Feb 232013

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Invest accordingly.

Prof. Evans

Feb 132013

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

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

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

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

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

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

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

This process is multiplied by automation.

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

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

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

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

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

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

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

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

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

Invest accordingly.

Prof. Evans

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…”


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.

Nov 042012

We examine the effect of securities laws on stock market development in 49 countries. We find little evidence that public enforcement benefits stock markets, but strong evidence that laws mandating disclosure and facilitating private enforcement through liability rules benefit stock markets.”
(La Porta, Lopez-de-Silanes & Shleifer 2006)

In general—and vastly oversimplified—regulatory regimes fall into three categories: Authoritarianism, Anarchism, and Transparency.

The term authoritarianism here refers to what one might think of as over-regulation, as when entrepreneurs in a particular country must seek permission—perhaps even an act of parliament or specific permission from the ruling junta—before being allowed to register a new firm.

The term anarchism here refers to a de facto, even if not a de jure lack of government oversight, where regulations either do not exist or exist but are not enforced.

The term transparency here refers to a regime, in which individuals are more or less free to do as they want, but must make public disclosures of actions or decisions of material importance.

Markets that could be described as ‘authoritarian’ tend not to attract much capital from investors outside those jurisdictions, and investors within those jurisdiction—particularly those who are not politically connected—often tend to prefer to invest abroad. This is in large measure, because they are highly constrained in how they can respond to new information, changing supply conditions for inputs, and evolving demand conditions among consumers.

For example, if one were required to declare the precise nature of one’s enterprise as a condition of registration and permission to operate, and one were forbidden to deviate in the future from this stated purpose in response to changing expectations, regulatory inflexibility might create an incentive for one to take one’s business to a jurisdiction less plagued by bureaucratic micro-management.

At the other extreme, ‘anarchic’ markets tend not attract much capital from outside those jurisdictions, and investors within those jurisdictions—particularly those who are not politically connected—often tend to prefer to invest abroad. This is in large measure, because they have little recourse to dispassionate enforcement institutions, like unbiased judges, neutral regulators, and incorrupt police.

For example, if one were subject to routine breach of contract, expropriation of property, or threat of violence, regulatory apathy might create an incentive for one to take one’s business to a jurisdiction less plagued by uncertainty.

Between these two extremes are ‘transparent’ markets, which one tends to find in English-speaking countries and non-English-speaking countries where the legal systems have been based on or even borrowed from England or the USA (and possibly the commercial code from Germany). In these countries, one has a relatively free hand to organize one’s affairs as one sees fit and to change plans as needed.

For example, in Australia, Canada, the UK, the USA, etc., one can incorporate, regardless of one’s standing in the community, family membership, political affiliation, or even criminal background. One does not need to declare the specific purpose of one’s firm—the boilerplate ‘purpose’ being “to engage in any lawful activity”—seek sponsorship or permission to incorporate, or submit to a background check. One submits articles of incorporation, pays a fee, and stays current with one’s filing requirements.

The executives of privately held firms must communicate all decisions and actions that have a material impact on the firm to their shareholders, or risk civil or even criminal complaint. The executives of publicly traded firms must file public disclosures for seemingly trivial matters, or risk regulatory penalties.

Jurisdictions where transparency is the order of the day tend to attract both domestic and global investment, have efficient and liquid markets, and recover from crises robustly.

The optimal level of regulation lies somewhere between authoritarianism and anarchism, in which executives are free to form expectations, make plans, take action, and to modify their plans in light of new information—including rumor, superstition, and noise—changing supply conditions for inputs, and evolving demand conditions among consumers.

Invest accordingly.

Prof. Evans

La Porta, Rafael, Florencio Lopez-de-Silanes, and Andrei Shleifer, 2006. “What Works In Securities Laws?” Journal of Finance 61(1), 1-32.

[possibly available at: http://works.bepress.com/cgi/viewcontent.cgi?article=1000&context=florencio_lopez_de_silanes]

[2003 Working Paper available at: http://www.nber.org/papers/w9882]

Dec 092011

The Third Way

Wilhelm Röpke (1899-1966) is credited by many as one of the architects of the post-WWII German Economic Miracle, driven by the implementation of the Social Market Economy that is advocated by adherents of ORDO Liberalism, and associated with the Freiburg School of political economy.

(The term ORDO refers to an academic journal established in 1948 by the founders of the Social Market Economy movement in Europe following WWII.)

ORDO Liberals see a distinction between laissez-faire and Classical Liberalism that is very similar to what Karl Polanyi (1886-1964) describes in his book, The Great Transformation.

Essentially, laissez-faire is about means and Classical Liberalism is about ends, and there is no guarantee that laissez-faire will lead to Classical Liberalism. Evidence includes cartels, ‘old boy’ networks, cronyism, Unconscionable Contract, etc., all of which can exist under laissez-faire, but are very different from the ends that Classical Liberals advocate.

Some of the most repressive societies are those that have evolved in remote tribal villages, so far removed from formal government that it essentially does not exist.

On the other hand, the opposite of laissez-faire, statism, has led to unfathomable horrors including the twin extremes of National (‘right-wing’) Socialism and International (‘left-wing’) Socialism, the Khmer Rouge, and numerous Middle Eastern dictatorships, along with watered-down versions of in Cuba, Myanmar (Burma), Venezuela, Zimbabwe, et al., ad nauseam.

Statists see this not so much as a distinction between laissez-faire and Classical Liberalism, but as an inevitable consequence of laissez-faire, and they argue that government regulators and enforcers should achieve desired ends by whatever means are deemed acceptable.

In post-WWII Germany, the heavy hand of government was used to create a social safety net for the socioeconomic bottom-most while allowing market participants to allocate resources. So long as individuals employed means and achieved ends that were acceptable to government regulators, they were left to do as they wished. When someone in power determined that either the means or the ends were unacceptable, government agents stepped in to redirect the resources.

For the decade after the War, politicians and regulators steered the German economy down this middle way with some success, avoiding the excesses of command-&-control socialism at one extreme and the kind of anarchic chaos seen later in Russia following the fall of the Soviet Union at the other extreme. China’s rulers appear to be attempting to follow a similar path today.

If politicians and regulators are united in their belief that Classical Liberalism is the ultimate end, and that the constrained laissez-faire of the market is the most efficient means to achieve that end, with occasional intervention, then an ORDO Liberal policy regime can work.

There is, of course, no guarantee that subsequent generations of politicians and regulators will not err on the side of command-&-control, as happened in Germany in the last quarter of the 20th Century. Where individuals wield power, the danger always exists that they will use it in pursuit of personal agendas, even at the expense of the community as a whole.

Sovereignty without Sovereigns

Today, as we transition from capital/labor national economies to an integrated knowledge/service global economy, we face an altogether different set of challenges. The question today is not, “Will statutes and regulations be overly burdensome?” but “How can transnational firms and networks be hindered in forming cartels in the absence of a global statutory and regulatory authority?

In other words, the danger today is not that the agents of a national government might tax or regulate a firm or industry out of existence, but that the executives of transnational firms and networks will enter into contractual arrangements that create artificial monopolies or otherwise exploit their positions to the detriment of consumers.

Granted, Dominium is less of a concern than Imperium, but it is a concern, when it results in higher costs for those least able to afford them. At the extreme, executives gain a kind of sovereignty by being beyond the reach of any particular government other than the ones that they happen to be standing in.

An example of this is illustrated in a recent Bloomberg story, “U.S. Studies Derivatives That ‘Game’ Tax Rules” that describes some of the difficulties that US legislators and regulators are facing in their quest to control the executives of financial firms and the participants in derivatives markets.

A major part of the problem is the fact that all financial assets are either contracts or titles that derive their existence from individual agreements and social institutions. They can be transferred quasi-instantaneously; encoded, shredded, and stored transnationally; and accessed, reassembled, and decoded from any jurisdiction.

The only things preventing the establishment of a peer-to-peer asset exchange that exists purely on the Internet are inertia and convenience. The tools and designs have existed for more than a decade. As long as the cost of the status quo remains less than the benefit, individuals will resort to status quo organizations, but if legislators and regulators raise the cost of doing business conventionally much more, then transitioning to something else becomes a viable alternative.

Even in the absence of overt blundering, the relative benefits of technological innovations are growing at exponential rates, and the tipping over into a new order that is out of the reach of any national government probably will come no matter what politicians do in any particular jurisdiction.

In such a world, the idea of a Third Way becomes untenable, as no national regulator or enforcer will be strong enough to compel laissez-faire to lead to Classical Liberalism.

Where things will lead, like all else in the future, is unknowable, but it is not unimaginable. I will explore some possibilities in Part 2 of this essay.

Invest accordingly.

Prof. Evans

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.


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

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
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 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