Archives for category: Economy

There’s a lot of dry wood in the forests around us. It stays there for a while. Only from time to time something happens that starts a fire.

Fill a room with a mixture of oxygen and hydrogen – at ‘room temperature’, and nothing happens. Strike a match and… you get a big noise and a little water. Don’t try this at home, you won’t live to tell the story. The noise is really big.

White phosphorus has to be kept under water. Whenever it gets in contact with humid air at a temperature above 30 degrees Celsius it starts to burn. And it cannot be extinguished in any other way than by submerging the whole thing under water.

Put a TNT stick (make sure it isn’t dynamite) into fire and it will simply burn. Fuse it properly and it will detonate whenever you ‘tell’ it to.

Let’s consider life now.

All the chemical elements, and a huge number of the organic molecules, which are the building blocks of any living organism have been around for eons while ‘life’ is a relatively recent occurrence.

Males and females – both animals and plants, roam around freely. Yet no offspring appears before something happens between a male and a female. This – the need for something to occur outside the individual organism, is valid also for bacteria – they need certain conditions to multiply, and viruses – which need the assistance of other, suitable, organisms.

Whenever conditions are right enough, sooner or later ‘life’ will surely appear. Or so it has happened all over our Earth. Till now, at least.

Whenever a living organism follows it’s normal set of instructions – its DNA remains fully functional, everything goes ‘as advertised’. If, by any reason, enough DNA is damaged beyond repair, the hell breaks loose. Being diagnosed with Cancer is enough to blow up even the most stable mind.

I’ve kept the most striking similitude for the last.
Both combustion and life continue only as long as certain conditions are met. Both need enough oxygen and fuel/nutrition.

There are also two big differences between them. One regarding ‘time’ – the successions of ‘moves’ which constitute the processes, and the other regarding ‘space’.

Combustion follows a set of pre-existing rules.  The chemical composition of the combustible might change the ignition temperature but that’s all it can do. Or it may add – as it’s the case for explosives, the possibility of detonation. But, again, both combustion and detonation follow a set of rules which are valid ‘across the board’. For all combustible and explosive substances.

On it’s turn, life follows two broad sets of rules. It has to obey all those which govern chemistry and physics – read combustion and detonation, and, on top of that, it has it’s own set of detailed instructions. Which vary from species to species.

I’ve left for the end the difference regarding ‘space’ because this one is very simple.

‘Combustion’ will extend all over the place where combustible is ‘continuous’, in a single ‘event’, while ‘life’ is, by definition, about finite organisms which multiply to make ‘good use’ of the available resources.
This being the reason for which combustion stops whenever the combustible available in an enclosed place is exhausted while life can resist a certain period of ‘famine’.

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Gara Herculane (1878-1886) is the oldest, and the most beautiful, railway station in Romania.
Like most others, after having performed wonders for all of us for more than a century, it has been made obsolete by trucks and automobiles.

DSC_0688

By clicking the picture you’ll be able to browse more images taken in and around the place.

 

More than 30 years ago, a very good friend of mine had emigrated from then communist Romania to the US. Ten years later he landed  a job with a huge Japanese corporation, his previous position having been that of COO for a way, way smaller corporation. One where the owners were not only involved in running the business but also ‘close’ enough to the ‘daily hustle’.
After a few weeks he phoned me. He was utterly dejected. ‘It’s as if I’m back in Romania, working for a state owned enterprise. Nobody cares for anything but the hide on their own backs. And they act very narrow-mindedly. They lie to their bosses, don’t share work related knowledge with their co-workers and so on, without realizing that by behaving in this manner they actually weaken the structure which ‘feeds’ them. Furthermore, those in charge don’t care about anything else but their fat ‘compensation packages’, not realizing that, on the longer run, their behavior is leading to ruin. Meanwhile, the shareholders  – from ‘far-away’, don’t realize what’s going on. Until too late, of course.’

Some 25 years ago, another good friend of mine had emigrated to Canada. He currently works, as a contractor, for a huge Canadian corporation. A few weeks ago he was here for a short vacation and we had a chat. ‘Nobody cares for anything anymore. The contracting agencies don’t give a damn whether the people they send over are actually able to do the work, the bosses don’t understand, or care, very much… it’s as if we, the ex-communists, have came back from their future…’

Even the ‘family run’ businesses have lost their edge. Their owners are no longer ‘close’ to their employees and the businesses are very quickly sold to the highest bidder. And incorporated into ever-growing entities…

The two friends I already mentioned said that ‘whenever a corporation grows big enough, it starts to resemble a state’. My own experience concurs.

Only I’d take a step further.

‘Whenever an organization grows big enough, those who ‘inhabit’ it start behaving as if employed by a state/state-owned entity’. As if their job/position is theirs to be had/defended by birth-right. A feudalism of sorts.

And these people end up passionately defending the organizations which give meaning to their lives.
As they are! Simply because any change in the organization would imply a change, for the worse, in the fate of the individuals defending the current status.

And why would any individual behave in such a short-sighted manner?

“Every position in a given hierarchy will eventually be filled by employees who are incompetent to fulfill the job duties of their respective positions.”

Peter

BTW, when was the last time you came across the concept of ‘company culture’?

 

“Capitalism has generated massive wealth for some, but it’s devastated the planet and has failed to improve human well-being at scale.”

Drew Hansen, Unless It Changes, Capitalism Will Starve Humanity by 2050,
Forbes, feb. 9, 2016.

I’m afraid we are dealing with a huge confusion.
Capitalism hasn’t generated anything and hasn’t starved, nor fed, anybody.
People did!

Capitalism is nothing more, nor less, than a particular manner in which we, ‘the people’, relate to property while ‘the free market’ is one of the manners in which economies are run.

And here’s the place where things become ‘murky’.

‘Oekonomia’ is Greek for ‘making ends meet’.

“The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniencies of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.

According therefore, as this produce, or what is purchased with it, bears a greater or smaller proportion to the number of those who are to consume it, the nation will be better or worse supplied with all the necessaries and conveniencies for which it has occasion.

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776

The way I read it, Smith sees ‘wealth’ as people’s/nation’s ability to supply for their ‘necessaries and conveniencies’.
In other words, ‘to make ends meet’.

How we define our needs, the manner in which we choose to fulfill them and what we are disposed to ‘spend’ in the process… is our responsibility.

So.
What is it that we need/want?
A healthy planet? Clean air/water/soil and a fair opportunity for each of us to earn their keep?

Or a dog eats dog type of contest for ‘who has the biggest pile of money’?

Capitalism can encompass both.

Unfortunately, the second scenario has nothing to do with ‘making ends meet’.
On the contrary!

two sided coin

So, Japan and Germany have huge trade surpluses. Despite their workers being the best paid in the whole world. In both absolute and relative terms. Among the major economies, anyway.
Meanwhile, the US has a humongous trade deficit. Yet the American CEO-s are ‘compensated’ as if they were the best in the world…

Interesting, right?

More ideas about the same subject here:

Why is Japan Economy (surplus of over $100 Billion) a considered Weak Economy? & Why is USA Economy (deficit of over $400 Billion) Strong Economy?

 

Survival of the fittest“.

Evolution is not about survival of the fittest but about the demise of those unable to adapt. Even if the difference seems trivial this approach has vast consequences. As Ernst Mayr explains it What evolution is, (Basic Books, New York, 2002) one can never know what “best” may mean, in any situation. First of all because (Werner Heisenberg, Herbert Simon, Dan Ariely) you can never have a complete picture of anything and secondly because in the real world ‘situations’ are changing constantly – Panta Rhei.
So the only relevant test is survival, being able to cope with whatever comes along and not the brilliance with which one might be able to solve a very particular problem, at a particular moment in time.

Division of labor

After understanding ‘survival’, it’s a lot easier to figure why social strategy functions better than sheer individualism: by creating the right environment for its members to become specialists a complex team will cope better when confronted with  different complex situations than a mob composed of identically qualified members.
With the caveat that this arrangement works only as long as every member of the team realizes that it’s better for him to belong than to get out and only as long as all the members of the said team act consistently as if ‘one for all and all for one’. Otherwise put, complex teams where each has it’s own more or less indispensable role work properly only as long as most of the members continue to be ‘socially intelligent‘.

For those who feel there is an apparent contradiction here please note there are two levels of analysis/interaction.
Individually, each of us has to take care of him/herself (and his/hers immediate family).
Socially, each of us has the duty to evaluate the other members of the group and to exchange information with them about the well being of the whole group.

This can be taken even further. Whenever a subgroup becomes too ‘specialized’ –  as is in ‘becoming so preoccupied with it’s own well being as to stop caring about the rest’, its own survival is in danger. Time and time again, history shows us that those who become estranged from the rest of the society end up badly. Creating problems for the entire society, true, but ultimately their behavior amounts to a form of suicide. Callous royals end up on the chopping block, seemingly indestructible dictators end up at the hands of angry mobs… Erstwhile top of the feeding chain (too big to fail?!?) companies end up broke or bailed out by the government…

Politics versus Economics

I’m constantly amazed by the fact that politics and economy have grown so apart from each other and each of them so disconnected from reality.
Politics has become a constant struggle for administrative power while economy has ‘metastasized’ into a battle field where the foot soldiers struggle to survive while the big brass  gorge themselves with ‘money’.

Nowadays, too many politicians have forgotten that their job is to figure out, in close cooperation with the rest of the society, how to solve the various problems which  challenge us on a daily basis. Too many of them do nothing but fight among themselves, each of them attempting to impose their particular vision on all of us.
In the same time, the economic mechanism is no longer geared towards ‘making the ends meet’ – the original meaning of the Greek word oikonomia.
Our not so distanced ancestors have invented a self governing mechanism which very efficiently allocated the available resources to those who were able to put them to good use. Adam Smith described this mechanism as ‘the free market’.
Presently, we’ve corrupted this previously self leveling mechanism into a collective MMA arena where the heavier knock the wind out of the weaker in the name of ‘king profit’.

All this because we mistakenly believe free market capitalism to be an ideology when it is nothing but a mechanism for allocating resources.
The best to date, admittedly, but only as long as we’re wise enough to preserve the freedom of the market.
And as soon as we’ve mistakenly ‘anointed’ profit as the most important goal of any economic venture… the market had ceased to be free!  You see, profit is the best measure for efficiency – which, in its turn, is the best indicator for economic survivability, yet efficiency itself is pointless if the needs of the market are not met. Smith’s famous characters – the baker, the brewer and the butcher, went to the market to meet the needs of their customers. They became comfortably well off because they were successful in meeting those needs in an efficient manner, not because they were successful in cornering the market… as some of the present day tycoons are teaching us

Why do I maintain that a ‘profit obsessed’ market is no longer free?
Well, simply because the participants to such a market are just as free as those addicted to heroin. Both kind of addicts think of nothing but the object of their addiction and are oblivious to everything else. As in blind to everything else!
And I’m sure you all agree with me that being blind is detrimental to being able to stay alive. Specially so for those unaware of their blindness!
Or unaware of their addiction…

 

“Between 1970 and 2010, the number of administrators in health care grew more than 3000%, while the number of physicians grew about 200%, according to the Bureau of Labor Statistics. During that same 40 years, U.S. health-care spending rose 2300%. Doctors’ fees account for only 8 cents of the health care dollar. Where do you think the other 92 cents are going?”  (Marni Jameson Carey, Focus on Health Coverage Misses the Point, Forbes.com, Oct 24, 2017)

A few years ago I was arguing that profit was overrated.
It seems that Forbes, a magazine which cannot be accused of any socialist tendencies, has reached a somewhat similar conclusion.

Even more interesting is the solution proposed by Forbes to the health care problem.

A return to the free market!

Free from what? Who says the American health care market is not free?
Well, click on the quote above and see what Forbes has to say about this…

But what happened? How did we get here?

Well, the free market described by Adam Smith was an environment where people used to fulfill their needs by selling their wares.
The butcher sold meat and bought everything else he needed, the brewer sold beer and bought everything else he needed, the baker… and so on!
OK, there  was a certain kind of competition which kept the things in check. The butchers competed against other butchers, the brewers…
And because of this competition, all traders – those who wanted to survive, anyway – streamlined their operations and became more and more efficient. Hence profitable.

I mentioned the link between the survival of a commercial enterprise and its ability to generate profit.
Apparently, it doesn’t make much sense to elaborate on this. Bear with me, please.

The whole point of the free market is the division of labor. Besides its freedom, of course.
Each of us does what he knows better and then we trade our respective wares. This way all of us fare better than if each of us would have had to produce everything each of us needs to survive.
In this scenario, competition – between ‘bakers’, for example – is actually a tool which makes it so that the market, as a whole, doesn’t waste resources. When the less efficient bakers are ‘encouraged’ to find something else to do, the entire market is better off. And so on.
In this sense, profit is only one indicator – and a very good one – of how able to survive is a certain commercial venture. But not the only goal of the entrepreneur who started/runs the enterprise. What he wants is to make an as good as possible living by doing what he knows best, in close collaboration with the other participants to the free market.

Adam Smith had written his books some two and a half centuries ago.
And the free market had served us well, for a while.
Just look at what we’ve accomplished in these two and a half centuries.

But, just as Forbes points out, things are no longer going in the right direction.

Why?

Simply because the market is no longer free!

Not only because some of the participants have become ‘heavy’ enough to crush all competition. This is only the lesser part of the problem.
The really big one, and so well hidden that it’s almost invisible, is that too many of us have become obsessed with the same thing. Money!

Life-of-modern-people

Profit has become THE absolute goal of everything we do. Too many of those who participate in the free market no longer want to collaborate with the others but simply want to get rich. By any (legal) means.

Some say this is a good thing.
They invoke Adam Smith’s words as a justification for their beliefs.

I beg to differ.

The simple existence of our current obsession has profoundly altered the very nature of the market. Which is no longer free.

Because WE are no longer free. When too many of us are obsessively concentrated on the same thing, they will necessarily disregard all other options. And the rest have no other option but to follow.

This is not freedom!

Mesmerized people can not be described, by outside observers, as being free.
Regardless of how they consider themselves.

 

I’ve reached the conclusion that thinking and digesting have very much in common.

Citarum 2

We can’t do it by our own. Those of us who don’t cooperate/speak with those around them, don’t have what to eat or what to think about.

Both processes imply three stages. Identification, absorption, use.
We use cultural models to identify both our food and the important issues.
Absorption – through our gut/conscience, is both highly specific to each individual and governed by our common DNA/shared cultural traditions.
The ‘products’ of the digesting/thinking process are, again, used both in public as well as in private. Part of the energy we get from our food is consumed ‘cooperatively’ with our ‘coworkers’ while most of our thoughts end up either verbally expressed or put in practice.

Both processes, digesting as well as thinking, increasingly change the environment where we, and others, live.

Citarum 1

Until not so long ago it was possible to buy unlimited coverage against the risks that scared you.
After things became too complicated and fraud a too widespread occurrence even the Lloyd’s gave up and started to introduce caps on insurance policies.
In fact Lloyd’s of London was the only place – that I knew of – where risk was understood, at least in part, in a ‘functionalist’ manner.
Risk is something that can be seen in two ways.
As yet another opportunity for making profit or something that has to be mitigated for the profit of the entire community.
Let me deal with the latter ‘option’ first.
Somehow I don’t buy it that Bismarck was primarily motivated by the well-being of the workers.
But what the German industrial barons of the day needed in order to catch up with the British ones – the Albion was the industrial power house of that time, o tempora…- was more and more people willing to leave the relative safety of the country-side and come to the city to work in the newly built factories.
In order to appreciate the huge difference between these two situations we must remember that in those times families were a lot larger than they are now and that their members used to help each other in times of need. But this could happen only if the members of the same family remained in close vicinity and worked on very flexible schedules – agriculture or family owned shops. You cannot go help your ailing mother if you work in shifts and live two hundred miles away from her.
So, in order to ‘lure’ more and more people out of the fields, and in a very short time, Bismarck had to offer them a ‘safety net’.
OK, let’s accept the idea that, maybe, there are some risks that the society, as a whole, should concern itself with.
But how to fulfill this ‘social need’?
How to identify which risks should be dealt with in a collective manner and which should be left alone. Then how to manage the whole process?
‘State-wide’ or through privately owned/operated initiatives?
Does it really matter?
I don’t think there is a universally valid recipe here.
The Bismarck’s social insurance system worked in Germany.
Lloyd’s has functioned almost seamlessly for 3 centuries. In England.
Both systems, one centered mostly on profit and the other on the safety of those who took part in it, worked because they spread out both the risks and the profits.
Current systems, where only the risks are being mutualized while the benefits tend to become more and more centralized – by ‘design‘, by corruption or both – are no longer functioning properly.
Take ‘Obama Care’, for instance. Most people, including Donald Trump, agree that something has to be done about ‘public health’ but the whole thing isn’t yet working properly.
Instead of fighting among ourselves on whether the state/government should have anything to do with risk management how about considering for a moment where our current infatuation with ‘profit‘ has brought us?

It depends on the meanings we attach to these two concepts.

Yanis Varoufakis, Greece’s ex finance minister, is convinced that ‘Capitalism will eat democracy – unless we speak up.

Since he has some experience in this matter I’ll follow his line of thinking – for a while.

His point being that you can have successful capitalism in undemocratic societies – like Singapore and China – and that effective power has slowly shifted from the political sphere of the society to the economic one – which is undemocratic by definition.

Can’t say he’s entirely wrong, can we?

But we can say he’s somewhat confused…
So, he mentions Lee Kuan Yew’s Singapore and China as capitalistic success stories and then says that  the political sphere is gradually falling  under the yoke of the economic one… Well, last time I looked, in China the state was still in full control of everything that moved and the state was firmly in the hands of the politicians. Same thing was happenning during Yew’s tenure as Singapore’s good willed dictator.

Unfortunately there is some truth in his words when we look at what’s going on on the both sides of the Atlantic and that’s why I’m going to examine whether we have the same kind of capitalism in both situations.

By Google-ing the word I got two definitions for the concept.

The first definition that was offered by the search engine came from Oxford Dictionaries, “An economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state” and the second one came from Merriam Webster: capitalism is “an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market“.

Putting them together we have private ownership, private decision, free market and profit as a goal.

Are these enough to describe a reasonably well functioning economic system?
I’m afraid not.

Let me give you some examples.
The French state has a controlling interest in Renault and the land of Bavaria quite a sizeable one in VW. Renault is in good shape and VW was too, until very recently. So private ownership is not an absolute necessity.
In the US we had quite an interesting situation. Two out of the three big car manufacturers  had to be bailed out by the state. All three were privately owned so we must look somewhere else: the Ford family still has a powerful word in the management of the single one which didn’t had to be bailed out. In Europe the best run auto company seems to be BMW – again controlled by a single family, the Quandt’s. It seems that it helps a lot if those who call the shots have a long time interest in the well being of the company versus the situation in which the top management has (short time) profit as the single/obsessive target.
Coming back to Renault and VW, they can be compared to Singapore, China and, maybe, Spain. Singapore was able to develop a ‘capitalistic’ economy despite it being an authoritarian society simply because Lee Kuan Yew was a very special kind of ‘dictator’ – one that not only cared sincerely for the greater good of his people but also didn’t loose his head during his long stage at the helm. A similar thing happened in Spain – Franco was the sole dictator who had made preparations for a democratic evolution after his demise, while China had to wait for another good-willed dictator to grab the power – Deng Xiao Ping – before it could steer towards the present course. No other authoritarian regimes but these two have ever managed to replicate this feat – we still have to wait a little before pronouncing Vietnam as the third, and very few other publicly owned companies fare so good as Renault does.

So, we have rather strong evidence suggesting that ‘skin in the game‘ trumps blind insistence on short time profit and that a free, democratic, society offers greater chances for economic development than a authoritarian one. In fact the politicians that need periodic confirmation from the people they govern do have some skin in the game while the authoritarians are in a position that is somehow equivalent to that of the CEO’s of the huge corporations whose stock owners are so disspersed that practically don’t count much – the members of the board practically slap each-other on the back and are able to do practically what they want with the companies. Look what happened at GM, Chrysler and, for example, ENRON.

But how free should be that society in order for capitalism to thrive?

Could it be so free that a guy could come from the street and claim your house as being his own? No?

So we need a free but orderly society. One where private property changes hands only when its owner says so – or has previously entered into a contract which stipulates that in certain conditions that transfer has to take place.

Meaning that in order to have a functioning capitalist society we need not only private ownership but also private owners who have enough trust in each other to start making business together.

You see, the feudal lords of the Dark Ages did have a lot of private property but capitalism couldn’t take hold in earnest as long as the (absolute) monarch could strip a man of his property and give it to somebody else. They couldn’t enter into (longish time) contracts because the era was dominated by huge uncertainties regarding various aspects of the social and economic life.

In fact it is exactly this well tempered freedom that is the crux of functional capitalism. Enough freedom so that everybody could feel confident that he is his own master but tempered by rules enforced in a pwerfully enough manner to give everybody sufficient trust that most contracts will be executed faithfully.

In this sense for capitalism to work properly we need to have a market that is free in more dimensions that one.

It has to be free from political intrusion in the sense that the government should leave it alone as a rule of thumb but also that the same government should keep it free from becoming cornered by a single group of interests.
In fact there is no difference from a market that is run by a governmental agency or by a monopolistic corporation – no matter if the latter is private. As soon as decision making becomes concentrated in too few hands mistakes starts happening. And their effect accumulate until the system finally collapse. Or is dismantled by some ‘exasperated’ more powerful agency – as Standard Oil and  ‘Ma Bell’ were dismantled by the US government. Which, by doing so, created the premises for  the huge development of those two respective markets – oil and communications.

Only this freedom of the markets can seldom be preserved by an authoritarian regime. Yew’s Singapore and contemporary China are exceptions, not the rule. Most authoritarian regimes cannot resist temptation and start meddling in the economic life of their countries. By doing so, they introduce a lot of ‘noise’ into the system. Eventually, this noise drowns the useful signals and ‘blinds’ the decision makers.

Same thing happens – and here Varoufakis has a valid point – when economic agents become so powerful that they can dominate the policy makers. The politicians can no longer preserve a balanced stance towards the economy and give in to ‘special interests’. This way the markets loose their freedom, with all the malign consequences that come with this situation. Among them, the lack of trust that slowly creeps in the souls of those who have to do business in the no longer free markets. Which lack of trust is very bad for all those involved.

And another thing about which Varoufakis is absolutely right. A lot of money are not being moved through the ‘front doors’. Not that they are not invested at all but because they are kept somewhat hidden they do not contribute as much to the well being of the world economy as they could/should.

2.1 $ trillion have been accumulated, as of  October 2015, in off shore accounts by the top 500 American companies in order to avoid taxes and
Between $21 an $32 trillion have been hiding in 2012 in various offshore jurisdictions.

Why is that? Simply because those who are called to decide about these money do not ‘trust’ that by bringing these money home and by investing them there, after paying the taxes, will be able to generate profits equivalent to those produced by leaving them off shore?

So what should we do? Tell them ‘democratically’, by electing somebody who is crazy enough to implement such a measure, to bring them home? Or even  confiscate them, one way or another?

I’m afraid that here I part again ways with Mr. Varoufakis. And with Aristotle: the way I see it democracy is not ‘the constitution in which the free and the poor, being in majority, control government‘. That would be ‘mob rule’.
A truly democratic process starts before the vote. When every stakeholder can make its point known to those who are going to cast a ballot so they’ll be able to do that having a reasonably clear understanding about what’s going on.

Frankly I’d rather rephrase Varoufakis’ message. ‘Corporatism has a tendency to disembowel democracy and transform it into ‘mob rule’ – the situation where the poor are no longer that free simply because they are convinced through ‘unholy’ methods to vote one way or another.

What can be done? Explain, loud and clear, that if jobs disappear the same thing will happen with the aggregate demand?
Explain that by giving their workers as little money as they can in reality the results are way worse than if the wages were as high as the companies could afford?
Ford didn’t give his workers more money because he loved them but simply because he had understood that in the long run he would be better off himself by doing this, you know!

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