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.

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.

Economics (4) Money

Money has been in use for thousands of years. A large majority of humans seem to be able to function with it. In the realm of psychology, it is referred to as a “secondary reinforcement”, and studies have shown that other animals, especially other apes, can deal with it. Despite all that, I am left with the view that few people actually understand what money is or why it functions as it does. A simple litmus test is to ask “is money a thing of value (worth)?”. True understanding shows that money is not inherently valuable.

The adoption of money, that is to say its use in commerce, did not spread quickly, nor was its evolution without rude surprises for its adherents. As I said earlier, the true need was for some improvement in efficiency and reliability in balancing exchanges of surpluses, or rather tracking the outstanding debts that arose from inequalities in those exchanges. The essential properties needed were as follows:

  • Scaleability — able to represent amounts of value owed from small to large
  • Granularity — able to represent amounts to arbitrary precision
  • Stability — able to retain its identity (the amount owed) over a sufficiently long time
  • Recognizability — able to not only be recognized by party to whom the debt was owed, but also by the party who owed that debt

An extra bonus for any system that permits such accounting to service exchanges between every pair of parties with surpluses to exchange.  This extension would impact all of the essential properties.  Getting such a system accepted by a sufficient portion of the population requires a long period of acclimation, with the system needing to evolve over generations of players.

Initially, a party learning to use money is unwilling to accept a lessor item in exchange.  Thus, the initial design of money must preserve the illusion that the tokens of money actually embody the worth imagined.  Numerous extreme events have shown over and over again that no material can have sufficient value to impart to the tokens the needed value without the value of the material being largely due to its role in producing those tokens (coins).  In the more general case, any commodity backing a currency is more valuable as the backing than it can possibly be in all other roles combined.  Yet, the illusion, or rather the delusion, of pieces of money having inherent value seems to be a requirement of the initial bootstrapping of monetary systems.

A functioning system of money permits exchanges of surpluses to be distributed over

  • multiple parties
  • multiple locations
  • multiple times

The system rewards its participants by

  • vastly increasing the opportunity to trade away a surplus before it loses its value
  • vastly increasing the opportunity to correct shortfalls in needed products
  • better matching
  • allowing much greater amounts of specialization
  • facilitating opportunities for diverse investing
  • reducing waste or loss via missed opportunities

Those rewards together with the enhanced efficiencies over the long term outweigh the increased risks from counterfeit currency, theft (it too benefits from the efficiency), or simple loss of tokens.

Modern currency is a fiat currency; it has value only in that the powers-that-be dictate that it has value. It seems to be a house of cards, but it cannot fall down because the agencies responsible adjust the supply to match the demand of a vibrant economy (parties cannot shift their trading patterns even as fast as the agencies can withdraw or redeem the currency). We have become dependent on patterns and practices made possible by fiat currency coming-into or going-out-of existence as is needed.

Even more strange is the discovery that money is not a thing, but rather a property of things. We have learned this at a gut or reflex level; we count up our assets by adding together cash, bank accounts, houses, corporate shares, insurance policies, etc; we trade with coins, paper bills, checks, credit cards, eftpos cards, stamps, coupons, etc. Credit cards actually work the reverse of most money systems, they create currency on demand and collapse it on payment — retailers can trade on payments before the customer has actually parted with with the assets.

Politics (3) Colorado Cash

It does really seem that Marijuana is a gateway drug, although not in the sense that that claim was initially made.  In fact, as far as self-medication and recreational pharmaceuticals trends and causalities are concerned, it seems that cannabis in all its forms is as much of a gateway to other substances as is bubble gum.  The serious abuse gateways seem to be tobacco and alcohol.

My current claim about the gateway-ness of cannabis is more of a claim about behaviour patterns, especially as influenced by ill-considerred laws.  This was blatantly true back in the ’60s and ’70s, as so many of my cohorts mistakenly assumed that government lies (and make no mistake there — they were lies) about substance abuse were uniform.  To correct for the gross misinformation, we took to wearing buttons that said “Speed Kills” so that we were all warned that amphetamines were really and truly dangerous.  This warning also helped to establish a framework that substances being abused coverred a wide spectrum — experience with one was not a reliable indicator of how another might affect users.

Since cannabis was illegal, to get some one had to trade with people who might also traffic in other dangerous substances.  Thus marijuana openned the traffic gateway to other substances.

Today, the US federal government continues to force cannabis to maintain its role as a traffic gateway to illegal businesses even though it is legal to grow, trade, and consume in Colorado.

I suggest that it is time for Colorado to double down on its innovative policies.  I propose the formation of the Money Transfer Agency (MTA) of the State of Colorado.  The MTA would be in many ways like a bank, while being different enough to operate outside the federal banking laws.  It would operate like this:

  • Every account of the MTA must be owned by a single legal entity (person or corporation) established in the state, and have one or more registerred controllers who must have had a background check done.
  • Any entity (with or without an account) may deposit any amount of cash to any account.
  • An account controller may electronically effect transfer of funds to any other account.
  • An account controller may personally withdraw cash from the account.
  • The MTA may use money held in trust to acquire any sufficiently liquid bonds or notes issued by governments or their agencies within the state.

This arrangement would permit the following:

  • Cannabis consumers can open accounts, and make regular deposits.
  • Consumers can transfer money to retailers.
  • Retailers can transfer money to satisfy tax and regulatory demands at any level within the state.
  • Retailers, growers, and processors can transfer money to their respective suppliers.
  • Brokers can set up operations to receive money transfers, make cash withdrawals, and make payments to entities outside the state.

Such a system would simultaneously enhance growth of legitimate businesses while reducing exposure to both theft of the money and illegal transfers of product out of state.

Economics (3) Surplus

Looking at reality through the filter of economics captures all of life with some additional false positives (things that we do not classify as alive but still seem to trade time and energy for material and energy).  Using investment as the filter eliminates the false positives at the expense of adding a far greater number of false negatives (most of life does not invest).  Evolution is at play, rewarding species that are predisposed to invest (predisposed either directly through genes or indirectly via thought).

A side effect of investment is that one might produce a surplus of a desired product (such as food), possibly in amounts beyond what the individual can consume.  It seems common enough for investing species to develop (in individual thought or in species wide genes) a protocol for sharing the occasional surplus with others.

In the simplest form, the genetically controlled protocol has no parameters and every incident is both like every other incident and at the same time independent of every other one.  The next rung up the ladder, if you will, is where each act of sharing affects the social standings within a community.  While I lack proof or references to supporting research, my crude thought experiments suggest that humans exhibit a range of mechanisms for long term profit from sharing, with the simplest being nearly indistinguishable from adjusting a single parameter that affects social standing.  I suggest that prior to adopting systems of writing, much effort went into rememberring every sharing incident (transaction) so as to, over a long term, balance out the net benefit to each party, with some of the “corrections” being more of sharing the deficits than sharing the surpluses.

One might think that a barter system would relieve the burden on the memories of the individuals in a community, but further reflection ought to highlight the immense difficulty getting exchanges to balance the values of what is being traded.  Given this limitation, one should expect that trading patterns in a community would be either between closely connected neighbors or be regularly recurring exchanges involving specialization (of skills or access to resources) or both. Some advances would be needed to enable communities (and civilizations), on more than a minimal scale, to practice, and profit from, specialization, investment, and exchange.

The reward for finding and using such advancements proved more than sufficient for several developments to come into practice, specifically counting (numeracy), writing (literacy), and money.  These advances were repeatedly discoverred around the world.

Economics (2) Investment

Investment is the oldest or first economic practice, even though the practice started long before we seemed able to do the economic analysis to justify it.  Perhaps, evolution selects for investment in that those who make investments are more likely to have descendants; such would permit investment to become more common without yet requiring that humans do conscience analysis.

In its simplest form, investment is doing work, expending time and effort, before it (the product) is needed.  In that very simple form, investment only changes long term outcomes to the most trivial  extent: most transactions are unchanged, some become more efficient, and some are wasted work.  The efficiency of investment grows as we see patterns in our transactions and anticipate needs before they become acute.

A very large impact can arise when some product or intermediary can be used more than once.  This situation is the an example of “economies of scale”, albeit at the very small end of that scale.  Some very early examples are: building a nest to use for more than one night (repeat use of a product), saving a rock that has been chipped in order to form a knife (repeat use of an intermediary product), planting a perennial crop (repeat harvest), and planting a field with seeds for an annual (parallel treatment of very many plants).

Studying and learning are among the most abstract investments, and may also have the largest  payouts.

Investments have build (or at least paid for) all the accomplishments of humanity.  They are also the foundation for almost all the other advancements in economics, including specialisation and trade.  I suspect that investment has some hidden costs, such as making war more common than it might otherwise be.

Economics (1) Life

This is the beginning of a new thread, economics. I see it as a study of life as seen through a filter, a defining filter. The patterns that show up when looking through that filter are both interesting in the abstract and relevant to directing our subsequent behaviour.

Distilling all human existence down to its most basic shows that our lives are a long series of transactions or conversions. We have a steady increment of time, we get one second for each second, such a trivial and obvious pattern. We have muscles to animate ourselves and have an impact on our surroundings. We have a series of needs, such as: food, drink, shelter, warmth, cooling, comfort, and safety. We use time and our muscles, in fact our whole bodies, to satisfy our needs. Of course, we have learned to use our brains (our minds) to increase our efficiency at getting satisfaction for the our expenditure of time and effort. We have learned to seek the maximum satisfaction for the minimum time and effort; this is the essence of economics.

Life is much more than can be seen through the filter of economics, but all the other pursuits depend on having resources beyond what must be converted (consumed) in order to sufficiently satisfy those needs on which we depend. This leads to a relationship, a pattern, of greater economic efficiency enables greater production of all esthetics, or in other words “economics funds the arts”.