Conquer the Crash: You can SURVIVE and PROSPER in a Deflationary Depression. Robert R. Prechter, Jr. 2002. ISBN 0-470-84982-7
EXCERPTS
If you follow the advice in this book and no financial crisis occurs, you cannot get hurt. In fact, you should profit nicely form most of these suggestions. Even if my outlook proves incorrect, the worst case is that your money will earn less than it otherwise may have.
… the largest stock-market collapses appear not after lengthy periods of market deterioration indicating a slow process of long-term change but quite suddenly after long periods of rising stock prices and economic expansion. A depression begins, then, with the seemingly unpredictable reversal of a persistently, indeed often rapidly, rising stock market. The abrupt change from increasing optimism to increasing pessimism initiates the economic contraction.
A bull market that has endured since the time of the Great Depression is definitely ending, and its termination could well mark the end of an uptrend of one degree larger, which has endured since the founding of the Republic.
… stock market advances and economic cycles must get weaker before they reverse. The final rise is where that weakness must be evident. Advances come in five waves, so the fifth wave is where the relative weakness manifests. The mechanism of that difference, I believe, is the immense optimism of major fifth waves, which encourages the populace to engage in financial speculation. Third waves are built upon muscle and brains. Fifth waves are built upon cleverness and dreams. During third waves, people focus on production to get rich. During fifth waves, they focus on finance to get rich.
A prime symbol of the deterioration … is the Federal Reserve System. Its manipulation of money and credit for the past 89 years … has been so destabilizing that it has transformed America from a production powerhouse into a society obsessed with dodging inflation and manipulating money and credit. A prime symbol of the deterioration in wave V … is General Electric, the oldest name in the Dow Jones Industrial Average. Through wave III ending in 1966, GE was one of the finest engineering and manufacturing concerns in the world. Its goods lasted for decades. In wave V, accountants took over the company and transformed it from a manufacturing concern into a financial concern. Today, its manufactured goods are mediocre and its vaunted company a cardboard edifice of credit services. It is the United States in microcosm.
If no dividend is ever paid, of what value is a share of stock? Do you really want to own a share of a super-successful enterprise that handsomely pays everyone involved in it except you, an owner?
Corporate earnings cycle with the stock market but with a 2-month to 2-year lag. Earnings do not begin to rise until well after stock prices have turned up from a bottom, and they do not begin to fall until well after stock prices turn down from a top. For this reason, the two trends often oppose each other. In contrast, book values and dividend payouts tend to be much steadier, cycling only on a very long-term basis with the largest economic trends, therefore providing a steady benchmark against which to compare stock prices to obtain a reliable relative valuation measure.
As I write this chapter, the “watchdog” of earnings, Standard & Poor’s, has just bowed to pressure to change the basis of its earnings reports to “operating earnings” rather than total company earnings so that the reported P/E ratio will henceforth be about half of what it really is.
The engine of high stock market valuation is widely shared optimism. The greater the degree of the advance that is to ending, the greater the optimism at its peak. Optimism also tends to remain strong in the early stages of a bear market … Bull markets, they say, climb a “Wall of Worry.” I like to add, “and bear markets slide down a Slope of Hope.”
To summarize, though my outlook may sound impossible, I am quite comfortable saying that the DJIA will fall from quintuple digits, where it is today, to triple digits, an unprecedented amount.
A pertinent observation with respect to our current concern is that a mania is always followed by a collapse so severe that it brings values to below where they were when the mania began.
Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt).
Self-liquidating credit is a loan that is paid back, with interest, in a moderately short time from production. Production facilitated by the loan generates the financial return that makes repayment possible. The full transaction adds value to the economy.
Near the end of a major expansion, few creditors expect default, which why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely. Deflation involves a substantial amount of involuntary debt liquidation because almost no one expects deflation before it starts.
A high-debt situation becomes unsustainable when the rate of economic growth falls beneath the prevailing rate of interest on money owed and creditors refuse to underwrite the interest payments with more credit.
A deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people’s desire and ability to lend and borrow. A depression is characterized in part by a persistent, sustained, deep, general decline in production.
Governments have often outlawed free-market determinations of what constitutes money and imposed their own versions upon society by law, but earlier schemes usually involved coinage. Under central banking, a government forces its citizens to accept its debt as the only form of legal tender. The Federal Reserve System assumed this monopoly role in the United States in 1913.
In 1933, President Roosevelt and Congress outlawed U.S. gold ownership and nullified and prohibited all domestic contracts denoted in gold, making Federal Reserve notes the legal tender of the land. In 1971, President Nixon halted gold payments from the U.S. Treasury to foreigners in exchange for dollars. Today, the Treasury will not give anyone anything tangible in exchange for a dollar. Even though Federal Reserve notes are defined as “obligations of the United States,” they are no obligations to do anything. Although a dollar is labeled as a “note,” which means a debt contract, it is not a note for anything.
The International Monetary Fund, the World Bank and similar institutions, funded mostly by the U.S. taxpayer, have extended immense credit around the globe. Their policies have supported nearly continuous worldwide inflation, particularly over the past thirty years. As a result, the global financial system is gorged with non-self-liquidating credit.
If the duration of recent past cycles is to repeat, then the falling portion of the current economic cycle would last another two years, and the depression would reach bottom in 2004.
The primary basis for today’s belief in perpetual prosperity and inflation with perhaps an occasional recession is what I call the “potent directors” fallacy. It is nearly impossible to find a treatise on macroeconomics today that does not assert or assume that the Federal Reserve Board has learned to control both our money and our economy. Many believe that it also possesses immense power to manipulate the stock market.
For many people, the single biggest financial shock and surprise over the next decade will be the revelation that the Fed has never really known what on earth it was doing. The spectacle of U.S. officials in recent weeks lecturing Japan on how to contain deflation will be revealed as the grossest hubris.
If people and corporations are unwilling to borrow or unable to finance debt, and if banks and investors are disinclined to lend, central banks cannot force them to do so. During deflation, they cannot even induce them to do so with a zero interest rate.
One example of action impelled by defensive psychology is governments’ recurring drive toward protectionism during deflationary periods. Protection is correctly recognized among economists of all stripes as destructive, yet there is always a call for it when people’s mental state changes to a defensive psychology.
The ultimate effect of deflation is to reduce the supply of money and credit. Your goal is to make sure that it doesn’t reduce the supply of your money and credit.
The ultimate effect of depression is financial ruin. Your goal is to make sure that it doesn’t ruin you.
The main goal of investing in a crash environment is safety. When deflation looms, almost every investment category is associated with immense risks. Most investors have no idea of these risks and will think you are a fool for taking precautions.
An added problem with owning government bonds is the political risk. Governments have a long record of stiffing their creditors in a crisis, and no government is immune from adopting that solution to its financial problems. A new regime especially may have little regard for previously squandered credit.
In the initial stages of a depression, sellers remain under an illusion about what their property is really worth. They keep a high list price on their house, reflecting what it was worth last year. I know people who are doing that now. This stubbornness leads to a drop in sales volume. At some point, a few owners cave in and sell at much lower prices. Then others are forced to drop their prices, too. What is the potential buyer’s psychology at that point? “Well, gee, property prices have been coming down. Why should I rush? I’ll wait till they come down further.” The further they come down, the more the buyer wants to wait. It’s a downward spiral.
Taking out a home equity loan is nothing but turning ownership of your home over to your bank in exchange for whatever other items you would like to own. It’s a reckless course, and it stems from the extreme confidence that accompanies a major top in social mood.
Owning an array of investments is financial suicide during deflation. They all go down, and the logistics of getting out of them can be a nightmare. There can be weird exceptions to this rule, such as gold in the early 1930s when the government fixed the price, or perhaps some commodity that is crucial in a war, but otherwise, all assets go down in price during deflation except one: cash.
Why do banks fail? For nearly 200 years, the courts have sanctioned an interpretation of the term “deposits” to mean not funds that you deliver for safekeeping but a loan to your bank. Your bank balance, then, is an IOU from the bank to you, even though there is no loan contract and no required interest payment. Thus, legally speaking, you have a claim on your money deposited in a bank, but practically speaking, you have a claim only on the loans that the bank makes with your money.
Some states in the U.S., in a fit of deadly “compassion,” have made it illegal for a bank to seize the home of someone who has declared bankruptcy. In such situations, the bank and its depositors are on the hook indefinitely for a borrower’s unthrift.
The estimated representative value of all derivatives in the world today is $90 trillion, over half of which is held by U.S. banks. Many banks use derivatives to hedge against investment exposure, but that strategy works only if the speculator on the other side of the trade can pay off if he’s wrong.
If the authorities in your country decide to disallow short selling, the bad news is that this option will be closed to you. The good news is that they usually take such actions near the major bottoms, so it will probably be about the proper time to cover shorts and start composing your “buy” list anyway.
If your government decides to confiscate gold, your country’s banks will be recruited in the operation. If it happens sometime in the coming crash, the reason will probably be “fighting terrorism.”
With the retirement setup in the U.S., the government need not be as direct as Argentina’s. It need merely assert, after a stock market fall decimates many people’s savings, that stocks are too risky to hold for retirement purposes. Under the guise of protecting you, it could ban stocks and perhaps other investments in tax-exempt pension plans and restrict assets to one category: “safe” long-term U.S. Treasury bonds. Then it could raise the penalty of early withdrawal to 100 percent. Bingo. The government will have seized the entire $2 trillion held in government-sponsored, tax-deferred 401K private pension plans. I’m not saying it will happen, but it could, and wouldn’t you rather have your money safely under your own discretion?
Bear markets engender labor strikes, racial conflict, religious persecution, political unrest, trade protectionism, coups and wars. In the area of personal behavior, part of the population gets more conservative, and part gets more hedonistic, and each side describes the other as something that needs reform. One reason that conflicts gain such scope in depressions is that much of the middle class gets wiped out by the financial debacle, increasing the number of people with little or nothing to lose and anger to spare.
Usually in a major bear market, you are less likely to encounter a mob, a criminal or a terrorist than to face state-sponsored controls within your own country or military attack from without, and there may be little that a retreat or karate can do for you in those situations.
You cannot anticipate every possible law, regulation or political event that will be implemented to thwart your attempt at safety, liquidity and solvency. This is why you must plan ahead and pay attention. As you do, think about these issues so that when political forces troll for victims, you are legally outside the scope of the danger.
Far more people in the past century had their lives wrecked or terminated by domestic implosions that by war. Whether you lived in Russia in the 1920s, Germany in the 1930s, Europe in the 1940s, China in the late 1940s, Cuba in 1959 or Cambodia in the 1970s, the smart thing to do early was to get out of Dodge.
People and institutions that best weather the system-wide debt liquidation of a deflationary crash and depression are those that take on no debt and extend no risky credit. This is the ideal situation for most people most of the time, anyway.
If you are entrepreneurial, start thinking of ways to serve people in a depression so that you will prosper in it. For example, I am writing this book. Think about what people will need when times get hard.
Don’t rely on government programs for your old age. Retirement programs such as Social Security in the U.S. are wealth-transfer schemes, not funded insurance, so they rely upon the government’s tax receipts.
Government surpluses generated by something other than a permanent policy of thrift are the product of exceptionally high tax receipts during boom times and therefore signal major tops. They’re not bullish; they’re bearish and ironically portend huge deficits directly around the corner.
Don’t expect government services to remain at their current levels. The ocean of money required to run the union-bloated, administration-stultified public school systems will be unavailable in a depression. School districts will have to adopt cost-cutting measures, and most of them will result in even worse service. Encourage low-cost free-market solutions, which will benefit both children and teachers.
Showing posts with label finances. Show all posts
Showing posts with label finances. Show all posts
Sunday, October 26, 2008
Friday, October 10, 2008
Two Perspectives on the Financial Crisis
Here are two perspectives on the current financial crisis.
Jim Willie gets almost hysterical at times in his revulsion at what is going on, but he still reveals a lot of info. Here is his take on the events of the last few weeks - what is really going on behind all the bailouts and mergers:
"Bataan Death March Tickertape"
http://www.financialsense.com/fsu/editorials/willie/2008/1009.html
William Engdahl has a much broader perspective on the grand strategies on the world stage. His tone is much more subdued and matter of fact, but his content is even scarier:
"BEHIND THE PANIC: Financial Warfare over future of global bank power"
http://www.financialsense.com/editorials/engdahl/2008/1009.html
These are increasingly desperate times. If the US banking system implodes, short term credit will severely disrupt ALL business operations in the US, including retail. This will threaten food supplies, utilities, and other necessities of modern life - likely resulting in considerable public "unrest".
Keep your eyes and mind open,
Michael Childress
Jim Willie gets almost hysterical at times in his revulsion at what is going on, but he still reveals a lot of info. Here is his take on the events of the last few weeks - what is really going on behind all the bailouts and mergers:
"Bataan Death March Tickertape"
http://www.financialsense.com/fsu/editorials/willie/2008/1009.html
William Engdahl has a much broader perspective on the grand strategies on the world stage. His tone is much more subdued and matter of fact, but his content is even scarier:
"BEHIND THE PANIC: Financial Warfare over future of global bank power"
http://www.financialsense.com/editorials/engdahl/2008/1009.html
These are increasingly desperate times. If the US banking system implodes, short term credit will severely disrupt ALL business operations in the US, including retail. This will threaten food supplies, utilities, and other necessities of modern life - likely resulting in considerable public "unrest".
Keep your eyes and mind open,
Michael Childress
Thursday, September 18, 2008
What's Going on with A.I.G. Bailout?
There has been a considerable uproar over the Federal Reserve Banks $85 billion load to A.I.G., in return for a 79.9% equity stake. Some commentators have complained that the Fed had no government authority to conduct this transaction – that Congress or the Treasury or some regulators should have given approval. This simply demonstrates the ignorance of both the American public and the media. The Federal Reserve Bank is NOT a government agency in any form, but instead is a privately-owned consortium of twelve regional banks, each of which is in turned owned by a number of private domestic and foreign banks. No approval is therefore needed.
As for the implications and ramifications of this and other recent Fed activities, please consider the following informative commentaries:
Christopher Laird
http://www.financialsense.com/fsu/editorials/laird/2008/0917.html
Darryl Schoon
http://www.financialsense.com/fsu/editorials/schoon/2008/0917.html
Keep your eyes and mind open.
Michael Childress
As for the implications and ramifications of this and other recent Fed activities, please consider the following informative commentaries:
Christopher Laird
http://www.financialsense.com/fsu/editorials/laird/2008/0917.html
Darryl Schoon
http://www.financialsense.com/fsu/editorials/schoon/2008/0917.html
Keep your eyes and mind open.
Michael Childress
Tuesday, September 2, 2008
Quick Summary of the US Financial Disaster-in-Progress
Jim Willie is a favorite commentator. In particular, he gets news from around the world through the US media propaganda screen, with lots of surprising perspectives on how the world sees us, the U.S. us, that is. This weeks public commentary pretty much tells it all:
http://www.321gold.com/editorials/willie/willie082908.html
You might wonder why he is so vitriolic about the Powers That Be. He is still as idealistic as we all used to be, I think. Looks like we all should do some serious investigating on J.P. Morgan, apparently a wholly-owned subsidiary of the Rothschild Empire.
Keep your eyes and mind open.
Mike Childress
http://www.321gold.com/editorials/willie/willie082908.html
You might wonder why he is so vitriolic about the Powers That Be. He is still as idealistic as we all used to be, I think. Looks like we all should do some serious investigating on J.P. Morgan, apparently a wholly-owned subsidiary of the Rothschild Empire.
Keep your eyes and mind open.
Mike Childress
Thursday, August 28, 2008
Financial Markets Believe McCain Will Win in '08
Good analysis of why financial markets believe Senator McCain will win in '08:
http://www.financialsense.com/fsu/editorials/danielcode/2008/0828.html
Just before the '06 elections, mostly for Representatives, Goldman-Sachs manipulated the unleaded gasoline futures markets so that gasoline prices dropped sharply, but temporarily. This effectively removed the economy as an issue in that election period, leaving the "Wars" in Iraq and Afghanistan as the main issues. This time around, it looks as though the Powers That Be are again manipulating the markets to keep the economy out of the picture - oil and gas are cheaper, the dollar is stronger, gold and silver and other commodities are lower, and the media "talking heads" are chanting in unison that the economy, exports, and GDP are doing much better. Mr. Needham in the above commentary suggests that this is temporary again.
Keep your eyes and mind open.
Mike Childress
http://www.financialsense.com/fsu/editorials/danielcode/2008/0828.html
Just before the '06 elections, mostly for Representatives, Goldman-Sachs manipulated the unleaded gasoline futures markets so that gasoline prices dropped sharply, but temporarily. This effectively removed the economy as an issue in that election period, leaving the "Wars" in Iraq and Afghanistan as the main issues. This time around, it looks as though the Powers That Be are again manipulating the markets to keep the economy out of the picture - oil and gas are cheaper, the dollar is stronger, gold and silver and other commodities are lower, and the media "talking heads" are chanting in unison that the economy, exports, and GDP are doing much better. Mr. Needham in the above commentary suggests that this is temporary again.
Keep your eyes and mind open.
Mike Childress
Sunday, August 24, 2008
Building Wealth by Lester C. Thurow - EXCERPTS
Building Wealth: The New Rules for Individuals, Companies, and Nations in a Knowledge-Based Economy. Lester C. Thurow.
EXCERPTS
In the new man-made brainpower industries of the twenty-first century, all of Europe is an also-ran. Nowhere is it an industrial leader.
For in the end, it is productivity growth (the ability to produce more output using fewer inputs) that ultimately drives real wealth creation.
At the end of the twentieth and beginning of the twenty-first centuries, six new technologies – microelectronics, computers, telecommunications, new man-made materials, robotics, and biotechnology – are interacting to create a new and very different economic world.
Knowledge is the new basis for wealth … Exactly how one controls (owns?) knowledge is in fact a central issue in a knowledge-based economy.
Just as the second industrial revolution moved us from local to national economies, so the third industrial revolution is moving us from national economies to a global economy … The existing international institutions – the International Monetary Fund, the World Bank, the United Nations, the World Trade Organization – were not meant to deal with a global economy.
In short, no one is going to set up a global government in the foreseeable future – regardless of whether it is or is not needed. As a result, the world is going to have a global economy without a global government. This means a global economy with no enforceable, agreed-upon set of rules and regulations, no sheriff to enforce codes of acceptable behavior, and no judges and juries to appeal to if one feels that justice is not being done.
In the twentieth century as local economies were replaced by national economies, national governments gained power. They needed to be given the powers necessary to control national economic systems. A global economy reverses this process.
To have great wealth is to have it all. It is not surprising that get-rich-quick books sell, even though the buyers know the books will convey nothing helpful. They are the modern equivalent of alchemy. Neither exists, but it would be so nice if they did that many are willing to suspend their critical faculties and believe in the unbelievable. Fairy tales both sell and give comfort – even when they are know to be fairly tales.
RULE ONE: No one has ever become very rich by saving their money. The rich see opportunities to work and invest in situations where large disequilibriums exist. This was as true for John D. Rockefeller as it is for Bill Gates. In both cases heir lifetime savings constitute a small fraction of their total wealth. Carefully saving one’s money and investing in normal equilibrium situations can make one comfortable in one’s old age but never really wealthy.
Big old firms understand, and often even invent, the new technologies that transform the world, but they have a structural problem that is almost impossible to solve. When new breakthrough technologies come along, old firms must destroy themselves to save themselves. They must cannibalize themselves, but they cannot.
“Entertainment” shopping will be able to compete with electronic shopping or some products, but no one knows which products. Which customers will be willing to pay more if they buy in an entertaining environment and which ones just want to buy at the cheapest possible price? Those who figure it out first will become rich.
Studies show that productivity falls sharply if workers telecommute for more than a day or two per week, but companies save most of their money by not having offices for the telecommuters.
If one takes a wide definition of culture (all leisure activities), culture is the world’s biggest industry.
New technologies mean change. Change means disequilibrium. Disequilibrium conditions create high-return, high-growth opportunities. The winners understand the new technologies, are lucky enough to be in the right place at the right time, and have the skills to take advantage of these new situations. They become rich.
The problem with wealth generated from sociological disequilibriums is that it usually reflects more a transfer of existing wealth rather than a generation of new wealth.
RULE THREE: Business that would grow rapidly with high profit margins must take advantage of technological disequilibriums, exploit developmental disequilibriums, or create sociological disequilibriums. All other activities are slow-growth, low-rate-of-return commodity businesses.
For some unknown reason the third industrial revolution simultaneously created great market wealth and a miserable productivity performance.
If countries attempt to protect their companies in home markets, their companies are increasingly shut out of global markets, and for most big companies global markets are now more important than home markets.
The wealth pyramid begins with social organization. Social organization constitutes the great building stones at the bottom of the pyramid. Think of any of the world’s poorest countries – Haiti, Bangladesh, central Africa, Albania. All are characterized by chaos, disorder, and an inability to organize themselves socially. They cannot maintain public order. They cannot build or repair infrastructure. They cannot organize and staff village schools. They cannot deliver health services.
The Americans invented mass universal public education, were its leaders for a century, and used it to create their twentieth century success. But an educational system that once led the world is no longer world-class. America has to reinvent itself if it doesn’t want falling wages for a poorly skilled bottom two-thirds of its workforce.
With the onset of the third industrial revolution, the ability to rapidly open up the new and close down the old became the central characteristic needed for economic success. The American system was built to open up the new and close down the old. That is what it does best.
Having tried to set up one’s own business, even if one fails, is the mark of a good potential employee – works hard, creative, takes risks, knows how the world works.
Capitalism is a process of creative destruction. The new destroys the old. Both the creation and the destruction are essential to driving the economy forward.
Entrepreneurs are risk takers, organizers, and doers, not usually thinkers and inventors. The characteristics needed to create new knowledge are very different from the characteristics necessary to bring that knowledge into active use.
Sustainable long-run competitive advantage can be had only through an advantage in skills, education, and knowledge. Yet this is precisely where Europe has its greatest competitive advantage. If ratings were given for top to bottom skills, Europe would get the best ratings. It is more creative at the top than Japan and better educated at the bottom than America. Relative to any comparatively sized group in the rest of the world it is the best educated. Europe is a continent rich in human capital. Why, then, is it a laggard when it comes to the creation of wealth?
Western Europe has not solved its unemployment problem because it won’t adopt policies to accelerate growth or to lower wages.
RULE SIX: There are no institutional substitutes for individual entrepreneurial change agents. The entrepreneur winners of the game become wealthy and powerful, but without entrepreneurs, economies become poor and weak. The old will not exit; the new cannot enter.
In the United States, where payroll taxes are low, the underground economy is small. In Western Europe, where payroll taxes are high, the underground economy is large.
Knowledge generates the basic breakthroughs in technology that create the disequilibrium conditions in which high returns and high growth rates are possible.
Creating technological disequilibriums is an art form that not all societies have mastered. Even within creative societies, creativity is not spread equally. American Jews win far more than their proportional share of America’s Nobel Prizes. (But Israelis win almost none.) America’s great research universities are not evenly spread across the country. Every area of America does not have its Silicon Valley or Route 128.
Creativity does not occur when it has to challenge authority. Creativity occurs when there is no authority to challenge – when there is an empty space without order where creativity can grow unmolested. But to many, an empty space without order is chaos – and chaos must be suppressed.
Einstein dropped out of high school at fifteen; renounced his citizenship one year later; lived on the margins socially, economically, and morally; called himself a gypsy and was considered a bohemian by others. His life was in some sense a search for order in disorder, both scientifically and sociologically. Great creativity requires hard facts, wild imagination, and nonlogical jumps forward that are then proved to be right by working backward to known principles. Only the rebellious can do it. Curiosity and the desire to explore can be enhanced. Useful curiosity requires individuals who have mastered the existing body of knowledge but are not paralyzed by it. Enhancing curiosity is what really good graduate education is all about. Societies that value and honor curiosity produce curious people.
The reason manufacturing does most of the R&D spending is that historically it has been impossible to make money on innovations unless one made and sold the products that were the fruits of that new knowledge. Selling knowledge so that others could make the products that came from it has never been a profitable strategy.
To be useful, inventions usually need a well-educated workforce that can absorb the technology and acquire the skills necessary to employ it. If this skill base does not exist, the invention lies unused. This is why well-educated inventors in the developing world often move to the United States. Because their fellow citizens are undereducated, they can’t get their invention to market in their home environment.
While there are obviously individual exceptions, technological breakthroughs aren’t usually made by older researchers who have been looking at the same things in the same ways for long periods of time. New ways are usually conceived by those who haven’t accepted the old ways.
Whatever the process for establishing clear, enforceable property rights, capitalism does not work unless who owns what is clear. The private ownership of productive assets and the ability to appropriate the output that flows from those assets lies at the heart of capitalism. This principle is what gave capitalism its name. To make capitalism function, legally enforceable ownership rights have to be established.
Capitalism cannot deal with pollution because it cannot establish the ownership rights to clean air and water.
The source of any retailer’s future success is apt to be buried in the software of its electronic information and logistics systems rather than in its advertising or the novelty of its products.
Without a clear, workable, enforceable system of intellectual property rights, knowledge-based capitalism is not going to work. No one is going to invest the necessary sums in research and development if they cannot garner the resulting gains.
The prevailing wisdom among those who earn their living within our system of intellectual property protection is that some minor tweaking here and there will fix the problem. Much of this wisdom flows from nothing more profound than the belief that to open up the system to fundamental change would be equivalent to opening Pandora’s box. All can vividly see themselves as potential losers. Few consider the private and public gains that might accrue from a different system. The prevailing wisdom is wrong. The time has come not for marginal changes but for wide-open thinking about designing a new system from the ground up. This is never going to happen if the problem is left to those who make their living operating the current system. They have too many vested interests in preserving it with the fewest possible modifications.
The differentiation must start with distinctions between fundamental advances in knowledge and logical extensions of existing knowledge. Each deserves a different kind of patent.
In nineteenth century capitalism, human skills weren’t seen as that important. Labor was a rented, hired-and-fired, marginal factor of production. Socialism arose as a response to the secondary position of labor in capitalism, promising to give labor a central position in the economic system. This is what gave it its political appeal. Interestingly, just as socialism and communism were dying, technology was elevating humans to a more central position in the productive framework of capitalism. Capitalism was being forced to put human skills and knowledge, rather than machinery, at the heart of its system.
In a global economy where employers arbitrage the world looking for the lowest wages, people’s pay is not based on whether they live in a rich or a poor country but upon their individual skills. The well-educated living in India make something that looks like American wages, while the uneducated living in America make something that looks like Indian wages.
Older workers sell experience and skills of an earlier vintage. Young workers sell newly acquired skills. Experience is just less valuable. Over the past quarter of a century the returns to experience have been going down for every level of education.
In the twenty-first century, no country that wishes to be rich can leave some of its citizens uneducated. This applies to women as well as men. Any society that does not educate women (the Taliban in Afghanistan) is not going to be successful … Successful societies will educate women because they contribute needed talent to the workforce, but they will also do so because uneducated mothers seldom have well-educated sons. A knowledge economy requires two interlocking but very different skill sets. Knowledge creation requires highly educated creative skills at the very top of the skill distribution. Knowledge deployment requires widespread high-quality skills and education in the middle and bottom of the skill distribution. The same country need not lead in both.
Looking at how wages rise as years of education go up, big economic payoffs exist for the first few years of education and the last few years of education, but only very small economic returns accrue per year of education in between these extremes.
An extra year of college education has very little positive effect on earnings if the student does not complete a degree program. From an economic perspective the right advice is “Get a degree or don’t go.”
Publicly financed education spreads the costs across the entire population (not just those with kids) and across each individual’s lifetime. Spread out in this way, the costs don’t seem so overwhelming.
Age discrimination laws can protect older employees against being unfairly dismissed by their old firms, but they cannot get them a good job at a new company. Employers get to decide whom they will hire. In a fast-changing world, older employees too often bring obsolete experience and out-of-date skills. There are always a lot of possible young employees who look better and are better. Older job seekers do not suffer from discrimination. They are objectively economically obsolete.
RULE TEN: The biggest unknown for the individual in a knowledge-based economy is how to have a career in a system where there are not careers.
Under capitalism those who own tools are the decision-makers, and market wealth consists of the ownership of tools and the output that flows from them.
Current consumption expenditures on the health care and pensions of the elderly (over 50 percent of the federal budget now goes to the elderly) are driving investment spending out of the federal budget.
Rising stock market values cannot be used to finance investment in new tools. The money received by those who sell stock must be equal to the money given up by those who buy stock. It is a zero-sum transaction as far as investments are concerned. It generates no new funds for building tools. Only holding consumption below earnings can provide the necessary resources to build tools.
In America, all of our social conditioning is now leading not just toward the primacy of individual consumption but toward the view that nothing else matters at all. Billions are spent advertising the benefits of different consumption goods. Little or nothing is spent advertising the importance of investment goods. When he first came into office in 1992, President Clinton was debating whether his new administration should focus on health care, education, or infrastructure. He chose health care, a form of public consumption, rather than education or infrastructure, both forms of public investment. He did not just make a political mistake. He focused Americans on a consumption problem when he should have focused them on investment problems. Even if he had succeeded in reforming health care, it was the wrong problem to address. He could and should have focused us in a very different direction.
In cities that have developed since the onset of the auto age, population densities simply aren’t high enough to justify the frequency of service that makes mass transit competitive with the auto in cost or time.
Market prices measure what is happening to the relative supplies and demands of natural resources. What has happened to oil is happening across the spectrum of other energy supplies, minerals, and agricultural products. Reductions in demand plus new technologies have created a world where natural resource availability is growing far faster than demand.
It is not possible to have American standards of living at home without at the same time having American production standards at work.
Americans want more than they have, but with marketable wealth of just $1.3 million invested in riskless government bonds, one could have those dreams without ever having to work, without ever touching one’s principal, and at death be able to leave one’s children $1.3 million in wealth.
In all countries, wealth is much more unequally distributed than earnings.
Falling equity in one’s own home is also the principle reason why the wealth of the median household is going down in absolute terms. When it comes to the wealth accumulation of the median family, home equity loans (something first allowed in the mid-1980s) have been a disaster.
Great wealth does not depend on personal savings, but modest wealth does. With lower savings rates in America, less wealth for those with lower savings rates should come as no surprise. Americans have a more unequal distribution of wealth because they have chosen to have more current consumption and less wealth. America’s greater inequality is simply a matter of different tastes.
Acquiring great wealth is best seen as a conditional lottery. Luck is necessary. One does have to be in the right place at the right time. Great wealth is created during times of change – the second and third industrial revolutions. Capitalizing on existing disequilibriums (technological, sociological, or developmental) is the name of the game.
Wealth is created in the financial markets but not by the financial markets. Financial markets capitalize the value of eliminating technological, developmental, or sociological disequilibriums.
With electronic shopping, where products are delivered to the home rather than carried home by the buyer, maybe the profits will be made by the delivery companies (UPS, Federal Express) and not by those that run the Internet stores. For what new, never-before-delivered services will people be willing to pay premium prices? What will have to be done to preserve those premium prices?
In the long run market wealth cannot grow unless productivity grows. Productivity is the putting together of the basic building blocks of the wealth pyramid so that humans with finite lifetimes and limited energy levels can produce ever greater levels of output. New technologies are staffed with new skills organized in new ways using new tools powered by new sources of energy to make new things. The difference between output and input growth is what causes wealth to increase.
Slower rates of growth in the capital-to-labor ratio inevitably mean slower rates of growth in productivity.
The antitrust suit against Microsoft is a dramatic case in point. It illustrates a type of regulatory chaos that doesn’t make sense in a well-ordered society. It’s a suit that would not have been brought in any other country in the world. In a short period of time Microsoft has become the most valuable company in the world, with a dominant global market position. It is precisely the kind of company that every country wants. Anywhere else it would be protected like a crown jewel. Other governments would ask what they could do to help it – not what they could do to hobble it … But such erratic, nonsensical actions reflect a type of regulatory chaos that does create economic space for other firms – even if those other firms are apt to be in other countries. American industry has too much chaos, but too much is clearly better than too little when a country reaches America’s position on the wealth pyramid. A high degree of chaos leads to economic creativity.
Revolutions cannot be organized from the top by those running the old system. Revolutions are always frightening to those with vested interests. Those at the top of any successful system, whether political or industrial, have vested interests.
Leaders are not entrepreneurs. Leaders are the order part of the system. Entrepreneurs are the chaos part of the system. Both are necessary, but neither can play the role of the other. Creativity cannot be organized. It is a product of disorganization. In very successful societies, creativity requires some chaos, but not so much chaos that there is not enough order to use what has been invented.
Large bureaucracies, whether government or private, always have too many vested interests in the old to be pioneers of the new technologies that will destroy the old … Capitalism’s only advantage is that death is easier if big firms are privately owned … Socialism never figured out how to kill its dinosaurs; they just went on using up resources until the system collapsed.
Big companies are where managers of the new companies learn the management skills (make mistakes on other people’s money) that allow them to start up their own companies with fewer mistakes.
Centrally organized economic change is theoretically possible but in practice impossible. The economic losers who already exist are always politically stronger than the potential winners who have yet to come into existence.
Capitalism does not work when assets have to carry debts whose value is greater than the market value of the assets themselves. Capitalism only works when profits can be earned.
If countries cannot do what is necessary, economic stagnation looms over their futures. But the causes of that stagnation are not in the economy. They lie in an unsolved political crisis – an inability to act when action is required – that leads to disastrous economic consequences.
Judges don’t think about what makes sense from the perspective of accelerating technological and economic progress. Their concern is with how new areas of technology can be inserted into the legal framework with the least disruption to existing legal interpretations.
As monopoly power wanes, and social interest in encouraging the development of new intellectual property grows, the balance in our system should shift toward encouraging the production of new knowledge and be less concerned about the distribution of existing knowledge. Tighter or longer-term patents and copyrights are warranted.
If someone cannot think of how a legal right can be enforced, it should not be a legal right.
The system must be able to determine rights and resolve disputes quickly, efficiently, and cheaply. Many of the problems with the current patent system flow from the lack of consistent, predictable, rapid, low-cost determinations about intellectual property rights and a means of quick, cheap dispute resolution.
To accomplish society’s interest in expanding knowledge as rapidly as possible, certain classes of knowledge ought to be in the public domain and freely available to everyone. The use of basic scientific knowledge is central in an era of man-made brainpower industries because it allows breakthrough technologies to be developed.
Because of low salaries, elementary and secondary teachers tend to come from the bottom of the education distribution. Americans are asking people who were not themselves good students to teach others to place a high value on being a good student.
Part of the American workforce will have the skills necessary to take advantage of the new technology-intensive global economy. They’ll march on to economic success, joining a global team and leaving the rest of the American workforce behind. The problem isn’t that this model won’t work. The problem is precisely that it will work … The problems are basically moral. Is one living in a good society if that society knowingly lets a major fraction of its citizens drop out of the first world and effectively become third world wage earners?
Governments can increase investment by spending more of their own funds on infrastructure tool-building … The tax system could be shifted from an income/payroll-based system to a consumption-based one in which citizens are taxed only on what they take out of a system (consumption) and not on what they put into it (tools or work effort).
The returns to capital are up and the returns to labor are down. On a global basis labor is more abundant relative to capital than it is in the developed world. As a consequence the earnings of capitalists grow, and the earnings of labor fall. Similarly the returns to skills are up and the returns to raw unskilled labor are down.
EXCERPTS
In the new man-made brainpower industries of the twenty-first century, all of Europe is an also-ran. Nowhere is it an industrial leader.
For in the end, it is productivity growth (the ability to produce more output using fewer inputs) that ultimately drives real wealth creation.
At the end of the twentieth and beginning of the twenty-first centuries, six new technologies – microelectronics, computers, telecommunications, new man-made materials, robotics, and biotechnology – are interacting to create a new and very different economic world.
Knowledge is the new basis for wealth … Exactly how one controls (owns?) knowledge is in fact a central issue in a knowledge-based economy.
Just as the second industrial revolution moved us from local to national economies, so the third industrial revolution is moving us from national economies to a global economy … The existing international institutions – the International Monetary Fund, the World Bank, the United Nations, the World Trade Organization – were not meant to deal with a global economy.
In short, no one is going to set up a global government in the foreseeable future – regardless of whether it is or is not needed. As a result, the world is going to have a global economy without a global government. This means a global economy with no enforceable, agreed-upon set of rules and regulations, no sheriff to enforce codes of acceptable behavior, and no judges and juries to appeal to if one feels that justice is not being done.
In the twentieth century as local economies were replaced by national economies, national governments gained power. They needed to be given the powers necessary to control national economic systems. A global economy reverses this process.
To have great wealth is to have it all. It is not surprising that get-rich-quick books sell, even though the buyers know the books will convey nothing helpful. They are the modern equivalent of alchemy. Neither exists, but it would be so nice if they did that many are willing to suspend their critical faculties and believe in the unbelievable. Fairy tales both sell and give comfort – even when they are know to be fairly tales.
RULE ONE: No one has ever become very rich by saving their money. The rich see opportunities to work and invest in situations where large disequilibriums exist. This was as true for John D. Rockefeller as it is for Bill Gates. In both cases heir lifetime savings constitute a small fraction of their total wealth. Carefully saving one’s money and investing in normal equilibrium situations can make one comfortable in one’s old age but never really wealthy.
Big old firms understand, and often even invent, the new technologies that transform the world, but they have a structural problem that is almost impossible to solve. When new breakthrough technologies come along, old firms must destroy themselves to save themselves. They must cannibalize themselves, but they cannot.
“Entertainment” shopping will be able to compete with electronic shopping or some products, but no one knows which products. Which customers will be willing to pay more if they buy in an entertaining environment and which ones just want to buy at the cheapest possible price? Those who figure it out first will become rich.
Studies show that productivity falls sharply if workers telecommute for more than a day or two per week, but companies save most of their money by not having offices for the telecommuters.
If one takes a wide definition of culture (all leisure activities), culture is the world’s biggest industry.
New technologies mean change. Change means disequilibrium. Disequilibrium conditions create high-return, high-growth opportunities. The winners understand the new technologies, are lucky enough to be in the right place at the right time, and have the skills to take advantage of these new situations. They become rich.
The problem with wealth generated from sociological disequilibriums is that it usually reflects more a transfer of existing wealth rather than a generation of new wealth.
RULE THREE: Business that would grow rapidly with high profit margins must take advantage of technological disequilibriums, exploit developmental disequilibriums, or create sociological disequilibriums. All other activities are slow-growth, low-rate-of-return commodity businesses.
For some unknown reason the third industrial revolution simultaneously created great market wealth and a miserable productivity performance.
If countries attempt to protect their companies in home markets, their companies are increasingly shut out of global markets, and for most big companies global markets are now more important than home markets.
The wealth pyramid begins with social organization. Social organization constitutes the great building stones at the bottom of the pyramid. Think of any of the world’s poorest countries – Haiti, Bangladesh, central Africa, Albania. All are characterized by chaos, disorder, and an inability to organize themselves socially. They cannot maintain public order. They cannot build or repair infrastructure. They cannot organize and staff village schools. They cannot deliver health services.
The Americans invented mass universal public education, were its leaders for a century, and used it to create their twentieth century success. But an educational system that once led the world is no longer world-class. America has to reinvent itself if it doesn’t want falling wages for a poorly skilled bottom two-thirds of its workforce.
With the onset of the third industrial revolution, the ability to rapidly open up the new and close down the old became the central characteristic needed for economic success. The American system was built to open up the new and close down the old. That is what it does best.
Having tried to set up one’s own business, even if one fails, is the mark of a good potential employee – works hard, creative, takes risks, knows how the world works.
Capitalism is a process of creative destruction. The new destroys the old. Both the creation and the destruction are essential to driving the economy forward.
Entrepreneurs are risk takers, organizers, and doers, not usually thinkers and inventors. The characteristics needed to create new knowledge are very different from the characteristics necessary to bring that knowledge into active use.
Sustainable long-run competitive advantage can be had only through an advantage in skills, education, and knowledge. Yet this is precisely where Europe has its greatest competitive advantage. If ratings were given for top to bottom skills, Europe would get the best ratings. It is more creative at the top than Japan and better educated at the bottom than America. Relative to any comparatively sized group in the rest of the world it is the best educated. Europe is a continent rich in human capital. Why, then, is it a laggard when it comes to the creation of wealth?
Western Europe has not solved its unemployment problem because it won’t adopt policies to accelerate growth or to lower wages.
RULE SIX: There are no institutional substitutes for individual entrepreneurial change agents. The entrepreneur winners of the game become wealthy and powerful, but without entrepreneurs, economies become poor and weak. The old will not exit; the new cannot enter.
In the United States, where payroll taxes are low, the underground economy is small. In Western Europe, where payroll taxes are high, the underground economy is large.
Knowledge generates the basic breakthroughs in technology that create the disequilibrium conditions in which high returns and high growth rates are possible.
Creating technological disequilibriums is an art form that not all societies have mastered. Even within creative societies, creativity is not spread equally. American Jews win far more than their proportional share of America’s Nobel Prizes. (But Israelis win almost none.) America’s great research universities are not evenly spread across the country. Every area of America does not have its Silicon Valley or Route 128.
Creativity does not occur when it has to challenge authority. Creativity occurs when there is no authority to challenge – when there is an empty space without order where creativity can grow unmolested. But to many, an empty space without order is chaos – and chaos must be suppressed.
Einstein dropped out of high school at fifteen; renounced his citizenship one year later; lived on the margins socially, economically, and morally; called himself a gypsy and was considered a bohemian by others. His life was in some sense a search for order in disorder, both scientifically and sociologically. Great creativity requires hard facts, wild imagination, and nonlogical jumps forward that are then proved to be right by working backward to known principles. Only the rebellious can do it. Curiosity and the desire to explore can be enhanced. Useful curiosity requires individuals who have mastered the existing body of knowledge but are not paralyzed by it. Enhancing curiosity is what really good graduate education is all about. Societies that value and honor curiosity produce curious people.
The reason manufacturing does most of the R&D spending is that historically it has been impossible to make money on innovations unless one made and sold the products that were the fruits of that new knowledge. Selling knowledge so that others could make the products that came from it has never been a profitable strategy.
To be useful, inventions usually need a well-educated workforce that can absorb the technology and acquire the skills necessary to employ it. If this skill base does not exist, the invention lies unused. This is why well-educated inventors in the developing world often move to the United States. Because their fellow citizens are undereducated, they can’t get their invention to market in their home environment.
While there are obviously individual exceptions, technological breakthroughs aren’t usually made by older researchers who have been looking at the same things in the same ways for long periods of time. New ways are usually conceived by those who haven’t accepted the old ways.
Whatever the process for establishing clear, enforceable property rights, capitalism does not work unless who owns what is clear. The private ownership of productive assets and the ability to appropriate the output that flows from those assets lies at the heart of capitalism. This principle is what gave capitalism its name. To make capitalism function, legally enforceable ownership rights have to be established.
Capitalism cannot deal with pollution because it cannot establish the ownership rights to clean air and water.
The source of any retailer’s future success is apt to be buried in the software of its electronic information and logistics systems rather than in its advertising or the novelty of its products.
Without a clear, workable, enforceable system of intellectual property rights, knowledge-based capitalism is not going to work. No one is going to invest the necessary sums in research and development if they cannot garner the resulting gains.
The prevailing wisdom among those who earn their living within our system of intellectual property protection is that some minor tweaking here and there will fix the problem. Much of this wisdom flows from nothing more profound than the belief that to open up the system to fundamental change would be equivalent to opening Pandora’s box. All can vividly see themselves as potential losers. Few consider the private and public gains that might accrue from a different system. The prevailing wisdom is wrong. The time has come not for marginal changes but for wide-open thinking about designing a new system from the ground up. This is never going to happen if the problem is left to those who make their living operating the current system. They have too many vested interests in preserving it with the fewest possible modifications.
The differentiation must start with distinctions between fundamental advances in knowledge and logical extensions of existing knowledge. Each deserves a different kind of patent.
In nineteenth century capitalism, human skills weren’t seen as that important. Labor was a rented, hired-and-fired, marginal factor of production. Socialism arose as a response to the secondary position of labor in capitalism, promising to give labor a central position in the economic system. This is what gave it its political appeal. Interestingly, just as socialism and communism were dying, technology was elevating humans to a more central position in the productive framework of capitalism. Capitalism was being forced to put human skills and knowledge, rather than machinery, at the heart of its system.
In a global economy where employers arbitrage the world looking for the lowest wages, people’s pay is not based on whether they live in a rich or a poor country but upon their individual skills. The well-educated living in India make something that looks like American wages, while the uneducated living in America make something that looks like Indian wages.
Older workers sell experience and skills of an earlier vintage. Young workers sell newly acquired skills. Experience is just less valuable. Over the past quarter of a century the returns to experience have been going down for every level of education.
In the twenty-first century, no country that wishes to be rich can leave some of its citizens uneducated. This applies to women as well as men. Any society that does not educate women (the Taliban in Afghanistan) is not going to be successful … Successful societies will educate women because they contribute needed talent to the workforce, but they will also do so because uneducated mothers seldom have well-educated sons. A knowledge economy requires two interlocking but very different skill sets. Knowledge creation requires highly educated creative skills at the very top of the skill distribution. Knowledge deployment requires widespread high-quality skills and education in the middle and bottom of the skill distribution. The same country need not lead in both.
Looking at how wages rise as years of education go up, big economic payoffs exist for the first few years of education and the last few years of education, but only very small economic returns accrue per year of education in between these extremes.
An extra year of college education has very little positive effect on earnings if the student does not complete a degree program. From an economic perspective the right advice is “Get a degree or don’t go.”
Publicly financed education spreads the costs across the entire population (not just those with kids) and across each individual’s lifetime. Spread out in this way, the costs don’t seem so overwhelming.
Age discrimination laws can protect older employees against being unfairly dismissed by their old firms, but they cannot get them a good job at a new company. Employers get to decide whom they will hire. In a fast-changing world, older employees too often bring obsolete experience and out-of-date skills. There are always a lot of possible young employees who look better and are better. Older job seekers do not suffer from discrimination. They are objectively economically obsolete.
RULE TEN: The biggest unknown for the individual in a knowledge-based economy is how to have a career in a system where there are not careers.
Under capitalism those who own tools are the decision-makers, and market wealth consists of the ownership of tools and the output that flows from them.
Current consumption expenditures on the health care and pensions of the elderly (over 50 percent of the federal budget now goes to the elderly) are driving investment spending out of the federal budget.
Rising stock market values cannot be used to finance investment in new tools. The money received by those who sell stock must be equal to the money given up by those who buy stock. It is a zero-sum transaction as far as investments are concerned. It generates no new funds for building tools. Only holding consumption below earnings can provide the necessary resources to build tools.
In America, all of our social conditioning is now leading not just toward the primacy of individual consumption but toward the view that nothing else matters at all. Billions are spent advertising the benefits of different consumption goods. Little or nothing is spent advertising the importance of investment goods. When he first came into office in 1992, President Clinton was debating whether his new administration should focus on health care, education, or infrastructure. He chose health care, a form of public consumption, rather than education or infrastructure, both forms of public investment. He did not just make a political mistake. He focused Americans on a consumption problem when he should have focused them on investment problems. Even if he had succeeded in reforming health care, it was the wrong problem to address. He could and should have focused us in a very different direction.
In cities that have developed since the onset of the auto age, population densities simply aren’t high enough to justify the frequency of service that makes mass transit competitive with the auto in cost or time.
Market prices measure what is happening to the relative supplies and demands of natural resources. What has happened to oil is happening across the spectrum of other energy supplies, minerals, and agricultural products. Reductions in demand plus new technologies have created a world where natural resource availability is growing far faster than demand.
It is not possible to have American standards of living at home without at the same time having American production standards at work.
Americans want more than they have, but with marketable wealth of just $1.3 million invested in riskless government bonds, one could have those dreams without ever having to work, without ever touching one’s principal, and at death be able to leave one’s children $1.3 million in wealth.
In all countries, wealth is much more unequally distributed than earnings.
Falling equity in one’s own home is also the principle reason why the wealth of the median household is going down in absolute terms. When it comes to the wealth accumulation of the median family, home equity loans (something first allowed in the mid-1980s) have been a disaster.
Great wealth does not depend on personal savings, but modest wealth does. With lower savings rates in America, less wealth for those with lower savings rates should come as no surprise. Americans have a more unequal distribution of wealth because they have chosen to have more current consumption and less wealth. America’s greater inequality is simply a matter of different tastes.
Acquiring great wealth is best seen as a conditional lottery. Luck is necessary. One does have to be in the right place at the right time. Great wealth is created during times of change – the second and third industrial revolutions. Capitalizing on existing disequilibriums (technological, sociological, or developmental) is the name of the game.
Wealth is created in the financial markets but not by the financial markets. Financial markets capitalize the value of eliminating technological, developmental, or sociological disequilibriums.
With electronic shopping, where products are delivered to the home rather than carried home by the buyer, maybe the profits will be made by the delivery companies (UPS, Federal Express) and not by those that run the Internet stores. For what new, never-before-delivered services will people be willing to pay premium prices? What will have to be done to preserve those premium prices?
In the long run market wealth cannot grow unless productivity grows. Productivity is the putting together of the basic building blocks of the wealth pyramid so that humans with finite lifetimes and limited energy levels can produce ever greater levels of output. New technologies are staffed with new skills organized in new ways using new tools powered by new sources of energy to make new things. The difference between output and input growth is what causes wealth to increase.
Slower rates of growth in the capital-to-labor ratio inevitably mean slower rates of growth in productivity.
The antitrust suit against Microsoft is a dramatic case in point. It illustrates a type of regulatory chaos that doesn’t make sense in a well-ordered society. It’s a suit that would not have been brought in any other country in the world. In a short period of time Microsoft has become the most valuable company in the world, with a dominant global market position. It is precisely the kind of company that every country wants. Anywhere else it would be protected like a crown jewel. Other governments would ask what they could do to help it – not what they could do to hobble it … But such erratic, nonsensical actions reflect a type of regulatory chaos that does create economic space for other firms – even if those other firms are apt to be in other countries. American industry has too much chaos, but too much is clearly better than too little when a country reaches America’s position on the wealth pyramid. A high degree of chaos leads to economic creativity.
Revolutions cannot be organized from the top by those running the old system. Revolutions are always frightening to those with vested interests. Those at the top of any successful system, whether political or industrial, have vested interests.
Leaders are not entrepreneurs. Leaders are the order part of the system. Entrepreneurs are the chaos part of the system. Both are necessary, but neither can play the role of the other. Creativity cannot be organized. It is a product of disorganization. In very successful societies, creativity requires some chaos, but not so much chaos that there is not enough order to use what has been invented.
Large bureaucracies, whether government or private, always have too many vested interests in the old to be pioneers of the new technologies that will destroy the old … Capitalism’s only advantage is that death is easier if big firms are privately owned … Socialism never figured out how to kill its dinosaurs; they just went on using up resources until the system collapsed.
Big companies are where managers of the new companies learn the management skills (make mistakes on other people’s money) that allow them to start up their own companies with fewer mistakes.
Centrally organized economic change is theoretically possible but in practice impossible. The economic losers who already exist are always politically stronger than the potential winners who have yet to come into existence.
Capitalism does not work when assets have to carry debts whose value is greater than the market value of the assets themselves. Capitalism only works when profits can be earned.
If countries cannot do what is necessary, economic stagnation looms over their futures. But the causes of that stagnation are not in the economy. They lie in an unsolved political crisis – an inability to act when action is required – that leads to disastrous economic consequences.
Judges don’t think about what makes sense from the perspective of accelerating technological and economic progress. Their concern is with how new areas of technology can be inserted into the legal framework with the least disruption to existing legal interpretations.
As monopoly power wanes, and social interest in encouraging the development of new intellectual property grows, the balance in our system should shift toward encouraging the production of new knowledge and be less concerned about the distribution of existing knowledge. Tighter or longer-term patents and copyrights are warranted.
If someone cannot think of how a legal right can be enforced, it should not be a legal right.
The system must be able to determine rights and resolve disputes quickly, efficiently, and cheaply. Many of the problems with the current patent system flow from the lack of consistent, predictable, rapid, low-cost determinations about intellectual property rights and a means of quick, cheap dispute resolution.
To accomplish society’s interest in expanding knowledge as rapidly as possible, certain classes of knowledge ought to be in the public domain and freely available to everyone. The use of basic scientific knowledge is central in an era of man-made brainpower industries because it allows breakthrough technologies to be developed.
Because of low salaries, elementary and secondary teachers tend to come from the bottom of the education distribution. Americans are asking people who were not themselves good students to teach others to place a high value on being a good student.
Part of the American workforce will have the skills necessary to take advantage of the new technology-intensive global economy. They’ll march on to economic success, joining a global team and leaving the rest of the American workforce behind. The problem isn’t that this model won’t work. The problem is precisely that it will work … The problems are basically moral. Is one living in a good society if that society knowingly lets a major fraction of its citizens drop out of the first world and effectively become third world wage earners?
Governments can increase investment by spending more of their own funds on infrastructure tool-building … The tax system could be shifted from an income/payroll-based system to a consumption-based one in which citizens are taxed only on what they take out of a system (consumption) and not on what they put into it (tools or work effort).
The returns to capital are up and the returns to labor are down. On a global basis labor is more abundant relative to capital than it is in the developed world. As a consequence the earnings of capitalists grow, and the earnings of labor fall. Similarly the returns to skills are up and the returns to raw unskilled labor are down.
Sunday, August 17, 2008
"Removing a Fatal Impediment" by Deepcaster LLC
'Some of the worst Investment Mistakes and Political Misjudgments occur as a result of the psychological impediment of “Denial.”
'Denial is a natural human tendency - - it is often easier, temporarily, to deny unpleasant realities than to actually address and cope with them. But failing to address, acknowledge and cope with unpleasant realities more often than not has quite deleterious consequences.
'This is especially true in the world of investing. As we describe below, key ominous financial and geopolitical developments over the past weeks are coming to a head. There is a high probability that these developments will serve as an occasion for, at the very least, greatly increased tension, and, at worst, for disaster.'
The rest of this article, which covers domestic and international crises in progress are at:
http://www.financialsense.com/fsu/editorials/deepcaster/2008/0815.html
This is stuff the domestic media refuse to cover accurately.
Keep your eyes and your mind open,
Michael Childress
'Denial is a natural human tendency - - it is often easier, temporarily, to deny unpleasant realities than to actually address and cope with them. But failing to address, acknowledge and cope with unpleasant realities more often than not has quite deleterious consequences.
'This is especially true in the world of investing. As we describe below, key ominous financial and geopolitical developments over the past weeks are coming to a head. There is a high probability that these developments will serve as an occasion for, at the very least, greatly increased tension, and, at worst, for disaster.'
The rest of this article, which covers domestic and international crises in progress are at:
http://www.financialsense.com/fsu/editorials/deepcaster/2008/0815.html
This is stuff the domestic media refuse to cover accurately.
Keep your eyes and your mind open,
Michael Childress
Tuesday, April 29, 2008
William Engdahl's Financial Tsunami Essays #1
Wonder what all the buzz is about with banks and world finances and mortages and all that mysterious stuff? And how it affects you?
This is the first in a series of essays published on-line by William Engdahl. This one covers one of the main reasons for what is now called a world financial grid-lock in the banking industry. Engdahl explains a lot for us non-financial types, a lot more than the mainstream media would dare to explain, else the whole country would be hunkering down for the upcoming world financial crises.
Here's the link:
http://www.financialsense.com/editorials/engdahl/2007/1124.html
Links to more essays in this series will be forthcoming.
Here's to keeping an open mind in these challenging times!
Mike Childress
This is the first in a series of essays published on-line by William Engdahl. This one covers one of the main reasons for what is now called a world financial grid-lock in the banking industry. Engdahl explains a lot for us non-financial types, a lot more than the mainstream media would dare to explain, else the whole country would be hunkering down for the upcoming world financial crises.
Here's the link:
http://www.financialsense.com/editorials/engdahl/2007/1124.html
Links to more essays in this series will be forthcoming.
Here's to keeping an open mind in these challenging times!
Mike Childress
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