded that the IRS does have such power.

This conclusion is counterintuitive. An alternative would be for presidents, princes, and parliamentarians to enforce transparency, and otherwise to mind their knitting, rather than concern themselves with affairs that are beyond their abilities.

Invest accordingly.

Prof. Evans

Nov 042012
 

When I was a child, I had a book of jokes that contained the story—if memory, after nearly a half-century, serves*—of Little Mable Moneybags. This story reminds me of the attitudes of many vocal activists—both libertarian and social welfarist—who live in North America and Western Europe.


Little Mable Moneybags was a very lucky little girl, who had been born into a very lucky family. One day in school, her teacher asked her to write a story about a poor family. This is what she wrote:

Once upon a time, there was a frightfully poor family. They were all frightfully, frightfully poor.

The mommy was poor, and the daddy was poor. The little girl was poor, and her teddy bears were all poor. The kitty was poor, and the puppy was poor.

The chauffeur was poor, and the chef was poor. The butler was poor, and the upstairs and the downstairs maids were poor.

The groundskeeper was poor, and security guards were poor.

They were all frightfully, frightfully poor.


Whenever I get mail with the smiling face of a celebrity or millionaire on the letterhead, extolling the virtues of and asking me to send money to a lobbying group or ‘non-partisan public policy research institute’ that is dedicated to reducing regulation and taxes or increasing regulation and taxes, I think of Little Mable Moneybags, and wonder why so many libertarians and social welfarists seem to be oblivious to the poor in any meaningful way. They all want me to donate my money and time to lobby for tax-cuts that benefit only those who actually pay taxes or tax-increases that ultimately go to government employees.

While I recognize that everyone who pays taxes benefits directly from tax cuts, everyone—individual and multinational firm, alike— who receives government subsidies benefits from tax increases, and everyone benefits indirectly an optimal level of regulation, those who benefit the most almost never are among those least able to protect their own interests.

If I am going to expend an effort to promote liberty, minimal government, and individual responsibility, I am going to be much more interested in helping the poor extricate themselves from the social welfare bureaucracy than in promoting the pet causes of individuals who earn more than I do.

If I am going to expend an effort to help the poor, I am going to be much more interested in helping the poor extricate themselves from the social welfare bureaucracy than in expanding it and perpetuating the cycle of dependency.

And, in particular, if am going to expend an effort to promote liberty, minimal government, individual responsibility among the poor, I am going to focus my attention on the 5.5 billion who live outside the OECD who are really poor.

In the meantime, the mailers go straight into the recycling bin.

Invest accordingly.

Prof. Evans

_____
* If you are a copyright holder who feels that this, in any way, violates your rights, contact me immediately to provide proof of ownership, and to let me know your intentions.

Jan 032012
 

While responding to a Facebook post, about these final stages of the transition from a hodge-podge of nation-based Capital vs Labor economies to an integrated global Knowledge vs Service economy, it occurred to me that lovers of classical liberalism might be dismayed to see capitalism actually end up being its own undoing, as leftists have predicted… but not as leftists have predicted.

That is, not for economic reasons, but for political reasons.

In other words, the one perfect jewel that classical liberals hold so dear might perform precisely as advertised, but be surrounded by unappreciative drones who are two paychecks from reverting to savagery and outnumber the enlightened 99:1 by many accounts.

I exaggerate, but only for effect.

Imagine for a moment that an economy is going through a massive transition, such that:

  • A century ago, about 40% of the US workforce was engaged in agriculture. Today, it is a bit less than 2%.
  • A half-century ago, about 40-50% of the US workforce was engaged in manufacturing and distribution. Today, it is somewhere around 10% and falling.
  • A lot of white collar occupations are being taken over by software, including bookkeeping, accounting, paralegal, inventory control, etc.
  • Throw in about 10% working in various levels of government, and that leaves around 75-80% looking for something useful to do. In general, the choice is between a) high-end knowledge work, like entrepreneurship, industrial design, etc., and b) locally delivered personal services like pepper spraying peaceful protestors, automobile maintenance, etc.

That leaves a lot of idle hands.

Now, imagine that those hands get to vote.

All the eloquent arguments, apodictic truths, and hermetic logic in the world will not sway an electorate in thrall to populist demagogues, be their shirts red, brown, or black.

If my one, tiny voice mattered, I’d do what I could to get the humanitarians to stop hanging out with left-wing populists, and to get the classical liberals to stop hanging out with right-wing populists.

The false dichotomy of Eat the Rich vs Eat the Poor is a loser’s game.

The most charitable act that one can undertake to help the poor is to start a business and hire them. The most selfish act that one can undertake to keep the poor from storming the Bastille is to make sure that they have enough bread and circuses.

Invest accordingly.

Prof. Evans