USA Today recently ran an article reminding Americans of the importance of local and tacit knowledge. With Iraq no longer under the control of American forces, the population is struggling to understand and engage in the basic concepts of democracy, including political organization, law interpretation, combating international sabotage of the elections and so forth.
Why are Iraqis having such a hard time? There’s a great body of knowledge needed to grasp the nuisances of any political system. Iraqi citizens do not have access to this self-ruling knowledge because democracy was transplanted instead of grown. Because Iraq lacks any influential custom of democracy, trying to grasp it is a bit like trying to understand algebra without knowing how to multiply. America has democratic institutions that stretch all the way back to Ancient Greece. Iraq’s democratic customs stretch all the way back to last year.
People have memories and they often look to the past to help answer today’s questions. Iraqi citizens, for example, are afraid of expressing themselves because they are do used to be killed for it. And the problems don’t stop with this generation because they teach and talk to their kids. Twenty, thirty and forty years from now, Iraq’s rising leaders will still favor secrecy and religious texts over secularism and free speech. It’s possible it might even be worse than that. Assuming the “democracy” (is it really a democracy if the citizens don’t understand how it works or was forced on them?) lasts this long, the next generation might be worse at this crazy system than their parents because, like most people, they don’t like being told what to believe. (Especially when the order is “You have a right to choose...but you can’t choose that.”) So will they ever “get it?” There’s no way to tell but forcing it isn’t going to work. Instead of trying to manufacture a political system, America should try to grow it, making suggestions and offering foundation-building requirements, not demanding sweeping reforms. For example, paying groups of locals to police an area instead of paying them to act just like Americans troops among American troops doesn’t build communal relationships, reinforce trust between peoples and remind citizens that they won’t be shot if they say something disagreeable. Even having police officers instead of soldiers teach police work would do wonders.
Ordering someone to be more democratic is not only confusing, it’s hypocritical and illegitimate. Iraqis have to be let to learn for themselves and that includes letting them choose their own government, even if we don’t like it.
Tuesday, June 29, 2004
Sunday, June 27, 2004
Deconstructing Iowa
The Des Moines Register reported that Iowa may be taking an important step to liberalization as calls for ending the state control of liquor wholesaling gain voice. The arguments against public ownership are the same—it’s expensive, inefficient and poorly run.
But this case involves an interesting twist. A large part of the work force for the state monopoly comes from Iowa’s prisons who are being paid 37 cents an hour which saves the state millions of dollars and provides job training. But people who cite this argument as justification for a state monopoly miss the point. There’s no reason why the private sector couldn’t employ these inmates instead. Nothing would have to change. And for those that don’t want the state to loose the money, they need to be reminded of the role of government. Governments are not supposed to make money; they are supposed to ensure that other people can make money.
But this case involves an interesting twist. A large part of the work force for the state monopoly comes from Iowa’s prisons who are being paid 37 cents an hour which saves the state millions of dollars and provides job training. But people who cite this argument as justification for a state monopoly miss the point. There’s no reason why the private sector couldn’t employ these inmates instead. Nothing would have to change. And for those that don’t want the state to loose the money, they need to be reminded of the role of government. Governments are not supposed to make money; they are supposed to ensure that other people can make money.
Friday, June 25, 2004
One Moore Lesson
I just got back from seeing Michael Moore’s new movie, Fahrenheit 9/11. In case you live under a rock, the movie turns a critical eye to the Bush administration, accusing them of lying to the American public about White House’s reasons for invading Iraq.
There’s a lot I want to say about the documentary beyond the fact that I thought it was an excellent flick everyone should see. But lingering just below the surface of the movie is its most important lesson, a lesson we continuingly have to relearn.
Nothing better captures this lesson than Crossfire’s Tucker Carlson’s interview last September with pop singer Britney Spears. In response to a question about if she supports the war in Iraq, Britney said, “Honestly I think we should just trust our president in every decision he makes and should just support that, you know, and be faithful in what happens.” I was able to bear a gruesome fifteen minutes of today’s Crossfire, long enough to hear Carlson completely agree with her.
What Spears and Carlson are telling us is that we should never question our leadership, which is precisely what the documentary does. There’s a growing consensus in our government that questioning the establishment is evil. The very fact that Moore had trouble finding a distributor for such a controversial film is reminiscent of his accusations that both the media and the Democrats weren’t asking enough questions. Far too many were either too lazy or too cowardly to challenge the Man.
Being able to face the status quo is the cornerstone of creating a better world. Just as firms challenge each other to create a better industry, ideas need to be able to challenge each other to create a better society. When institutions, like the American government, insist that the nonconformists are unpatriotic (a claim that I’m sure the authors of the Declaration of Independence would disagree with), and we accept those claims, we start down the road to oppression. When Spears and Carlson promote passive complacency, they miss everything this country stands for.
Moore fittingly ended his documentary with a quote from 1984. In it, we are reminded of the connection between powerlessness and ignorance, between the rulers and the silencers, between absolute power and its maintenance through war. Even if you don’t like Michael Moore, you should see this documentary just to remind yourself of your right—no, your duty—to question everything.
There’s a lot I want to say about the documentary beyond the fact that I thought it was an excellent flick everyone should see. But lingering just below the surface of the movie is its most important lesson, a lesson we continuingly have to relearn.
Nothing better captures this lesson than Crossfire’s Tucker Carlson’s interview last September with pop singer Britney Spears. In response to a question about if she supports the war in Iraq, Britney said, “Honestly I think we should just trust our president in every decision he makes and should just support that, you know, and be faithful in what happens.” I was able to bear a gruesome fifteen minutes of today’s Crossfire, long enough to hear Carlson completely agree with her.
What Spears and Carlson are telling us is that we should never question our leadership, which is precisely what the documentary does. There’s a growing consensus in our government that questioning the establishment is evil. The very fact that Moore had trouble finding a distributor for such a controversial film is reminiscent of his accusations that both the media and the Democrats weren’t asking enough questions. Far too many were either too lazy or too cowardly to challenge the Man.
Being able to face the status quo is the cornerstone of creating a better world. Just as firms challenge each other to create a better industry, ideas need to be able to challenge each other to create a better society. When institutions, like the American government, insist that the nonconformists are unpatriotic (a claim that I’m sure the authors of the Declaration of Independence would disagree with), and we accept those claims, we start down the road to oppression. When Spears and Carlson promote passive complacency, they miss everything this country stands for.
Moore fittingly ended his documentary with a quote from 1984. In it, we are reminded of the connection between powerlessness and ignorance, between the rulers and the silencers, between absolute power and its maintenance through war. Even if you don’t like Michael Moore, you should see this documentary just to remind yourself of your right—no, your duty—to question everything.
Wednesday, June 23, 2004
Learning To Evolve
The Des Moines Register had an article Sunday about an Iowa company named Chapman Lumber, a timber firm who is finding success in exporting Iowa’s (apparently) abundant supply of high quality hard woods to China and Europe. Now I never thought of my home state as a fortress for quality lumber—like most people I associate that role with Canada—but apparently Iowa’s good at something that doesn’t involve corn. No one is more surprised than I.
Economics and biology have a lot in common, and not just when biological organisms, like trees, are bought and sold. While I’ll concede that there are differences between Economic and Darwinian evolution, these differences do not hamstring our understanding of trade. When Mike tells us that Darwinian evolution cannot explain the learning process, he’s reminding us that the forebears of Darwin were wrong: a giraffe cannot learn to lengthen its neck to reach food but a company can learn to improve its structure to reach profits. But there is a learning process in biological evolution. It’s harder to see because, unlike economics, it occurs over hundreds or thousands or million of years, but it is there.
Chapman Lumber most definitely engaged in a learning process when it sought out the Chinese and European markets. It learned what they needed, it learned what it had and it evolved to take advantage of that knowledge. It wasn’t always this way—China’s surge of growth started long after Chapman Lumber started in 1954—but it is happening now so the company can capture more profit. Iowa’s one billion dollar hardwood industry originates in the fact that a long, long ago, hardwood seeds prospered here. Obviously, these seeds did not actively seek out the Hawkeye State. It is far more reasonable that they spread all over primarily because the forest grew and in the Midwest they flourished. Like Chapman Lumber, hardwoods carved out a niche in foreign soil and like Chapman Lumber, these plants adapted to their new soil.
True, Chapman Lumber learned actively. It did not send wood to every country it could think of and stuck with the one that bought the product. But I argue that the woods learned too, though they are not aware of it. The oak, cherry, walnut and hickory seeds learned passively and tacitly. They did not try to learn anything while struggling to survive in the world, nor are they aware they’ve learned anything. These species tacitly know they can survive here because they didn’t die out in the face of competing species and their children flourish here.
Howard Baetjer teaches us that capital is embodied knowledge: my microwave has knowledge about physics stored up in its structure that allows it to work. And because that and other knowledge is applied in my microwave, I don’t need to know anything about physics to create a hot meal in seconds. Similarly, the structure of a firm or species is embodied knowledge. If I became a Chapman Lumber employee tomorrow, I could benefit from the job security that their firm allows because of the knowledge it embodies. Similarly, if I became an oak seed organism tomorrow I could benefit from the knowledge that I can prosper in Iowa without having to “learn” it. In both cases, I am not at risk if the direction the species/firm is going happens to be wrong. The knowledge that embodies Chapman Lumber’s assets and oak trees’ location and DNA tells me everything will be fine.
This example can be applied to any species to demonstrate that it learns because the knowledge it gains—even if it is passive and tacit—is embodied in the organism’s structure. The giraffe’s longer neck embodies the knowledge that a longer neck is needed to survive for this species. Future giraffes do not bear the costs of the painful learning process when giraffes with shorter necks die out. The learning process occurs, but it is passive and skips the realization step. Organisms never say, “Ah ha! A longer neck lets me get more food!” or “Iowa is a good place to grow!” But employees can declare, “China is the future of this company and here is why.”
Competition is the engine of economic (and biological) progress. Giraffes had to “learn” the value of longer necks because the competition of food sources close to the ground was too fierce. Forests grow because plants “learn” they have a better chance of surviving on the outer edge of the forest rather than within—where light and water are scarcer. It’s not that competitive language is a poor way to describe the benefits of trade; it’s that people do understand the full implications of trade.
Economics and biology have a lot in common, and not just when biological organisms, like trees, are bought and sold. While I’ll concede that there are differences between Economic and Darwinian evolution, these differences do not hamstring our understanding of trade. When Mike tells us that Darwinian evolution cannot explain the learning process, he’s reminding us that the forebears of Darwin were wrong: a giraffe cannot learn to lengthen its neck to reach food but a company can learn to improve its structure to reach profits. But there is a learning process in biological evolution. It’s harder to see because, unlike economics, it occurs over hundreds or thousands or million of years, but it is there.
Chapman Lumber most definitely engaged in a learning process when it sought out the Chinese and European markets. It learned what they needed, it learned what it had and it evolved to take advantage of that knowledge. It wasn’t always this way—China’s surge of growth started long after Chapman Lumber started in 1954—but it is happening now so the company can capture more profit. Iowa’s one billion dollar hardwood industry originates in the fact that a long, long ago, hardwood seeds prospered here. Obviously, these seeds did not actively seek out the Hawkeye State. It is far more reasonable that they spread all over primarily because the forest grew and in the Midwest they flourished. Like Chapman Lumber, hardwoods carved out a niche in foreign soil and like Chapman Lumber, these plants adapted to their new soil.
True, Chapman Lumber learned actively. It did not send wood to every country it could think of and stuck with the one that bought the product. But I argue that the woods learned too, though they are not aware of it. The oak, cherry, walnut and hickory seeds learned passively and tacitly. They did not try to learn anything while struggling to survive in the world, nor are they aware they’ve learned anything. These species tacitly know they can survive here because they didn’t die out in the face of competing species and their children flourish here.
Howard Baetjer teaches us that capital is embodied knowledge: my microwave has knowledge about physics stored up in its structure that allows it to work. And because that and other knowledge is applied in my microwave, I don’t need to know anything about physics to create a hot meal in seconds. Similarly, the structure of a firm or species is embodied knowledge. If I became a Chapman Lumber employee tomorrow, I could benefit from the job security that their firm allows because of the knowledge it embodies. Similarly, if I became an oak seed organism tomorrow I could benefit from the knowledge that I can prosper in Iowa without having to “learn” it. In both cases, I am not at risk if the direction the species/firm is going happens to be wrong. The knowledge that embodies Chapman Lumber’s assets and oak trees’ location and DNA tells me everything will be fine.
This example can be applied to any species to demonstrate that it learns because the knowledge it gains—even if it is passive and tacit—is embodied in the organism’s structure. The giraffe’s longer neck embodies the knowledge that a longer neck is needed to survive for this species. Future giraffes do not bear the costs of the painful learning process when giraffes with shorter necks die out. The learning process occurs, but it is passive and skips the realization step. Organisms never say, “Ah ha! A longer neck lets me get more food!” or “Iowa is a good place to grow!” But employees can declare, “China is the future of this company and here is why.”
Competition is the engine of economic (and biological) progress. Giraffes had to “learn” the value of longer necks because the competition of food sources close to the ground was too fierce. Forests grow because plants “learn” they have a better chance of surviving on the outer edge of the forest rather than within—where light and water are scarcer. It’s not that competitive language is a poor way to describe the benefits of trade; it’s that people do understand the full implications of trade.
Tuesday, June 22, 2004
Prosperity vs Competition
It is my understanding that I am not breaking my contract with the LSAC by posting this. If I later realize that I am, obvious parts will be excised.
One of the questions on last week's LSAT was something like this: Surveys show that members of Country X would prefer a situation where Country X's economy grows by 10% and Country Y's economy grows by 8% to a situation where Country X's economy grows by 15% and Country Y's economy grows by 20%, even though the second situation was better for Country X. Which answer explains this apparent dilemma?
My answer was that the respondents preferred beating the other country to doing well individually. Experience with economics seems to be quite helpful on that test, as the situation did not seem foreign to me. That is, not that I feel the same way, but that I encounter this often.
I believe this is to a large part because we use the wrong terminology in explaining trade. We discuss trade in the lgnaugae of firm-to-firm competition, a language which does not grasp mutually beneficial trade. I think we make this mistake because we also mistake Darwinian evolution for Market evolution [David will follow up with an argument against that point, I hope]. The language we use is couched in Darwinian terms--the competition between firms, the concept of survival of the fittest, etc. can fit to some degree when discussing firm-to-firm competition, but it, too, cannot explain the learning that takes place through competition.
My overly optimistic and unrealisitc suggestion? Quit explaining trade as competition between nations. Start explaining market activity as more than just competition. When you start with the model of perfect competition as the framework for understanding market activity, you lose large parts of the story.
One of the questions on last week's LSAT was something like this: Surveys show that members of Country X would prefer a situation where Country X's economy grows by 10% and Country Y's economy grows by 8% to a situation where Country X's economy grows by 15% and Country Y's economy grows by 20%, even though the second situation was better for Country X. Which answer explains this apparent dilemma?
My answer was that the respondents preferred beating the other country to doing well individually. Experience with economics seems to be quite helpful on that test, as the situation did not seem foreign to me. That is, not that I feel the same way, but that I encounter this often.
I believe this is to a large part because we use the wrong terminology in explaining trade. We discuss trade in the lgnaugae of firm-to-firm competition, a language which does not grasp mutually beneficial trade. I think we make this mistake because we also mistake Darwinian evolution for Market evolution [David will follow up with an argument against that point, I hope]. The language we use is couched in Darwinian terms--the competition between firms, the concept of survival of the fittest, etc. can fit to some degree when discussing firm-to-firm competition, but it, too, cannot explain the learning that takes place through competition.
My overly optimistic and unrealisitc suggestion? Quit explaining trade as competition between nations. Start explaining market activity as more than just competition. When you start with the model of perfect competition as the framework for understanding market activity, you lose large parts of the story.
Monday, June 21, 2004
Thomas Sowell vs The Rule of Law
In a recent column by Thomas Sowell (not one of my favorite columnists, by far) suggests that the push by Iraqi leaders to make foreign workers subject to Iraqi law is dangerous. He writes :
In short, he believes that non-Iraqis in Iraq should not be compelled to follow Iraqi law, for the sake of the stability that those non-Iraqis might feel, not having to deal with laws that might be different than in their home country. No mention of how home countries would actually have the ability to enforce their laws in sovereign nations, which might be relevant given the Bush Administration's defense in the Guantanamo Bay cases--that Guantanamo Bay is not on American soil and thus American law does not apply.
Sowell proceeds to compare the insistence on the local rule of law with ineffective symbolism. Given how much effort Sowell makes to suggest that law is a powerful signal to individuals as to what the customs and proper actions are, it seems silly to suggest that anything so large as suggesting that people in Iraq must follow its laws--regardless of their nationality--can be explained away as trivial symbolism.
I imagine he would be completely opposed to any states rights issues, as well?
Obviously subjecting foreign workers and entrepreneurs to a wholly different legal system from the one they are used to is creating yet another obstacle to recruiting people whose skills and experience are urgently needed to get Iraq back on its feet again as a functioning society.
In short, he believes that non-Iraqis in Iraq should not be compelled to follow Iraqi law, for the sake of the stability that those non-Iraqis might feel, not having to deal with laws that might be different than in their home country. No mention of how home countries would actually have the ability to enforce their laws in sovereign nations, which might be relevant given the Bush Administration's defense in the Guantanamo Bay cases--that Guantanamo Bay is not on American soil and thus American law does not apply.
Sowell proceeds to compare the insistence on the local rule of law with ineffective symbolism. Given how much effort Sowell makes to suggest that law is a powerful signal to individuals as to what the customs and proper actions are, it seems silly to suggest that anything so large as suggesting that people in Iraq must follow its laws--regardless of their nationality--can be explained away as trivial symbolism.
I imagine he would be completely opposed to any states rights issues, as well?
How Prizes Change the World
Today marks the first time in history that a privately funded ship left the cradle of earth, joining the nations that have set foot in space. SpaceShipOne, one of over two dozens competing vessels, is well on its way to winning the X Prize, a $10 million prize to the first team that can send a three-manned (or equivalent) ship into space and repeat the achievement within two weeks.
What the X Prize captures is the freedom to try, to explore and to fail—all freedoms law and legislation tend to constrict. Without the worry of a government overseer, competitors can explore whatever theory or idea they wish and because there’s a prize, there’s focus, urgency and cohesion that jumpstarts the competition. Michael Polanyi advocated a “dynamic order” that shuns central planning and encourages in engaging “the full possibilities of research.” The X Prize is just one example of the dynamic order: a freedom-loving structure that lays the groundwork for scientific leaps. It is a formula for future research.
I’m not sure exactly what makes a prize for something as inspiring as space flight—maybe it’s the publicity that captures the imagination of the scientist, maybe it’s the guaranteed bonus that finally convinces someone it’s worth the risk and time, maybe it’s atmosphere and buzz that comes with a competitive environment. Really, it’s all of them and other reasons I can’t yet identify. We do know it’s not just a matter of the prize money. SpaceShipOne’s team—Scaled Composites, LLC—spent $20 million to get this far, more than twice the value of the prize. This isn’t unusual. During the Orteig Prize, the prize Charles Lindbergh won when he flied from New York to Paris without stopping, other competitors often spent more than the $25,000 prize.
Why do people spend more than the guaranteed return of the prize (which itself already isn’t guaranteed)? Why, when left to their own devices, do individuals exaggerate their own risk by spending so much? Perception and experience. Everyone knows that completing the prize will spawn a new era of travel and a new industry that the winners will be at the helm of. And even the losers of the prize may turn out to be economic winners. Every team has access to a unique body of knowledge that may prove useful outside the context of the prize. Armadillo Aerospace, for example, created a new rocket fuel, one that’s more powerful and cheaper than the fuel NASA uses. Just as the completion of the Orteig Prize spawned the development of the multi-billion dollar aerospace industry, there’s no reason to think that the X Prize won’t do the same.
Today we saw private interests at work, jumpstarted by other private interests. And behind all the activity that led up to the space flight is an enormous body of knowledge that didn’t cost taxpayers a dime. Yet this knowledge will no doubt prove pivotal as travels to space become more affordable and, decades from now, available to the average person.
What the X Prize captures is the freedom to try, to explore and to fail—all freedoms law and legislation tend to constrict. Without the worry of a government overseer, competitors can explore whatever theory or idea they wish and because there’s a prize, there’s focus, urgency and cohesion that jumpstarts the competition. Michael Polanyi advocated a “dynamic order” that shuns central planning and encourages in engaging “the full possibilities of research.” The X Prize is just one example of the dynamic order: a freedom-loving structure that lays the groundwork for scientific leaps. It is a formula for future research.
I’m not sure exactly what makes a prize for something as inspiring as space flight—maybe it’s the publicity that captures the imagination of the scientist, maybe it’s the guaranteed bonus that finally convinces someone it’s worth the risk and time, maybe it’s atmosphere and buzz that comes with a competitive environment. Really, it’s all of them and other reasons I can’t yet identify. We do know it’s not just a matter of the prize money. SpaceShipOne’s team—Scaled Composites, LLC—spent $20 million to get this far, more than twice the value of the prize. This isn’t unusual. During the Orteig Prize, the prize Charles Lindbergh won when he flied from New York to Paris without stopping, other competitors often spent more than the $25,000 prize.
Why do people spend more than the guaranteed return of the prize (which itself already isn’t guaranteed)? Why, when left to their own devices, do individuals exaggerate their own risk by spending so much? Perception and experience. Everyone knows that completing the prize will spawn a new era of travel and a new industry that the winners will be at the helm of. And even the losers of the prize may turn out to be economic winners. Every team has access to a unique body of knowledge that may prove useful outside the context of the prize. Armadillo Aerospace, for example, created a new rocket fuel, one that’s more powerful and cheaper than the fuel NASA uses. Just as the completion of the Orteig Prize spawned the development of the multi-billion dollar aerospace industry, there’s no reason to think that the X Prize won’t do the same.
Today we saw private interests at work, jumpstarted by other private interests. And behind all the activity that led up to the space flight is an enormous body of knowledge that didn’t cost taxpayers a dime. Yet this knowledge will no doubt prove pivotal as travels to space become more affordable and, decades from now, available to the average person.
The Midwestern Version of Rent Control
The Des Moines Register reported today that college students all over the Midwest are using subsidized housing intended for the poor, straining the federally funded program. Amazingly, people are surprised that students can “get away with it” and want US department of Housing and Urban Development to restructure their eligibility rules.
What the public is really saying is that they are angry that the world isn’t following their neat little plan they told everyone to follow. Like New York’s infamous rent control program, which intended to ensure senior citizens cheap housing but only ensured a select few inexpensive apartments, this law has unintended consequences when as it moved from the lab-like legislative floor to the real world. College students, like anyone with a tight budget, are always looking for the best deals. Perhaps the problem doesn’t rest with the students but with the government rules. While I don’t want anyone to sleep on the streets, trying to manufacture an economy according to some grand plan by constructing layer upon layer of laws isn’t the answer.
A single institution can’t outsmart the collective actions of countless working minds. But by creating the opportunity for new ideas and innovations, by reintroducing the incentive for people to create profitable low income housing, we can find an answer instead of spending millions trying to manufacture the perfect society. Economies are grown, not built.
What the public is really saying is that they are angry that the world isn’t following their neat little plan they told everyone to follow. Like New York’s infamous rent control program, which intended to ensure senior citizens cheap housing but only ensured a select few inexpensive apartments, this law has unintended consequences when as it moved from the lab-like legislative floor to the real world. College students, like anyone with a tight budget, are always looking for the best deals. Perhaps the problem doesn’t rest with the students but with the government rules. While I don’t want anyone to sleep on the streets, trying to manufacture an economy according to some grand plan by constructing layer upon layer of laws isn’t the answer.
A single institution can’t outsmart the collective actions of countless working minds. But by creating the opportunity for new ideas and innovations, by reintroducing the incentive for people to create profitable low income housing, we can find an answer instead of spending millions trying to manufacture the perfect society. Economies are grown, not built.
Saturday, June 19, 2004
The Right to Responsiblity
In a country built on freedom, it amazes me how often people confuse the difference between a right and a privilege.
According to a report by CNN a few days ago, the United States lingers behind European countries in term of, in CNN’s words, “workers rights.” Two of these so-called rights enumerated by CNN are paid vacation and paid maternity leave. Let me get one thing straight: getting paid for work you don’t do is not—repeat IS NOT—a right. Workers, international or otherwise, have no more of an entitlement to getting paid for doing nothing than firms have a right to make their employees work without paying them. Getting something for time you don’t work is a privilege that must be earned.
No doubt proponents of Europe’s “rights” claim that denying these people payment is a form of penalizing them. “Why should someone be punished for having a child?” But you could ask the same of the company that has to pay Jane a steady salary even though she’s not helping them make that money. Or of her co-workers that have to pick up the slack in her absence but can’t get paid more because the company has to pay Jane instead. Why should the business and her co-workers be punished for her pregnancy? Are we really willing to say that some people—like families—are more deserving than others? Like a vacation, having a baby can be very nice but there are costs to nice things. Paying them is called responsibility.
According to a report by CNN a few days ago, the United States lingers behind European countries in term of, in CNN’s words, “workers rights.” Two of these so-called rights enumerated by CNN are paid vacation and paid maternity leave. Let me get one thing straight: getting paid for work you don’t do is not—repeat IS NOT—a right. Workers, international or otherwise, have no more of an entitlement to getting paid for doing nothing than firms have a right to make their employees work without paying them. Getting something for time you don’t work is a privilege that must be earned.
No doubt proponents of Europe’s “rights” claim that denying these people payment is a form of penalizing them. “Why should someone be punished for having a child?” But you could ask the same of the company that has to pay Jane a steady salary even though she’s not helping them make that money. Or of her co-workers that have to pick up the slack in her absence but can’t get paid more because the company has to pay Jane instead. Why should the business and her co-workers be punished for her pregnancy? Are we really willing to say that some people—like families—are more deserving than others? Like a vacation, having a baby can be very nice but there are costs to nice things. Paying them is called responsibility.
Thursday, June 17, 2004
Networks are Expensive!
The very reason governments justify their funding of projects like fiber optics is because such things could easily become expensive. Why would a private company spend so much money on laying the cable for a network that would benefit the public, but might put the company out of business? The truth of networking is that the most expensive thing tends to be placing the wiring. Cable TV is fundamentally a federal project, given how many subsidies went into laying the cables. Granted, this was because the wireless options (antennae) were insufficient to meet the demands of rural areas.
But this is no longer a problem. 802.11g ("WiFi") and upcoming wireless protocols are fast approaching speeds that cable networks offer, and is significantly cheaper than wiring a building. Satellite TV requires only a single object in the sky--no subsidies there--and offers what would be a cheaper alternative to cable if it weren't for those nasty subsidies.
But in the short-term, it is hard for the government to look forward and have faith that someone might privately create a solution. Legislatures pat themselves on the back all the time about faith in the market. But when the market hasn't already solved the problem, they promptly try to solve it themselves, with projects like Iowa's little network.
But this is no longer a problem. 802.11g ("WiFi") and upcoming wireless protocols are fast approaching speeds that cable networks offer, and is significantly cheaper than wiring a building. Satellite TV requires only a single object in the sky--no subsidies there--and offers what would be a cheaper alternative to cable if it weren't for those nasty subsidies.
But in the short-term, it is hard for the government to look forward and have faith that someone might privately create a solution. Legislatures pat themselves on the back all the time about faith in the market. But when the market hasn't already solved the problem, they promptly try to solve it themselves, with projects like Iowa's little network.
Wednesday, June 16, 2004
Iowa's Lesson in Humility in the Face of a Changing Market
Sunday’s Des Moines Register confirmed something we Austrians already know: states aren’t good conduits for creating goods people will use. Sure, there are exceptions—like national security—but when it comes to technological infrastructure, especially in this age of increasing genuine uncertainty, bureaucrats just don’t cut it though they act like they can.
That’s the painful lesson Iowa’s Democratic legislators are learning as they desperately try to get the state-run fiber optics network, a $356 million investment, to turn a profit. Republican legislators, however, are trying to sell the network, which would have to be sold for a fraction of the investment.
Why is this fiber optics network that once attracted foreign representatives to the state to study it for their own countries such a burden, today? Over ten years ago, the Iowa’s government decided to create the ICN (Iowa Communications Network) to administer a new network that would link the state’s government agencies to the greater world. Especially designed for schools and colleges, the ICN would link institutions via video and become a valuable teaching tool for Iowa’s schools, especially the rural ones. But the network’s conception was back in the late 80s and earlier 90s, before the Internet became a practical (and cheaper) alternative. Now it’s horribly obsolete, expensive to run and the only thing schools tend to use the network for—Internet access—may be made obsolete by emerging technologies like wireless communication.
Supporters of Iowa’s own version of the Great Wall (another big project that never proved worth it) claim the project is akin to the country’s interstate for its premise is no different: it’s a network for transporting information. But the physical infrastructure of superhighways doesn’t become obsolete by advances in the auto industry. That network isn’t so dependent on the quality of the technology it supports. When Ford creates a new car, it doesn’t require the road to be upgraded. But new information technologies require a better network to carry the larger amounts of data the technologies depend on. Networks provide speed and there is no network fast enough. But rarely do we have to upgrade the highways to accommodate faster vehicles.
Like most government businesses, it would be better to abandon them and leave the risk and glory to private companies who possess the knowledge needed to use the assets more wisely. Because they have a personal stake in its success, they are willing to think about the big picture and acknowledge that technology isn’t constant. When will bureaucrats learn that they can’t predict the future and learn some humility?
That’s the painful lesson Iowa’s Democratic legislators are learning as they desperately try to get the state-run fiber optics network, a $356 million investment, to turn a profit. Republican legislators, however, are trying to sell the network, which would have to be sold for a fraction of the investment.
Why is this fiber optics network that once attracted foreign representatives to the state to study it for their own countries such a burden, today? Over ten years ago, the Iowa’s government decided to create the ICN (Iowa Communications Network) to administer a new network that would link the state’s government agencies to the greater world. Especially designed for schools and colleges, the ICN would link institutions via video and become a valuable teaching tool for Iowa’s schools, especially the rural ones. But the network’s conception was back in the late 80s and earlier 90s, before the Internet became a practical (and cheaper) alternative. Now it’s horribly obsolete, expensive to run and the only thing schools tend to use the network for—Internet access—may be made obsolete by emerging technologies like wireless communication.
Supporters of Iowa’s own version of the Great Wall (another big project that never proved worth it) claim the project is akin to the country’s interstate for its premise is no different: it’s a network for transporting information. But the physical infrastructure of superhighways doesn’t become obsolete by advances in the auto industry. That network isn’t so dependent on the quality of the technology it supports. When Ford creates a new car, it doesn’t require the road to be upgraded. But new information technologies require a better network to carry the larger amounts of data the technologies depend on. Networks provide speed and there is no network fast enough. But rarely do we have to upgrade the highways to accommodate faster vehicles.
Like most government businesses, it would be better to abandon them and leave the risk and glory to private companies who possess the knowledge needed to use the assets more wisely. Because they have a personal stake in its success, they are willing to think about the big picture and acknowledge that technology isn’t constant. When will bureaucrats learn that they can’t predict the future and learn some humility?
Monday, June 14, 2004
Why Johnny Doesn't Care
I believe there are few issues that capture the title of our blog as nicely as the so called war on drugs. This war, which by the way we are losing and costs taxpayers over $19 billion last year, gains popularity based on a single, flawed premise: people aren’t allowed to do harm to their own bodies. Like laws against suicide, anti-drug laws claim that your life is the responsibility of everyone else. We spend billions to tell people they don’t have the absolute right to use their body as you see fit, even it means harming it.
So that’s why I’m not too upset that my home state, Iowa, ranks number one in the country for meth incidents so far this year, according to yesterday’s Quad City Times, a local newspaper. Of course, that’s not their spin: methamphetamines are evil and the people that use them need to be protected from their own decisions. The article cites medical studies that demonstrate “meth-use in youth [is] ‘scary.’” Like marijuana and alcohol abuse in teens, extensive meth use can cause serious and permanent damage. While I don’t want those crazy kids harming themselves, they are becoming adults and telling them they can’t or shouldn’t do something doesn’t encourage them to start thinking long term on their own. In fact, telling them not to do something only encourages them to do it. That’s what being a teenager is about, challenging the status quo in an effort to find your own way.
Unlike most mainstream political thinkers, I don’t think people are a group of mindless nitwits who need to be herded like sheep. When you treat people as dumb and useless, they get pissed off, not surprisingly, leading to apathy, anger and social and cultural rebellion. While most QC Times readers will conclude that Iowa is filled with teens that shouldn’t think for themselves, I see Iowa filled with too many parents who were brought up thinking their kids shouldn’t think for themselves.
So that’s why I’m not too upset that my home state, Iowa, ranks number one in the country for meth incidents so far this year, according to yesterday’s Quad City Times, a local newspaper. Of course, that’s not their spin: methamphetamines are evil and the people that use them need to be protected from their own decisions. The article cites medical studies that demonstrate “meth-use in youth [is] ‘scary.’” Like marijuana and alcohol abuse in teens, extensive meth use can cause serious and permanent damage. While I don’t want those crazy kids harming themselves, they are becoming adults and telling them they can’t or shouldn’t do something doesn’t encourage them to start thinking long term on their own. In fact, telling them not to do something only encourages them to do it. That’s what being a teenager is about, challenging the status quo in an effort to find your own way.
Unlike most mainstream political thinkers, I don’t think people are a group of mindless nitwits who need to be herded like sheep. When you treat people as dumb and useless, they get pissed off, not surprisingly, leading to apathy, anger and social and cultural rebellion. While most QC Times readers will conclude that Iowa is filled with teens that shouldn’t think for themselves, I see Iowa filled with too many parents who were brought up thinking their kids shouldn’t think for themselves.
Sunday, June 13, 2004
Betting Markets
This post at Marginal Revolution on the wisdom of crowds raises the issue that betting markets are more than just the average of polls. Just a quick glance at the graph shows the discrepancy is not just noise. Certainly a large part of this knowledge has to be that the market participants are also betting on their own future decisions. I think the SEC should be prosecuting most of these market participants for insider trading.
What happens when a good becomes a service?
Could it be that David's unwillingness to have his preference for McDonald's changed by a free download is influenced by the increased availability of music downloads (increased competition), combined with the very low price of music--free, on peer-to-peer networks, and $1 on iTunes?
David raises a more interesting question for me: why the stability of the music download service factors into David's decision as to use the service. My guess is because his music would cease to play were his service of choice to stop working. What was once a good, a CD, an actual object, has become a service,a few megabytes in the internet. iTunes requires permission from Apple to play music downloaded from its store. Some services require monthly payment just to continue playing music already downloaded. So long as the consumers understand these licenses, there is nothing problematic.
Every legal music downloading service has within it some aspect of that problem: if the service were ever to shut down, so would the music purchased in that system. Imagine if Amazon.com went bankrupt, and all the books you ever purchased from it were to disappear in a cloud of smoke. Granted, if one of these services were to go under, it is likely that another service would act quickly to serve its customers. However, it is nearly certain that such a shift would result in a changing of the terms of the original contract.
Knowing that the stability of the music seller is tied in with the future availability of purchased goods should make consumers wary of using these stores. Personally, I have not spent money on these stores (though I was quite happy to obtain several albums through Pepsi's promotion in February). This problem should arise in any industry like this--Microsoft's monopoly is in a large part a function of its ability to signal to consumers that it has long-term stability.
I know iTunes has been wildly successful, but I do not have many statistics on other services, such as emusic.com. However, given that the major players in the field are Apple and Walmart--companies whose future does not depend on selling music--I would venture to say that the question of stability may play a factor in consumer choice.
David raises a more interesting question for me: why the stability of the music download service factors into David's decision as to use the service. My guess is because his music would cease to play were his service of choice to stop working. What was once a good, a CD, an actual object, has become a service,a few megabytes in the internet. iTunes requires permission from Apple to play music downloaded from its store. Some services require monthly payment just to continue playing music already downloaded. So long as the consumers understand these licenses, there is nothing problematic.
Every legal music downloading service has within it some aspect of that problem: if the service were ever to shut down, so would the music purchased in that system. Imagine if Amazon.com went bankrupt, and all the books you ever purchased from it were to disappear in a cloud of smoke. Granted, if one of these services were to go under, it is likely that another service would act quickly to serve its customers. However, it is nearly certain that such a shift would result in a changing of the terms of the original contract.
Knowing that the stability of the music seller is tied in with the future availability of purchased goods should make consumers wary of using these stores. Personally, I have not spent money on these stores (though I was quite happy to obtain several albums through Pepsi's promotion in February). This problem should arise in any industry like this--Microsoft's monopoly is in a large part a function of its ability to signal to consumers that it has long-term stability.
I know iTunes has been wildly successful, but I do not have many statistics on other services, such as emusic.com. However, given that the major players in the field are Apple and Walmart--companies whose future does not depend on selling music--I would venture to say that the question of stability may play a factor in consumer choice.
Saturday, June 12, 2004
Like All Things, It Depends: An Example of the Influence of Attitude
Is it just me or do people think that economists are magical creatures, capable of predicting the future and handing out pots of gold to any that follow their instructions?
My brother, Jason, is visiting this weekend for a neighborhood wedding and yesterday he was kind enough to take me out to lunch. On the way to the restaurant, we passed a local McDonald’s an I noticed the drive-thru line stretched at least ten cars long. I passed on to my brother that I’m glad we’re not going there and had an idea why. McDonald’s recently began offering free music downloads. I asked him if he was sure that people are responding that strongly to offer. “Well David,” he asked me, “you’re the economist; do these special offers work?”
This is why economists are known for answering questions the frustrating “It depends:” it’s always the best answer to such over simplistic questions. I blame the media’s and public’s willingness to embrace what Paul Krugman calls “policy entrepreneurs,” known as economists that abandon core economic realities in favor of telling politicians what they want to hear.
But Jason’s question opens the door for another question: how much does perception and attitude influence deals like these. Not more than three or four years ago, we were celebrating the miracle of free music from Napster. Now such programs are harder to find and the sheer volume and opportunity won’t reach the miracle that was Napster anytime soon. Like most people, I miss those times of free music; resorting to buying music online instead of simply downloading seems too…tragic to engage in. Even getting free downloads for a normally priced service doesn’t perk my interest. I know I’m not alone and I’m betting McDonald’s offer isn’t working as well as they wished. The only way to know for sure is by how much longer they’ll keep the offer around and if they’ll ever bring it back. Personally, think McDonald’s is always that crowded around lunch time.
My brother, Jason, is visiting this weekend for a neighborhood wedding and yesterday he was kind enough to take me out to lunch. On the way to the restaurant, we passed a local McDonald’s an I noticed the drive-thru line stretched at least ten cars long. I passed on to my brother that I’m glad we’re not going there and had an idea why. McDonald’s recently began offering free music downloads. I asked him if he was sure that people are responding that strongly to offer. “Well David,” he asked me, “you’re the economist; do these special offers work?”
This is why economists are known for answering questions the frustrating “It depends:” it’s always the best answer to such over simplistic questions. I blame the media’s and public’s willingness to embrace what Paul Krugman calls “policy entrepreneurs,” known as economists that abandon core economic realities in favor of telling politicians what they want to hear.
But Jason’s question opens the door for another question: how much does perception and attitude influence deals like these. Not more than three or four years ago, we were celebrating the miracle of free music from Napster. Now such programs are harder to find and the sheer volume and opportunity won’t reach the miracle that was Napster anytime soon. Like most people, I miss those times of free music; resorting to buying music online instead of simply downloading seems too…tragic to engage in. Even getting free downloads for a normally priced service doesn’t perk my interest. I know I’m not alone and I’m betting McDonald’s offer isn’t working as well as they wished. The only way to know for sure is by how much longer they’ll keep the offer around and if they’ll ever bring it back. Personally, think McDonald’s is always that crowded around lunch time.
Thursday, June 10, 2004
A Market of Knowledge
This article is a week ahead of schedule.
About a month ago I stumbled onto Wikipedia, a free online encyclopedia. Every entry on the site is created by volunteers, lending their expert knowledge to any entry that they happen to want to create. New entries and updates are posted on a page for anyone to edit as they see fit. At any given time, over a quarter of a million articles are being worked on in the English version. While the Columbia Encyclopedia 6th Edition has 6.5 million words, the 2002 Encyclopedia Britannica has 55 million words and the 2002 Encarta Encyclopedia has 26 million words, Wikipedia’s three-year-old English version contains over 81.6 million words, a value that increases everyday from over seven thousand contributors.
Naturally, this open system contains immense potential for abuse. Wikipedia is meant to be a reference though it contains no official decree that its pages are accurate. I had to ask myself, are the 7,135 contributors just as good as a handful of paid employees? The other night I ran an experiment, placing ten false articles into the system. The article topics ranged from gardening to economics to entertainment. Sometimes the mistakes were subtle, easily attributed to typos. (Characters of Middle Earth: The assembly of protagonists and antagonists depicted in J.R. Tolstein’s The Habbit.) Sometime the articles were blatantly wrong. (sampling bias: A form of prejudice that discriminates against the sampos subculture of Lower Manhattan. Those that exercise a sampling bias commonly accuse the sampos people of being too clean and anal retentive, threatening the wild and grimy character of the area.)
I expected to check the site daily and watch the contributors struggle with my articles or ignore them completely. After about a week, I figured I could examine what proportion were corrected. But in less than an hour of the articles’ publishing contributors cleaned Wikipedia of my errors. Most of the articles were redirected, meaning the article’s topic was awfully similar to an existing article so my text was replaced with the old text.
One of my articles was deleted by network administrators, the only Wiki members whohave the power to purge their databank of any article. My article was about Marvin Perry, who I claimed was an actor best known for his portrayal of Chandler on Friends. Wikipedia takes deleting material very seriously—my deleter had to justify the deletion—because while the original article remains available no matter how many times it is redirected or edited, a deletion eliminates the presence of the article completely. However, Wikipedia members can vote for a deletion to be undone so even an administrator lacks absolute power.
There was one article members had trouble with. It said "blue ribbon" is “A show on Comedy Central about comics participating in a dog show.” Defaulting to humble ignorance, a member of the Wiki community named Stormie was about it let it go until he Googled it and checked Comedy Central’s website, yielding no evidence to my claim in either case. He also noted my other contributions were highly suspicious and turned the article into a “candidate for deletion,” meaning he’s suggesting to network administrators to research the topic and delete it if needed. With my experiment complete, I admitted that the article was a fake, hopefully preventing dozens of administrators wandering about the World Wide Web in a hopeless pursuit of a series about comics showing off their dogs. Thankfully, my "blue ribbon" article no longer exists.
Wikipedia is an organic encyclopedia, using the disperse nature of knowledge to its advantage by opting out of a position of control. It relies on the fun and inherent satisfaction people experience when they participate in teaching others. As such, it is extremely accurate (Ronald Regan’s entry, for example, was updated mere hours after his death). In Michael Polanyi’s words, Wikipedia represents the dynamic order that evolves when freedom is paramount. It is self-ordering, self-correcting and even the most influential lack absolute power.
About a month ago I stumbled onto Wikipedia, a free online encyclopedia. Every entry on the site is created by volunteers, lending their expert knowledge to any entry that they happen to want to create. New entries and updates are posted on a page for anyone to edit as they see fit. At any given time, over a quarter of a million articles are being worked on in the English version. While the Columbia Encyclopedia 6th Edition has 6.5 million words, the 2002 Encyclopedia Britannica has 55 million words and the 2002 Encarta Encyclopedia has 26 million words, Wikipedia’s three-year-old English version contains over 81.6 million words, a value that increases everyday from over seven thousand contributors.
Naturally, this open system contains immense potential for abuse. Wikipedia is meant to be a reference though it contains no official decree that its pages are accurate. I had to ask myself, are the 7,135 contributors just as good as a handful of paid employees? The other night I ran an experiment, placing ten false articles into the system. The article topics ranged from gardening to economics to entertainment. Sometimes the mistakes were subtle, easily attributed to typos. (Characters of Middle Earth: The assembly of protagonists and antagonists depicted in J.R. Tolstein’s The Habbit.) Sometime the articles were blatantly wrong. (sampling bias: A form of prejudice that discriminates against the sampos subculture of Lower Manhattan. Those that exercise a sampling bias commonly accuse the sampos people of being too clean and anal retentive, threatening the wild and grimy character of the area.)
I expected to check the site daily and watch the contributors struggle with my articles or ignore them completely. After about a week, I figured I could examine what proportion were corrected. But in less than an hour of the articles’ publishing contributors cleaned Wikipedia of my errors. Most of the articles were redirected, meaning the article’s topic was awfully similar to an existing article so my text was replaced with the old text.
One of my articles was deleted by network administrators, the only Wiki members whohave the power to purge their databank of any article. My article was about Marvin Perry, who I claimed was an actor best known for his portrayal of Chandler on Friends. Wikipedia takes deleting material very seriously—my deleter had to justify the deletion—because while the original article remains available no matter how many times it is redirected or edited, a deletion eliminates the presence of the article completely. However, Wikipedia members can vote for a deletion to be undone so even an administrator lacks absolute power.
There was one article members had trouble with. It said "blue ribbon" is “A show on Comedy Central about comics participating in a dog show.” Defaulting to humble ignorance, a member of the Wiki community named Stormie was about it let it go until he Googled it and checked Comedy Central’s website, yielding no evidence to my claim in either case. He also noted my other contributions were highly suspicious and turned the article into a “candidate for deletion,” meaning he’s suggesting to network administrators to research the topic and delete it if needed. With my experiment complete, I admitted that the article was a fake, hopefully preventing dozens of administrators wandering about the World Wide Web in a hopeless pursuit of a series about comics showing off their dogs. Thankfully, my "blue ribbon" article no longer exists.
Wikipedia is an organic encyclopedia, using the disperse nature of knowledge to its advantage by opting out of a position of control. It relies on the fun and inherent satisfaction people experience when they participate in teaching others. As such, it is extremely accurate (Ronald Regan’s entry, for example, was updated mere hours after his death). In Michael Polanyi’s words, Wikipedia represents the dynamic order that evolves when freedom is paramount. It is self-ordering, self-correcting and even the most influential lack absolute power.
Tuesday, June 08, 2004
The Reality of the Reality Behind Reality Television
Tonight NBC premieres the 2,453rd reality season: the second season of Last Comic Standing. By sheer coincidence VH1 is ran a repeat of The Secrets of Reality Television Exposed the other day. The show tags itself as the reality behind reality television, recounting the antics of the genre’s past few years.
The show focuses on the people that made the so-called reality shows reality, with a special emphasis of how much it screwed up their lives, complaining that they will always be defined from one embarrassing moment on television. One woman from The Bachelor commented that while she has numerous degrees and traveled the world, she will always be known as the woman who made the “slurping sound” in the bushes with the star. These unfortunate illustrious insinuate that they are victims: they were promised fame and fortune but were manipulated, embarrassed and used then thrown out without compensation.
Of course, no where in the contract they signed that said they were promised a damn thing, including not being embarrassed. Let’s not kid ourselves, the drama—no matter how inflated—is why reality television is so popular. That’s why people who understand that rarely want to go on reality television: the chances are you will be worse off. I hold no remorse for the person that thought they would be handed immense wealth without being risked with notoriety and embarrassment.
Ironically, this show came from the network that brings us such respectable shows like 50 Most Awesomely Bad Songs…Ever, Best Week Ever, VH1’s Ill-ustrated and The Greatest: 40 Greatest Celebrity Feuds—all of which carefully document the most embarrassing moments of the lives of the famous. To anyone that’s ever complained that the media is too intrusive, that they are tired of the paparazzi in their face, that they don’t want their biggest mistakes common knowledge, I say this: If you want all the benefits of fame, then you better be prepared to costs. If you want people taking your picture all the time, you better be prepared to have it taken when you lest want it to be. You can’t get something—especially something as power as fame—for nothing. Grow up, America.
The show focuses on the people that made the so-called reality shows reality, with a special emphasis of how much it screwed up their lives, complaining that they will always be defined from one embarrassing moment on television. One woman from The Bachelor commented that while she has numerous degrees and traveled the world, she will always be known as the woman who made the “slurping sound” in the bushes with the star. These unfortunate illustrious insinuate that they are victims: they were promised fame and fortune but were manipulated, embarrassed and used then thrown out without compensation.
Of course, no where in the contract they signed that said they were promised a damn thing, including not being embarrassed. Let’s not kid ourselves, the drama—no matter how inflated—is why reality television is so popular. That’s why people who understand that rarely want to go on reality television: the chances are you will be worse off. I hold no remorse for the person that thought they would be handed immense wealth without being risked with notoriety and embarrassment.
Ironically, this show came from the network that brings us such respectable shows like 50 Most Awesomely Bad Songs…Ever, Best Week Ever, VH1’s Ill-ustrated and The Greatest: 40 Greatest Celebrity Feuds—all of which carefully document the most embarrassing moments of the lives of the famous. To anyone that’s ever complained that the media is too intrusive, that they are tired of the paparazzi in their face, that they don’t want their biggest mistakes common knowledge, I say this: If you want all the benefits of fame, then you better be prepared to costs. If you want people taking your picture all the time, you better be prepared to have it taken when you lest want it to be. You can’t get something—especially something as power as fame—for nothing. Grow up, America.
Sunday, June 06, 2004
Remembering the Freedom to Fail
On this D-Day anniversary, let us be reminded of the freedom that the soldiers fought for: freedom from totalitarianism, tyranny and oppression. Concentrated power is the single most common source of evil, determining winners and losers to further its personal interests—Hitler’s Germany is but one extreme example of it. But Nazism is long dead; as we remember our fallen heroes let us focus our right to liberation to another fortress of power, one that is far less evil but far more influential in today’s world: the Federal Reserve.
Last night I finished Roger Lowenstein’s When Genius Failed: The Rise and Fall of Long-Term Capital Management, a book Mike recommended and now a book I’m recommending to you, our reader (let’s not kid ourselves; there’s only one of you). It depicts the events surrounding a hedge fund called Long-Term Capital Management (LTCM), a fund so arrogant it felt as though it could predict the future by examining the past. Over a dozen major banks had their fingers deep in the fund even though the partners refused to tell anyone what exactly their portfolio consisted of, scared that the word of their strategy would spread. And then, in 1998, everything changed. Events the fund did not predict—Russia’s default of its loans and the Asian crises—wrecked havoc on its portfolio and the fund was losing millions every day. If the fund went bankrupted, the Federal Reserve feared that it would send shocks throughout the worlds’ economy, possibly collapsing a financial system that was already on its knees.
While the Fed did not send LTCM the $4 billion it needed to hold on, it did call in the presence of the major banks on Wall Street to organize a deal. After a lot of pushing and prying the banks complied, even though most of them didn’t agree to the terms, and LTCM held on. In fact, it held on so well, it turned around after the markets started returning to normal. Meanwhile, the partners of LTCM remain millionaires to this day. Thinking it was doing the world a favor, it manipulated the outcome.
Because of the Fed’s intervention, the banks were able to save a fund that should have completely and utterly failed. While one could argue that the banks would’ve have got together and save LTCM because they had a vested interest in doing so. But the Fed’s intervention occurred at the last minute—the banks clearly thought it wasn’t worth it. The banks should have been taught a lesson that can only be learned by paying the penalty of massive losses: don’t invest in a fund that a) claims to be clairvoyant and b) refuses to say what they’re doing. But no one needs to learn a lesson more than the fund’s partners, who stayed on for another year after the banks bought, and made six figure salaries. By all but forcing cooperation, the Fed prevented losers from losing, like a principle telling a teacher to inflate the grades of a star athlete. By denying one of the most basic freedoms in a capitalist society—the freedom to fail—lessons are not learned. John Meriwether, the original founder of LTCM, started a new fund in late 1999, raising as much as half of a billion dollars. This new fund (JWM Partners) would follow many of the same strategies as LTCM. Let us pray…
Last night I finished Roger Lowenstein’s When Genius Failed: The Rise and Fall of Long-Term Capital Management, a book Mike recommended and now a book I’m recommending to you, our reader (let’s not kid ourselves; there’s only one of you). It depicts the events surrounding a hedge fund called Long-Term Capital Management (LTCM), a fund so arrogant it felt as though it could predict the future by examining the past. Over a dozen major banks had their fingers deep in the fund even though the partners refused to tell anyone what exactly their portfolio consisted of, scared that the word of their strategy would spread. And then, in 1998, everything changed. Events the fund did not predict—Russia’s default of its loans and the Asian crises—wrecked havoc on its portfolio and the fund was losing millions every day. If the fund went bankrupted, the Federal Reserve feared that it would send shocks throughout the worlds’ economy, possibly collapsing a financial system that was already on its knees.
While the Fed did not send LTCM the $4 billion it needed to hold on, it did call in the presence of the major banks on Wall Street to organize a deal. After a lot of pushing and prying the banks complied, even though most of them didn’t agree to the terms, and LTCM held on. In fact, it held on so well, it turned around after the markets started returning to normal. Meanwhile, the partners of LTCM remain millionaires to this day. Thinking it was doing the world a favor, it manipulated the outcome.
Because of the Fed’s intervention, the banks were able to save a fund that should have completely and utterly failed. While one could argue that the banks would’ve have got together and save LTCM because they had a vested interest in doing so. But the Fed’s intervention occurred at the last minute—the banks clearly thought it wasn’t worth it. The banks should have been taught a lesson that can only be learned by paying the penalty of massive losses: don’t invest in a fund that a) claims to be clairvoyant and b) refuses to say what they’re doing. But no one needs to learn a lesson more than the fund’s partners, who stayed on for another year after the banks bought, and made six figure salaries. By all but forcing cooperation, the Fed prevented losers from losing, like a principle telling a teacher to inflate the grades of a star athlete. By denying one of the most basic freedoms in a capitalist society—the freedom to fail—lessons are not learned. John Meriwether, the original founder of LTCM, started a new fund in late 1999, raising as much as half of a billion dollars. This new fund (JWM Partners) would follow many of the same strategies as LTCM. Let us pray…
Friday, June 04, 2004
An Austrian's D-Day Lesson
Tomorrow is the sixtieth anniversary of D-Day and about a quarter of my day is spent at the History Channel which is running a week-long marathon on all D-Day things. Keep in mind, the week isn’t about WWII in general or even an overview of the Western Front. It’s hour after hour of the events directly leading up to D-Day, including the day itself. I think they’ve spent more time talking about these events than the time it took for the events to take place.
“Well, so what?” you ask. What does Austrian economics have to do with D-Day? Obviously, that’s a simple question—economics has to do with everything. But allow me to dwell on one point—knowledge. We Austrians love knowledge and according to the History Channel, just enough went right for the Allies so that D-Day succeeded and much of these advantages were knowledge in nature.
Allow me to focus on my favorite military operation: Operation Bodyguard—aimed to convince the Nazis that the Allied invasion would occur at Pas de Calais. Using double agents, fake tanks and, in one case, an actor pretending to be an Allied general, the Allies were able to convince the Nazis to move hundreds of thousands of troops, including the crucial Panzer tanks, precisely where the Allies wanted them to be—away from Normandy, away from Paris and away from Berlin. On D-Day, Allied troops lost less than ten thousand men, half what was expected. There is no doubt that without this operation, the Allies would have not been able to establish a foothold in Europe. D-Day changed the entire course of the war. The deception was so effective that after the success of D-Day, the Allies continued to send fake messages, convincing the Nazis (for a while) that the landing at Normandy was just a diversion.
A little bit of knowledge changes everything. By altering perceptions, it changes the means-ends framework, which completely changes the playing field. On the sixtieth anniversary of D-Day, let us be reminded about the power of knowledge and its role in today’s society. This lesson is especially important to learn in our modern military—spy networks are more important than ever before because the nature of war is so different. No longer is it army versus army but cloaked insurgents versus army. As the fight against terrorism continues and we rapidly approach the June 30th handover date of Iraq, let us remember that one Austrian interpretation of D-Day tells us to favor focus on good intelligence and deception rather than brute force, a lesson that is all the more true now than it was sixty years ago.
(Correction: For some reason I thought it was the 5th rather than the 4th when I wrote this blog. Obviously, the anniversary is Sunday, not Saturday.)
“Well, so what?” you ask. What does Austrian economics have to do with D-Day? Obviously, that’s a simple question—economics has to do with everything. But allow me to dwell on one point—knowledge. We Austrians love knowledge and according to the History Channel, just enough went right for the Allies so that D-Day succeeded and much of these advantages were knowledge in nature.
Allow me to focus on my favorite military operation: Operation Bodyguard—aimed to convince the Nazis that the Allied invasion would occur at Pas de Calais. Using double agents, fake tanks and, in one case, an actor pretending to be an Allied general, the Allies were able to convince the Nazis to move hundreds of thousands of troops, including the crucial Panzer tanks, precisely where the Allies wanted them to be—away from Normandy, away from Paris and away from Berlin. On D-Day, Allied troops lost less than ten thousand men, half what was expected. There is no doubt that without this operation, the Allies would have not been able to establish a foothold in Europe. D-Day changed the entire course of the war. The deception was so effective that after the success of D-Day, the Allies continued to send fake messages, convincing the Nazis (for a while) that the landing at Normandy was just a diversion.
A little bit of knowledge changes everything. By altering perceptions, it changes the means-ends framework, which completely changes the playing field. On the sixtieth anniversary of D-Day, let us be reminded about the power of knowledge and its role in today’s society. This lesson is especially important to learn in our modern military—spy networks are more important than ever before because the nature of war is so different. No longer is it army versus army but cloaked insurgents versus army. As the fight against terrorism continues and we rapidly approach the June 30th handover date of Iraq, let us remember that one Austrian interpretation of D-Day tells us to favor focus on good intelligence and deception rather than brute force, a lesson that is all the more true now than it was sixty years ago.
(Correction: For some reason I thought it was the 5th rather than the 4th when I wrote this blog. Obviously, the anniversary is Sunday, not Saturday.)
Wednesday, June 02, 2004
The Day After Tomorrow Part III: What Do We Do?
I saw The Day After Tomorrow last night with a friend. We, in typical nerd fashion, mocked the science and the acting throughout the entire film. It was enjoyable as a mindless summer action flick. Ultimately, I would say that the only truly unbelievable thing is that Dick Cheney (or whatever the film's VP character was named) would ever admit to being wrong.
It would be difficult to believe that the film does not contain political messages, but what exactly are their conclusions? As far as I can tell, the lessons we were to have learned are as follows:
1. Don't vote for Dick Cheney.
2. Listen to scientists.
Neither lesson is very helpful if the filmmakers seek to change the problem they forecast. I think both David and I are united in our belief that the government is not necessarily (I think David would say "not at all") qualified to resolve such issues as resource depletion. I think the anonymous reply to David's post brings up a good point, that resources are extremely interconnected. Ultimately, if the price of petroleum rises, then those products for which petroleum is an input will also rise in price, creating new substitutes.
But the poster also brings up the point that some of these uses for pteroleum have no known substitutes. Understandably, many concerned people would be wary of leaving this problem up to the hope that we find a viable alternative. Short of turning the problem over to the government, which I'm sure will find some pretty inefficient rationing protocols, how do we allay the fears of the worried?
It would be difficult to believe that the film does not contain political messages, but what exactly are their conclusions? As far as I can tell, the lessons we were to have learned are as follows:
1. Don't vote for Dick Cheney.
2. Listen to scientists.
Neither lesson is very helpful if the filmmakers seek to change the problem they forecast. I think both David and I are united in our belief that the government is not necessarily (I think David would say "not at all") qualified to resolve such issues as resource depletion. I think the anonymous reply to David's post brings up a good point, that resources are extremely interconnected. Ultimately, if the price of petroleum rises, then those products for which petroleum is an input will also rise in price, creating new substitutes.
But the poster also brings up the point that some of these uses for pteroleum have no known substitutes. Understandably, many concerned people would be wary of leaving this problem up to the hope that we find a viable alternative. Short of turning the problem over to the government, which I'm sure will find some pretty inefficient rationing protocols, how do we allay the fears of the worried?
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