MORE INCONVENIENT TRUTH – ECONOMICS
Economics, Independence, Wealth, Productivity, and Software
2008 August 27


     An elderly friend of mine on the Upper East Side was known for her independence. She told me, "I can be independent because I can depend on so many people." Another friend told me, "Things are more like they are now than they have ever been."

     We have more megapixels, gigahertz, and terabytes than ever before, but deep in our hearts, we know something is really wrong. There is an unease in the United States of America these last few decades that is really new, something wicked this way comes. This stateside disease is affecting Asia and Europe, but I don't believe it has afflicted Asia and Europe. Both of these continents are more productive and wealthier than they were a few decades ago.

     I'd like to go over the basics of economic productivity, truth inconvenient to those who seize power through economic zealotry. My earlier piece dealt with the inconvenient truth about ecological zealots. You know the story, "We have to help the poor, never mind who they are, so you have to give me power to help them." These are the subjects discussed in this essay:


Economics
Natural Law
Wealth
Productivity
Software

    

    


Economics 101: Scarce Resources

     On the first day of class back in 1974, my Economics 101 professor, Burt Malkiel, explained that economics is not the study of money. It isn't about dollars, rand, pounds, rubles, shekels, shillings, or euros.

Economics is the study of the distribution of scarce resources.

     The definition of "economics" therefore depends on the definitions of "scarce resources" and "distribution." Scarce resources are goods and services that have more people wanting them than naturally exist, basically things that people buy and sell. (We have to think for a minute to think of non-scarce resources, like air in the eighteenth century or food in the sub-Saharan Africa portrayed in the movie "The Gods Must Be Crazy.") Distribution is how those goods and services get from those who make them to those who use them. Usually makers and users are not the same people.

     We picture an evolution from total self-sufficiency where the makers and users of goods and services are the same people through a trading-barter society to a money economy where there is a universal currency of value. That money typically evolves from hard money, something scarce and valuable like gold, to soft money whose value is the integrity of those who issue it.

     It's easy to picture economics being about money as it is the universal representation of things economic, and it's easy not to picture the underlying goods and services as being what the whole story is about.

     These goods and services can be consumed or kept by their producers, taken by force, given away, or traded.

     Self sufficiency isn't an option for most of us, forceful distribution is seldom a good option, and altruism isn't much better in the long run. So that leaves trade as our fundamental economic force.

     Trade happens when I have something you want and you have something I want, we find out about each other, we decide on a mutually-agreeable exchange, and we follow our agreement in exchanging our goods and services. This works fine for direct exchange between two people at the same time.

     An alternative view of the evolution of soft money, the view I prefer, regards it as convenient accounting of debt. Most of the time lots of us have something others want in different places at different times. We can print up pieces of paper promising goods and services which we can exchange for other things. Those pieces of paper start as specific promises of named good and services at specific times and places, "Mr. Jones promises to deliver ten cords of wood to Mr. Smith in his driveway on May 3."

     When they become less specific in recipient, "Mr. Jones promises to deliver ten cords of wood to the bearer," these pieces of paper become money. After giving Mr. Jones something he needs, I can give this piece of paper to Mr. Brown for something I need and he can use the ten cords of wood from Mr. Jones.

     The next steps are more subtle. We can have promises or for things to deliver at a later date as futures contracts and for things we don't plan to deliver as collateral for loans. Finally, we can have units of value not tied to a particular good or service. Mr. Jones agrees to ten cords of his wood being worth twenty credits and establishes his price as two credits per cord.

     Once we have money in one form or another, we have a medium for trade without having to know each other. Leonard E. Read's 1958 essay "I Pencil" discusses how this happens with an impassioned plea not to let government bureaucrats and regulators mess it up.

     I would be overly optimistic to argue that an informed community of price setters and buyers produces the maximum wealth and optimal distribution. However, when the free-market economy has been allowed to function it has done a good job of producing a lot of wealth and making sure that almost anybody willing to work and to produce something useful gets a piece of that pie.

    

    


Natural Law and Invisible Hands

     So long as informed buyers and sellers are free to exchange goods and services to pursue their ends, an economy will produce wealth, and reward those who work to do so. Participants in such an economy will be free to decide which goods and services are important to them even if most people think otherwise. Producer supply and consumer demand will settle on equilibrium prices that maximize the value to both parties. In 1776 Adam Smith wrote about this process as an invisible hand that drives markets to their greatest good.

     There is a community of economic philosophers going back to the middle ages who say this free-market economy is a natural law, that leaving markets free will eventually gravitate to the greatest good. I don't believe this.

     There is a tremendous social and political infrastructure required to have a free market. There are older, wiser, and better-educated people who have thought about these issues, so let me give a brief overview of what it takes to have the so-called Natural Law happen.

     There are societies dominated by nature, neither religious nor political, that are neither productive nor free. Anybody who has spent time in central Africa can tell you how bad things are there. Everybody agrees there are just a couple of big things that need to change to save these people from their misery, but they just don't seem to agree on what those big things are. So let me make a suggestion.

     To have a productive, free society, a place where most of us would really want to live, we need three things:


• Respect for life, liberty, property, and promises.
• Respect for other people's religious choices.
• Respect for other people's economic choices.

     The first, respect for life, liberty, property, and promises, is the so-called natural law of western philosophers. "We hold these truths to be self-evident." They're not self-evident and they're not natural law. They are a finely-tuned system of interpersonal relationships and societal pressures that the western world developed over centuries. Ayn Rand called it "the sanctity of contract." The intricate network of what is and isn't property doesn't come from a house of worship or a legal system, these institutions follow community understandings.

     A friend asked me why I thought it was so nice that I lived (at that time) in a place where people didn't lock their doors, where 80 hours per week of police coverage was enough. Because it means that community respects property, that it wouldn't occur to most people to take something that wasn't theirs, or at least to leave a note, "Pete, I borrowed your electric saw," signed "George."

     The second and third items, respect for religious and economic choices, are the more-usual libertarian views on freedom of religion and freedom from politics. Some of us interpret the second item as freedom from religion. (The Marxist communists used this point to gain leverage with members of the intellectual and social elite.)

     While we're busy touting religious and economic freedom, let us not forget the first, foundation principle of respect for people, their lives and their property.

     These are the principles upon which the United States of America was founded. I was embarrassed to hear two people living here in conversation where one said, "People who have those [conservative American] values should go somewhere and form their own country." They did, we did, and you're both here because you appreciate what those values produced. As we reject these founding values, our lives become less prosperous and less free.

     Yes, it's true. Ideas have consequences.

    

    


The Fallacy of Total Wealth

     We measure wealth as the product of how much we have times how much it's worth. That doesn't sound silly, does it? So howcum it produces such silly results and decisions?

     I'd like to go over the fallacy of how we measure wealth, starting with an example.

     Suppose a fashionable desert town (think of someplace near Sedona) has one hundred homes that sell for a million dollars on the market. We know that's their price because there's a steady flow of people buying and selling, maybe five a year, and the price is a million dollars. The total real-estate wealth of that community is easy to calculate:

wealth = price × quantity
wealth = 100 houses × $1,000,000
wealth = $100,000,000

     Now there's a Big Fire, the horrible event everybody has been dreading, and twenty of those homes turn to ash surrounded by burnt cactus. The resulting eighty homes are now worth 1.5 million dollars because they're in high demand.

wealth = price × quantity
wealth = 80 houses × $1,500,000
wealth = $120,000,000

     Are you shitting me? Is this community really $20,000,000 better off from the fire? I don't think the folks at the chamber of commerce see it that way. The folks spending Friday evenings at Harry's Pub on Sycamore Street don't see it that way, either. Clearly this town has less of whatever makes somebody wealthy than before, 20% less in their real-estate assets.

     The actual answer is more complicated than that, and I don't have it all worked out, but only the 100th house is worth $1,000,000. The 99th house is worth a little more, what it would sell for if one house weren't there. The 98th house is worth even more, what it would sell for if two houses weren't there. Whatever measure you want to use for wealth should include the incremental values added up over the inventory being assessed.

     So when somebody says the market capitalization of a company is the stock price times the number of shares, I don't believe it. I don't know what to believe, but that isn't it. In the last year or so, they tell me America's credit market has lost $500 G. (For big-bucks numbers, $1 K = $1000 = one thousand, $1 M = $1000 K = one million, $1 G = $1000 M, and $1 T = $1000 G.) Europe lost another $500 G for a total loss of $1 T, a terabuck.

     This might be taking the covers off an erosion of wealth that has been going on for decades or it might be a phantom response to a comparatively small change. In either case, we didn't wake up one morning and find ourselves $1 T, a terabuck, poorer.

     Market capitalizations of companies are similarly misleading. Just because the marginal shares being bought and sold are wagging like a happy dog's tail doesn't mean the company is changing in any fundamental way. I remember one chief executive officer (CEO) of a major American corporation making an important decision and then checking the stock price a few hours later. If his company's stock went up, then he knew he did the right thing.

     This is wrong on many levels. First, stocks respond to the performance and health of a company. It takes more than a few hours, more like a few years, for a decision, even a really good decision, to change the financial performance of a large company. Second, do we expect individual good decisions to make perceptible changes on something as long-term as a stock price? Should one evaluate a home-cleaning service by having the house appraised before and after? Third, he's got it backwards. Wall Street investors buy and sell stock, they don't run companies. So why is this executive relying on those investors for approval of his corporate decisions? He's supposed to be the expert in his company (another discussion to be had about the millennial wave of inept American CEOs), not following the people who are trying to follow him. There's some circular reasoning in there.

     So here's the clincher:

     THE UNITED STATES IS A LOT POORER THAN IT WAS FORTY YEARS AGO.

     The economic pundits tell us things are great here in the U.S.-of-A, but our personal experience keeps telling us differently. We have big-screen plasma TVs with 500 cable channels and just think what that would have cost in 1968. How can we compare then and now anyway? It's apples and oranges.

     The comparison is made by looking at things we needed then and still need now. More of us spend more time commuting to work more hours at shittier jobs with less stability. We spend a greater fraction of our income on housing, food, clothing, and education, and are not better housed, fed, clothed, or educated.

     So what about computers and cell phones and big-screen plasma TVs? We have more megapixels, gigahertz, and terabytes than ever before, but we should use more basic measures of wealth.

     There are two flies in the we're-a-lot-poorer-argument ointment. Communication and air travel are both a lot cheaper. These are almost necessities in 1968 and 2008, things Americans would miss meals to have then and now. I don't think either is cheap enough or important enough to displace the higher costs of the bottom-line necessities, but we should consider them.

     In light of our failings in necessities, I don't think it's that interesting how much nicer "CSI Miami" is than "The Ed Sullivan Show" or how much better "Jeopardy!" is in high definition than in black-and-white when the questions were harder. (For Smothers Brothers fans, Pat Paulson for President is looking pretty good these days.) Cars are more fun today, even with those silly air bags, but where can we drive them with all the traffic jams of people driving to jobs they hate?

    

    


Productivity - America's Real Issue

     You have no natural rights, not now, not ever, you never did. If you want to see what rights nature affords, then get some zoology books and study nature. If you want to see what rights nature affords us humans, then spend some time in equatorial Africa. You'll see more clearly if you paint your skin dark brown and leave your American or European passport in your hotel room as you wander around.

     So what rights do we have and what rights should we have?

     Let me put it this way. A lot of people before our time took a lot of risks and shed a lot of blood so we could hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights that among these are Life, Liberty and the pursuit of Happiness. If we have to fight horrible, bloody wars to defend these truths, then maybe they are not as self-evident as we thought they were. Yet we need to live in a society where they are self-evident to enjoy the kind of lives most of us want to live.

     Think of this issue another way. If we want to live in a free and respectful society, then we have to pay for it. Paying taxes and giving tribute only aggravate tyranny, so how are we going to pay? The answer, my friend, is to take only what we earn. If we want something from somebody else, then we make bloody sure that somebody gets something he wants from the deal. We make sure that we're happy and he's happy.

     One of the disturbing trends in the United States over the last half century is the growing community of non-productive whiners articulating their entitlement to a share of the pie. Never mind the exact accounting, finding something useful you can do should be a prerequisite for getting something from the rest of us. This has become a racial issue here: "Howcum all these hard-working immigrants are getting ahead while we're still stuck on welfare-relief in the slums?"

     I'm old-fashioned enough to like the things wealth provides me. I want to have a nice place to live, no bugs, warm in the winter, cool in the summer, two cats in the yard, safe neighborhood, good schools, nice weather, free from crime, and all that stuff. I like having an automobile and driving it where I want to go with gasoline in the tank. In my own case, I like having an airplane and flying it on my weekend outings. I like having airlines take me to various places on this planet. I like having good food to eat and medicine when I'm not well.

     Since I can't make these things, I need somebody else to provide them. I'm comfortable with the notion that I have to provide these people with something I can make. Maybe there are a few intermediary parties, maybe more than a few intermediary parties, but eventually what I produce has to be enough to pay for the effort to make my home and car and travel and food and health care.

     I had a friend who worked in my profession for the government. He complained once that private-sector engineers were paid more than government engineers. "In other words," I told him, "you're complaining that I get more of my paycheque than you do." A famous-within-his-field analyst named Gene Woolsey said it was important to train a generation of productive students "so the socialists will have someone to tax."

     A busy, vital, productive society has the resources to pay the additional cost to maintain its freedom. A society of whiners and snivelers isn't going to make it.

     The division between producers and moochers has sprawled into social issues where it has no business. Racial issues from urban gentile ghettos to affirmative action ultimately boil down to who are earning the wealth and who feel entitled to consuming it without earning any of it.

     A free society doesn't mean you get to live your life for free. As miserable as it sounds, if you do nothing, then you should get nothing. Sure there are horrible cases like blind people and cripples who can't work, but they're not the problem we're having in the United States. It's the rest of the able-bodied, disabled-by-television-minded cases who need to get off their high horses and on the job market.

    

    


The Software Event Horizon

     This gets me back to my standard forum of my own complaining, the world of software. I like solving problems, I like computers, and I like programming. I'm good at these things and I add value with them. There were a few others doing the same thing forty years ago who created a mystical aura around the digital computer. (Wasn't it Michael Crighton in The Terminal Man who pointed out, back then, that we always seemed to put the mainframe computer in a shrine-like environment with raised floor, fluorescent lighting, glistening cabinets, and glass walls?) Spinning computer tape drivers and blinking console lights were a symbol of precise, mathematical thought applied to difficult problems.

     Now things are breaking all over the place. The cost of Microsoft's shifting sands (Have you seen Vista yet?) is enormous. I don't blame Microsoft any more than I blame Katrina, we didn't have to build a major city without protection in hurricane country and we didn't have to base our businesses on bad software.

     So how does software fit in a discussion of wealth and productivity? Simply this: The humongous post-modern software-programming enterprise pays (my off-the-cuff guess) ten million people quite well but doesn't produce very much, if anything. If you're part of that scene, then you're probably not part of the productive scene that is needed to dig our world economy out of its current hole.

     In fact, we're paying ten million salaries for an industry that isn't doing any good (I'm being nice today). That means somebody is producing stuff while somebody else is getting paid. Software is sucking ten million salaries worth of the life blood of our planet.

     I believe the software industry is doing more harm than that. Have you seen the movie "Brazil"? There's a culture today that nothing works and nothing is really supposed to work. In 1981 I sent a friend in Massachusetts an e-mail from California. I gave him a time and place I was going to be in New York City. I didn't need or expect a reply because I knew either he would get the e-mail or I would get a notification. Today we confirm our confirmations and still we worry.

     When my friend's car jumped into an intersection at a red light because he pressed the DEFROST button, that shocked us in 1985. Those who are reading this in 2008 should ask yourselves, does this shock you in 2008? I didn't think so.

     So what is the Software Event Horizon? I take this from the Douglas Adams trilogy "The Hitchhiker's Guide to the Galaxy" where he describes, tongue in cheek, a planet where shoes got so bad that people needed more and more shoes that wore out more and more quickly until the entire planet was consumed making shoes. He called this the "Shoe Event Horizon." Can the 7000 million people on our planet ever produce enough software to fix the problems in the computers we run today?

     Software is like government and cancer, I'm afraid. The only way to have it better is to have less of it.

     I'm not suggesting we get rid of our computers, never mind that I enjoy driving a manual-everything 1987 car and fly a manual-everything 1967 airplane. I'm suggesting we expect fewer bells and whistles from our software and emphasize getting the right answers right away from our software vendors.

     If some software doesn't help somebody make a better decision or run a better enterprise or make something work better, then why are you buying it? I know it looks pretty, but lots of things look pretty and I don't buy them. You shouldn't buy them either.

    

    

_

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