dispelling a few myths

I found this in a comment on youtube:

One negative of capitalism is it requires cyclical consumption, corps have to reproduce the same junk over and over with minor changes just to keep it going.
Another is ‘technological unemployment’, meaning machines take jobs and there are NO replacements. So everyone without work is just supposed to die.
The[se] are INHERENT problems that can not be fixed by changing the curency or controlling the government.

On cyclical consumption: while it does often seem as though this is what’s happening, it doesn’t have to be this way. If we the consumers want a washing machine that just does the job without all the bells and whistles, and lasts a long time, then there’s a market for it and a smart company will produce it — and in so doing outsell the company that’s producing the overfancy hunk of junk. True, there are certain kinds of products — trendy clothing, for example — that do seem to go around and around in circles. But it’s optional to participate in these markets. You can opt out and wear whatever you find at the local rummage sale for 2 bucks, or for Spitalfields Market in London for 2 pounds, like me! The option to not participate in ridiculousness is one part of the wonders of a free society.

On technological unemployment: this reminds me very much of Manna by Marshall Brain. The robots are taking all of our jobs! It does seem plausible on the surface — if all the jobs are done by robots than what’s left for us to do to earn money?

There’s actually nothing to be afraid of; technological unemployment is actually a wonderful thing! It’s one of myavorite things to think about because I get all warm and fuzzy inside. One way to approach this is to look at history. How about the washing machine? At some point in history, it was somebody’s job to wash the clothes. Nowadays it only takes a few minutes to throw them in the washer; so that job is now gone, replaced by laundromat tycoons and good old GE. And yet disaster was averted and those people put out of work have managed to find other jobs. And now everyone’s standard of living has gone up because we are free to, if we wish, use the laundry machine instead of washing by hand. (It’s important that it’s optional to use the laundry machine — to satisfy those that long for a simpler life, of which there are many, we must allow for the fact that sometimes simple manual labor tasks provide for deeply satisfying work. This is part of the argument for low taxes, but I digress.)

How does this work? The reason you’re getting confused is because you’re looking at the economy in a static fashion. As if the demand for goods and services today is roughly the same as what it’ll be in 50 years. However, these things change over time; how many people in the 1890s were employed by Hollywood? What was at that time a futuristic technological luxury is now a commonplace commodity with an entire industry to support it which employs thousands if not millions of people.

Another way to think about it: forget about jobs and money. Just think about a bunch of humans milling about the earth trying to have a good time. In one scenario, some of the humans spend day in and day out as bank tellers: handing people cash and punching some buttons on a computer. Then someone invents the ATM and those humans no longer have to hand people the cash, they are free to do other things (like invent new ATM-like devices! Or take up cricket.) Net, the world is surely better off with the ATM than without, all other things equal.

So fear not! There will be new opportunities for all; and they’ll be more and more creative as technological improvements take care of the less-fun jobs.

(cross-posted at freedomislove.org)

we are all traders

I was listening to Principles of Economics on Librivox recently and was delighted to hear this little gem:

Man cannot create material things. In the mental and moral world indeed he may produce new ideas; but when he is said to produce material things, he really only produces utilities; or in other words, his efforts and sacrifices result in changing the form or arrangement of matter to adapt it better for the satisfaction of wants. All that he can do in the physical world is either to readjust matter so as to make it more useful, as when he makes a log of wood into a table; or to put it in the way of being made more useful by nature, as when he puts seed where the forces of nature will make it burst out into life.

It is sometimes said that traders do not produce: that while the cabinet-maker produces furniture, the furniture-dealer merely sells what is already produced. But there is no scientific foundation for this distinction. They both produce utilities, and neither of them can do more: the furniture-dealer moves and rearranges matter so as to make it more serviceable than it was before, and the carpenter does nothing more. The sailor or the railway-man who carries coal above ground produces it, just as much as the miner who carries it underground; the dealer in fish helps to move on fish from where it is of comparatively little use to where it is of greater use, and the fisherman does no more.

– Principles of Economics, by Alfred Marshall (public domain)

The full text is available here.

(cross-posted at freedom is love — crazy new blog idea?)

401-Keg Plan

From a recent Daily Reckoning article:

“If you had purchased $1000 of shares in Delta Airlines one year ago, you would have $49.00 today.

“If you had purchased $1000 of shares in AIG one year ago, you would have $33.00 today.

“If you had purchased $1000 of shares in Lehman Brothers one year ago, you would have $0.00 today.

“But… If you had purchased $1000 worth of beer one year ago, drank all the beer, then turned in the aluminum cans for recycling refund, you would have received $214.00.

“Based on the above statements, the best current investment plan is to drink heavily and recycle. It’s called the 401-Keg Plan.”

tax day 2009: who do you work for?

As tax season rolls around again, it’s a great opportunity for principled libertarians to carefully consider their relationship to taxes. I like to compute the percentage of my income that goes to taxes. For most working people, that’s somewhere between 25 and 40 percent or more (not including sales taxes). When you get on up close to where you’re paying 50% in taxes, it starts to raise some interesting ethical considerations.

  • Supporting the enemy. If I believe the government is primarily engaged in evil, destructive activities such as war and welfare, and I’m spending more than half of my effort supporting the government, aren’t I a net subtraction from the world? Most people believe some of what the government is doing is good and some bad, so maybe you want to calculate how much of the budget goes to things you oppose, such as the wars in Iraq and Afghanistan, the bailouts, or whatever it may be, and then multiply this percentage by your tax percentage to see how much of your time goes towards supporting your enemy.
  • Non-financial aspects of your work. Is your job rewarding in non-financial ways? For example, a therapist or a teacher might feel they are affecting the world in a positive way that is hard to measure in dollar terms. If your job is one of these types, maybe you aren’t so concerned that a large percentage of your income supports the enemy, because you’re fighting back more effectively in other ways. For those of us in the financial industry, it’s generally harder to measure our positive effect any way other than in dollars.
  • What are you doing with it? Are you giving all of your after-tax after-living-expenses money to the cause of liberty, to offset your support for the government? If you’re working, say, 25% for the enemy, are you working at least 25% for the good guys too? If not, should you be?
  • The future. Higher taxes seem likely in the not-too distant future. If you’re already paying 40% or more, it might not be long until you’re paying 50% or more. In historical terms, we’re pretty low right now. In the 50s, top rates were over 90% and in the 70s, they were 70%. Once I’m clearly working 9 months out of the year directly for that which I oppose, it puts me in a very sticky ethical situation.

An interesting question that I haven’t thought about much yet is how the inflation tax plays in here. If you’re knowingly sitting on a pile of cash that the government inflates away to support the empire, have you essentially just handed that wealth over to the government?

Ron Paul has pointed out that if we simply changed our foreign policy from one of offense to one of defense, we would save nearly enough money to eliminate the individual income tax (which provides less than half the revenue for the federal government). There’s also the fairtax.

today’s reading

I’ll warn you up front: I don’t have anything useful to write today, but I’m writing anyway. There, now it’s not my fault if you keep reading.

Here are the highlights from a few of the articles I read today.

From Money and Our Future, by Lew Rockwell:

The government today is marshaling every resource and every means at its disposal to prop up a failing system of the past. Meanwhile, we live in completely new times. These new times are characterized by an international division of labor, global capital flows, digital information delivery, and the slow but systematic destruction of the establishment in media, banking, and finances. What is emerging to replace them is something that no government on the planet can stop. Markets will not be crushed and they resist control as never before.

This quote harkens back to my last post in that Lew seems to be agreeing that the whole system is due for an overhaul. He’s even so optimistic as to say that it’s going to get one. Forward the robots!

But here’s a bit of a tempering view, from Bill Bonner over at the Daily Reckoning, in response to an FT claim that the moment is not far when machines “will solve problems including energy scarcity, climate change and hunger”:

Machines can help build safer bridges. They can help cure diseases. They can play chess and tell you where you left your car keys. But they can’t solve social and political problems…at least not directly. A smart computer could help build a more energy efficient automobile, but it can’t solve the problem of energy scarcity. Because there isn’t really an energy scarcity problem. Engineers, technicians and businessmen produce and sell energy—just like they produce and sell diamonds or custard pies. Stuff—including energy—is always ‘scarce.’ Even sand is scarce. The Sahara may be full of it; but when you want some for your backyard, it won’t be free. Machines—as smart as they are—can’t solve this ‘problem.’ Resources are allocated either by the invisible hand—the give and take of free people—or by the heavy hand of whoever is in power. Smart machines aren’t going to change that.

Come on Bill, haven’t you heard of replicators a la Star Trek? Have some faith in the robots of the future!

Next up we have a random graph from mises.org which serves, I think, as one important indication of what’s been going on in our economy lately:

Top 10 Countries by Military Expenditure, 2007:
military expenditure

And finally, some Mogambo Guru to keep things lively:

So, naturally, I yearn for “Restoring Sound Money in America” with a fervor that is incomprehensible to my wife and kids, family, neighbors, elected officials and random passersby that I accost on the street by demanding “Do you know that you are a moron for voting into office worthless socialist/communist/fascist trash like Nancy Pelosi, Barney Frank, and Harry Reid, and then compound you stupidity by NOT buying gold, silver, and oil to protect yourself from the inevitable inflation in prices?”

I could never have said it better.

good riddance to the financial sector

I had the pleasure of seeing James Grant of Grant’s Publication give a talk over the summer, where he stated something to the effect of “banking will still be profitable in the future.” His point was, bank stocks have been getting sold like crazy, and at some point they’ll probably be oversold and undervalued, so it’s a good spot to look for opportunites.

I want to present a bit of a contrarian view, because I’m not so sure.

The NY times has a neat picture of the shrinkage of the financial sector. In about a year it went from 20.4% of the market to 16.9%, meanwhile losing about half of its total value.

The thing I keep wondering about is not when will the industry bottom out and begin to grow again, but why should banking be 20% of the market to begin with? What does that industry actually do, other than push numbers around on pieces of paper? Paper.. not so much anymore! It’s digital now, baby, and maybe that’s why the end is neigh.

You see, computers (I actually prefer the term “robots,” it’s more fun to think of it that way) are way better at pushing numbers around than people with pens and paper. Let’s break down a few things that banks do:

  • Lend money – just before the meltdown, you saw the emergence of direct person-to-person lending on the internet via sites like Prosper and Zopa. Investors can get better rates, and so can borrowers, if you eliminate (or at least reduce) the big chunky margin that traditional banks like to take.
  • Consumer banking – I use an internet bank. I get awesome perks like interest on my checking account and completely free ATM withdrawals at any ATM in the country (hmm.. ATMs.. robots..). Meanwhile, I cost the bank nearly nothing because I’ve never been to a branch (they only have three, and they’re all in California), and I do all of my banking robotically on the internet. Oh, and pretty much everyone uses ACH to move money around these days, right? That’s pure robots too.
  • Trading – Some of the bigger financial firms historically made money trading. Over the past few years, technologically savvy trading firms have stepped in and taken much of the business away from the pen-pushers. Using robots that are designed to pick up pennies, where people used to have to get paid much more to do the same thing.

So if robots can move money around almost instantly and at almost zero marginal cost, why does this need to be 20% of the economy anymore? I say good riddance, financial sector, may you become 5%.. or less!

bailout reading

Here is the source for a lot of what I’m reading on the bailout. It’s the most consistent explanation I’ve come across. It breaks things down without getting caught up in fuzzy abstract things that are all mysterious.

Warning: you may find that reading this carefully and with an open mind is a lot like taking the red pill. Best to be well grounded in preparation. I’m not kidding.

person-to-person lending

Prosper and Zopa have emerged with a fresh new idea: person-to-person lending. The basic idea is as follows: borrowers register with the site, have credit reports taken, then post their request for an unsecured loan, with some interest rate cap and a description of their situation. Lenders, who are also registered with the site, can then bid the lowest rate they’re willing to accept to loan to this person. Lenders can loan small amounts to many people, and the system will deliver the proper fraction of the payments to the proper lender.

The idea is certainly commendable: open up the personal loan markets to ordinary people, instead of keeping all the goods in the banks. In theory, this should improve the efficiency of this market significantly and make the world a better place. I’m pretty optimistic.

The biggest drawbacks I can think of:

  • no IRA accounts for lenders — In the current situation, lenders have to pay taxes on all interest income as if it were ordinary income. This situation may be worsened by the following: for higher-risk loans, lenders diversify by lending small amounts to many places. When some significant fraction of these default, the lender has lost that fraction of their returns. But can they deduct this loss on their taxes? Not sure. I see no reason that IRA and other tax-advantaged accounts for lenders should be impossible.
  • it’s not easy — One of the big advantages of the bank way of doing things is that banks have professionals poring over loan applications deciding which ones to fund. Individuals can’t be expected to gain the same level of expertise. This could lead to a bad reputation for person-to-person lending as a dangerous place for your money. On the other hand, this may really open the doors for new small lending firms to pop up all over the place and get started. These firms could then become experts at lending on these sites; at which point the system is similar to before, but different in that a huge pool of loans and lenders compete in the same marketplace, instead of having a bunch of disconnected markets.

It will also be interesting to see what this does to the credit reporting systems. It’s not clear that credit scores will be sufficient for judging risk in these marketplaces. Perhaps this will shed light on inefficiency in that area as well, and we will see better credit rating systems emerge soon.