Posts Tagged ‘economics’

The other day I had some harsh words for the “average” American. While I still stand by what I say when it comes to taxation, there may be some hope after all.

65% of voters favor across the board spending cuts.

I hate to break it to the political class in Washington. The American people may be ignorant about things that matter, it seems they get that we have a spending a problem. Failure to compromise could hold some interesting political consequences to the tyrants that currently “represent” us.

I am actually willing to go along with small tax increases on everyone, including myself, as long as we get massive spending cuts. The thing is the Democrats have no intention of compromising and there will be no spending cuts offered. The mainstream media has somehow managed to convince the American people that the Democrats and the Marxist in Chief are willing to compromise. It could also be that the American people are just a bit naive in believing the elected members in the Democrat party actually care about America. The American people are about to learn how much they have been duped.

Any Republican that goes along with a crap compromise that has no spending cuts of any size should be primaried and removed from office. I already will not be voting for Roy Blunt in the next Senate primary, and I definitely won’t vote for him in the general if he supports the wrong path in the next year.

Another interesting piece of data is this, 68% of people are favorable to capitalism only 24% are favorable to socialism. We still believe in the things that made this country great. The problem is I don’t think Americans are well educated on the ins and outs of each system. It is up to us to educate our neighbors, friends, and families.

Over the next year, pledge to learn more about American history and economics. Become an expert, and earn the trust of your friends and family, so that when what we are doing  as a country quits working (and it will!) you are there to educate them on the truth.

I love John Mauldin. He is probably one of the smartest economic minds alive today. If you like economics I suggest you subscribe to his newsletter at Mauldin is brilliant because he is capable of synthesizing a large amount of theory, statistics, and research into a cohesive whole. He was one of two economists to call the collapse of 2008 months before anyone else (while all the “experts” were convinced there was no top to the market.)

In his newsletter from July 23, 2012 Mauldin shared the Hoisington Quarterly Review. Two paragraphs that you must read if you don’t have the time to check out the whole thing:

“Three recent academic studies, though they differ in purpose and scope, all reach the conclusion that EXTREMELY HIGH LEVELS OF GOVERNMENTAL INDEBTEDNESS DIMINISH ECONOMIC GROWTH. In other words, DEFICIT SPENDING SHOULD NOT BE CALLED “STIMULUS” as is the overwhelming tendency by the media and many economic writers. While government spending may have been linked to the concept of economic stimulus in distant periods, such an assertion is unwarranted, and blatantly wrong in present circumstances. While officials argue that governmental action is required for political reasons and public anxiety, governments would be better off to admit that traditional tools only serve to compound existing problems.” 

“Reinhart, Reinhart and Rogoff dealt with the idiosyncrasies of countries of different sizes and their abilities to engage in different policy actions (such as devaluations and subsequent inflation) by limiting their samples to advanced countries. In the second study “Government Size and Growth”, Bergh and Henrekson found that to the extent there are contradictory findings of the relationship between the size of government and economic growth they are explained by variations in definitions and the countries studied. The Swedish economists focused their study on the relationship in rich countries by measuring government size as either total taxes or total expenditures relative to GDP. Using a very sophisticated econometric approach under this criterion, they revealed a consistent pattern showing government size has a significant negative correlation with economic growth. Their results indicate “an increase in government size by ten percentage points is associated with a 0.5% to 1% lower annual growth rate.”

Dear politicians and Obama supporters, read the above two paragraphs until you actually understand them.

The Rational Optimist: How Prosperity Evolves
The Rational Optimist: How Prosperity Evolves by Matt Ridley
My rating: 5 of 5 stars

Every so often you come across a book that causes you to reevaluate the way you view the world. The Rational Optimist is definitely one of those books. Personally, I think this may be one of the most important books of the last 10 years. In many ways I am an optimist, but when it comes to the bigger picture of the world I would have to admit I have been a pessimist for some time. While I certainly am pessimistic about the short-term in America, we are going to have to feel some pain at some point to wake people up; I am certainly an optimist now about the future of the human race and where we are headed.

This is the author’s purpose in this 369 page romp through human history. “In this book I have tried to build on both Adam Smith and Charles Darwin: to interpret human society as the product of a long history of what the philosopher Dan Dennett calls ‘bubble-up’ evolution through natural selection among cultural rather than genetic variation, and as an emergent order generated by an invisible hand of individual transactions, not the product of a top-down determinism.”

In other words, free-market economics should be viewed as an evolutionary concept and has done nothing but improve our situation. It is a bottom-up force. It is not dictated by government or intellectual fiat. The author undeniably proves this point throughout his book.

The book is set-up rather brilliantly. Ridley starts out by introducing his argument in chapter 1. “The cumulative accretion of knowledge by specialists that allows us each to consume more and more different things by each producing fewer and fewer is, I submit, the central story of humanity. Innovation changes the world but only because it aids the elaboration of the division of labour [sic] and encourages the division of time. Forget wars, religions, famines and poems for the moment. This is history’s greatest theme: the metastasis of exchange, specialisation [sic], and the invention it has called forth, the ‘creation’ of time. The rational optimist invites you to stand back and look at your species differently, to see the grand enterprise of humanity that has progressed – with frequent set-backs – for 100,000 years. And then, when you have seen that, consider whether that enterprise is finished or if, as the optimist claims, it still has centuries and millennia to run.”

Ridley runs through the last 200,000 years of human history through the next nine chapters.

Chapter 2: The collective brain: exchange and specialisation [sic] after 200,000 years ago

In this chapter Ridley looks at what sparked the path toward modernization after 200,000 years ago. His argument is brilliant and something I have often played with in my mind. “The answer lies not in climate, nor genetics, nor in archaeology, not even entirely in ‘culture’, but in economics. Human beings started to do something to and with each other that in effect began to build a collective intelligence…The effect of this was to cause specialisation [sic], which in turn caused technological innovation, which in turn encouraged more specialisation [sic], which led to more exchange – and ‘progress’ was born, by which I mean technology and habits changing faster than anatomy….what Friedrich Hayek called the catallaxy: the ever-expanding possibility generated by a growing division of labour [sic].”

The very thing that makes us better as people is the very thing the leftists decry and try to destroy in American society: free-trade. “The extraordinary thing about exchange is that it breeds: the more of it you do, the more of it you can do. And it calls forth innovation.”

Chapter 3: The manufacture of virtue: barter, trust and rules after 50,000 years ago

This chapter is quite interesting. Ridley takes a look at how trust has evolved and why it’s such a fundamental part of human society. “Collaboration between unrelated strangers seems to be a uniquely human achievement. In no other species can two individuals that have never before me exchange goods or services to the benefit of each other, as happens routinely each time you visit a shop or a restaurant or a website.”

Ridley destroys the arguments of so many modern Americans, especially those that support the mentality that capitalism is ‘evil’ or that it’s selfish. “The notion that the market is a necessary evil, which allows people to be wealthy enough to offset its corrosive drawbacks, is wide off the mark. In market societies, if you get a reputation for unfairness, people will not deal with you.

Ever bought something on eBay? How do you know you will get your product? Simple, you trust in the free-market that exists. You know that bad operators are expelled from the community of traders because other traders rat them out through seller reviews and ratings. (Hey, look ma, no government regulation!) The traders on eBay simply want to make money, they want to financially enrich their lives. At their core they are fundamentally expressing what the free-market capitalism system is supposed to be about: wealth through trust.

Ridley goes on to further demonstrate the moral nature of the free-market. “There is a direct link between commerce and virtue. ‘Far from being a vice,’ says Eamonn Butler, ‘the market system makes self-interest into something truly virtuous.’ This is the extraordinary feature of markets: just as they can turn many individually irrational individuals into a collectively ration outcome, so they can turn many individually selfish motives into a collectively kind result.”

Ridley makes an amazing point in this chapter that reflects the American political landscape right now. “Politically, as Brink Lindsey has diagnosed, the coincidence of wealth with toleration has led to the bizarre paradox of a conservative movement that embraces economic change but hates its social consequences and a liberal movement that loves the social consequences but hates the economic source from which they come.” This in a nutshell describes your average American of both political stripes. The fundamental problem is Americans are so poorly read on economics, the end result is the current political reality that we have. Ignorance is not bliss.

Chapter 4: The feeding of the nine billion: farming after 10,000 years ago

I’m not going to dig greatly into this chapter. Ridley’s basic point here is that trade actually proceeded farming and that you can’t have farming on the scale we need in the world without trade. The most important thing Ridley does in this chapter is point out the danger that the organic food craze actually proposes to our future growth.

Chapter 5: The triumph of cities: trade after 5,000 years ago

Ridley takes a look at the importance of cities and how they evolved. In a word, trade. “Cities exist for trade. They are places where people come to divide their labour [sic], to specialise [sic] and exchange.

There is an important discussion on the intersection between government, cities, and trade in this chapter. It’s something so many Americans don’t seem to grasp, “…merchants make wealth; chiefs nationalise [sic] it.”

Probably the best section in this chapter is called ‘The virtue of fragmented government’. “Political fragmentation is often the friend, not the enemy of economic advance because of the stop which it gives ‘both to power and authority’.”

“…there is something beneficial to the growth of the division of labour [sic] when governments are limited (though not so weak there is widespread piracy), republican, or fragmented. The chief reason is surely that strong governments are, by definition, monopolies and monopolies always grow complacent, stagnant and self-serving. Monarchs love monopolies because where they cannot keep them to themselves, they can sell them, grant them to favourites [sic] and tax them. They also fall for the perpetual fallacy that they can make business work more efficiently if they plan it rather than allow and encourage it to evolve.”

“Empires, indeed governments generally, tend to be good things at first and bad things the longer they last….governments gradually employ more and more ambitious elites who capture a greater and greater share of the society’s income by interfering more and more in people’s lives as they give themselves more and more rules to enforce, until they kill the goose that lays the golden eggs…but a greater threat comes from ‘government failure’. Because it is a monopoly, government brings inefficiency and stagnation to most things it runs; government agencies pursue the inflation of their budgets rather than the service of their customers.”

“The message from history is so blatantly obvious – that free trade causes mutual prosperity while protectionism causes poverty – that it seems incredible that anybody ever thinks otherwise. There is not a single example of a country opening up its borders to trade and ending up poorer.”

Chapter 6: Escaping Malthus’s trap: population after 1200

This chapter is a fascinating study on how and why population rises and falls. The important thing to understand is that a Malthusian crisis is a result of decreasing specialisation [sic].

Ridley destroys the pessimists argument that the world is headed toward overpopulation. I used to somewhat subscribe to this (what appears to be) utter nonsense. The argument goes something like if we don’t do something to control population then we will not be able to feed the mouths in the world and calamity will result. The fascinating thing that Ridley proves that as a society becomes more specialized birth rates naturally fall. In other words it’s a natural evolutionary result, we don’t need some intellectual or government agency to figure out how to survive, we just do it. “But remarkably few people seem to know that the rate of increase in world population has been falling since the early 1960s and that the raw number on new people added each year has been falling since the late 1980s…Population growth is slowing even while death rates are falling….the entire world is experiencing the second half of a ‘demographic transition’ from high mortality and high fertility to low mortality and low fertility.” There is actually a peak in population and it will happen somewhere around 2075 at 9.2 billion. In reality we will be able to feed the world forever.

Chapter 7: The release of slaves: energy after 1700

This chapter is incredibly important. In it Ridley argues ‘that economic growth only became sustainable when it began to rely on non-renewable, non-green, non-clean power.” What really matters, “non-renewable resources such as coal are sufficiently abundant to allow an expansion of both economic activity and population to the point where they can generate sustainable wealth for all the people of the planet….and can then hand the baton to some other form of energy.”

The green movement is the enemy to progress, growth, and ironically a natural transition to a more green form of energy. They are effectively their own worst enemies, not to mention ours.

Chapter 8 The invention of invention: increasing returns after 1800

“The most fundamental feature of the modern world since 1800…has been the continuing discovery of ‘increasing returns’ so rapid that they outpaced even the population explosion…The concept of a steady final state, applied to a dynamic system like the economy, is as wrong as any philosophical abstraction can be.”

Ridley destroys the belief that governmental top-down innovation works. Innovation is an evolutionary concept and governments don’t innovate very well.

“The perpetual innovation machine that drives the modern economy owes it existence not mainly to science; nor to money; nor to patents; nor to government. It is not a top-down process at all…It is the ever-increasing exchange of ideas that causes the ever-increasing rate of innovation in the modern world.”

The real good news about the future, the thing that should make you most optimistic, is “the world is turning bottom-up again; the top-down years are coming to an end.” I know it’s hard to believe even in America, but Barack Obama, the far-left, and the center-left Republicrats are the last breath of this mentality. They may win for a little while longer and cause severe damage in the short-term, but the reality is the world and America is changing. Truth is truth, it cannot be denied, once denied it will rear it’s head again with a vengeance.

Chapter 9: Turning points’ pessimism after 1900

This was an interesting chapter. Ridley runs through the great pessimism scares of the last century; cancer, nuclear Armageddon, famine, running out of resources, clean air, genes, and plague. He effectively demonstrates how the pessimists were wrong every time.

Ch. 10: The two great pessimisms of today: Africa and climate after 2010

Yet another intriguing chapter. Global warming wackos beware, I know exactly who and what you are. The important part of his argument is that he effectively demonstrates how these modern day pessimists are a danger to the future growth of the human race. They are the enemies to progress and growth, and they must be stopped.

“I am testing my optimism against the facts, and what I find is that the probability of a rapid and severe climate change is small; the probability of net harm from the most likely climate change is small; the probability that no adaptation will occur is small; and the probability of no no new low-carbon energy technologies emerging in the long run is small. Multiply those small probabilities together and the probability of a prosperous twenty-first century is therefore by definition large.”

Go away you green nuts, you are the enemy of modern progress. And yet so many of you call yourselves “progressives.”

Chapter 10: The catallaxy: rational optimism about 2100

“Said Lord Macaulay, ‘We see in almost every part of the annals of mankind how the industry of individuals, struggling up against wars, taxes, famines, conflagrations, mischievous prohibitions, and more mischievous protections, creates faster than governments can squander, and repairs what invaders can destroy.”

“So the human race will continue to expand and enrich its culture, despite setbacks and despite individual people having much the same evolved, unchanging in nature. The twenty-first century will be a magnificent time to be alive.”

Mr. Ridley you have convinced me, I am now a rational optimist! To think, I bought your book as a result of specialization and progress. The economy had deemed the book seller Borders no longer a survivor, I bought it in a close-out sale at 70% off suggested retail.

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