Tuesday, April 15, 2014

That Is Anti Free Enterprise

"By substituting the judgment of bureaucrats and political interests for the private knowledge of millions of entrepreneurs seeking the most productive use of labor and capital, government mis-allocates scarce resources that would be better spent increasing private-sector productivity - and along with it private incomes."

Jason Lewis

Why is that?  In an economy, what allocates scarce resources?


If you fool with the market, you fool with prices. 
If you fool with prices you fool with the allocation of scarce resources.
If you fool with the allocation of scarce resources you screw up and weaken the economy.


Why is gubment so very, very good at screwing up the economy?  (And that is one of the exceptionally few things any gubment is good at...) 

Because bureaucrats, councils, legislative bodies, lobbyists, indeed, any and all of the Wizards Of Wonderfully Smart cannot possibly know of or understand the gabillions of interactions that take place, all of the international connections that take place, all of the motivations and desires that take place to make even the most insignificant product on the market come TO the market!

Such bureaucrat information is limited only to the small political interest that small Wizard Of Wonderfully Smart has in mind.

Only the market is smart enough to do that.

The word "judgment" used in the quote above is used VERY loosely.

So, Jason Lewis is saying that the factors of production in any economy are more effectively and efficiently employed by private sector individual and business interests.  Is that true?

Well, certainly!  There is no political motivation when one retains monies to employ in productive activity.  That is done in self interest!  Those monies are put at risk, with hopes and desires on the line.  That risk, hope and desire contributes to the economy, and to the whole!

When someone's money is "used" by any bureaucrat, there is no risk.  There is no individual hope on the line.  It contributes to what the bureaucrat wants it to.  It's some other person's money!  The bureaucrat throws the money out there and looks to get more!

They are looking for private incomes!


Tuesday, April 8, 2014

Free Enterprise Does Well and Keeps The Shop

"Well done is better than well said.  Keep thy shop and thy shop will keep thee."

Ben Franklin (1706 - 1790)

Free enterprise isn't about good intentions.
Free enterprise isn't about what we say we will do or what we say will happen.
Free enterprise isn't talk the talk


It truly is about doing well, and keeping the shop.

Free enterprise is about integrity.

Ben Franklin had such a succinct way of saying things.  The brilliance in his brevity is legendary.

If each in the cog of a free enterprise endeavor, in free enterprise economies, and there are innumerable cogs involved in the production of everything - if each cog would keep his shop, and do well, indeed do his best, and in the end the final whole is greater than the sum of its parts.

How is that?  The Invisible Hand.  The market is the great sifter.  It sifts relentlessly.  The bad are discarded in favor of those who do well and keep their shops.  There is no idle talk, or good intentions.  The market sifts for results.  The BEST results.

Only the best results thrive.

There are those who deride capitalism for this best result.  They deride how "harsh" and "unfair" capitalism is.  They say there is no "equality" in capitalism!  Well, of course not.  If we get out of something what we put in, if we reap what we sow, there will never be "equality" of result.  Obviously some will sow less and others will sow more.

The Bible has a similar quote - would that all "shops" would act in this fashion:

"Give, and it shall be given unto you; good measure, pressed down, and shaken together, and running over, shall men give into your bosom. For with the same measure that ye mete withal it shall be measured to you again."  (Luke 6: 38)

Consider THAT as a business model!  Woulda, coulda, shoulda that all businesses had that approach!

Another term to describe that sort of business is the Golden Rule.

Are these businesses out there?  I think they are!  Mostly small businesses, the bread-and-butter businesses, those who rely on the relationship and not getting done with the job at hand as quickly as possible.  Those who want CONTINUED business down the road.  They leave their signatures on every job, and that signature describes who they are.

Ben Franklin hit this nail in completely with one strike!  Properly endowed and pursued, free enterprise does well and keeps the shop.

Tuesday, April 1, 2014

Free Enterprise Blazes New Trails

"Do not go where the path may lead, go instead where there is no path and leave a trail."

Ralph Waldo Emerson (1803 - 1882)

That is the essence of free enterprise.  That is the essence of capitalism.

Reorganization, innovation, change, creative destruction, recombination, new, entrepreneurship, divergence, pioneering, improvement, greater efficiencies, increased productivity, rising tide - could we go on?

Are there any ideas in there that conflict with the human spirit of freedom, growth, personal challenge, and personal leadership?

There is not.

And this is what Emerson suggests!

However, who is it that takes the arrows?  Those who lag behind?  Those who mimic, and the pirates?  The scammers who play off of what has gone before, making something "new and improved" but worthless?

No, the pioneers take the arrows.

When the pioneers succeed despite the headwinds and storms the market rewards them greatly.  When they do not succeed the market leaves them in a heap, and crushed.

Who but the free market pioneers will stick their necks out?
Who but the free market pioneers will take the risks of reputation and property? 
Who but the free market pioneers will devise and implement, organize and reorganize, and experiment, experiment and experiment until success rears its wonderful head?

Then why do so many others feel entitled to any gained and earned pioneer rewards?

Why do so many others feel to be given windfall profits?

Windfall profits you say?  Only the capitalists and free market titans earn windfall profits!

Not so and that is untrue.  Those who think that are falling prey to "progressive" thinking of the left.  The left would have us all think that windfall is defined as unexpectedly large profits, unfairly earned.

Any entrepreneur who hits it big might reap rewards that exceed dreams, but that does not make those rewards unexpected!  Why would anyone risk it all on an idea they did not think would succeed?  Entrepreneurs fill their tanks with plans and hopes, and struggle, struggle, struggle toward fruition.  These rewards are NOT UNFAIR.  THEY ARE EARNED.

When bureaucrats think it is their place to TAX those rewards at unfair rates the tax becomes an unexpected reward, AND REWARDS TOWARD WHICH THOSE BUREAUCRATS AND GUBMENTS DID NOT PARTICIPATE IN CREATING.


When gubments earn huge percentages of someone's sweat and equity, all earned and striven for, that in and of itself is, by definition a 


Gubments benefit from windfall profits, entrepreneurs do not.  Entrepreneurs actually work for any profits.

Think carefully.  When free enterprise, entrepreneurial, hard-earned rewards are taxed, where would that money be better used:

By a business that uses the gain to employ more people and produce more of a wanted or needed product,
by a gubment that has demonstrated historically its ability to waste, squander, misuse and misapply it?

Which raises a higher tide - The Invisible Hand Of the Market, or the Not-So-Invisible Foot of Gubment?

Which blazes new trails - The Invisible Hand Of the Market, or the Not-So-Invisible Foot of Gubment?

I vote for the Emerson model - blazing a new trail, 
lifting a greater number,
 and leaving a good mark.

Tuesday, March 25, 2014

Free Enterprise Is Always Managing Change

"It is not the strongest or most intelligent who will survive but those who can best manage change."

Charles Darwin (1809 - 1882)

Darwin carved a niche for himself as someone who is respected and someone who is reviled.

The above quote, typically associated with his thinking about "natural selection," could very easily be applied to economics, and capitalism, as well.

Darwin was a reader and fan of Adam Smith.  He understood how economics creates change.  Applying this thinking to his other studies he posited the above quote.

Just as he applied his thinking of random variation and selective survival to various species, it can be applied also to economics.

Markets are complex and creative.  Markets change all the time.  Markets destroy to recreate.  Joseph Schumpeter called that "creative destruction."

It could be said that nothing is really invented, but is a recombination of what came before.  The much-read historian L.T.C. Rolt once said that the automobile was "sired by the bicycle out of the horse carriage."  If you look at the first car designs, that is very true!

Consider technology.  How long do new things survive?  How long is a program of software, for example, used before it is changed, improved, modified, magnified, or whatever?  How often do apps update on your phone?

But consider any product.  If I go to buy tires for my car, do I contact the synthetic rubber manufacturer, the vulcanizer, the tread designer, the tire producer, the shipper, the wholesaler, et al, before I make my way to a retailer to select and have my tires installed?  I don't have to!  The market does that for me.

It is exceptionally unlikely that the chemist altering the formula for synthetic rubber to make a longer-lasting tire has personal involvement with the clerk or tire installer where I purchase my tires.  He might!  But it is exceptionally unlikely.  And the chemist, or the shipper, do not do what they do to satisfy anyone in particular, but to satisfy the general demand for what they are participating in out of self interest.

These individuals in the chain of events operate entirely out of self interest.   THAT is the invisible hand of the marketplace at work.

The marketplace is exceptionally complex.  And very destructive.  Tires popular just 10 years ago have given way to the newer design, longer-tread wear, quieter, smoother-riding tires that I purchased just a couple of months ago.

And when I chose my tires, I had my pick of many characteristics and prices to choose from!

Tire manufacturing and distributing and selling companies have managed to deal with change.  And have survived.

It is all chaos to be sure.  But exceptionally-managed chaos.  Something no gubment, institution, law writer, council or overlord could ever, ever manage.

Managing change happens invisibly, naturally, continuously and necessarily -
when free markets are in charge.
Creative destruction is the natural order of free enterprise.

Tuesday, March 18, 2014

What Happens When Super-Successful Capitalists Fail?

"We will get our men in Brazil.  We are not going to South America to make money, but to develop that wonderful and fertile land ... We'll train the Brazilians and they will work as well as any others."

Henry Ford (1863 - 1947), regarding Fordlandia

"The Ford Motor Company in Brazil is said to be one of the best equipped and most liberally funded expeditions that ever entered the region."

Unknown author of "The Ford Motor Company of Brazil." The Inter-American Review, July 1929
What happens when a very successful capitalist is thwarted by other capitalists and warlord dictators in other parts of the globe?

Have you ever heard of Fordlandia?

In the early 20th century a huge majority of the world's rubber supply was held by a cartel made up of British and Dutch "rubber barons."  The only source of rubber at that time was from a South American rubber tree called havea brasiliensis.  Its sap was the fount of natural latex.  Brazil was the largest producer.  In the 1870s smugglers, capitalists all, privily carted seeds from this South American tree to various large plantations in the Far East.  Production from these plantations eventually overtook and crushed Brazilian production, and their control by the above "rubber barons" strangled the world's rubber supply, becoming the largest producers.

In the 1920s, Ford's business was booming and he needed rubber!  He had only one source for rubber to make his zillions of needed automobile tires.  He decided to do what every bona fide capitalist does - HE DECIDED TO COMPETE!

He competed by integrating vertically.  He would produce his own rubber!  Where would a very nice place to grow havea brasiliensis be?  Very good - Brazil.  In 1929 Ford contacted the Brazilian gubment, who graciously provided him a specialist named Villares to look over the Amazon for a suitable location for Ford's desired rubber plantation.  The hope was to bring the rubber business back to Brazil.

(Side note here:  it turned out later that the Brazilian gubment did not trust foreign investors and Villares was actually the landowner of the property he "found" for Ford.  Villares knew it was hilly and rocky and unsuitable for a rubber plantation.  Not knowing all this Ford went along with the deal because the Brazilian gubment conceded him up to 2.5 million acres.  Ford's part of the deal was a 7% kick back of future profits to the gubment.  Ford actually purchased the useless land from Villares.)

A location was found along a tributary of the Amazon called the Tapajos River.  The 15,000 square miles of land was to produce enough rubber annually to supply 8 million tires a year.  Feverishly Ford began building his new utopia in 1930.  In addition to factory buildings, a town flourished with as many as 10,000 residents.  A host of other businesses grew up as well - restaurants, barber shops, shoemakers, butchers, you name it.  There was a hospital, library, and a hotel!  Fordlandia was established.

Ford's first mistake was to get his best engineers and factory supervisors to work, instead of hiring horticulturalists, to manage the plantation.  Razing thousands of acres of land he planted thousands of saplings.  And all very close together.  To Ford's thinking more was better.  However, heavy rains washed the rich topsoil away, so Ford razed more land and planted more saplings!

An acre of Brazilian jungle naturally contains an average of 7 rubber trees per acre.  They mingle with the other plant species, but are not too close together.  This is for a reason - drought, insects and a deadly leaf fungus.  Too close together the trees' leaves pass this fungus easily from tree to tree.  Nature knows what it is doing.

In addition, there was much disaffection among workers, who did not want to work 9-5 (the heat of the day) or eat American cuisine.  Ford also wanted them to participate in American cultural activities like square dancing and sing-a-longs (in English).  The prohibition on alcohol was a big downer for the workers as well,  and they eventually rioted.  The workers were paid twice the going daily wage, but that was not enough.

The lack of sapling growth and worker unhappiness caused Ford to do two things - he hired a plant pathologist, Dr. James Weir, and moved to another location in 1933.  Finding Belterra, about 80 miles away, he began again.  Weir brought thousands of saplings from the Far East to plant at Belterra.  By 1940 only 500 workers remained at Fordlandia while some 2,500 worked at Belterra.

In 1942 only 750 tons of latex was produced at Belterra, far short of the 38,000 ton goal Ford had set.  And something else happened.  The Japanese during World War II virtually shut off the rubber supply from the Far East.  Anticipating this, the United States had previously begun a large program to develop synthetic rubber.

Ford's rubber plantation failed in a big way.  Two economic principles combined to doom him - 
1.  Product differentiation and 
2.  Substitution.

By 1945 synthetic rubber was indeed developed and there was no longer the desperate need for Ford's latex.  He finally abandoned his dream, selling his interests to the Brazilian gubment for $250,000, after losing today's equivalent of $200 million!  As recently as 1987 Belterra  was producing latex, but not at a commercially-viable rate.  Fordlandia is abandoned today, and a tourist stop.

Ford's capitalist attempt ended in a complete failure.  It started with a land scam and ended in a huge financial loss.  Free enterprise makes no guarantees.  He did proclaim Fordlandia to be a "sociological success," however!   That was probably a disaster too, but having not ever visited, Ford never saw this for himself.


Tuesday, March 11, 2014

Improving Lives, Or Trampling On Them? Invisible Hands Don't Trample.

"The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it." 

Adam Smith (1723 - 1790)

This 18th-century quote is so appropriate today!  And accurate!

Why is it that gubments worldwide, and statesmen worldwide, think they can control the private sectors in their countries to the degree that their "control," as they hope, can shape economic policy positively?

Notice Adam Smith's use of the word "capitals."  Capital is one of the factors of production, which is defined as also including land, labor and entrepreneurs.  Capital comes in many forms.  Certainly a big part of the capital I bring to my job as a home inspector is my education and its application by virtue of my experience.  A "trained eye" is just that.  But that's not all.  I have tools, and a camera, and software, and the like, and the ability to use those factors of my production to create reports that inform home buyers of what my experience has determined pertains to their purchase.  All of those things, and more, make up my business capital.

Why is it that gubments, and statesmen in those gubments, or councils, or senates (to use Adam Smiths' words) worldwide think they can control the private sector, and that sector's various capitals, to the degree that these factors of production can be manipulated and controlled to create economic growth?

Of course they have no hope of controlled economic improvement.  IT IS IMPOSSIBLE!

Impossible you say?  Of course!  Nobody anywhere even knows how to make a pencil, so how can any gubment, person or council know how to most efficiently direct the trillions of combinations of activities that make up every day's activities in any market place?

Adam Smith, in his famous book The Wealth of Nations, from which the above quote was taken, proposed that what most efficiently guides and directs any market place is an Invisible Hand overall.  Each of those trillions of combinations of activity is trying every day to bring to the market their good or service.  Most do their small part without any knowledge of the majority of what the market place is also bringing to pass to aid them!  It took zillions of people, and the employment of factors of production, to bring you that shoelace that you tie on your shoe.

As regards gubment involvement in the marketplace's Invisible Hand, Milton Friedman suggested there is also an Invisible Foot.  He said, "When government attempts to substitute its own judgments for the judgments of free people, the results are usually disastrous.  In contrast to the free market's invisible hand, which improves the lives of people, the government's invisible foot  tramples on peoples' hopes and destroys their dreams."  (emphasis mine)

This perfectly complements the Adam Smith quote above.  We have come full circle.  What Adam Smith called "folly," Dr. Friedman called "trampling."

What's the difference?

When markets are manipulated and controlled, economic growth is IMPOSSIBLE.

Gubment manipulation and control stultifies, tramples and destroys.  Invisible Hands don't trample.

Wednesday, March 5, 2014

Everyone Has A Place

"Those who were adept and brave fellows I have made military commanders. Those who were quick and nimble I have made herders of horses. Those who were not adept I have given a small whip and sent to be shepherds."

Genghis Khan (1162 – 1227)

Of course, not thinking economic principles at all, Genghis Khan was merely trying to create a conquering army that was more efficient in every regard.

And the economic principle would be?  The division of labor.

Everyone in his army had a place.  And a place that suited him and his abilities.  An army is made up of many component parts, each with its own function and contribution.

Many centuries later, in 1776, the Scottish economist Adam Smith published his famous book The Wealth of Nations.

One of the many concepts the book treats is the division of labor.  Smith, of course, related it to economic growth.  The division of labor implies the assignment of jobs to each person in a company or factory that best suit him.  We all have our proclivities, skills and abilities.  Smith's proposition was that each person's strengths get best utilized.  As the labor is divided into smaller parts each working person becomes more expert in his job, his efficiency would improve and his productivity would increase.

Smith realized that the possible downfall of division of labor was in people being stultified mentally, eventually getting bored and dissatisfied.  To him, for labor to be productive, it had to fulfill two goals:

1.  it had to "lead to the production of tangible objects," and
2.  it had to "create a surplus that could be reinvested into future production."

His thinking was employed by businesses, however, and factories in the Victorian Era of Europe grew in size and productivity, and they propelled economic growth.  Standards of living improved generally.

Apparently everyone in the Khan army enjoyed his contribution.  Although no new surplus was created, there were tangible rewards to the ransacking, but only for the Mongols!  Conquering comes with built-in benefits.  But only for the conquerors.  For everyone else we are talking about the broken window fallacy.

Genghis Khan was obviously not entirely on board with the division of labor concept, thinking that some jobs should not be delegated out or divided into smaller parts.  A National Geographic study on DNA determined in 2003 that some 8% of the 4 billion Asians share the Genghis Khan y chromosome.  It was determined that he has some 16 million male descendants!  If his army was divided up into everyone's most important contribution, that y chromosome progeny is quite an individual contribution!