Dec 022011
 

MSNBC is running an article entitled “Nine Jobs That Humans May Lose to Robots” that lists nine professions that are becoming increasingly automated:

  • Astronauts
  • Babysitters
  • Drivers
  • Journalists
  • Lawyers and Paralegals
  • Pharmacists
  • Rescuers
  • Soldiers
  • Store Clerks

We can expect to see more articles like this as we continue the transition that began in the final decades of the 20th Century, from an economic order driven by capital and labor to one that is driven by knowledge and service, in which the capitalist no longer can be caricatured by a Dickensian factory owner, but instead by Scott Adams’s Dilbert, a highly talented employee with specialized skills, as Peter Drucker explains in his 1993 Post-Capitalist Society.

Today, nearly a quarter-century on, we can look back to see how accurate Drucker’s predictions were, as Massachusetts Institute of Technology economists, Erik Brynjolfsson and Andrew McAfee, do in their 2011 Race against the Machine, and except for the specific technologies that Drucker cites, he was spot-on.

If you can do your job from your sofa, then that sofa can be within walking distance of your employer’s headquarters, across town, or in Jakarta. If a robot, a piece of software, or someone in Jakarta can do your job, and you are in the Global North/West, then this would be a very good time to start thinking about a career change.

In general, you have two options:

Innovation and Entrepreneurship

There is no silver bullet here. All you can do is follow your heart and heed no one’s counsel but your own. The first few times out, you probably will fall flat on your face, but console yourself with the knowledge that 95% of science is wrong, meaning that most hypotheses are rejected during the experimentation phase. However, that 5% that works is where the frontiers of knowledge and experience are expanded.

Some platitudes might be useful, but feel free to replace them with your own:

  • Follow your heart, and the money will take care of itself.
  • Set aside 20% of what you spend on equipment, and six months’ rent, so that you can cover your bills during slow periods.
  • If you create texts, music, videos, software, etc., give your work away for free.
  • Network as if your life depended on it, and remember that it is a sad dog that wag its own tail.
  • Always be learning, and be prepared to change product lines or career tracks about once every five years.

If you won the lottery, what would you do with your day? You undoubtedly are not the only human alive who is driven by whatever your answer is. There is your business plan. Don’t draft revenue projections until you’ve made several sales; you cannot predict your cash flows, if you’ve never had any. And remember that innovation is what has not been done before. If the people around you think that your idea is ludicrous, then you’re probably onto something good; if others think that your plan makes sense, then the idea is already past its expiration date, and it is already part of the background noise.

You will make mistakes and have regrets. You’ll get knocked down; get up again, and don’t let anything keep you down.

Crafts

By ‘crafts’ I mean anything that must be done locally, including landscaping, plumbing, home repair, nursing, firefighting, automotive maintenance, etc. If the idea of an activity’s being outsourced overseas is absurd, then it is a craft.

You don’t have to be a hairdresser or manicurist; you can own the shop and hire hairdressers and manicurists. John D. Rockefeller famously said that he would prefer to have 1% of the money earned by 100 others than 100% that he had to earn himself.


Whichever route you choose, do not let yourself get lulled into the false security of a ‘job’. No such thing as a job exists, as is easy to see, if one considers that, if one normally works 40 hours per week, and then starts pulling ten hours of overtime per week, one does not report that one has 1.25 jobs; similarly, if one’s schedule were cut from 40 to 30 hours per week, one would not complain that one had 3/4ths of a job.

If you measure the value of your time in dollars per hour (or euros, or pesos, or yen, or yuan, or shekels, or lira, or dinar, or whatever), then you are saying that each hour of your time is as valuable as every other hour, which means that whatever you do to earn that money is ripe for automation.

If you earn $10 or $20 per hour driving a cash register, keep an eye open for self-checkout stations to be installed where you work. Ditto paralegals and bookkeepers, secretaries and executive assistants, etc.

The global economy is increasingly integrated, and borders are fading fictions. There is a cost for every benefit, and an opportunity hiding within every cost.

And… the machines are lurking… watching… biding their time… Make your peace with them.

Invest accordingly.

Prof. Evans

Nov 132011
 

Max Weber (1864-1920) was one of the fathers of modern sociology, back when Sociology and Economics were still on speaking terms, before the invention of Macroeconomics in the 1930s and the conquest of Sociology by collectivists in the middle decades of the 20th Century.

Weber’s work on charisma* is particularly relevant today.

The term ‘charisma’ will be applied to a certain quality of an individual personality by virtue of which he is set apart from ordinary men and treated as endowed with supernatural, superhuman, or at least specifically exceptional powers or qualities… [I]t is the duty of those who have been called to a charismatic mission to recognize its quality and to act accordingly… No elective king or military leader has ever treated those who have resisted him or tried to ignore him otherwise than as delinquent in duty. (pp.358-360) [italics in original]

In other words, charisma is sanctimonious narcissism with a band of disciples.

Charismatic authority… is sharply opposed both to rational, and particularly bureaucratic, authority, and to traditional authority… Both rational and traditional authority are specifically forms of everyday routine control of actions; while the charismatic type is the direct antithesis of this. Bureaucratic authority is specifically rational in the sense of being bound to intellectually analysable rules; while charismatic authority is specifically irrational in the sense of being foreign to all rules. Traditional authority is bound to the precedents handed down from the past and to this extent is also oriented to rules… [C]harismatic authority repudiates the past, and… it recognizes no appropriation of position of power by virtue of the possession of property

The rallying cry of the charismatic ruler is, “Change!” with no reference to what the ultimate goal of that change is. It is a tantrum and not a strategic plan.

The only basis of legitimacy for it is personal charisma… as long as it receives recognition and is able to satisfy the followers or disciples. (p.361-362)

As long as a charismatic ruler holds his or her disciples in thrall, they bestow authority upon him or her. However, when the shine begins to tarnish, and the façade begins to crumble, the disciples withdraw, if they do not openly denounce and condemn.

What is despised, so long as the genuinely charismatic type is adhered to is traditional or rational everyday economizing, the attainment of a regular income by continuous economic activity devoted to this end… From the point of view of rational economics activity, charisma is a typical anti-economic force. It repudiates any sort of involvement in the everyday routine world. It can only tolerate, with an attitude of complete emotional indifference, irregular, unsystematic, acquisitive acts. (p.362)

Charity, volunteerism, national service, and the like are the favored programs of the charismatic leader. Never mind that all of our clothing, food, housing, and transportation must be produced, the charismatic leader holds grubby capitalist profiteers in disdain, and rhapsodizes over sacrifice, spreading the wealth, and making the high and mighty pay their fair share.

This is one reason why charismatic rulers tend to be populists and collectivists—whether of the so-called ‘right-wing’ national socialist or ‘left-wing’ international socialist variety—and we probably never will see a charismatic libertarian… at least not one who isn’t nuttier than a squirrel’s dreams.

[I]t is conceivable that insulation from economic struggle should mean limitation of those who were really eligible to the ‘economically independent’; that is, to persons living on income from property. (p.363)

Charismatic rulers and their disciples will tend to come from those who are referred to in many places as ‘Volvo socialists’ and ‘trustafarians’. One who has become a multi-millionaire from the proceeds of a best-selling autohagiography can afford the luxury of living a charismatic life, especially if that individual is not the son or daughter of the hegemony. Those who live from paycheck to paycheck—i.e., those who are bound up in the status quo and pay the taxes that support the political and parasitic classes—are excluded from the inner circle, and only the idle and the unemployed can stay with the movement long enough to wield power in the charismatic ruler’s regime.

Weber goes on to describe how a charismatic revolutionary movement must transform into a new permanent routine structure. “The vassals, the holders of benefices, or officials are differentiated from the ‘tax payers.’ The former, instead of being the ‘followers’ of the leader, become state officials or appointed party officials.” The final stage is reached, when the animals take over the farm and change their chant from “Four legs good, two legs bad,” to “Two legs good, four legs bad.”

Invest accordingly.

Prof. Evans


* source:

Weber, Max (1964; 1947), The Theory of Social and Economic Organization (Trans., A.M. Henderson & Talcott Parsons; Ed., Talcott Parsons), New York: Free Press. ISBN: 0-684-83640-8 [return]

Nov 042011
 

http://blogs.indystar.com/varvelblog/files/2011/11/110411.jpg

It is unclear what the Occupy Wall Street phenomenon is really all about. On the one hand the claim is that it is about corruption, but on the other hand it is couched in terms of ‘the 99%’ versus ‘the 1%’, which looks like moth-eaten class hatred that has never worked in the past.

For example, when Occupy Wall Street protestors call for ‘The Government’ to rein in ‘corporate greed’, they invoke an amorphous collective, and it is only fitting that the key individuals within that collective be treated as that collective; viz., the Treasury Secretary, the former Treasury Secretary, and the president of the New York Fed, are all former Goldman Sachs executives.

It would not be surprising in the least, if they returned to their former employer after their terms of government service ended.

Do the Occupy Wall Street protestors seriously Hope™ that Wall Street executives currently on sabbatical in Washington, DC, will Change™ anything significant? It is muddle-headed to turn to Wall Street bankers to rein in Wall Street bankers… unless one is calling for self-regulation, as libertarians do.

Perhaps, Occupy Wall Street protestors expect agents of the SEC to rein in corporate greed. But if agents of the SEC were going to rein in corporate greed, then they should have done so by now. It is, after all, right there in their job descriptions to ensure transparency and the smooth operation of markets in the USA. And yet, toxic waste (an actual financial term) was sold as AAA-rated debt right under their noses.

It is as if a kid stole a piece of candy from a shop, and the security guard did nothing. Emboldened, the kid went back and grabbed a fistful of candy, and the security guard did nothing. Later, the kid went back and filled a bag with candy, and the security guard did nothing. Finally, the kid returned with his gang and emptied the candy shop, which went out of business, and the crowds directed all of their anger at the kid and effectively none at the firm that hired the security guard, or the fact that the security guard is a former member of the kid’s gang.

If the Occupy Wall Street protestors Hope™ that Congress will effect Change™, then they should Occupy Pennsylvania Avenue. Although, in this post-9/11 world, they should avoid even the appearance of unrest in their ranks, lest they be declared domestic terrorists by someone in charge.

When the Occupy Wall Street protestors storm the offices of the SEC chanting, “Do! Your! Jobs!” we’ll know that they are sincere about corruption, and that they are not just a loose band of individuals who are envious of those who have more than they do.

Instead, whoever is tacitly leading this movement has rigged it so that residents of the wealthiest society in all of human history can flatter themselves that they are downtrodden, even though the poorest 5% of US residents are wealthier on average than more than 2/3rds of the more than 7 billion humans alive today, and 75% of US residents are wealthier than more than 90%.

Seen globally, something like one-quarter of US residents are in the top 1% of humanity. If this is about redistributing the wealth of the top 1% to the bottom 99%, take care to note how many are standing behind you, ready to pounce.

If the Occupy Wall Street movement is about corruption, then it is about corruption, and the proper targets are at both ends of the money trail. If the Occupy Wall Street movement is about redistribution, then it is socialism, and if the redistribution is to be contained within US borders, then it is national socialism.

Invest accordingly.

Prof. Evans

Oct 232011
 

An interesting pattern emerges, when we line up market structure from economics and finance with theories of developmental psychology and pedagogy, as in the table below. For more details than I describe here, click on the links at the head of each column to see the Wikipedia articles on these topics.

Admittedly, the alignment undoubtedly is not as precise as implied below, but the exercise is fruitful, at least in broad brushstrokes. The point here is to seek insights that might lead to testable hypotheses, rather than to present established conclusions concerning a detailed theory of society.

Brief Introduction of Each Column

Starting at the bottom, Maslow argued that the primary motive of all individuals is survival; where this is not assured, nothing else will occupy an individual’s mind. Once survival is assured, the individual will focus on safety. Only after survival and safety are fulfilled, can individuals focus on social needs. When survival, safety, and social needs are fulfilled, the individual can focus on self-esteem, which is a fundamental topic in itself, especially among those who grow up in dangerous or abusive environments. Finally, once all of these needs have been fulfilled, the individual can focus on self-actualization — ‘realizing one’s full potential’ or ‘going beyond oneself’ — which might manifest itself in the creation of works of art, volunteering, or any other activity that one feels compelled to do for its own sake

Kohlberg‘s focus was on morality. He argued that how an individual decides ‘right’ from ‘wrong’ starts at a primitive level and becomes more sophisticated as one matures. At the lowest level, the test is pain vs pleasure; if it hurts, it is wrong, and if it feels good, it is good. In time, this develops into egoism, in which the orientation is toward oneself to the exclusion of all others, often associated with young toddlers and their tantrums. As one develops — and corresponding to Maslow’s Social stage — one’s moral orientation becomes outward; first as ‘be nice’, and later as a law & order adherence to the rules. For a minority of the population, contradictions and other failings of the status quo lead to an moral orientation based on questioning authority and reconciling inconsistencies. Finally, some very few adopt a universal ethic, which manifests itself as a single principle that guides the individual’s sense of right and wrong. For some, this ethic might be non-aggression; for others, the superiority of one’s tribe; etc.

An individual can move up or down either hierarchy, but will tend to be grounded in a specific one at any particular time. Individuals generally can imagine the next developmental level up, but not beyond. Those operating at a very primitive level, for example, will be unable to distinguish a universal ethic from egoism. This, also, is not to say that a universal ethic will be viewed by others as ‘good’, as when one who has embraced non-aggression evaluates the morality of a tribalist who believes in the collective ‘superiority’ of his or her people.

Bloom‘s Taxonomy deals with pedagogy and the appropriate method of education. With very young children and those who are new to a subject, the first step is identification, which essentially is being able to point a thing when named. The next step is definition, which is when the learner is able to explain what something is without naming it. Next is application, which is using a tool, concept, or anything else in a prescribed fashion. Higher-order learning begins with analysis, which is breaking complex puzzles, concepts, or objects into simpler constituent units. There is some debate concerning the order of the last two steps: evaluation, which is judging a thing based on some standard, and synthesis, which is constructing something new from existing components, whether it is a structure, a work of art, story, etc.

Market structure is the relationship between the number of buyers and the number of sellers in a market. Here, we focus on the number of sellers and assume that the number of potential buyers is very large. The most restrictive market structure is the command economy, in which a central authority rations goods and services, and secondary trading is generally difficult if not forbidden outright. Next is monopoly, in which only one supplier exists. One of the hallmarks of monopoly markets is price discrimination which occurs when two buyers pay different prices for the same good or service; in any other market structure, buyers can shop among sellers and buy from the one with the lowest price. A market with a small number of sellers, each of whom represents a significant portion of the overall market is called an oligopoly. Oligopolies are distinguished by ‘interdependence’, in which a sale made by one oligopolist is a sale lost by each of the others; oligopolists often have very large advertising budgets. A market with imperfect competition has a large number of sellers — each of whom might have some amount of monopoly power based, most commonly, on geography — none of whom represents a significant fraction of the total market. Most of the sellers that each of us deals with in the real world are imperfect competitors, who might be able to price discriminate through coupons, early bird specials, happy hours, etc., but who do not have the market power of an electric, sewage, or water utility. A commodity market is one in which the good or service sold by one seller is economically identical to the others’. This includes things like wheat, gold, and financial assets that are sold on formal exchanges. At the furthest extreme are public goods*, which exist in such abundance that one’s consumption does not diminish anyone else’s ability to consume them, and one is unable to meter their consumption or stop others from consuming them. Common examples are breathable air at sea level, seawater, and anything else that one can consume in unlimited quantities for free.


Market Structure and Developmental Psychology
Maslow’s
Hierarchy
Kohlberg’s
Stages
Bloom’s
Taxonomy
Market
Structure
Self-Actualization Universal Ethic Synthesis Public Good
Self-Esteem “Question Authority” Evaluation Commodity
Social Law & Order Analysis Imperfect Competition
“Be Nice” Application Oligopoly
Safety Egoism Definition Monopoly
Survival Pain/Pleasure Identification Command


The Table Row-by-Row.

In general — and bearing in mind that the real world is much subtler than implied here — life in a command economy is brutish and mean. Individuals in such a society likely have little time for reflection on higher ideals, and instead focus their attention on survival and avoiding punishment.

In a society dominated by monopoly, the focus is on personal benefit to the exclusion of virtually all else. Corruption is a common feature in a society that has one provider for each category of goods and services, and innovation and entrepreneurship are essentially unknown — except, perhaps in the oligopolistic or imperfectly competitive underground economy — and daily life is highly bureaucratized.

A society dominated by imperfect competition — “a nation of shopkeepers” as Karl Marx sneeringly described 19th Century England — is organized along the principles of ‘getting along’, ‘not rocking the boat’, and ‘observing established customs’. Perhaps, regulations exist to ensure that the peace is kept. At a personal level, social needs are the primary focus, along with ‘knowing one’s place’. Marginal improvements in techniques are tolerated, so long as they are not disruptive.

A society dominated by commodification — ‘McCulture’, if you will — will be one in which individuals’ social needs are fulfilled in general, and the quest for self-esteem is the primary focus. Rules are broken, norms are evaluated, old ways are cast aside by each new generation. Seen from the outside, such a culture might look superficial, made of plastic, and chaotic, but it operates by its own internal logic of creative destruction and disruptive innovation.

Finally, a society dominated by public goods is a society in which individuals seek self-actualization through the synthesis of what has never existed before, based on some universal ethic. For those locked into the habits of thought of lower stages of development, a public goods society is indistinguishable from a command or monopoly society (i.e., ‘communism’). But, whereas command and monopoly societies suffer from chronic shortage, public goods societies have so must stuff that they just give it away.

The Way Ahead

The wealthy parts of the world today are dominated by commodification, self-esteem, and social change. However, a small but growing subculture of open source, free culture, and ubiquitous charity already has had an impact on modern life. The move is away from command and monopoly in the form of patent and copyright. Granted, those with a vested interest in the status quo will not go quietly, but go they will.

This is not a ‘good’ thing or a ‘bad’ thing, as all value is subjective. It simply is. Some will love the change, others will hate the change, and the great majority will just roll with the tide.

We are in the latter stages of an epochal transition from the capital/labor dichotomy to the knowledge/service dichotomy in an increasingly integrated global community, where borders are largely meaningless, anything that can be encoded as information — whether software, music, texts, videos, title, or even money — flows freely, and emerging institutions are supplanting traditional forms of social coordination.

Invest accordingly.

Prof. Evans


*Note: The term ‘public good’ should not be confused with ‘government-provided good’. If the ability of an individual to consume a good or service is reduced by others’ consumption, or if it is possible to restrict access, then it is a private good, regardless of whether it is provided by government or no direct fee is charged for it. Thus, ‘public schools’, ‘public beaches’, ‘public roads’, etc. are government-provided private goods.

Oct 182011
 

(Orig.: 01 Feb 2009; updated)

Some myths refuse to die. The Overpopulation™ Myth is one of the more pernicious, as it leads inevitably and inexorably to calls for what is the functional equivalent of genocide. And, that’s just bad for business.

Granted, Overpopulation™ advocates tend not to come right out and actually say it, but it is there, as it has been all along.

For example, according to The Sunday Times (1 Feb. 2009), “Jonathon Porritt, who chairs the [UK] government’s Sustainable Development Commission, says curbing population growth through contraception and abortion must be at the heart of policies to fight global warming.”

Never mind that life expectancies and incomes — worldwide — are higher today than they were a half-century ago. Back then, our parents told us to eat all of our vegetables, because children were starving in China and India, and South Korea and Japan were Third World countries. Today, we tell our children to earn graduate degrees, so that they do not lose their jobs to the Chinese and the Indians, and obesity (i.e., too much food) has become a major health hazard worldwide.

Never mind that women spontaneously bear fewer children as incomes rise, as shown in Figure 1 below. In many countries today — mostly in Europe and Northern Asia — the population is decreasing due in large measure to very low fertility rates.

Figure 1

Buried near the bottom of the Sunday Times article linked above is the real issue that the Overpopulation™ Myth was cooked up to obscure: “The fertility rate for women born outside Britain is estimated to be 2.5, compared with 1.7 for those born here [in the UK].” [emphasis added] The code phrase is “born outside Britain.” It is fairly obvious whom Mr. Porritt is referring to here; it isn’t the Poles, the French, or even the Irish.

After a half-century of the same discredited fear-mongering, it has become incontrovertible that the Overpopulation™ Myth is very thinly veiled racism. As unpleasant as race supremecists of all colors, religious radicals, and neo-fascists are, at least they have the conviction to come right out and say it. Overpopulation™ advocates exploit baby fur seals, the victims of political oppression, and obscure species as shields for their real agenda.

A bit of arithmetic is instructive here.

Today, the world population is approximately 7 billion humans. The population densities of Hong Kong and Singapore are approximately 6,500 individuals per square kilometer. These are wealthy, modern cities, proving that a lot of people can live well in a tight space. If all of the individual humans in the world were contained within an area that were a bit larger than 1 million square kilometers, that would result in a population density comparable to those of Hong Kong and Singapore, and it would leave the entire rest of the surface of the earth available for energy and food production, manufacturing, and waste processing.

Egypt (1 million sq. km.) or Bolivia (1.1 million sq. km.) would do. The US Southeast (Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, and Tennessee) would do. 1/2 of Argentina would do. 1/7th of Australia would do.

That would leave all of the Sahara Desert available for solar energy production, the unoccupied land in the Subtropical and Temperate Zones available for food production, and the uninhabitable bits for waste removal.

“Ah, HA!!!,” comes the Overpopulation™ activist’s predictable rejoinder, “How’re y’gonna feed ‘em all?!?”

Let us do the math. 7 billion individuals, each of whom consumes 2,500 calories per day (being a bit generous here), would require approximately 6.4×1015 calories per year.

Assuming that one were able to grow only one crop per year on a given piece of land, and depending on the staple in question, Table 1 shows the number of square kilometers (sq. km.) needed to grow enough of each crop listed to feed the world, assuming that only that particular crop were grown.

Table 1
crop calories
per sq. km.
(millions)
sq. km. needed
to feed the world
(millions)
potato 2,270 2.82
corn/maize 1,850 3.75
rice 1,825 3.78
wheat 741 9.37
soybean 690 10.07
Source: Foods & Nutrition Encyclopedia, Volume 1 by Audrey H. Ensminger


Basically, we could relocate everyone to Argentina, turn the USA into a giant farm, and have the rest of the Americas and all of the Eastern Hemisphere left over for energy production, manufacturing, and waste disposal.

Granted, the likelihood that this kind of reorganization would ever take place is nil. The point of the exercise is to show that advocating for political transparency, more efficient urbanization, and market reforms is less unsettling than calling for mass forced abortions among those “born outside Britain”. (If the abortions that Mr. Porritt, et al., call for were voluntary, the women would be getting them already, and there would be no need to advocate for them; ergo, it is a logical necessity that they must be involuntary.)

The calculations above show that the earth’s carrying capacity is more than sufficient to feed and house humanity, and Hans Rosling’s presentations show that individuals are making the right decisions on their own. Rather than perpetuate discredited Malthusian myths, one would do much better to approach those “born outside Britain” as potential friends and business partners than as outsiders who are unfit to decide for themselves whether or not they should be permitted by those ‘born inside Britain’ to raise families… in order to “fight global warming.”

Invest accordingly.

Prof. Evans


Update, February 2013: Someone else had a similar idea, and put together a very nice illustration:

Oct 172011
 

Based on a post from 14 March 2009

In early 2009 independent economic policy analyst, Geoff Gitlen, modestly proposed an intriguing solution for future banking crises that Occupy Wall Street activists would do well to embrace: reorganize all banks as non-profit organizations.

[Note: The following is my interpretation of the Gitlen Plan. If it isn't in quotation marks, Mr. Gitlen didn't say it.]

The rationale for the Gitlen Plan is straightforward and unexceptional. Already, credit unions in the USA operate as non-profit organizations, and it would be a small step to expand this to include all institutions that are regulated by the Fed or the Office of the Comptroller of the Currency (OCC). Commercial banks already are among the most heavily regulated firms in the economically developed parts of the world. Bank managers are encumbered by all manner of restrictions on how they can conduct their businesses, and they are burdened by social requirements, e.g., ethnic, gender, racial, and socioeconomic preferences in lending that favor individuals who are members of politically favored groups. Meanwhile, depositors are insured against loss, which removes one source of critical oversight.

Reorganizing banks as non-profit organizations would be much less radical than having the central government buy controlling interests in them, as we saw in 2008/2009.

For starters, non-profit status would remove the perverse incentives that lead the managers of insured banks to engage in highly risky and politically motivated — or mandated — practices. If banks operated so as to cover their expenses, but not to seek excessive profits, the same way that the Red Cross, the United Way, and other large charities operate, bank executives still could earn salaries that are many times the national average, work in prestigious and comfortable offices, and jet around the world to exotic places and hobnob with power brokers and washed-up pop stars.

However, they would not be under pressure from shareholders to take on the kinds of risks that led to the S&L Crisis and the recent housing/subprime mess.

Gitlen argues, given that banks do not operate as normal commercial enterprises, why take half-measures? Rather than perpetuate one-foot-on-the-brake-one-foot-on-the-gas [accelerator] policies, where regulators compel banks to pursue social goals on the one hand, and banks have coopted regulators* on the other hand, Gitlen argues that we should heave this syncretic mess overboard to the sharks and crabs and embrace an institutional structure that could be more harmonious with the realities of modern banking.

The Gitlen Plan is in stark contrast to libertarian calls for deregulation, free banking, and market discipline, which have no hope of gaining political traction in today’s climate, where otherwise intelligent individuals can decry the current crisis — with utterly straight faces and in the sincerest tones — as a failure of unbridled capitalism, even though the firms at the center of the crisis are among the most heavily regulated in the world, outside of healthcare. With this kind of doublethink passing as conventional wisdom from the corner pub to the halls of Congress, we must choose among viable options and put away our dog-eared copies of Atlas Shrugged, Human Action, and Das Kapital for now.

Gitlen has identified one such option:

Reorganize banks as non-profit organizations, and let those individuals who work for banks and chafe at the notion of working for a charitable organization seek employment in private equity funds and offshore finance centers, like Bermuda, Grand Cayman, Hong Kong, Nassau, and Singapore.

As in all things in life, there is a cost for every benefit, and the Gitlen Plan is not cost-free, but the choice is not between utopia and the status quo, but between available options. Given the worldwide movement for change loosely organized under the Occupy Wall Street banner, the Gitlen Plan could be the most viable option.

Invest accordingly.

Prof. Evans


* For more on regulatory capture and the current crisis, see Buiter (2008) (Warning: PDF).

Oct 162011
 

In business, economies of scale means that it is less expensive, per unit of output, to produce goods, if one produces a lot rather than a few. For example, one would not build a factory, buy raw materials, and hire workers to make only one car. Similarly, one would not set up a restaurant to make only one meal.

Once the oven is hot, the freezer cold, and the employees on-site, the additional cost (what economists call the ‘marginal cost’) of producing a second meal is substantially less than the cost of going from zero to one meal. Likewise, the cost of producing the third, fourth, and subsequent meals can fall even further, as the employees get into the rhythm of the job, several items bake in the oven at a time, and the freezer is cooling more than air and empty shelves.

The larger the operation, the greater the output relative to the costto a point.

However, as with plants, animals, and essentially everything else, there is a limit to how much a firm can grow, before costs begin to rise faster than income.

Sticking with the restaurant example, let us assume that a good day’s gross income is $10,000, and that the pre-tax profit is about 15% of that, after paying for groceries, utilities, maintenance, payroll, insurance, etc. [Feel free to substitute an appropriate amount of your local currency, if you reuse this text.]

Now, imagine that the owners have hired a new general manager — we’ll call him Skippy [Feel free to substitute a culturally appropriate derogatory name here.] — who wants to double the gross revenue to $20,000 per day, even on historically slow days.

Skippy holds ‘motivational’ meetings and exhorts the employees to “work smarter” and to be “dedicated” to the “mission” and “vision” of the organization. He wants to run three eight-hour shifts per day, seven days per week including holidays, and to minimize costs.

One young man at a meeting asked, “Um… If we wanted to minimize costs, shouldn’t we just shut down? That way, costs would be reduced to zero.”

Skippy replied, “You have a bad attitude. Ask not what this firm can do for you; ask, rather, what you can do for this firm.”

One problem with selling more meals than is optimal is that one has to provide incentives for potential customers to become actual customers. One option is to offer larger servings, but customers typically eat only so much at each meal. Another option is to reduce prices, either across the board, during times that the restaurant is usually closed or business is slow, for individuals who are members of a favored category — females, a particular ethnicity, a profession, etc. — or some other form of discrimination against those who are not members of the favored category.

By doing so, the restaurant operator reduces the income from each meal sold, even though the costs of producing those meals do not fall. Quite the contrary, by running the equipment without break, one is unable to clean, maintain, or repair it, and by working one’s employees harder, they get tired, make mistakes, and become resentful; beyond the optimal scale, costs per unit of output rise.

It does not matter if it is a restaurant, factory, bank, or whatever, each firm has its optimal size, and anything larger or smaller than that optimal size is less efficient than it would be if it were operating at the optimal scale.

If Goldilocks were a management consultant, one might hear her say, “This firm is tooo small. This firm is tooo big. And, this firm…? This firm is juuust right.”

In general, two things systematically prevent firms from operating at their optimal scales: hubris and regulation.  Things that unsystematically prevent firms from operating at their optimal scales stem from the unknowability of the future: uncertainty, surprise changes in market conditions, natural disaster, and other things that one cannot foresee.

Hubris is the kind of overconfidence that leads one to believe that one knows more than one knows, and thus can do more than one can do. It is one of the qualities of the kind of narcissist that is expert at climbing to the top of an organization, in spite of a lack of actual knowledge, talent, or skill.  Such individuals often conflate speculative hypotheses with proven conclusions, confuse ‘could’ with ‘must’, and are loath to admit when they are in error.  They speak with great bombast, demean those who ask for clarification, and typically refer to their track records when pressed for details.

In positions of power, hubris can lead to doublethink, especially a desire to minimize costs and to maximize gross sales simultaneously, in spite of the fact that there is a cost for every benefit.

Granted, one can try to minimize fraud, abuse, and waste, but any more than this implies fewer raw materials, fewer fixed assets, and less available labor, and thus reduced output; decrease costs, decrease revenue.  Similarly, if one wants to increase output, this implies more raw materials, fixed assets, and available labor, and thus increased cost; increase revenue, increase costs.

Hubris tends to result in firms that operate above their optimal scales, based on the notion that bigger is better.

Regulation leads to inefficiency most commonly through the misapplication of the observation that price tends to approximate the marginal cost of production in a competitive market.  Only in a monopolistic market can one charge a price higher than the marginal cost of production, because in a competitive market – i.e., a market that has a very large number of relatively small suppliers – if one tried to charge a higher price, a competitor would undercut the price.  This process would continue, until no one were willing to charge a lower price.

In monopoly markets with only one supplier or in oligopoly markets with a small number of relatively large suppliers, sellers can charge prices that are substantially above marginal cost, because buyers have nowhere else to go.  The choice is between paying the high price or going without.

This reasoning underlies antitrust statutes.  The idea is that, since perfectly competitive markets have the lowest profit margins, and thus the lowest prices to consumers, a small number of large suppliers is de facto bad.

This ignores economies of scale.

Some productive processes have very high barriers to entry, typically in the form of expensive equipment, as is the case with airlines, cruise ships, railroads, electrical utilities, etc.  If it makes economic sense for suppliers in these industries to be large and highly concentrated, then the tendency will be for the successful to acquire the unsuccessful.

Some suppliers operate in a ‘winner-take-all’ environment, as is the case with search engines, social network websites, operating systems, etc.  If consumers tend to favor a particular supplier to the exclusion of essentially all other competitors, then the optimal supplier will tend to be a monopoly.

Regulations that hinder concentration where it results from economies of scale serve only to force suppliers to be inefficient.

The main thing to bear in mind is that hubris is ultimately its own undoing, and, in an increasingly integrated global community, regulation at the national level is increasingly anachronistic.

BEARING THE DISCLAIMER AT THE BOTTOM OF THIS PAGE IN MIND, a contrarian speculative strategy might be to sell short assets that are darlings in the popular media (i.e., subject to hubris) and buy long assets that are under intense government scrutiny (i.e., likely to migrate from unfriendly jurisdictions to friendly jurisdictions).

Invest accordingly.

Prof. Evans

Oct 152011
 


Bureaucratics – Images by Jan Banning

Those of us who live in relatively well run places can forget that corruption is a very important factor throughout most of the world.

Dutch historian and documentary photographer Jan Banning has published a 50-photograph exhibition that is “a comparative photographic study of the culture, rituals and symbols of state civil administrations and its servants in eight countries on five continents,” called Bureaucratics.

The images are a stark reminder of what awaits entrepreneurs: underpaid individuals with the power to expedite or impede progress. It is easy to vilify corrupt officials, but they are only responding to incentives and pursuing available options for which the expected benefit exceeds the expected cost, including opportunity cost. These are some of their faces.

It might be the case that borders are increasingly meaningless in our increasingly integrated global community, but bureaucrazy follows its own rules.

Invest accordingly.

Prof. Evans

Oct 142011
 

It is my hope to set up a low-cost online educational outlet here at Pecuniology.com. Whether I organize this as a school, a vendor of education services that caters to schools, a publisher of open educational resources, or some combination of these is yet to be determined.

One of my biggest concerns is marketing. How do I get the message out, and above all how do I compete against subsidized incumbents like, hypothetically, the University of California?

As it turns out, members of the University of California chapter of the American Federation of Teachers are very helpfully exiting the market that I intend to enter.

California Teachers Union members want to block online courses at the University of California, allegedly, in the name of protecting educational quality but much more likely in the name of protecting instructors’ salaries… not that there’s anything wrong with that.

Nonetheless, I thank them for this most generous gift.

Invest accordingly.

Prof. Evans

Oct 092011
 

Reuters via Yahoo! reports, “American[s]… are placed on a kill or capture list by a secretive panel of senior [US] government officials, which then informs the president of its decisions… There is no public record of the operations or decisions of the panel, which is a subset of the White House’s National Security Council… Neither is there any law establishing its existence or setting out the rules by which it is supposed to operate.” [emphasis added]

Naturally enough, some people have a problem with this.

One could rail against the unfairness of it all, post angry comments below blog posts, or even go to the extreme of sending a sharply worded email to someone in power. As an act of absolute desperation, one might wait two, four, or six years and… vote.  Alternatively, one could look for the investment implications.

Because I am neither licensed nor qualified to offer investment advice, and everything that I post here is for educational and entertainment purposes only, I will not make any speculative recommendations, but I will provide some guidelines for forming and testing your own hypotheses.

First, consider that the US Department of Homeland Security (DHS) has begun testing a project to predict future crimes on members of the public, called the Future Attribute Screening Technology (FAST) project.  FAST “is designed to track and monitor, among other inputs, body movements, voice pitch changes, prosody changes (alterations in the rhythm and intonation of speech), eye movements, body heat changes, and breathing patterns.” Best of all, a field test was performed at a large venue in the USA earlier this year.

The US Federal Bureau of Investigation (FBI) [i.e., national police] by mid-January 2012 will activate a nationwide facial recognition service in some US states that will allow local police to identify unknown subjects in photos.

In other words, privacy is dead.

Love it or hate it, ask yourself, “Who benefits?”

You might not be able to stop Rome from burning, but you can try to profit from it, so that you avoid being a burden on others.

Invest accordingly.

Prof. Evans