Economics (6) Good Capitalism & Bad

Good reasonning requires precise language. While capitalism seems (to me) to have been what has enabled almost all advancement by humans around the world, I still hear people attack it as if it were their bane. People learn much of their vocabulary by observing uses by other people, which works imperfectly. Thus, many expect that capitalism is about everything that goes wrong instead of it being about everything (both good and bad). (This kind of confusion occurs with great regularity: “socialism” is where government controls the means of production, regardless of the political ideology; this feature is almost as prevalent as capitalism: I have never met a person who has dealt with any government that was not in some way socialist.)

I offer here a attempt to clear up some of the confusion by suggesting that capitalism can be practiced in either of two forms: “proper capitalism” (good) and “criminal capitalism”. This dichotomy is not as clean and absolute as I would like. I offer here some common examples of criminal capitalism:

  • when your gangsters show up and force people to work in your factory or mine
  • when you load a contract with fine print that significantly affects the exchange
  • when you lie about significant aspects of the deal, like who owns what you are selling or what attributes the product actually has
  • when you use insider information to disadvantage your trading partners
  • when you loot and pollute the environment, aka. the commons that is really owned by all of society

I suggest a simple litmus test for proper capitalism: you must be able to envision how every participant in your deal(s) can profit, that is, the value realised by the participant at the completion of the deal is seen by the participant as greater than it was at the beginning. Fools will deny that this is possible because they believe that life is a zero-sum game. But capitalism has generated great wealth for all of society by exploiting the win-win scenarios.

The primary mechanism by which capitalism generates wealth is the “free market” where the defining freedom is the freedom to decline (to not participate, to walk away). In a free market, people participate only if they see a profit for themselves. A properly regulated free market, with support from the legal system, generates so much wealth over time for all the participants (and, oddly enough, even the onlookers) as to affect the courses of nations.

Stories (2) Mistborn

I intend to write mostly about the better stories that I have experienced.  Rarely do I reread any book, only very recently doing it.  This book is not an exception, to either of these patterns.

Mistborn is high fantasy.  We enjoyed the book and are likely to read the sequels.  The characters are very well formed, such that we could regularly anticipate possible actions or speech from them, even though the plot kept us from knowing which of the possibilities would manifest, or when.

Not only did the people in this story have well developed character, so too did the whole world.  While we did not get to see all of the world nor even the boundaries, what we did see was consistent with itself, with its surroundings, and with its history (its motivations).  This is one of very few stories that attempts to regularize the system of magic that is central to the action of the story, and it works quite well.

Not only were the people in the story well formed, they had natures that we could relate to.  Most of the action plays out as we expect it would in the real world, excepting for the effects of magic.  The dance of suppressed peoples, with seething frustration and generations of conditioning, as they dabble in resistance and are seduced into committing to rebellion with all its accompanying costs, aligns well, but not too perfectly, with how real world histories played out.

Frustration grew in me, due to the ways that the people in the story refused to accept a small (in the scheme of things) distraction that would have significantly improved the likelihood of their longterm success.  Yet, that focus on the short-term direct approach resulted in the telling of a crisp story.

The morals embedded in the story (as well as any other subtext) were sufficiently subtle to not leave us crying about a story highjacked.  Indeed, there were messages about religious scams and corruption of government, just not with too fine a point.

Economics (5) Scaling

The earlier discussion of investment gave investment the definition of “doing work, expending time and effort, before it (the product) is needed”. I think of this as “baseline investment”, providing the minimum profit at the minimum risk.

Scaling involves investing time and other resources beyond the minimum.  A scaled operation is only profittable in one of two ways.  The simplest way is to produce a product or products that will be used or consumed before they go bad, a period called the “shelf life” of the product.  The other way is to count on trading away the product(s) within the(ir) respective shelf life(s).  Both ways become profittable when scaling causes the cost per unit of product to go down, which it will if there are overhead costs which increase less than proportionately to the increased quantity of product(s).  Those overhead costs are sometimes referred to as “non-recurring engineering costs”, or even as “setup costs”.

A very simple example is preparing a field to grow a crop.  The total investment is the sum of two parts: the setup of the plow and the trip to the field plus the work per area affected (width of plow effect by length of plow track).  Increasing the size of the field increases the cost of plowing in proportion to the additional area, but the overhead of preparing to plow increases trivially up to the point where the field is too big to plow in one session.  Thus, a farmer might reasonably increase the size of his field from the minimum needed to satisfy the household requirements, up to the maximum area that can be done without having to add additional days.

This boundary in the problem space is affected by the configuration of the plow, by the number of animals to pull the plow, by the number of workers on the farm, and by other factors.  Increasing the field size should result in an increase in the crop yield and the surplus can be traded.  Trading a crop surplus for tools to scale operations counts as investing.  Farm productivity (product produced per resources consumed) has increased for most of the last several millennia, with obvious acceleration for much of the past several centuries, as profits have been “plowed back into the operations”, buying or building improved tools and methods.

There is amusement to be gotten by recognizing that this concept of scaling can be applied to itself, scaling of scaling.  Once you realize that some productive activity already being done can be scaled to some profit, it is a short leap to seeing how much it can be scaled, that is, scaling up the scaling operation.  In the simple example above, this might look like analyzing how big a field can be made productive, how much can tools reduce the unit costs, how much surplus product can be traded, how much of the trading process can be replicated or expanded (scaling that process), etc.

Establishing patterns of trading surpluses together with scaling of scaling can lead to the discovery of specialization.  This is the abandonment of less productive activities to others and replacing those products (that you no longer make) through trade.  The evolution of specialization is not only possible, but progresses with relative rapidity because almost every incremental refinement of the process is more efficient, more productive than the previously accepted practices.