22 September 2018

From Gates to Bezos - What the Change in World's Richest Man Tells us About a Shift From an Information to Entrepreneurial Economy


On America’s west coast there are examples of what the popularization of entrepreneurship could look like at the regional and company-level.

Silicon Valley continues to attract more venture capital and to create more wealth than any country in the world. The folks in the Bay Area have created an entrepreneurial economy.

Further north in Seattle, Jeff Bezos has created an entrepreneurial company.

Jeff Bezos recently emerged as the world’s richest man and is the world’s only triple-digit billionaire. Bezos is an entrepreneur. He has also created a platform that has popularized entrepreneurship. Not only does Amazon have more than 500,000 employees, it has "2 million sellers, hundreds of thousands of authors, [and] millions of Amazon Web Services developers.”  And, Bezos reports, "In 2017, for the first time in history, more than half of units sold on Amazon worldwide were from third-party sellers."[1] 

Bezos isn’t doing all the entrepreneurial lifting at Amazon; he’s got millions of co-entrepreneurs and the result is that as they struggle to become rich they inevitably increase his net worth. People who create, make or ship products hope to get rich by selling through Amazon. Jeff Bezos is just one of the millions of entrepreneurs who use the platform that his team has built.

Knowledge workers turn raw data into knowledge in the same way that factories turn raw materials into products. A computer makes knowledge work far easier and during the 1980s and 1990s, the personal computer became ubiquitous as knowledge work evolved and became more common. Microsoft provided the PC’s operating system and software like Word, Outlook, and Excel and for Microsoft it was like having a patent on forks and spoons when people stopped eating with their hands.

In 1995, Bill Gates became the world’s richest man by creating tools that enabled knowledge workers to do their work. In 2018, Jeff Bezos became the world’s richest man by creating tools that enabled entrepreneurs to do their work. From the last couple of decades in the 20th century to the first couple of the 21st century, the source of new wealth was shifting from making knowledge work easier to making entrepreneurship easier.

Sometimes what is most obvious deserves the closest scrutiny. A region that has created record amounts of wealth. The world’s richest men? Those might just hold clues as to how the economy is changing. Successful economic policies in this century will popularize entrepreneurship.

Three categories of successful 21st century economic policies will be “follow the lead of Silicon Valley,” create an entrepreneurial track in education, and make it easier for employees to act - and be rewarded - like entrepreneurs


[1] https://www.sec.gov/Archives/edgar/data/1018724/000119312518121161/d456916dex991.htm

18 September 2018

Trump Hikes Taxes - How Tariffs Really Work and Why They Rarely Do (work, that is)

Here in mid-September, Trump just announced tariffs on $200 billion in goods from China.

This is a tax on American consumers that works out to about $60 per American. Americans will pay that much more for items.

Who gets that money? American companies that have already proven themselves incapable of competing. American companies who need protection in the form of tariffs.

There are times when it makes sense to have trade protection in the form of tariffs. If your national policy is working to move from an agricultural to an industrial economy, or from an industrial to information economy it makes sense that you may want to protect some sectors or companies from foreign competition as they establish themselves against global competition. For awhile.

Companies that benefit from trade protection have a few options about what to do with the added revenue. They can increase the wages of hard-hit employees who have been competing against cheaper foreign labor. They can use the extra revenue to invest in new capacity or technology so that they are more competitive. Or they can payout the profit to stockholders and executives in the form of bonuses, using this subsidy from American consumers as a reward for having the political clout to do what they could not do through the market.

Tariffs are essentially a tax but not a tax that go to the government. Government spending can actually help displaced workers by funding unemployment and retraining. Government spending can finance infrastructure building that makes regions more competitive because of better rails or roads or cheaper energy or water. Government spending can go into the basic research that companies can develop into products.

Apple is now the most valuable company in the world, worth more than a trillion. It's most profitable product is the iPhone. The iPhone represents product development that incorporates research advances like touchscreen, satellite, and small chip technology originally funded by government research. (This is well documented in Mariana Mazzucato's The Entrepreneurial State.) Government research can lead to breakthroughs that not only help citizens but that can be the basis for new products that companies develop into highly profitable markets. A few billion in research spending can help to create trillions in value.

Tariffs don't help to finance basic research, infrastructure, education, or the creation of new industries and companies. Tariffs often subsidize companies that have not kept up, doing more to reward executives who have made campaign contributions than executives who have invested in the future. Within the last year, the GOP passed a tax cut that makes it harder to do any of these things. With Trump's new tariffs, it has just reversed that tax cut for the typical American and will now give that tax or tariff revenue to uncompetitive companies instead. 

16 September 2018

When Trial by Jury Costs Too Much

I had jury duty the other day. Along with 40 others, I was called into a courtroom to be considered to serve on a trial. Simply put, an individual felt that a car dealership had misrepresented a car to him and he was suing. I wasn't chosen. (Juror 22 of our 40 ended up on the jury; I was juror 23.) Given that, I never learned what he paid for the car but the average price paid for a used car is about $15,000. Taking such a case to jury strikes me as absurd.

Median income in San Diego is about $50,000 a year, which works out to $1,000 a week or $200 a day.

40 of us jurors spent a day on that trial. (Most of that time was spent waiting before being called into the courtroom to be screened.) So, day one of that trial cost us or our employers about $8,000. (40 people at $200 a day.)

The judge and attorneys chose 14 people (jury of 12 plus 2 alternates). The judge had estimated that the trial would be done the following Monday, which meant 5 more days for those 14 jurors. That's another $14,000. Combined with the $8,000 for the 40 jurors on day one, that means $22,000 for jurors.

That does not include the salary for the judge, bailiff, court clerk and various administrative folks we briefly dealt with. Let's say that collectively those folks make the same $200 a day and that there are only 4 of them (assuming that all the administrative folks behind the scene average out to one per courtroom). So this trial costs another $4,800 (let's call it $5,000) in salaries for them, for a total of $27,000 for actual or lost wages / productivity of the folks needed to support this one trial.

$27,000 in salaries for the folks involved in litigating a case that probably had to do with what portion of a $15,000 car purchase a buyer should be reimbursed. As a society, we're spending at least twice as much to settle a grievance as the grievance is worth.

I completely support the right of individuals to sue companies and for companies to sue individuals. Bad things happen and injustices deserve their day in court. It's a great thing that we have our court system and that we're free to sue anyone (within reason). I simply think it's absurd to treat so many of these civil cases as deserving of a jury trial given the labor costs involved.

During a football game, there are set rules and there are referees who penalize teams for breaking the rules. Within the NFL it is about 14 penalties a game, (given the ball is in play only about 11 minutes a game (and no, I'm not joking: you can read the explanation behind that stat here )), that works out to more than one penalty per minute. We do this because we want games to be fair. I think that the world of everyday business and employment is at least as important and while I don't think that we should have penalties levied every minute, I do think that such penalties should be standardized, cheap and common. If you rough the kicker, the penalty is 15 yards and an automatic first down. If you fail to tell a buyer that a car has been in an accident, the penalty is $5,000 or 20% of the purchase price, whichever is more. (Or whatever we decide as a society.) As with referees who know the game and can quickly adjudicate the penalty, these business issues that fall under the bailiwick of a civil suit should have default penalties that expedite the process. Many such incidents should be judged within an hour or at worst half a day and then levied a penalty (or thrown out) by an individual expert or two. It should not cost $30,000 to litigate a case on a $15,000 purchase; at most it should cost a couple of thousand dollars.

If trials were cheaper, we could have more of them, in the same way that cheaper computers or cars have meant that more people can have them. More of a good thing is better and cheaper trials would make life more fair. 

Our court system is too expensive and this notion that every petty case deserves a jury trial is one reason. As with so much in life, experts can do a better job for less and should.  We should have justice. It should not cost society more than it is worth.

14 September 2018

The Recovery is Real And Yet We Still Have Poor People. That's How Economies Have Always Worked

I'm seeing a fair bit about how the recovery isn't real or isn't really done because people are still poor. That's nonsense. We have had and always will have poor people. Markets simply don't lift up everyone. Markets are marvelous but they've never taken care of everyone.

The philosopher Karl Jaspers (who died in 1969) argued for an Axial Age. Within a few centuries the foundations for religions we still have today were laid. 

Confucius and Lao-Tse were living in China, all the schools of Chinese philosophy came into being, including those of Mo Ti, Chuang Tse, Lieh Tzu and a host of others; India produced the Upanishads and Buddha and, like China, ran the whole gamut of philosophical possibilities down to materialism, scepticism and nihilism; in Iran Zarathustra taught a challenging view of the world as a struggle between good and evil; in Palestine the prophets made their appearance from Elijah by way of Isaiah and Jeremiah to Deutero-Isaiah; Greece witnessed the appearance of Homer, of the philosophers – Parmenides, Heraclitus and Plato, – of the tragedians, of Thucydides and Archimedes. Everything implied by these names developed during these few centuries almost simultaneously in China, India and the West.
— Karl Jaspers, Origin and Goal of History, p. 2

One theory (I don't think it is Jaspers') is that this happened at this point in history because of the emergence of the city which lead to wealth. Oh, and disparities in wealth. If you are living as a hunter gatherer, you can't accumulate much. If you settle down in a city, you can. And as more people live in proximity there is more opportunity for trade (of goods, ideas and services) and the prosperity that comes with it. This emergence of wealth raised the question of who we should be towards the poor; the major religions emerged - in part - as answers to that question.

There are certainly things we can do to make the poor more self-sufficient, to create opportunities for them and their children. I think that's hugely important. But once we've done that, we will still have poor people. And at that point how we treat them is not a question of economic policy; it's a question of morality, something humans were clear about roughly 3,000 years ago.


08 September 2018

Kaepernick, Nike, Police, and a Protest of a Protest of a Protest

I have this thing about institutions. When they use people, they're oppressive. When people use them, they're enabling.  Free people get to use their institutions - from church and state to bank and corporation - rather than be used by them. In oppressive communities, people are tools of their institutions; in free societies, institutions are the tools of people.

I say all that to opine about Kaepernick, Nike, and the The National Association of Police Organizations.

In response to Nike's new ad featuring Kaepernick, the National Association of Police Organizations has protested Nike's campaign and any NFL player who takes a knee during the national anthem. They argue that Kaepernick's protest suggest that the police are systematically racist and so they are protesting his protest.

I'm protesting their protest of his protest.

A police organization ought to focus on the work of making police better, in the same way that NFL teams should focus on making their teams better. Period. That is the purpose of the organization and that should be their focus.

Meanwhile, we live in a country with a first amendment. I know that some of you will say that an employer has the right to dictate what its employees - whether police or football players - should do. I think you're wrong.

If all of the football players want to protest, let them. If only two do, let them. If all of the police officers want to protest that protest, let them. If only two do, let them. Be clear that they are exercising these first amendment rights as individuals though. At the moment of protesting police brutality or protesting people who protest in front of the flag, the people protesting are doing this as citizens, not football players or police officers. No matter what percentage of them do it, they do it as individuals, not as that institution. At that moment they are not a 49er or a police officer. They are Americans.

First amendment rights are not subject to democratic vote or group norms. You have the right to believe whatever religion you want, express whatever opinion you have, assemble freely with whoever you want. The institutions you're a part of don't have the right to dictate any of that - or co-opt your first amendment rights to express those on your behalf.

That concludes my protest of a protest of a protest.

What a great country.

07 September 2018

In Other News, Trump Still Has a Penis

This week Bob Woodward's new book Fear and an anonymous New York Times op-ed from a Trump administration official describes a president who is inexperienced but confident, stupid, impulsive, and amoral.

We knew all this before the 2016 election. This was treated as news this week but there is nothing new in these reports. It merely confirms what we've known since Trump came down the escalator to announce his campaign and to accuse Mexicans of being rapists and murderers. In spite of the hoopla surrounding this news, Trump's poll numbers barely moved. Americans know who he is.

What remains so absurdly sad is that given the choice between that and a woman who believed in public service, was incredibly intelligent, disciplined, and experienced .... we chose that. Clinton carefully thought through the consequences of choices; Trump doesn't even have the attention span to think through the choices, much less their consequence. And speaking of choices, given the choice of someone as qualified for the presidency as anyone in our lifetimes, we chose someone who is not qualified to be a mayor.

Hillary Clinton was unable to close the deal that so many thought was done. She won the popular vote by 3 million and came within 100,000 votes in the three states that would have put her over the top in the electoral vote. I can't help but think it is because she was lacking one simple thing that every previous president had: a penis. It was a close race. She lost by inches.

Trump is so many things but maybe the saddest thing is that he is a reminder that even 96 years after women were finally given the right to vote, even the worst man as candidate wins against a woman. Some time ago my son came home from class reporting that one of the students actually said, "I think that women should be treated equal to men. I just don't think that they should be in positions of authority over men."

In Clinton's book What Happened she has a chapter on being a woman in politics. That chapter alone should be required reading. At one point Clinton quotes Frances Perkins, the first woman to serve in the U.S. Cabinet, under FDR, who said, "The accusation that I'm a woman is incontrovertible." But women in politics is only slowly becoming normal. Clinton also writes, "Even the simple act of a woman standing up and speaking to a crowd is relatively new. Think about it: we know of only a handful of speeches by women before the latter half of the twentieth century, and those tend to be by women in extreme and desperate situations. Joan of Arc said a lot of interesting things before they burned her at the stake."

Social change seems to lie somewhere between the glacial pace of evolution and the still leisurely pace of personal development. We have so very far to go before the best kind of woman is able to beat the worst kind of man. We still weren't there in 2016.

Trump will be taught in future classes for so many reasons: the most pathetic may be to illustrate how resistant this country still was early in the 21st century to giving women power.

06 September 2018

The American Way - What Amway and Shaklee Had to do with the Popularization of Entrepreneurship

Richard DeVos died today. In 1959 he co-founded Amway with his friend Jay Van Andel. Like Shaklee - founded just three years earlier - Amway had an interesting business model. Rather than manufacture products to be sold in stores by someone else, these new businesses recruited sales people to be part of the business. The bad thing about the model is that it is wildly inefficient compared to, say, a Walmart where sales costs are so much lower and less labor intensive. The good thing about the model is that the product is being sold by people who can explain why it deserves a price premium and - most interesting of all - make money for recruiting people better than them.

My mother was in Shaklee [note that I'm not as familiar with Amway but think it generally has the same model] and one of the really fascinating things about it is that if she recruited someone who was downstream from her, she got some credit for their success. I don't know the exact formula but I do know that she partly had incentive to sell product and partly had incentive to recruit people even better than her. With the right people "downstream" from her, her income was enhanced. She was an entrepreneur (or at the very least a salesperson) who could make more money by recruiting other entrepreneurs (or salespeople) - some of whom might even be better than her.

I think this should be emulated by more traditional Fortune 500 firms. 

Imagine that when hiring someone to join the Fortune 500 firm, each manager wasn't just trying to recruit someone able to do the job and report to that manager. Imagine instead managers trying to bring on board "employees" who had the entrepreneurial drive or perspective that could result in their transcending their designated role to build the business. And imagine that these managers who hired employees who turned out to be even better at the entrepreneurial effort of building the business saw an increase in their income because of the success of the people they'd hired.

For one thing, managers would be happy to hire someone who quickly advanced beyond that hiring manager. You would be happy to have people who quickly outgrew a role and forced you to - sigh - go through the hassle of hiring again. For another, managers would do a lot to develop these new hires because of this incentive. (We invest in things that offer a return.) And the focus on the business would be less about finding people to fill roles in an existing business than in finding people who could build the business. This is not a bad mechanism (albeit just one mechanism) for the popularization of entrepreneurship. 

I kind of like the idea of this being the American Way (or as those two cool Dutch guys abbreviated it, Am'way). 

That's a fairly cool business legacy.

05 September 2018

The Silly Debate About Bannon and Free Speech and the Two Reasons That the First Amendment is So Vital

As I write this there is a bit of a furor over the fact that Steve Bannon was invited to an ideas festival hosted by the New Yorker and then disinvited, prompting a flurry of pieces like this one in the New York Times by Bret Stephens.

"The only security of all is in a free press."
- Thomas Jefferson
Steve Bannon is a white nationalist. He believes that white superiority and national economies are nonfiction. There are people who think that he deserves an audience for his tried - and spectacularly disproven - ideas. Some of these people argue that this is a free speech issue.

At some point in the evolution of science, astronomers presumably stopped inviting "scientists" who argued that the earth was at the center of the universe. Like white nationalists, geocentrists had been proven wrong and no longer deserved a hearing.

Free speech doesn't mean that any curator of content like the New Yorker owes you their audience. I wish that were the case because I would sue every major news outlet and conference host (as would every person with a set of ideas they were trying to get out into the world).

There are two reasons for the first amendment that guarantees the right to free speech, assembly, religion, and press, what is essentially freedom of thought and expression.

The first is simply because it is such a vital part of the human experience to hold beliefs and to express those. This is reason enough for the first amendment but there is more.

The second is that a community with freedom of thought and expression will make more progress. If you espouse a really dumb idea, I can refute it with a better idea. As I stand there smug and proud, another person can come along with an idea even better than mine. And as they accept their accolades for such insight and intelligence, another person comes along with an idea that refutes theirs. And so it goes in a parade of progress that all depends on people freely having ideas, sharing ideas, and refuting or refining ideas to evolve a worldview that lets them better deal with reality. The ultimate test of their ideas is whether these ideas enable them to travel across the ocean or sky or space, conquer diseases that once conquered them, feel happy and know how to make others happy, and do other things like create energy or knowledge. The first amendment is not meant as a tool for protecting old ideas but as a tool for creating new ideas that we can act on in new ways.

The real power of the first amendment is that the evolution of ideas drives progress. This evolution is driven by the free expression and exchange of ideas and animated by beliefs we're passionate about.

Old ideas like white nationalism that destroyed a country as great as Germany and resulted in 100 million deaths do not deserve a second chance or a new audience. We already know it doesn't work. The first amendment doesn't mean that it has a right to an audience. Properly understood, the first amendment means that it deserves to be discarded as we move on to something more practical and intelligent.

04 September 2018

What Freedom of Religion Has to Do with Abortion

One sign that the Catholic Church is losing its monopoly over the opinions of the Irish is the vote there in May to end the ban on abortion.

Make no mistake about it, abortion is about religious freedom.

And on this side of the pond, here in the States, the Republican Party is strongly supporting a weak president for the simple fact that he'll get them Supreme Court justices who could overturn Roe v. Wade.

One group believes that at the instant a sperm and egg combine they deserve the legal protection of a newborn baby. For them, this is the start of life. At this point we can't even see this "baby." Even months later 99% of us would be unable to determine whether we were looking at an embryo that will later turn into cattle who we will later kill to eat or a child who we would later die to protect. The belief that a sperm becomes a human life at the moment of conception is essentially a religious belief.

Because we have religious freedom in this country, the group that believes zygotes at the moment of conception are no different from children are allowed to act on their belief. In this country women are not forced to abort. Their belief about when life begins is a religious or philosophical belief. We respect such beliefs in this country.

Because we have religious freedom in this country, the group that believes that life does not begin at the instant of conception but instead begins later (whether that be in the first or second or - in some states - in the third trimester) are allowed to act on their belief. In this country women are not denied the right to abort. Their belief about when life begins is a belief that we respect in this country.

The movement to ban abortion, to make it illegal, is a movement to end the religious freedom of people who believe differently from devout Catholics and some evangelists. Belief about when life begins falls into a category more akin to religion than science.

Curiously, it's not a ban against people who believe differently than Christ. We don't have a single word of Jesus pertaining to abortion. Abortion is something added since his time by some denominations of Christians. Most Lutherans think that abortion should be legal and most Jehovah Witnesses's think it should not. (And 57% of all Americans think it should be legal.)

Religious freedom takes many forms. Abortion rights is just one and it deserves as much protection as the right to be, to start being or to stop being a Muslim or Catholic or Jew or atheist. If you dig into the philosophy of someone who wants to take choice away from women you'll find someone who - at heart - does not buy into the notion of trusting individuals with religious freedom. They don't trust women who disagree that a sperm is just one moment away from having a soul.

And finally, let's talk about sex, pregnancy and raising a child. Sex is pretty awesome. A pregnancy with the expectation that you'll bring a little person into the world is kind of magical. But having sex forced on you - being raped - is one of the most traumatic things that can happen to a person. It rarely gets talked about, but it seems to me that having a pregnancy forced on you, being forced to have a child, has to be incredibly traumatic. Women know when they're ready to bring a child into the world and if this isn't that time, their lives are rocked. It's awful. Sex, pregnancy and children are wonderful ... when they're freely chosen. It's unconscionable to force them onto women.

All of progress results in more choice, more freedom. We have fireworks to celebrate national independence. We call this the land of the free. We fight for freedom. We've killed people from dozens of countries to "protect our freedom." Freedom is that cool and that important to the human experience. To deny women the freedom to choose when they bring a child into the world seems like a terribly medieval kind of oppression and one of the worst kinds of thefts of freedom, a theft even worse than stealing someone's freedom of religion.

02 September 2018

John McCain and What Might be Trump's Most Incredible Accomplishment

There were things I did not like about John McCain's politics. McCain and his buddy Lindsay Graham seemed intent on sending troops into every hot spot around the world. He gave us Sarah Palin, helping to move us towards candidates whose major qualification is fame rather than understanding. (He obviously regrets that. Palin was asked not to come to his funeral.)

There were things I did like about his politics. Most importantly, he pushed the Bush - Cheney administration away from torture; without him it's plausible that our official policy on torture would be no different from that of dozens of dictatorships around the world. 

Beyond politics, I'm not sure how you would dislike his person. A man who nobly stayed a prisoner of war for years rather than leave behind his fellow prisoners - a price that cost him, among other things, his ability to raise his arms above his head - is a man you can't help but respect.

He was an icon of the Republican Party and yet Trump attacked him.

Even though he was not running against McCain in the primaries, Donald Trump went out of his way to say that McCain was not a war hero. "I like people who weren't captured," said the man who claimed that his own personal Vietnam was avoiding sexually transmitted diseases at Club 54 in the 80s and who avoided being drafted into Vietnam because of "bone spurs." Trump made more than one enemy with that comment.

Trump has also - repeatedly - shown disrespect towards all the former Republican presidents named George Bush.

Here's Trump's remarkable achievement. To side with him, you have to side against both living, former Republican presidents and one of the party's most iconic figures and former candidate for president in John McCain. He has repeatedly shown contempt for those men. They have repeatedly made clear their disdain for him.

Trump has forced his supporters to choose between him and *
  • American prisoners of war
  • a gold star family (a family who has lost a child in combat)
  • every living former Republican president
  • the FBI
  • his own Attorney General Jeff Sessions
  • the American Intelligence community (which includes the CIA)
  • Economists who argue for multi-lateral trade agreements like the WTO, TPP, and NAFTA (which includes the overwhelming majority of economists)
  • the Editorial boards on 100 of the nation's top 102 newspapers (of the two newspapers that endorsed him for president, one was owned by Jared Kushner, his son-in-law)
  • iconic conservative voices like George Will, David Frum, and David Brooks
And Trump has succeeded in this. Republicans have sided with him over all these opponents to his policy and person.

In spite of making enemies of every living Republican candidate for president and every former Republican president, Trump's approval rating among Republicans stays close to 90%.

Based on this, I think it is safe to say that no president has - in my lifetime - changed a party more. Republicans not only love him but are willing to side against so much of what past Republicans have sided with to do that. Most recently they have happily joined with him in his contempt for McCain. (40% of Republicans disapprove of McCain.) To redefine a party that much is an incredible accomplishment.

----------------------------
* And of course as time goes on, the list of people Trump supporters have to side against grows. His former allies who have turned against him immediately end up on his enemies list. His former lawyer and confident Michael Cohen and former adviser Omarosa Manigault are just the most recent of the people who his supporters had to once revere and now disrespect.

01 September 2018

A Big Reason Racism is So Dangerous

The world's fastest man in the 100 meter race is black. Has been for some time. It seems tough to deny that there are differences in populations and it may be that some subset of folks with dark skin have a genetic advantage when it comes to something like quick sprints. It could be. Some Asians might be consistently different from other populations of Asians and some European consistently different from other populations of Europeans and perhaps the population of Asians is consistently different from the population of Europeans or Americans or Africans in some consistent way. I'm a little dubious about this and I don't really think that we have enough data as yet to know. (How could we not have enough data? Even genes get expressed differently in different environments and circumstances. I can easily imagine someone in 100 years laughing at these myopic observations of mine, pointing to all that they'd learned since about how "situational genetics" makes environmental factors seem like genetic factors. We are living in such a tiny slice of the story of human evolution. Plus even within families there are such huge differences that it's hard to imagine any real differences hold within much larger populations.)

Whether or not there are differences in populations in terms of ability, though, completely misses the point. Let me briefly digress to make that point.

Let's say that all you've known of transportation technology is bikes. You see a group of people standing around and you're asked to predict who will get to the next town the soonest. You "know" that men tend to be stronger than women, that young men are stronger than old men, and lean men are faster than fat men. So you spot the youngest, leanest man in the group and point to him. "He'll be fastest," you say. 

What you don't know from your little slice of time in 1880 is that you are now in a time when there are bikes, cars, bullet trains, planes and zip line infrastructure built between towns. As it turns out, an elderly lady with a cane and more money than the rest has hired a helicopter to get her to the next town and arrives there ten to 45 minute faster than anyone else.

Given technology advances, all the usual determinants are made irrelevant for predicting outcomes. The strong young man and the weak old woman move at exactly the same speed on the 767 jet and both are moving much faster than Usain Bolt ever ran. 

Which takes me back to social realities that are most often equated with economics.

At one point in time, physical strength makes the biggest different in one's productivity. At the next stage of development, the ability to quickly calculate numbers is the biggest determinant. At the next it is creativity. And so it goes. As machines and systems at turns obsolete, automate, and enhance our skills, different "natural" skills matter more or less.

I put "natural" skills into quotation marks because as we learn more about genetic engineering and enhance tools like CRISPR that enable genetic engineering, even genetic differences at birth will matter little at determining our "natural" set of skills.

Progress is about creating better systems to enable us to enjoy life. "All men are created equal," is such a brilliant line because it shifts the focus from the question of whether one is an aristocrat or peasant and the argument of how different such people may be to the question of how we engage in social inventions to make everyone happier and more prosperous.

Racists focus on the wrong thing. Genetic evolution hasn't been a determinant of progress for hundreds of thousands of years. Social evolution is what makes Norwegians more affluent than Greeks, not biological evolution. The question of how quickly we get to the next town is a question of technological invention The question of how prosperous, peaceful and long we live is a question of social invention; do we have the right education systems, financial systems, business systems, and healthcare systems to enhance our lives? 

That question matters to progress; the question of race does not.

31 August 2018

Progress under Threat

It's more interesting to write about how to make future progress than how to protect past progress but we don't always have that choice.

Apparently this blog closes down in August. I have not written a single post all of this month. I feel so very French.

I've written a fair bit about Trump when I would much rather write about the next economy. That will continue because Trump is such a big threat to progress.

WHAT IS PROGRESS?
As I wrote The Fourth Economy, I realized that I needed a definition of progress that worked from 1300 to 2050 - the period the book covers.  Progress couldn't just be conquering more land or manufacturing more goods or processing more information. It had to be bigger than that. The simple definition I adopted is that progress is an increase in autonomy. Autonomy means that an individual directs her own life. Power over gives way to power to, and the pope or monarch's power over the individual gives way to the individual's power to choose or define her own beliefs and policies and life. More goods to choose from means more autonomy. More data to inform a decision means more autonomy. All economic progress falls under the category of increases in autonomy.

Autonomy is the destination of and the means to progress. A rich man has more options about what to do with his weekend than does the poor man. A rich man can afford more education and investment to give himself more options in the future. Autonomy now can translate into more autonomy later. And it is not just about cash in one's pocket. Someone living in a place that respects religious freedom has more choices about what to do with his Sunday morning or Friday evening than a person living in a theocracy. When we make progress, we have more freedom about how to define and live a life and generally become more able to do that as a result.

HOW HAVE WE MADE PROGRESS?
In the first economy from 1300 to 1700, the individual gained autonomy in the realm of religion. Religious freedom meant that the no one could dictate to the individual what beliefs they held. It also meant that given a community could not impose supernatural beliefs upon people, so public affairs had to rely on the testable claims that eventually gave birth to the Enlightenment. Science that could be replicated and votes that could be counted became the basis for public practice rather than revelation of the elites about what God intended for communities.

In the second economy from 1700 to 1900, the individual gained autonomy in the realm of politics. No longer a subject of the monarch, individuals became citizens whose votes and dialogue shaped the policies that in turn shaped them. 

In the third economy from 1900 to 2000, the individual gained autonomy in the realm of finance. By 2000, the individual had access to credit and investment markets that were largely reserved for elites in 1900. Not only did life expectancy increase from 47 to 77 in the US but so did the means to fund retirement in those advanced years, through social security, pensions, and 401(k)s. Additionally,  Keynesian policies and bank regulations subordinated individual banks to a central bank goal of low unemployment and inflation.

What do these shifts have in common? The institution in question - church, state, and bank - get defined as mere tools that can be - that should be - used by anyone. The church becomes a tool for the masses and each individual is free to use it or not as they wish (or even create their own church). The state becomes a tool for the citizenry and not the monarch. Bankers can - and rather spectacularly still do - pursue profits but within financial conditions that will be tweaked to keep inflation and unemployment within a certain range; banks and financial markets are meant to be tools for the masses, for the betterment of the whole economy and not just elite bankers.

This table captures one dimension of the Fourth Economy, this notion of institutions as tools.



And here's a really important point: you never make progress into the next economy by reversing the progress of the last. The first step of democracy is not to discard religious freedom; democracies build on religious freedom.

Given, that we have freedom of religion, democracy and Keynesian policies, we can now shift our focus to how we want to define the corporation.

Or so I thought.

THE CONVERSATION I THOUGHT WE WOULD BE HAVING
I thought that the 21st century would be a story of how we change the corporation to make it a tool for the average employee, the popularization of entrepreneurship resulting in - among other things - more employees using the corporation as a tool for creating wealth for other stakeholders and for themselves. Part of that vision is that within a corporation of, say, 100,000 employees there will about 1,000 employees so successful at creating wealth that they make the same as or more than the CEO. (This 1% number is roughly what we have in the US: about 1% of the population makes more than the $400,000 we pay our president. This is a sign that our nation-state is mature. As the corporation matures from a tool for the elites to a tool or the average employee, we should see a similar percentage of employees equal or beat their CEO's pay.) 

I thought that we'd be focused on how to transform the corporation in this century. I was wrong.

For now.

TRUMP AS A SPEED BUMP ON THE PATH TO PROGRESS
As it turns out, the transition to the fourth economy has hit snags. Rather than a debate within the West about how to transform the corporation, we've got a president who challenges freedom of the press (a first economy issue), makes voting harder (a second economy issue) and challenges the Fed and banking regulations (a third economy issue).

Trump regularly calls the press the enemy of the people and warns evangelicals that a vote against him is a vote against "your religion." He constantly spouts nonsense, showing a disregard for anything vaguely resembling the truth, which might be the biggest first amendment threat of all. (One huge reason for freedom of thought is to allow the advance of good theories that crowd out bad theories in the form of superstition and conspiracy theories.) The GOP - in control of every branch of government - seems intent on making voting harder, not easier. They seem convinced that too many people are voting and that democracy has gone too far. Additionally, they still seem at odds with the gains of FDR's time and are trying to reverse  financial regulations meant to make finance safer for common people. 

Progress does not scuttle the old; progress builds on it. Multi-cellular creatures don't throw away single cells as outdated; they use them as building blocks. A democracy does not get rid of freedom of religion, it builds on it. There is no scenario in which we move forward by robbing people's freedom of thought (that shows up in freedom of religion, speech, assembly, religion and press) or even erode it. There is no scenario in which we move forward by giving fewer people in a community the power to define and choose the options that defines policies.; a better community will not have less democracy.  And there is no scenario in which progress will mean having less capital - or fewer people directing capital - to fund R-n-D, retirements, hiring and consumption. Progress will build on all that, not bulldoze it. 

And yet we have a president who regularly attacks the press, the Fed, and even religion.

I had thought that at this point I would be mostly exploring ways to make the corporation a tool, how to transform work in a way that made employees more entrepreneurial, gave them more power to use the corporation to create their own lifestyles and wealth rather than be treated as tools for that corporation. This seems relevant as a means to address issues of stagnating wages and wealth and income inequality. That conversation seems to be on hold.

I did not anticipate the fact that I'd have to feel alarm at the prospect of the progress of the first three economies being reversed. I never thought that we'd have a president so casually attack the press or feel so little compunction about things like imposing a Muslim ban. But as long as the gains of the first three economies are dismissed, we are at threat for a reversal that can quickly cost us. Without the first three economies to build on, the fourth becomes precarious, probably even moot. As long as we have President Trump, I will write about him.

THE GOOD NEWS
The good news is that such disruptions to progress, such reversals, are common. Transitions into new economies are rough.

I still feel optimistic and intend to soon write a post on the inevitability of progress. The bad news is that over the course of history that plays out across four economies, a "short-term" blip can last a decade - or even generation.  If successful, Trump's attacks on freedom of religion, democracy, and our central bank will be costly.  For this reason the blog will continue to discuss the threat of Trump more than I would like.

It seems so very silly and unnecessary to re-litigate cases for democracy or freedom of religion or Keynesian policies that have already been so brilliantly argued through the history of the West and yet ....

Sometimes you are able to make progress. And sometimes you just do well just to protect what you already have. I'm looking forward to the time when we can again shift our focus to making progress into what we can't know rather than protecting what past generations have already proven.

20 July 2018

Everything You Need to Know About Trump, Russia and Putin

19 July, Trump tweeted out a video of Hillary Clinton saying this: "We want very much to have a strong Russia because we think that a strong, prosperous, stable Russia is in the interest of the world."
Tweet here.

His comment with the tweet was: "When will the Dems and fake news ever learn? This is classic!"

And in that tweet we have everything we need to know about Trump and Russia.

Russia, the country, is weak. Certainly not militarily but economically. Americans make 6.5X as much and live a decade longer. Russians don't have the same rights as Americans. Many reporters, politicians, and activists have been killed for opposing Putin. (Contrast that with the US where there has been a veritable industry in opposing American presidents since Bill Clinton's presidency. Nobody gets killed for speaking out against our president but quite a few have gotten rich.)

Hillary saying that it would be a better world if Russia were strong is spot on. A more affluent, more open, more democratic Russia not only makes for a better trading partner for the West but makes it less of a threat to the West. A genuinely strong Russia is less likely to invade the Ukraine or Estonia or disrupt elections in France, Italy, and the US.

Trump, though, thinks that this sentiment is proof that Hillary and the Democrats are being hypocritical in criticizing him. He sees no difference between Russia and Putin.

Trump's mind is not capable of abstractions, of statistics that represent a group. He's like a child in that he only knows personalities and stories about individuals. At some level he seems incapable of distinguishing between Russia and Putin.

Putin is very strong. CNN is going to do a "Most Powerful Man in the World" segment on him. Estimates of his wealth vary from $50 to $200 billion. Putin can have anyone killed. He can influence elections in countries throughout the West and apparently even control the American president. Trump admires all of this and is - at the least - eager for Putin's friendship and at most terrified of upsetting Putin. Putin may be the only person Trump has not insulted.

That Hillary could think it both good for Russia to be strong and Putin to be weak does not even compute for Trump. (History suggests that the weaker a leader is relative to his people, the stronger the people.) For him a country is simply the supporting cast for a leader. He's not really interested in Russia. He's fascinated by Putin. And of course he's not really interested in the US but he is fascinated by Trump.

16 July 2018

Gales of Creative Destruction and the Stress of Progress

Since Oct-2010, the US economy has destroyed 475.6 million jobs (layoffs, retirements, firings, quits) and created 494.2 million jobs for net of 18.5 million jobs.

As of June, the labor force was 162.1 million.

So during the 8-year recovery the American economy has created 3X more jobs than there are people in the workforce and destroyed 3X more jobs than there are people in the workforce

244,000 jobs were created in May. More precisely, 5.8 million jobs were created and 5.5 million jobs were destroyed for a net of 244,000. It is not true that everyone kept his or her job except for 244,000 people who were newly hired. Every month people are laid off, fired, quit or retire; in May, 5.5 million people had such experiences. That's a lot of elation (those who retire), relief (those who quit), frustration and panic (those laid off and fired). We talk a lot about taxes but an economy this dynamic is emotionally taxing.

One of the challenges of the modern economy seems to be that given progress comes in the form of gales of creative destruction we have a high level of stress. Personally I think that just reinforces the necessity of things like universal healthcare, investments in job retraining and generous unemployment, etc. But regardless of the solution you'd advocate, you have to realize that anyone whose idea of the good life is a stable, predictable career is going to feel a continual level of stress and unease by progress.

Two things can be simultaneously true: we are creating better jobs and a lot of people end up with worse jobs. There are probably as many people laid off from manufacturing jobs paying $45,000 a year now working at Wal-Mart for $25,000 as there are people with new programming jobs making $75,000. (And of course that very dynamic is part of why median wages move upwards so slowly and why income inequality is increasing.)

This economy is wonderfully creative but it is increasingly disruptive. Entrepreneurship and social invention creates the new and obsoletes the old just as innovation does with products. We used to have marriage between one man and one woman and now we have same-sex marriage and polyamory. We used to have jobs with pensions and 40 hour workweeks and now we have 401(k)s and a gig-economy that offers us Uber-like jobs with both more freedom and uncertainty. We used to have an American economy and now we have NAFTA. If you find comfort in continuity you will actually find progress threatening because so often it forces us to act or be different. 

Innovation changes products while entrepreneurship and social invention changes people. That's unsettling.

It seems to me like the divide that doesn't get talked to enough is the divide between those who embrace progress and all its novelty and those who embrace tradition and all its familiarity. To the latter group, progress can actually feel like a threat.

07 July 2018

The Most Important Development in the Evolution of Humans

First an excerpt from Thinking Big, a book about how our brains evolved to adapt to social realities. A key point here is this matter of thinking in terms of relationships and not just rationally.

Food was certainly of vital importance and obtaining it efficiently and securely must have dominated much of their [early hominins’] lives. The archaeologist Rhys Jones, who lived with Aborigines in Northern Australia, once said to us that these hunters and gatherers were always 24 hours away from hunger.But for us the keys to understanding food lie in the implications for social cooperation. This takes two forms. First are the tactical demands, of getting working parties together to hunt or gather safely and with greater chance of success. This covers defence against predators as well as obtaining those foods that were needed to fuel expanding brains. Second is the strategic matter of planning for bad times. This is achieved by looking for help beyond your immediate community. Instead of restricting access to resources by defending them against all-comers, it is better to allow other people in. By linking individuals and their communities over very large geographical areas a form of ecological insurance is produced. [highlighted added]Archaeologists refer to this as social storage: tokens exchanged for food in bad times, and vice versa in good. In other words, if conditions deteriorate where you happen to be ranging, then we will allow your community to come over to our range and use our resources for a while. Later, the reverse will be the case, and you can pay us back. Such a system works well, but it requires that the community has a territory large enough to cover a wide range of habitats. It won’t work so well if community territories are small and consist of essentially the same kind of habitat.
…..Rather than concentrating on what may be rational explanations of why they hunted bison rather than reindeer or chose not to eat fish, as the isolated Tasmanians famously did 6000 years ago, we need to shift the perspective and see the role of food and other materials in creating relationships rather than simply meeting calorific goals. Archaeological explanations for the human story need to be relational (being social) as well as rational (being economic). Social life is not based on calories alone but on the relationships that emerge when things are made, exchanged, used, and kept.pp. 86-7 of Clive Gamble, John Gowlett, and Robin Dunbar’s Thinking Big: How the Evolution of Social Life Shaped the Human Mind, Thames & Hudson, London, 2014, paperback version 2018.


Put more simply, as humanity evolved it faced two choices.
1. Defend your limited resources from others.
2. Expand your limited resources by sharing with others.

Archaeologists think that Neanderthals adopted the first strategy and early humans adopted the second. Neanderthals went extinct. We've become the dominant species.

As it turns out, the second strategy of strengthening relationships rather than walls has a host of advantages. Not only do you have more insurance against bad times but this strategy requires you to cooperate with larger groups of others, which enables all sorts of advances. This means opportunities for wider array of mates, the exchange of ideas, and the "outsourcing" of or cooperation on explanations, research and development, and cultural and technological innovations that eventually dwarfed the diversification of food sources in importance.

The choice to cooperate to share more rather than compete to protect less may be the single most important choice early humans ever made.

05 July 2018

Trade Wars, Immigration and the Invasion of Iraq

I remember feeling so utterly baffled as to why so many of my fellow Americans were eager to invade Iraq. The reasons we were given were so odd. Saddam might have weapons of mass destruction. (Without convincing proof that reason could be used to invade any nation.) This was retaliation for 9-11. (We already knew most of the terrorists of 9-11 were from Saudi Arabia and none were from Iraq and that Osama bin Laden was behind the attack, not Saddam.) We could "liberate" the people of Iraq by dropping bombs on them. Finally, the idea was that at the instant Saddam were taken out, democracy would bloom in its place. (There is no history to suggest that every community is a democracy waiting to bloom with the removal of a despot. The predecessors to democracy are more complicated by far.)

There were no experts who believed any of these weird claims. None of this made sense. And yet Americans were so excited to go do this and Bush and Cheney and Condoleezza Rice assured us that it would work. (Didn't explain how it would work or even what the risks were but instead just adamantly insisted that it would. As it turns out, this is a big sign that the person talking to us doesn't know what they are talking about.)

I never did understand how it was going to make our lives better here in the US but it did turn out to cost us $4 trillion, kill 4,000 American soldiers and somewhere between 100,000 to 2 million Iraqis, triggered a refugee crisis that still rocks Europe, was the catalyst for forming ISIS, which still terrorizes that region, and Iraq is not only now less stable but now so is its neighbor Syria. It turns out that anger isn't really a great guide to good policy.

Now Trump and his supporters are just as excited about immigration and trade as Bush and the country was about invading Iraq. Like then, this will create huge misery for others, some misery for us, and will cost us a lot.

Like the Iraq invasion, trade wars and cracking down on immigration apparently gives a lot of people a cathartic release but it is costly - like shooting up heroin before driving onto the freeway.


Trump has increased spending on border patrol. He was taken the dramatic and hateful steps of seizing children from asylum seekers coming to this country. He has claimed that trade wars are easy to win. Now he's even looking to rescind citizenship from people who have already been granted citizenship.

There are no experts who agree that trade wars are easy to win. Even the Trump administration's cost-benefit analysis of immigration saw it as net positive, and besides the rate of illegal immigration has been seriously lowered in this century. 

Illegal immigration is the weapons of mass destruction of this administration, the weird policy fixation that no expert understands but nonetheless seems to trigger every tribal instinct that drives GOP voters. 

I know that some voters are hopelessly enamored of the power to take lives, whether it be through actual killing in an invasion or in the form of seizing children from their parents as they cross the border. Obviously you people are beyond reaching. But there are some folks who don't get excited about creating misery for others who have nonetheless continued to be Republican. If this is you, if you are excited about the crack down on unfair trade and immigration, ask some important questions.

How much is this anti-trade, anti-immigration effort going to cost? 
How is this going to make your life better? 
Which experts defend this and how do they explain it? 
At least importantly, how does Trump himself explain how this is going to make life better? Is there data to support any of these claims?

As an American voter, you can increase or decrease the level of misery on the planet, including your own. Take that responsibility seriously.

27 June 2018

Conservatives are Just Obsolete Liberals (The Supreme Court We Will Have for the Next Generation)

In this week's decision to support the president's immigration ban on 7 countries, Chief Justice John Roberts ruled that the Supreme Court's 1944 ruling upholding FDR's internment camps for Japanese Americans - Korematsu vs. United States - "was gravely wrong the day it was decided." It didn't seem that way at the time, of course, but 74 years later it seems obvious. This is how progress works.

About Trump's immigration ban. Trump made it clear that he wanted to ban Muslims. The minority position was that his tailoring the words in the ban to make his religious discrimination less obvious was irrelevant: this was still religious discrimination and thus unconstitutional. The majority ruled that the president has this kind of power and that his previous words about this being a religious ban didn't matter.

Two things about this.

One, with Kennedy's retirement due soon, the Supreme Court will be dominated by conservatives for probably the next quarter of a century. Kennedy was a swing vote and Trump will surely replace him with someone very conservative. Through roughly 2040 - at least - we will get Republican decisions from the court. This seems inevitable to me. So we may as well get used to this. It will likely be going on until I die.

Two, conservatives do eventually come around. Conservatives did not believe in religious freedom. At first. Now they do. Conservatives did not believe that the power of kings should be usurped by representative legislatures and democratically elected executives. Now they do. Conservatives believed that the race of American citizens (the Japanese interned in camps, for instance) was sufficient reason to imprison them. Now - 74 years later - they don't.

Conservatives have the same beliefs as liberals. They just hold them for one to three generations longer. So, even this conservative (and soon to be even more conservative) Supreme Court will eventually catch up with the times. It is rather stupid to have rotary dial phones when you can have touch pad or touch pad phones when you can cellular flip phones or cellular flip phones when you can have smart phones but at least Americans will eventually get the latest policy .... about a generation or two later than it is available.

15 June 2018

Keynes, Capitalists, Communists, Cryptocurrency and Central Bankers

Cryptocurrency emerges from the notion that it is better to trust an algorithm than the judgement of a central banker. 

So before we evaluate cryptocurrency, let's evaluate central banks.

I stand with conservatives who argue for the importance of family, church, state, bank and corporation. Two-parent families raise children less likely to go to jail and more likely to go to university (speaking of institutions). People who go to church weekly live longer. If you live in a failed nation-state your income prospects are cut by tens of thousands of dollars and your life expectancy by a decade or more.  And a great financial system (what I mean when I say bank) helps to create trillions in wealth and enable R-n-D, infrastructure, consumption, and entrepreneurship. 

When healthy and strong, these institutions make lives better. Showing a disregard for these institutions is to show a naivete about who we are as individuals. (Spoiler alert: alone we're less able to survive than dodo birds.)

Where I depart from conservatives is in my conception of these institutions. I do think they are hugely important. I don't think they are sacred. Instead, I think they are just tools.

The church is just a tool, no different from a juicer. What a church makes is more important than what a juicer makes, though, and that is why it is more important. Through a church people make things like meaning, faith in an uncertain future, compassion, identity and community. Those things matter more than juice so churches are more important tools than juicers. It is both that simple and complex.

Once we conceive of institutions as tools, we realize a couple of really important things. One, they didn't always exist. Like a car or toaster, church, state and banks are inventions. Two, just like other products or tools, they can be continually improved. If the purpose of a church is to create compassion, we can design rituals and beliefs to better enhance that just like we can design a saw to more accurately cut wood or a car to more comfortably get us across town. We can judge the Mormon Church or Catholic Church or Church of Scientology by how happy its members are, how much grief they cause non-members, and whether they make the world around them better. (And we can leave it to various churches to discover later who - if anyone - gets sent to heaven and who to hell.) If a church forces its members to disregard the Copernican Revolution or evolution and as a result its members end up in more primitive, less prosperous, anti-science communities we can judge that as a design flaw that needs updating, requiring change no different than debugging needed when  software keeps crashing or works on a laptop but not a smart phone. Catholicism, the United States, IBM, a chest freezer and a bulldozer all share this simple characteristic: they are merely inventions and can - indeed should - be changed and improved. It's true that children do better in two-parent households than they do in one: those two parents may be two dads, two moms, a grandma and a dad, etc. There is no sacred formula for effective institutions but some designs are more effective than others. The best societies design their institutions for who they actually are, not who their ancestors thought they were.

Banks - like churches and nation-states - are not sacred. They are just tools. When effective, they are tools for the masses and not just the elite.

***

So many questions arise from this orientation but a key one is, Who gets to use these tools? The answer is that it depends on how evolved a community is. The nation-state that is a tool of the monarch is more primitive than the nation-state that is a tool of the people. Dictatorships are more primitive than democracies. No one was richer than King Louis XIV in France or Saddam Hussein in Iraq or is richer than Putin in Russia. A nation-state that is the tool of the elite is only partly evolved. The bigger the market for a tool, the more benefit. This was true of computers once bought only by nation-states and now by most people and is true of nation-states once conceived for the glory of the king.

The progress of the West has come in two phase for each of its big institutions. 

In the first phase, creative geniuses conceive of and create institutions like church, state, banks and corporations that make us part of a bigger us. These social inventions hack into our tribal instincts and - rather than leave us in a small tribe of 150 or so - make us the part of a larger group, more people than we can ever hope to meet. "I'm a Christian," we say or "I'm an American" and we feel affinity for a group of billions or hundreds of millions of strangers. Social inventions make us part of a bigger us and that makes us more prosperous. A tribe is poor. Always. A tribal economy doesn't have enough people to allow specialization, economies of scale or the growth in knowledge that comes out of millions or billions of people interacting with one another. The state economies in the US before the Civil War were not as prosperous as the national economy of the US after. The bigger the group, the greater the prosperity. This act of social invention is incredibly important to progress.

In the second phase, the institution is made the tool of the masses and not just the elites. Martin Luther's cry of "We are all priests" or Jefferson's cry of "All men are created equal," were revolutionary. Why? They called for a shift in power from popes and monarchs to the common person. They made church and state tools for anyone to use. In the wake of this reconception of church and state we have religious freedom and democracy and now church and state policy are the product of every- and any-one.

The simplest way to think about the central bank is that it is a means to do for banks what Luther and Jefferson did for church and state: the central bank is a means to make banks a tool for the masses and not just the elites.

Four times the West has created the great institutions that have come to define market economies. Three times it has turned those institutions into tools for the masses. (The corporation is only now changing from tool for the CEO to tool for the newly entrepreneurial employee; that is not something that I'll get into here.) 




It took centuries for the Protestant Revolution that transformed the church in the West to culminate in religious freedom. Martin Luther nailed his 95 theses onto the door of the Wittenberg Castle Church in 1517 and it was not until 1648 that the Treaty of Westphalia was signed to grant religious freedom. (And of course what they thought of as religious freedom we would think of today as hugely restrictive.)  It took about a century for democratic revolutions to transform monarchies across the West. So I guess one ought not to be surprised that the revolution that transformed the bank -  a revolution that largely played out between 1933 and 2000 - is still not really understood or appreciated. You have to understand that revolution before you can really understand cryptocurrency.

***
"You have made yourself the trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out."
- John Maynard Keynes in an open letter to FDR in 1933

The revolution of the third economy - like the two before it - turned that period's dominant institution into a tool for the masses. The bank became a tool for everyone - and not just bankers - through a couple of mechanisms. The first was simply the work of social evolution - market forces at work. As capital became more abundant, the competition in capital markets shifted from households and businesses competing for capital to lenders and investors competing for customers of capital. The ads for credit cards, home mortgages, and 401(k) accounts late in the 20th century were evidence that capital markets had become as eager for thousands of dollars in business from tens of millions of people as they had earlier been for the tens of millions of dollars in business from thousands of elites. That alone helped with the popularization of capitalism from the wealthy elite to the average consumer. Keynesian policies were the second tool for turning banks into tools for the masses.

Before Franklin Roosevelt became president in 1933, the American economy had been in recession 48% of the 20th century. Half the time GDP was contracting. The good news is that capitalism was creating entirely new industries and technologies as transformative as electricity, radio, automobiles, and airplanes. Life was markedly better with the fruits of capitalism but it was also a world that generated about as many busts as booms. The bank obviously made capitalists rich but it wasn't as clear that it was benefiting workers. (Spoiler alert: it was but not not as rapidly or obviously.) Bankruptcy emerges after banks. From this turmoil of sudden wealth and poverty, income inequality and booms and busts communism was born. Communists knew the pain of that institution the bank and they wanted to be rid of it. It seemed to them wildly unfair and inefficient to have capitalists get rich while workers were losing careers each time a new industry emerged and an old one contracted. The innovation and automation that capital fueled could obsolete entire careers. Instead of banks, communists thought they'd use the nation-state as a mechanism for creating, investing and distributing capital.

The battle before Keynes was between capitalists (who Keynes refers to as orthodoxy in the quote above) and communists (the folks Keynes saw calling for revolution). Capitalists wanted the bank to be unchallenged and unchanged, left a tool for the elites to profit from with little or no regard for the worker or the broader economy. The capitalists were to the bank what royalists were to the nation-state or Catholics were to the church. They thought capitalism sacred. (They even referred to the market as the invisible hand, a nod, of course, to the hand of God that had earlier been thought to drive change and, of course, as with God's will, the market's decisions were not to be questioned or overturned.) Communists, by contrast, wanted the bank eradicated. Treat the institution as sacred or disposable? Side with the capitalists or communists? 

Well, the Keynesian response was to create policies that allowed capitalists to profit (profit motive remains a pretty clear signal about where to best allocate capital) while regulating banks through laws and central bank policy. The Federal Reserve's mission is to keep unemployment and inflation low.  Keynesian policy is fairly simple in concept: banks can do their thing as long as that doesn't mess up the larger economy that includes workers who have to stay employed and are also paid wages that can be made weaker by inflation. Capitalists were left free to profit as long as capital markets helped everyone prosper. Like freedom of religion and democracy before it, this "American Dream" treated a major institution both irreverently and as vital. 

After 1933, the world had three competing models running. One model was communism, another orthodox capitalism and the third Keynesian. (The orthodox capitalism models included a mutated form known as fascism that shared the orthodox belief in the natural inevitability of elites and the need to subordinate workers to business owners (and, of course, the state).) There was no competition. The Keynesian model was a triumph. As mentioned, from 1900 to 1933, the American economy was in recession 48% of the time. Since then it has been in recession only 14% of the time. In the 20th century, throughout the West, incomes and life expectancy rose dramatically. Keynesian economies trounced communists and unregulated market economies. People steadily got more access to credit and investment markets and as they did, wealth increased more than in any previous century.

The inventions of church, state and bank were so very, very cool. Turning them into tools for the masses rather than just elites was even more cool.

The punchline of the third economy's transformation of the bank? A banking system needs a central bank and regulations that save it from sub-optimization. Keynesian policies subordinate the banking system to the broader economy. Without that the economy booms and busts in ways that costs everyone - even banks.

So now let's turn to cryptocurrencies, the currency that relies on an algorithm rather than a central bank.

***

Cryptocurrencies are designed to avoid central bank policy. As long as they remain a minor part of the economy, this isn't such a big deal. Their value will vary wildly against other currencies but that won't adversely affect the economy, just the investors lucky enough to catch it on a swing up or unlucky enough to catch it before a big fall. 

But the more widely cryptocurrency is adopted, the more it will drive variation in GDP growth. Cryptocurrency promoters are not communists or Keynesians but instead are orthodox capitalists who have come back with algorithms. They are true believers in financial markets as forces that act best unsubordinated to anything else. They are designed to avoid central bank influence. If they are right than Keynes was wrong.

The good and the bad thing about algorithms is that they are rules that don't change in different environments. A new species can change an environment, though. The mortgage instruments that seemed like just a new product for bundling mortgage debt into securities that could be sold ended up changing the financial market in 2008. They were a key trigger to the Great Recession. It is not just that cryptocurrency would change the financial environment as it becomes more popular. The simple algorithms it follows will behave very differently in an environment in which they are dominant than one in which they are marginal.

Simple rules can still lead to weird chaos. This is one reason that the Federal Reserve has goals rather than rules. Things change and a constant growth in money supply can be a problem in an economy subject to shocks and surprises. Central banks change the variables they can to effect stability in employment and inflation. They are not perfect - that's impossible - but they are willing to subordinate capital markets to broader goals and they are willing to change things in novel or unexpected ways to effect such change. A cryptocurrency disconnected from any central bank or government regulation won't subordinate to broader economic goals and any attempt to suddenly change a predictable algorithm to do that could lead to chaos within the cryptocurrency market.

We see already that the simple algorithms that drive cryptocurrencies don't translate into stable prices of cryptocurrencies. As (and if) they become more popular they will not translate into stable economies. 

***

Speaking of social inventions, currencies are just made up. As it turns out, though, the point of currencies is not currencies. Currency just facilitates economic activity. To do this currencies have to be a store of value as well but that is incidental to its property, not its purpose. Currency induces people to work, to part with resources, to sacrifice or work now for future gain, and so on. A body is not made more healthy by the production of more RNA (that can, in turn, synthesize protein) any more than an economy is made more healthy by the production of more money. Hyperinflation is a reminder that the goal is not to maximize currency (or even to minimize it or keep it constant). 

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One of my beliefs with the fourth economy is that what limits in one economy becomes abundant in the next. In an industrial economy, capital is so scarce that more of it will almost always provoke more economic growth, the creation of more jobs and wealth. In an information economy, though, capital has become more abundant and introducing more of it has a diminishing effect.

What limits economic progress now is not the capital to finance education for knowledge workers or factories for capitalists or the startup capital for entrepreneurs. We have trillions wandering the globe in search of returns (and arguably driving prices of stocks higher than is justified by expected profits).

A key question to ask about cryptocurrency is whether it has emerged because we have so much capital in search of novel returns or if it exists because we do not have sufficient currency to facilitate the economic activity that creates new jobs and wealth. For me, the answer seems obvious. Cryptocurrencies emerged during a time of such capital abundance that the interest on Dutch bonds - and they have records that go back to the time of Martin Luther - was negative for the first time. It is hard to argue that the problem with the modern world is a lack of capital or currency. 

Cryptocurrencies seem a symptom of a glut of capital rather than shortage.

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Nor do we have a shortage of currencies. It seems plausible that the euro that emerged out of the EU will be  a prelude to the consolidation of currencies within regions. There are about 180 currencies around the world (most nation-states have one). It's not clear that we need more.  

Cryptocurrency advocates argue that bitcoin is poised to become the replacement currency for many of these national currencies. If currency needed no Keynesian policies to direct its behavior, this would actually be plausible. It is unclear, though, what would act as a central bank mechanism for any cyrptocurrency. I actually think it more plausible that the World Bank could issue a currency at some point.

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Keynes published The General Theory of Employment, Interest, and Money in 1936. (But as was evident in his 1933 letter to FDR, he'd been thinking about this theory for years.) Kurt Godel published his incompleteness theorem in 1931. Godel essentially argue that a system cannot contain its own proof. Ultimately, a system needs an outside reference. Keynes notion of capitalism was similar to Godel's notion of math: it needed an outside reference point to keep it from collapsing in on itself. 

A currency or financial system ultimately needs an outside regulatory engine or mechanism to keep it running smoothly. (Or relatively smoothly. Booms and busts are inevitable even if it is not inevitable that the busts are underway half the time.)

Currencies are only part of the system. The economy is the whole system and in order to optimize the economy you have sub-optimize the parts of it, including its capital or currency.  The lesson of Keynes is that banks, capital and currencies have to be regulated by something outside. (Lightly. But regulated nonetheless.)

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Cryptocurrency seems like modern technology based on an old, pre-Keynesian worldview that trusts in self-regulating financial markets that don't disrupt employment and GDP. I'm not sure that using a computer rather than a printing press makes that worldview any more effective. In fact, it could even make it more dangerous.