Category Archives: Economics

Hollywood Math

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A while back I watched the movie Kong: Skull Island on the Kodi. It was one of those impulse things. I felt like watching a movie and this one just happened to be easily accessible. Samuel L. Jackson’s angry black guy routine stopped being fun a long time ago, but I figured the movie was going to be mostly about the giant gorilla. As far as modern movies go, it was not too bad. I suspect it was better in a theater with high end sound and the giant screen to make the monsters look more monstrous.

For some reason, I got to wondering what it cost to make, so I looked it up. (I know, I know. I should not be using Wiki, but the Infogalactic page is out of date.) According to the published data, the film cost $185 million to make and generated $586 million in ticket sales. That looks like an amazing success, but movie accounting is a bit weird. The theater gets half the gross, so the distributor got about $285 million. That’s a gross simplification, but a useful one for looking at the mathematics of movie making.

Movies don’t always do so well. King Arthur was a giant flop this summer. It cost $175 million to make and grossed just $140 million. According to people who know these things, the studio lost $150 million on this one film. There were other massive flops this summer like the Aliens movie and the Amy Schumer comedy. The opacity of Hollywood accounting makes it impossible to know the final tally, but people who claim to know suggest that the big studios are posting losses this year as a result of the bombs.

Hollywood can withstand a bad year because of the high cost of making and distributing movies. Getting together $185 million to make a giant gorilla movie is not something you do on Kickstarter. It’s why Hollywood seems to be hooked on films with massive special effects budgets. It’s a niche only they can serve so they are trying to squeeze every penny from it. Dramas and documentaries, in contrast, have small budgets and small margins, so lots of small players can fight for those customers.

A common complaint about Hollywood is that they are not investing in new ideas and original scripts. Instead it is comic book movies, remakes of old films and sequels. The people in the business will counter with the fact that the losses are almost always accounting losses. The actors and directors are all getting paid. Once the accountants do their magic, often taking advantage of tax laws and special deals made with governments to shoot their films on location, the studios are in the black or close to it.

They are probably right in the short term. Hollywood is surely aware of what happened to the pornography business and what is now happening to the news business. Porn used to have a high barrier to entry. If you wanted to sell sex to the public, you had high costs due to a complex thicket of state and local laws to navigate. The Internet obliterated the barriers to entry. First came a wave of video makers who wiped out the skin mag operations. Then a wave of amateurs came through to wipe out the movie industry.

A similar thing is happening with the news and commentary business. First the internet undercut the ad business of newspapers. Why sell your car in the classifieds when you can sell it on eBay? Why advertise your job in the Boston Globe when you can use Monster? The only logical response has been for the newspapers to slowly move from their old distribution model to the internet. But, the cost of putting up a website is near zero now so anyone wishing to compete with the NYTimes can give it a go.

It’s not just the legacy media. Take a look at on-line audio and video. Joe Rogan does a one hour interview show that will get a few million viewers. His production costs are a fraction of what it cost to make the Charlie Rose program. Yet, Rogan reaches ten times the audience. The YouTube comic PewDiePie reaches 55 million people and he is essentially producing his show from his basement. Anthony Cumia was making his show from his basement until his success allowed him to rent a studio in Manhattan.

A similar thing is happening to radio. Podcasts are becoming a popular way to listen to news and commentary, that used to be the domain of radio. Buy a new car and you can sync your phone to the audio system, so you can tote around your own music and podcasts to play on the road. It will not be long before your car radio will let you listen to this stuff off the internet. Again, the low barrier to entry means a wider range of shows so the public can narrow cast to their taste. Old fashioned radio, as a result, is dying.

If you are in the media business, your number one task right now is figuring out how to keep the barrier to entry to high for that army of internet content makers. That’s why Hollywood is fixated on massively expensive super hero movies and film series based on comic books. They spend $100 million building out the infrastructure and then make five versions of Pirates of the Caribbean for $200 million a copy. Mike Cernovich is not competing with that, no matter how many Kickstarter campaigns he starts.

The beauty of this approach is that these sorts of films can easily be sold into foreign markets. The Chinese dudes watching Fast & Furious 19 don’t care about the dialogue or story. They want to see buff white dudes driving cars while shooting at bad guys. Given the level of writing for some of these movies, they may not even have to provide subtitles as no one really cares what’s being said. Hollywood is now in the business of creating giant special effects demonstrations that are viewed in movie theaters.

Whether this is sustainable in the long run is hard to know. Kong: Skull Island made a lot of money so a lot of people must have enjoyed it. I thought it was mostly stupid, but I watched it free at home, so I got my money’s worth. As long as these things keep making money, there’s no reason to think this model will break. It also means that Hollywood will be looking for ways to make these films even dumber. If they can get global audiences habituated to enjoying two hours of explosions, it simplifies their business even further.

The Servile State

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A century ago, Hilaire Belloc wrote in the The Servile State¹ that attempts to reform capitalism will lead to an economy in which the state dictates that certain people will work for others, who likewise must take care of them. Belloc called this the servile state. This is different from early arrangements in which slaves and serfs were the backbone of the economy. In those arrangements, the owner has a choice to not own slaves. It is also different from capitalism, in which everyone is politically free by law.

Belloc was a man of his age so he viewed economics through the goggles of socialism and the newly emergent industrial capitalism. In The Servile State, he was searching for an alternative to the destruction of liberty necessary with socialism and the instability inherent to capitalism. The former results in an inequality of political power, while the latter results in an inequality of material wealth. Eventually, a small number of people rule over the masses, who begin to resent their rulers, seeing them as tyrants.

What Belloc argued is that socialism is inevitably the state dictating to property holders how they can dispose of their property. The state does this either through direct ownership, or through legal requirements for the ownership and use of property. Political freedom is determined by the degree of freedom one has with regards his labor and the results of his labor.. Therefore, socialism must restrict the political liberty of citizens to the same degree that it controls property and labor of the citizens.

Capitalism puts ownership and control of property in the hands of the people. In pure capitalism or what we now call libertarianism, individuals not only control their labor and the results of their labor, they are politically free. In theory, men either labor for their own use or agree to labor for others. The state’s only purpose is to enforce contracts as all of the dealings between citizens is consensual and formalized in a contract. The appeal of capitalism, pure capitalism, is the allure of pure political freedom.

By the time Belloc was writing, it was clear that pure capitalism would inevitably result in the concentration of wealth. A small class of property owners would come to posses the bulk of the nation’s wealth. That means a class of people who were free and a class of people who were not free, because they could not own and control their own labor. This led to social instability and eventually violence. Belloc argued that attempts to reform capitalism through state action would result in something he called the Servile State.

Reforms to capitalism are always through the law. The state places limits on how the owners of property may use their property. This then leads to a negotiation between the state, which has the monopoly of force, and the property class, which has a monopoly of capital. The result is a system in which the state seeks to protect those without property by placing requirement in the capital owners. In return, the state require the masses to labor for the property class, under conditions set by the state.

The result is that the business is forced to hire people it may not wish to hire, but the state also dictates to labor how and when they can sell their labor. Put another way, the poor are forced to serve the rich, but the rich are forced to be generous to the poor, looking out for their welfare. It is a social contract enforced at the barrel of a gun. It has the inequality of capitalism and the lack of political liberty inherent in socialism. The Servile State is the worst elements of both economic systems.

Belloc could not see what was coming in the post-war era and he certainly had no idea what was coming with the technological revolution and the explosion of neo-liberal globalism. He was prescient, however, with regards to how English economic systems would evolve over time. Look around at the modern world and you see the world he described as the inevitable result of “reformed capitalism.” Today, employers hire whole teams of people who makes sure the rich and powerful follow the rules.

What’s been missing in the technological age is the other half of the equation. As the West de-industrialized, the enforcement of labor laws have fallen away. Masses of helot labor brought over from Asia into Silicon Valley, for example, worked under agreements they struck with the business owners. Tech companies love open borders as it gives them a loophole to avoid some of the constraints of the Servile State. The same is true at the unskilled end, where companies rely upon masses of labor from Latin America.

This is an untenable situation in its own right, but the coming automation of the American economy will result in an evolution of the Servile State. The Universal Basic Income is nothing more than a modern implementation of the sort of infringements on political liberty Belloc described a century ago. Property holders will be forced to care for the dispossessed and, inevitably, the state will put behavior rules on the dispossessed. The UBI will come with rules requiring the recipients to act a certain way.

You get a glimpse of this in the efforts to control political speech on-line. Social media companies get exceptions to anti-trust laws, permitting them to run monopolies. In exchange, they are tasked with policing dissent on behalf of the state. The users get “free access” to platforms like Faceberg and Twitter, just as long as they agree to the terms of service and accept discipline when they post subversive things. Imagine this system applied to the universal basic income or to access to your self-driving car.

Belloc’s alternative was something he and Chesterton called distributism. Some have argued that their economic ideas were proto-fascism, but that’s debatable. What Belloc argued for was the inverse of the Servile State. Instead of a strong central state, political authority would be distributed and diffused throughout society, while wealth concentration would be constrained locally though ad hoc arrangements and cultural institutions. The goal is to maximize liberty, while minimizing inequality.

Whether or not this is possible in the modern age is debatable. Belloc and Chesterton argued that this was the natural arrangement of Europe. They also argued that it required a strong and energetic Christian tradition. That ship has sailed in the West, but maybe it does not matter. There’s no getting around the fact that neo-liberalism may be economically stable, but it is wildly unstable culturally. The experience of Europe thus far suggests it is suicidal. How to address it may lie with globalism’s last critics.

The Douche Bag Society

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Inevitably, whenever I write about the new economy or new technology, I get responses like this one from reader Fred Z, taking me to task for challenging his assumptions about the morality of the new economy. Fred likes the fact he can grind his local vendors into poverty, by ordering his stuff from a stranger in America on-line. No one wants to be thought of as a bad guy, so he has bought into the neo-libertarian moralizing about so-called free trade and globalism. He’s not screwing his neighbor. He’s efficient!

Fred does not think of himself as a bad person for buying on-line, rather than buying locally. No one does. Every day we are told by our betters, through the mass media, that the only thing that matters is that you get what you want, when you want it, at the price you want it. The defining feature of the modern economy is that anything resembling value-added is stripped away, in order to turn it into a commodity. Once everything is just a commodity, then the only decision is price and when you can have it.

This is a big part of the libertarian fantasy. Everyone is a deracinated economic unit. The only engagement between humans is transactional. Fred Z feels no obligation to buy from a local vendor or even buy from a countryman. He’s just getting what he wants, when he wants it at the price he wants. His only concern is himself. If the people he ends up buying from are homicidal lunatics, that’s not his concern. If his decision to buy from strangers means his neighbors fall into poverty, then maybe his neighbors should just die.

The marketplace has always been a ruthless and unsentimental part of the human condition. The ancient Persians looked at the Greek agora as a festival of liars, robbing from brothers and neighbors. From the Persian perspective, haggling over price and quality was just one person trying to swindle the other, by telling lies to the other. The seller lied about the product and what he would take for it. The buyer lied about his opinion of it and how much he was willing to trade for it. They were right, the market is built on lies.

It is also why human societies have always put limits on what can happen in the marketplace. Life is all about the trade-offs. The socialists think they get better trade-offs with a highly regulated state economy where the excesses of the marketplace are constrained. Free market types think the trade-offs are better with much less control over market activity. They are both right to a point. That point is determined by how the people of a society want to live. What they want of themselves determines what they permit.

In the 1980’s, it was often remarked by Progressives that the Scandinavian countries made socialism work. They had high tax rates and very low amounts of inequality. The liberals were careful not to talk about it too much for fear people would notice that these countries were all white. The culture of the white people that made up these countries had a long tradition of egalitarianism and sharing so socialism worked for them. The trade-offs they preferred reflected what they loved and what they hated about the human condition.

That’s the debate we will have to have about neo-liberalism. Fred Z loves that he can get cheap stuff on-line, but he is not thinking about the trade-offs. The rich people who rule over us do think about the trade-offs, which is why they ruthlessly support a system that socializes costs and privatizes profits. The trouble for guys like Fred Z and everyone reading this is that we’re on the other side of the equation from those rich guys. We’re the ones on whom those socialized costs fall. We are getting the bill for all this.

Think about it this way. Law enforcement requires society to employ bad people to deal with the criminal element. It’s why even today, most cops are horrible people and prison guards are sociopaths. Policing deviant humans is an unpleasant task that is best done by unpleasant and cruel people, who take some pleasure in the task. Few of us could work in a prison and most of us would never want to do the things cops do every day. It also means law enforcement people get to do things the rest of us are prohibited from doing.

Even libertarians understand the necessity of having cops and jails, but they will argue that we have gone too far in an effort to make society safe. The cops have too much power and the state abuses the rights of too many people. The trade-offs are not acceptable, so libertarians argue for things like drug legalization. The costs of the police state far outweigh the costs of additional addicts. Whether or not you accept that, you have to accept the premise, that there are trade-offs and they should be debated.

The douche bag is someone that is self-absorbed and has a high time preference. He wants what he wants and he wants it now. At some level, he knows this is at odds with the rest of humanity so he takes some pleasure in annoying others. This feedback tells him he is serving himself and thus living up to his douche bag code. It’s why the douche bag laughs and mocks normal people when they point out that he is being a douche. It’s validation that he is being all the douche he can be. He’s the giant douche.

That’s what is at the heart of the global marketplace. Fred Z can be a colossal douche nozzle to his friends and neighbors, but call it mere consumerism. His friends and neighbors will eventually return the favor. The marketplace, instead of being confined to one area of our life is coming to define our lives and our common humanity. We live in an era when the stepinfetchits of the billionaire class can gleefully talk about killing poor people or deporting them. We are on the way to being a douche bag culture.

Iceland

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Iceland is one of the weirdest places on earth. In fact, it may be the weirdest, at least that is what many Icelanders will tell you. Some of their weirdness is made up for the tourists, but some of it is made up for their own entertainment. The belief in elves and “hidden people” seems to be mostly for local amusement. The Icelandic Phallological Museum, on the other hand, is harder, so to speak, to explain. But, when you live on a volcanic rock in the North Atlantic, indulging in weirdness is probably to be expected.

The little island republic came to world attention back in the financial collapse when they went bankrupt. Iceland had managed to become a hedge fund with a fishing village attached to it. Michael Lewis wrote a fascinating and humorous piece on them back in 2009. When I was over there last summer, I mentioned this to locals a few times and they had never heard of it. When I mentioned some of the colorful anecdotes from it, they laughed at me like I was an idiot, so Lewis may have been liberal with the truth.

In addition to the Dungeons & Dragons vibe to the place, Iceland is interesting for biological reasons. It is a small and extremely homogeneous population located on an isolated island. That means it makes for a good place to tease out things about the human genome. The genetics company deCode is located in Reykjavik and has been doing a lot of interesting work for decades. The willingness of the population to participate in this research makes it a great laboratory for this type of work.

Another topic of interest is how the people have organized themselves over the last 1,000 years since settlement. Unlike most places on earth, human settlement on the island is very recent and it has been written down. We can only guess about the waves of humans that settled in the Ruhr Valley or along the Thames, but we have written records about who settled Iceland and how they developed their society. It is, in this regard, an interesting anthropological study.

A Norwegian chieftain named Ingólfur Arnarson is usually considered to have been the first permanent settler in Iceland. His legend says he threw two carved pillars overboard as he neared the island, vowing to settle wherever they landed. He then sailed along the coast until the pillars were found. There he settled with his family around 874 and named the place Reykjavík, which means “Bay of Smokes” due to the geothermal steam rising from the earth. As is always the case, historians are not sure if this entirely true.

Eventually, Ingólfur was followed by other Norse chieftains, who brought their families and slaves, settling all the inhabitable areas of the island in the next decades. The Chieftains were Norwegian, while their slaves were Irish and Scottish, according to the Icelandic sagas and Landnámabók, which is a written history of the settlement. This tracks with the findings of modern genetics. That’s what makes Iceland so useful, We have written records and archaeological findings, that are validated by genetic data.

There are two theories for why the Norse fled Norway and settled on a volcanic rock in the middle of the North Atlantic. Legend says it was due to people fleeing the harsh rule of the Norwegian king Harald the Fair-haired. Norway was undergoing a consolidation of power under one powerful family and the losers were heading off for new lands. It is also possible that the western fjords of Norway were simply overcrowded in this period. The general theory for the rise of the Vikings is simple over population.

Once there was enough people to farm the land and create an economy, they set about organizing themselves. In 930, the ruling chiefs established an assembly called the Alþingi that convened each summer. The representative chieftains made laws, settled disputes and appointed juries to judge lawsuits. Because writing down laws could lead to the use of force to interfere with an individual or individual’s property, the laws were instead memorized by an elected Lawspeaker until the next assembly.

Since there was no central executive power, it meant the laws were enforced by the people on an ad hoc basis. A land dispute, for example, would require hiring some third party to act as the judge. Violence against people or property would require the people temporarily banding together to address the problem. This is the sort of arrangement that results in blood-feuds. Consequently,  the writers of the Icelanders´ sagas had plenty of material. Trial by combat was a real thing when it came to disputes.

Iceland did pretty well into the 13th century when the growing power of a few families led to a break down in the system. Rather than adjudicate disputes the old fashioned way, for example, it was easier to go to the head of one of the powerful families for relief. Inevitably, the ruling families began to resolved things, like land disputes, in a way that benefited them over other rival families. This led to other powerful families doing the same in order to check the power of their rivals and soon Iceland was dominated by a few chieftains.

The start of the 13th century known by the very cool name Sturlungaöld, which means “The Age of the Sturlungs.” Sturla Þórðarson and his sons were one of two clans waging war for domination of the the island. This clan eventually won the support of the king of Norway who was looking to exploit the conflict. Sturla Sighvatsson became a vassal of Haakon IV of Norway in 1235, thus allowing the Norwegian king to exercise authority over the island, by backing the Sturlungs against their rivals.

In 1262 Iceland signed the Old Covenant establishing a union with the Norwegian monarchy. It was a nice run as a transactional society, but they ran into the problem of how to deal with inequality once their society was able to amass excess wealth. The rich were not satisfied with being rich, they also wanted power, which means authority over others. It is the natural human impulse and the ad hoc system of governance was unable to respond to this internal challenge. The result was domination by a few.

Of course, they also had the problem of how to deal with powerful neighbors looking to dominate the island. Norway could use a combination of force and political meddling to create the sort of conditions they could exploit. An iron law of the human condition, and of nature, is that the strong come to dominate the weak. In the case of Iceland, Norway was the strong neighbor determined to dominate the island. They were not going to be talked out of it so Iceland eventually fell under her dominion.

The Hobbesian Net

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I clicked on a link from Drudge and I was taken to a website called CBS Money Watch, which is obviously a CBS property. The first thing I see is a video trying to load. I see the pause button and stop it before it starts. It then starts itself in a few seconds and I stop it again. I hate baked-in video. If I want to watch videos, I’ll go to a video site or turn on the television. The trend of jamming video into sites borders on the sadistic. No one likes this. No one can possible think it is a good idea. Yet, they keep doing it.

Like everyone, I use a combination of blockers and filters on my browser. It’s not that I begrudge the content makers their money. I get that they need to sell ads. I’m OK with it and prefer it over the paywall model. Having 85 pop-ups and hidden audio play automatically, on the other hand, is a dick move that should carry the death penalty. This does nothing but piss people off, which is why ad-blocking software proliferates, along with tools to block plugins. How did this happen? Why would anyone do this?

The standard answer to these questions is that there is a war between web content makers and the anti-capitalist developers behind the ad blockers. It’s the sort of thing that’s believable if you are new to the internet. The truth is the proliferation of pop-ups got so bad in the 90’s, the web was becoming unusable. I recall some sites having as many as a dozen pop-ups. You would close one and two more would open. Then there was the malware problem. Legitimate web sites would load malicious code onto your PC.

It’s another example of people applying the front lash and then complaining about the backlash. Ad-blockers, flash-block, script blockers, etc., would not exist if the web sites had been slightly responsible for their content. Instead, they got caught up in the hype of the “new economy” and tried to turn their customers into content. Even that could have been done with some care, but they carried on like they were doing you a favor and thereby created a market for these defensive browser add-ons.

This is a curious thing. We’re told that the normal relationship in business is for the seller to curry favor with the buyer. “The customer is always right” is something everyone learns at a young age. TV and radio companies put a lot of effort into making their product attractive by using pleasant personalities and inviting topics. Radio, which lives off ad dollars, is especially ruthless with their talent. Low ratings means you get fired, no matter how much the management likes and supports you. It’s all about the customers.

Even television, which is mostly a cable fee racket now, keeps up appearances by paying some attention to ratings. Even Cult outposts like ESPN pull back a little from their daily proselytizing in order to maintain the facade of respecting their customers. They may still be in the business of chanting the gospel, but they are not quite ready to have their on-air talent giving the viewers the middle finger. It’s still important to be well regarded by the audience, even when you’re a tax farmer.

Internet business, particularly the content side, is the exact opposite. The business model seems to be based on assaulting the customers in ever more creative ways. Twitter, which should be like radio in terms of a business model, is at war with its customers. The web designers appear to be sitting around, wondering how they can make the experience less pleasant for the user. In order to use your mobile devise to consume web content, you need a script blocker. Otherwise, your browser will lock up and force a restart.

It’s tempting to think that it is just incompetence and that may be a big part of it. For some reason, web development attracts a lot of hack coders. It also appears that web development relies on foreign labor. I regularly get solicitations from Indian coding shops and their specialty is almost always web development. There’s also the loosey-goosey standards on the web, which means everyone can be Steve Jobs, reinventing old ideas and calling them new. Much of what ails the web is simply not sticking with what works.

Even if that is all true, why would the business people sign off on the slow-loading crap that passes for web content? Why would the business side say, “Yes, let’s have our hidden and very loud audio ads re-spawn three times after the user figured out how to turn them off. Great idea team!” It strongly suggests the people making these decisions don’t actually spend a lot of time consuming their company content. At the Washington Times, I know this is true as their pages simply will not load on a mobile devise.

As is often the case, there may be things at work about which I’m unaware. The economics of most websites remain a mystery to me. Running ads strikes me as a compete waste of money, especially in the current environment where ad-blocking is the norm. I also suspect most people are trained to just filter out ads as they scan their gab feed or favorite web sites. I don’t recall the last time an ad caught my attention and I stopped to notice it. But, billions are spent on ads so maybe I’m an outlier.

Even so, the web content business model says something about modern society. The hostile relationship between the customer and seller is weird, but maybe it reflects the sterile transactionalism that is modern life. Not only are we strangers to one another, we feel free to treat one another like highwaymen. The sites try to jam us with ads and spyware and we try to break their business model by stealing their content. The internet economy is the war of all against all that Thomas Hobbes described as the state of nature.

The Credit Monster

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King Offa of Mercia is credited with being the first British king to use the mint as a political tool. He gained control of the mint and started striking his own coins under tight regulations. This meant that each coin had a fixed amount of metal and was clearly identified as having come from his mint. Forgers and coin clippers were killed and raw gold, silver and copper had to be sold to the mint in order to be used as a means of exchange. Offa profited from this through something called seigniorage.

It’s a good starting point when thinking about credit money. Imagine you were a shylock in this age and you lent 100 sceat to a local farmer. He agreed to pay you 110 sceat after the harvest. Now, let’s assume he had 100 sceat of his own, but needed your 100 to cover his costs until he could sell his crop. The harvest comes in and he sells his crop at a profit so he can pay you the original 100 plus the vig. Now, the two of you have 210 sceat. In effect, your lending just created 10 sceat out of thin air.

That’s always a hard thing for people to accept, as the number of sceat King Offa was minting did not change. The number of sceat in circulation therefore did not change. Where did the extra money come from? In a hard money world, the amount of currency is fixed or close to it. Credit activities therefore can only work if someone is now short ten sceat in order for you and your farmer client to have acquired the ten sceat in your transaction.The only other option is they magically appeared somewhere or were counterfeited.

This was and is the inherent problem of hard money. When the amount of currency is fixed, the economy can only grow at the expense of someone else. The boom town that is producing pottery is getting rich at the expense of some other town. The money in the latter is moving to the former. At some point, the flow of money into the boom town runs dry and that town goes bust, its money then flowing out to some other boom town, maybe even the bust towns that it had exploited in the boom times.

This may work fine if overall human productivity never changes. In the feudal age, human productivity did not change much and growth was glacial. When human ingenuity is high and we have a shift in technology, then hard money becomes unworkable. There has to be a way to increase the amount of money in circulation to reflect the increase in capital stocks as a result of increased productivity. The solution was fiat money backed by the full faith and credit of the issuing authority.

In theory, this solves a huge problem in human development. It removes the penalty for innovation, by allowing the money supply to grow as human ingenuity increases human productivity. It also discourages hoarding and encourages investing. Hiding gold under the barn does no one much good. Investing the gold in new ideas and projects increases the stock of capital. A cheap way to make bricks means more public works projects can be constructed, thus increasing overall wealth.

The problem, as the libertarians and gold bugs will tell you, is that government always resorts to debasing the currency, by printing up more of it when they over extend. The Romans debased their currency to the point of worthlessness. Medieval monarchs did the same thing during times of war. In the 30 Years War, Ferdinand II paid his armies with debased currency and when it came time for them to pay their taxes, they paid with the worthless currency, thus transferring the problem back to its source.

Fast forward to our time and we are in a age of credit money. Cars are bought on credit. Homes are bought on credit. Business relies on lines of credit. Of course, global finance is all about credit, especially complex credit like derivatives. It is so complex, in fact, that no one really know how much credit is out in the world. Put another way, the supply of money appears to grow itself as needed or at least as needed by the people with the right to grow it. How did Puerto Rico rack up $50 Billion in debt? It’s a mystery, but it happened.

It is too bad that all of the economic historians were killed, as it would be interesting to compare our current age with the Free Banking Era, which lasted from 1837 to 1864 in the US. It was a period of panics and short recessions. The Civil War brought with it the National Banking Act in ’63 and then the Long Depression, which lasted from 1873 to 1879. This was a period somewhat analogous to our own in that national banks functioned like the Federal Reserve, operating as the bank of last resort.

It’s not a perfect analogy, but something worth considering when thinking about where we are now and where we may be heading. Wildcat lending and money creation eventually led to government intervention, which ultimately led to a collapse now known as The Great Depression. The outcome of the Great Depression was the national government once again taking control of the money supply and the velocity of money through bank and security regulations. Maybe that’s the end of this cycle too.

A half dozen years ago, James Rickards wrote a highly readable book on the history of money and currency wars. In it he offered up one possible outcome of the inevitable currency war that may have already started. He suggested that a global currency based on a basket of energy products could become the reserve currency of the world. That makes some sense as the world runs on oil, gas and coal, but that sounds a lot like hard money. Every country will be tempted to flood the markets with oil, gas and coal.

Another possibility is a global central bank that functions like the Fed, but with a mandate limited to maintaining a steady money supply and regulating global banking. This idea has been kicking around for a while and relies on the expanded use of special drawing rights. This fits in neatly with the overall push for global governance, independent of popularly elected governments. That’s a clever way of saying it will be the financial hub of the post-democratic world.

It’s hard to know. People in the 19th century knew the system was broken, but getting the political class to fix it was hopeless until the world collapsed. Even then it took the leveling of Europe and Asia by the US to get a new system in place. That suggests we are headed to some sort of cataclysmic denouement to the credit money system. A global collapse followed by a world war with nukes, drones and space weapons probably puts us back to using colored beads in a barter economy, but maybe it will be for the best.

To Learn Nothing

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Being wrong is as natural as standing upright. All of us make mistakes, miss the obvious and make predictions that, in retrospect, were hilariously stupid. I predicted that the neocons, despite their rhetoric, were going to find a Pinochet to install in Baghdad after they ousted Saddam. After all, no one could be so dumb as to think that Western self-government would work in the Arab world. I think a lot of people on the Right look back at the Bush years and wonder how so many could be so wrong about the neocons.

Error is supposed to result in reflection and reconsideration. The only way to learn from a mistake is to actually learn something from it. The take away from the Bush years, for me at least, was that the Buckley Conservatives are yesterday men untethered from reality, so it’s time to go another way. Many reading this learned from the Obama years that democracy is a suicide pact with the dumbest people in your neighborhood. The solutions lie outside the political process. Who knows what we will learn in the Trump years.

One of the remarkable aspects of the managerial class is they don’t seem to learn much from their errors. The neocons are still claiming that elections will somehow turn the Arab world into a membership meeting of The Harmonie Club. After every Muslim atrocity committed in a Western city, the Progressives tell us the solution is more Muslims. Now we have Puerto Rico, which should be the example that puts some reality back into public policy debates, but that will never happen.

Puerto Rico has been a US territory since the Treaty of Paris ended the Spanish-American War. It probably would have been setup as an independent country, but the US Navy thought it was useful and the sugar growers liked being a US territory. Even though it no longer has any value to the Navy and they no longer grow much sugar, Puerto Rico remains a territory. It does have a strong manufacturing base, mostly due its status as a tax haven, but also as the result of US policy to encourage industry on the island.

It was not too long ago that the Official Right was championing Puerto Rico as an example of how fixing the institutions, reforming the economic polices, could fix even the most backward society. It was an obvious ploy to peddle open borders to their voters. After all, if Republicanism could work on the PR’s, it would work on those Mexicans imported into your town. Here’s an old Cal Thomas article talking about the wonderfulness of the Republican governor of the island at the time. I love this quote.

“I think the Republican Party has done an awful job handling this issue,” he says. “It makes no sense for us not to bring more Hispanics into the party because Hispanics are naturally conservative. The tenor of the public discourse surrounding this issue has sounded anti-Hispanic at times.”

What would he recommend to change the tone?

“First, show up; show respect. Most Republican candidates don’t do that. They talk about 15-foot fences and then try to address the issues of greatest concern in the Hispanic community. They are no different from other communities most of the time. On immigration, Republicans say, ‘we want legal immigration and we are the country, thanks to legal immigration,’ so we need to try to address this issue with a different tone than we’ve had so far.”

In case you’re wondering, Luis Fortuna, the subject of that column, now lives in DC at the insider law firm Steptoe & Johnson. The reason for that is those “naturally conservative” Hispanics voted him out of office. Despite all that, Puerto Rico is still Puerto Rico. It has a crime rate higher than every US state, something close to Baltimore. It also has a corruption rate triple the typical US state. In other words, despite the best efforts of the US, Puerto Rico is the product of the people who populate the island.

Now that the island is going bankrupt, it would make sense for the conservative cheerleaders to take stock and maybe reconsider those wonderful economic policies they were sure would fix anything. Similarly, libertarians, who are sure that tinkering with the tax code can fix everything, might want to take a look at Puerto Rico. Of course, that will never happen. Being a public intellectual in the modern era means never having to say you’re sorry for being wrong. Heck, you don’t even have to admit to being wrong.

Our rulers should also reconsider the wisdom of importing tens of millions of Hispanics into America. After all, California turned itself into Puerto Rico demographically and is now on its way to transforming itself into Puerto Rico financially. The underlying premise of open borders is that people are the same everywhere. It is the dirt that makes them into law-abiding, prudent Americans. We have spent a century pouring magic into our Caribbean colony and it is no better than the Dominican Republic.

The island has a per capita debt of $25,000 and per capita GDP of $28,000. Throw in the $16,000 in per capita pension liabilities and you have, well, California. The two biggest financial basket cases in America are also the two greatest examples of the prevailing ruling class orthodoxy. The fact that both are looking a lot like bust outs is probably not a coincidence. You would think some of the people in the political class would take note, but no one will learn anything from the Puerto Rican bankruptcy. They never learn.

A Post About Feudalism

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In the Middle Ages, feudalism was not thought of as a political system or even an economic system. The people using the term, and enforcing the rules, simply looked at it as a set of reciprocal legal and military obligations among the nobility. The lord or king, granted property, a fief, to a vassal, who then had military or economic obligations to the lord who granted it to him. The property could be land, titles or a right to collect taxes in a certain area of the realm. You’ll note that the peasants were not part of the discussion.

Just because the people ruling over the feudal system had no regard for the peasants, it did not mean the peasants were unimportant. The peasants worked the land, provided men for military service, operated the system of trade and food rents. Modern historians prefer to describe this period as manorialism. This a system that bound the peasants, the nobility and clergy together economically and politically through a hierarchy of economic obligations. Everyone kicked up to someone, in labor, kind or coin.

It’s easy to dismiss this organizational model, but it lasted for six centuries and provided the foundation for later developments like property rights and the rule of law. One big flaw in this system is it transfers the cost of society, and all the risks inherent in the human condition, to the lowest possible level of society. The peasants have to hand over food rents, even when there is a bad harvest or an invasion by barbarians. That’s because the lord of the manor owes his lord food rents or coin, regardless of the harvest.

Probably the biggest defect is it is a zero sum game at the top of society. The king can only have one heir. Similarly, his vassals can only have one heir. Usually, the goal was to have an heir and a spare. The spare served in the military just in case the first born son died or was an idiot. Extra kids and daughters would be sent off to the church. This is good for the church and military as they get high quality people, but the rest of society is locked into a swelling peasant population until nature culls the herd.

In his book A Farewell to Alms, Gregory Clark argues that Britain experienced an extended period where the peasants died off due to disease and violence. At the same time, members of the ruling class precipitated down to take up the positions in the lower classes. Downward mobility raised the mean IQ of British society until it reached an inflection point where it escaped feudalism and developed a market economy, and eventually the industrial revolution. Downward mobility birthed upward mobility.

Historians have argued that the black plague ended feudalism on the Continent because it knocked the foundation out from under the economic pyramid. When a third of the peasant population was killed by disease, the system ceased to be economically viable. Of course, the disease killed a lot of nobles too. Once the peasants were free to move about, they could go work for the highest bidder. The labor shortage caused by the plague gave the peasantry new economic power and that translated to political power.

The mobility of human capital, vertically as well as horizontally, coincides with the collapse of the feudal system. Whether it was the collapse of the system that unleashed this mobility or it was the mobility that undermined the system is debatable. Perhaps some combination of both. As the system became more fragile, mobility increased, which in turn made the system more fragile. The waves of plague that decimated the population finished off the process that started much earlier.

something similar happened in America in the 17th and 18th century. The second and third sons of land owners headed west looking for land. Of course, ambitious and talented men like Ben Franklin could literally go from rags to riches. Similarly, the post WW2 period was a time of high social mobility in America. Ambitious men could move up into the middle class or move west looking for a shot to make their fortune. It’s not an accident that the U-Haul Company started after the war. Americans are not moving much anymore.

Another interesting reality of the feudal system is that it was a rentier system. The people at the top did not make anything or improve anything. They were not particularly inventive or creative. The slow progress in agricultural technology is a good example of the technological stagnation. The nobles and the church lived off the rake. They skimmed from every layer of society. Feudalism was  a pyramid scheme, where each layer paid the layer above a portion of their take. It operated a lot like the modern financial system.

The real key to the system, the point of system, was the protection of asset values, which mostly meant land, but also mines, ports and fisheries. The chief concern of the nobles was the preservation of the asset base. Owning land meant owning rents, which meant a permanent place in the ruling class. Feudalism was, at its heart, a way to protect land from external threats, as well as internal ones. In the modern age, the monetary system works the same way. It’s primary purpose is to protect and promote asset values.

The challenge of the feudal system was not a lot different from the challenges of the current age, at least for those who sit atop the social system The key was maintaining the balance between the social layers of the pyramid. Too many people in the managerial class means too many idle hands doing the devil’s work. They could also start complaining about their economic status. Maybe they would try to rally the lower classes to support their demands for a bigger share of the skim.

No Footprints

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In the 1980’s, companies like Lotus Development Corp were “growth” companies, which meant they could not sell their products fast enough. The PC revolution was in full swing and Lotus 1-2-3 was the killer, must have, application. If you walked into their Cambridge headquarters, it looked like a bomb went off because no one had time to be tidy. It was all hands on deck to get product out the door. There were not a lot of rules either. The game was to grow and that’s what mattered. All the other corporate stuff was secondary.

That did not last. By the mid-90’s, the desktop computer market was established and the default platform was Microsoft Windows, which meant Microsoft Office. It was around this time that IBM was making a hostile takeover bid, not because they wanted a growth company, but because Lotus was becoming an asset company. That is, its value was no longer in sales of its products, but in the value of its patents and technology. IBM bought Lotus in order to squeeze every drop of juice from it and then, eventually, toss it away.

That’s the modern economy in a nutshell.

The Technological Revolution is often compared to the Industrial Revolution, because of the cultural impact. After the steam engine, people did not just have better stuff. People were different. They lived different and had different relationships to one another and their rulers. A similar process is underway in the Technological Revolution. Mass migration, the elimination of the middle-class and the end of popular government are three obvious examples of changes wrought by the technological age.

One difference between the Industrial Revolution and the Technological Revolution is the trail of breadcrumbs each left behind, as it worked its way through society. Today, Americans still drive over roads and bridges built during the peak of the industrial age. Even though our consumer goods are made by foreigners, they still use the same practices the West developed for industry. Even in blighted cities, you can still find old factory buildings that remind us of the past.

The technological age is a different animal. It tends to erase its own footsteps. Lotus Development Corp is a good example. It was not just that it lost the competition for desktop productivity software. Everything about it was consumed and recycled. Walk around Cambridge today and you cannot tell that Lotus even existed. The tech economy is a soylent green economy. Once the utility of its creations are exhausted, everything about it is consumed, erased from existence, as if people are ashamed of it.

The billionaire, Mark Cuban made his first million selling software. He worked as a salesman for a software store and then started his own company, which he eventually sold. Then Cuban founded  Audionet, which he sold to Yahoo for $2.6 billion. None of the companies Cuban started exist. The companies that bought his companies are all gone now, with Yahoo about to be swallowed up in a fire sale. Even the technologies he championed are now long forgotten.

Unless he uses his billions to have his name carved onto a mountain, Cuban will leave this world with nothing to show for himself, nothing anyone can point to and say, “Mark Cuban built that.” It’s unlikely that Cuban or any of the tech billionaires care about this. It is the way they want it, or at least it appears that way. That explains their zeal to erase our culture and replace it with a throw away version based in nothing but a desire to squeeze a few more drops from the societies they intend to throw away.

 

Whether you call it the technological age or the global age, these are just polite terms for cosmopolitanism, scaled to the supranational. In the city, you don’t build, you hustle. You don’t own, you rent. Nothing is permanent because a stationary target is an easy target. Instead you make what you can and you move onto the next thing. If you can shift the burden onto someone else, all the better. That’s how the game is played because in the city, everyone is a stranger.

That’s the new economy we are experiencing. No one thinks about the long term, because that’s a sucker’s play. The money is in the short hustle, You make your money and move on. The game is to pick the fruit, squeeze out all the juice and then toss away the rest, leaving it for a sucker to clean up later. The housing bubble is a good example. Everyone involved knew it was a grift. They are too smart to not have known. The game was to make money and not be the sucker left holding the bag.

I used to know someone who worked at Lotus in its heyday, so I had an interest in the company from the early days. I recall the owners turning up in local news a lot  and they were brimming with confidence. I wonder if those folks from the glory days of Lotus don’t look back with sadness at what happened to their company. They are rich men and did very well for themselves after Lotus, but still. I bet they would trade a lot to be able to walk past their old building with their old sign still over the door.

I could be all wrong and maybe they have long forgotten about their old firm. Maybe all those people simply made their money and moved on to the next thing. Men have lived their lives in order to be remembered since the dawn of time. Maybe as the Industrial Revolution resulted in different people and different social arrangements, this age is doing the same and the new man of the new economy is just a stranger passing through, uninterested in leaving footprints for future generations to examine.

The Truth About Health Care

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Humans live in a finite world. The universe may be infinite, but the world of man is finite. There’s only so much stuff. Because there is only so much stuff, there’s always going to be a shortage of the stuff that people tend to like or need. It’s not always a desperate shortage, but there’s never enough so that everyone can take what they want. There’s always going to be one more hand reaching for the last item just after it is gone.

This is a basic axiom of life and one of the foundation truths of economics. It’s even a foundation truth of communism, which assumes scarcity can only be mitigated, but never fully eliminated, by the elimination of profit. Economists of all stripes work from the assumption that scarcity is an immutable fact of the human condition. The question they wrestle with is how to increase supply and distribute the results.

What this means is that all goods and services must be rationed. Since there’s never enough to meet the maximum demand, there has to be some way to say “no” to people demanding the goods or services. The most common way to do this is price. The poor guy who wants a Mercedes is told he cannot have a Mercedes by the big numbers on the price tag. This is how the supply of luxury cars is rationed.

The other way to ration goods and services is for men with guns to take control of the supply and create rules for who can and who cannot have access to the stuff.  Rocket propelled grenades are not very expensive. An RPG can be had for around $500 and the rounds are about $100. The government, at least in America, controls the supply of RPG’s and determines who can have them. In other words, the government rations the supply of RPG’s in America.

This is an iron law of economics. All goods and services are rationed. This is true for health care too. There are no exceptions to this law. Thus, the First Truth of Health Care: No health care plan or system can ever be taken seriously unless it addresses, up front, how it will say “No, you cannot have it” to people who want it. At some point, someone has to tell the patient they cannot have whatever it is they want or need.

In America, rationing is mostly done by price, but increasingly the state is taking over this role. In Britain, most people are denied services by the long lines for those services. The long wait times for basic services is a form of rationing. If you can deliver X per day and the demand is for 2X, you solve this by giving people numbers and having them wait a long time until their number is called. This is socialized medicine in nutshell.

The fact is, most people could pay out of pocket, for their health services. It is only when poor people get old or have accidents when they need someone to pay for their medical care. Most middle-class people should be able to put away a little every payday to reserve for their later years. That is, if they were not being taxed into poverty by the current system in America that has seen prices rise five times the inflation rate.

Thus, the Second Truth of Health Care: The current insurance model is just a wealth transfer from the middle-class to the health care industry, in order to cover the cost of poor people and the metastasizing layer of people who live off the system. Those is really just a tax. Most people use about 5% of their plan for themselves, the rest is used to pay for poor people and the army of people who work in the system.

That’s the thing politicians never want to discuss, which is the whole reason they are talking about health care in the first place. How does a modern society pay for the poor, who cannot afford needed medical services? How to we address the free riders on the system? More important, how much are we willing to pay for the health services to the poor? There’s a limit to all of this and that’s the question that always has to be answered.

Of course, one of the paradoxes of modern life is that you can get very rich off the poor, which is why liquor stores and furniture rental shops dot the ghetto. In the social welfare game, the point is to lay a massive guilt trip on the public, and grease the right political palms, in order to get the middle class to look the other way as their money is siphoned off for one program or another for the poor, always administered by a rich guy coincidentally.

Thus, the Third Truth of Health Care: Health services are a massive skimming operation. Today, the one area of the economy that “grows” is the health care industry. Every year, more and more people pile into that wagon, mostly in administrative roles. The number of nurses and doctors does not grow very much, but the number of bureaucrats grows like a weed.

Then you have the pill makers, machine makers, research people and lawyers. There are always lots and lots of lawyers. The health care industry is massive and government dependent. It’s why rub rooms are now called message therapy centers. They are angling to get it on the racket, by having their service declared an essential health care service. That way, you will be paying for some guy to get a happy ending.

That’s why reforming health care has become an impossibility. As soon as anyone makes any noises about fixing the system, the army of lobbyists, hired by every vested interest, shows up to bury the reformers. If they are not able to kill the idea of reform entirely, they set about corrupting it into another grift that their clients can use to get a free shot at your wallet. The only people not represented in these efforts are the voters. They get no say.

This is the main reason Trump’s efforts to address the problems of ObamaCare failed last week. What Ryan and the other crooks in the GOP were hoping to do is pass a bill that made it easier for their paymasters to skim money from the rate payers, while providing fewer services. Ryan’s bill was just an attempt to help the people feeding at the trough get a little fatter off the middle-class. Its failure suggests we have reached the end phase.

Talk to anyone responsible for paying health insurance premiums and they will tell you that the rates are reaching the point where they cannot be paid. When premiums are going up by multiples of inflation, there can be only one result. Once rates pass a certain level, people stop paying those premiums. You get black markets, non-compliance and a system that can only persist through brute coercion. Soon after you get collapse.