Archives for posts with tag: Free market

In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.” Milton Friedman, 1970

Between 1776 and 1970 the world had leaped forward. Technologically, economically and socially. Not only that we’ve managed to learn so much about the world and to produce immense wealth but we’ve somehow managed to ‘spread around’ the results. The proportion of people who had improved their fortunes had grown constantly during the entire period.

The majority of Americans share in economic growth through the wages they receive for their labor, rather than through investment income. Unfortunately, many of these workers have fared poorly in recent decades. Since the early 1970s, the hourly inflation-adjusted wages received by the typical worker have barely risen, growing only 0.2% per year. In other words, though the economy has been growing, the primary way most people benefit from that growth has almost completely stalled.” Jay Shambaugh, Ryan Nunn, HBR

Isaac Newton hadn’t invented gravitation. He only ‘noticed’ it. Put it in words.
Adam Smith hadn’t invented the free market. He had noticed how it used to work and opened our eyes about it.
For what ever reasons, enough of us had chosen to close those eyes back. And have reached the conclusion that ‘greed is good’.

Milton Friedman was both horribly wrong and exactly right.

He was right in the sense that he had gouged correctly what the ‘general public’ wanted/was ready to accept. “in accordance with their desires, which generally will be to make as much money as possible

He was horribly wrong in the sense that he had perpetuated Marx’s error. Karl’s, not Groucho’s.

Money isn’t everything. Life beats it to the post.
Profit is, indeed, essential. Only it is nothing but an indicator. About how efficient a corporation is.
Meanwhile the role of a corporation is to accomplish – as Friedman himself had dully noted, the will of the shareholders.

The problem arises from the fact that ‘near mindedness’ blinds.
If/when both shareholders and management have nothing but ‘money’ in their scopes the market actually looses its freedom.

Economic agents no longer converge towards the market to solve each-others problems – like Smith had noticed, but to ‘make money’.

Not the same thing. Not by a long shot.

One way to interpret Maslow’s pyramid of needs is to consider that an individual might become a full fledged human only after having climbed to the ‘fifth floor’.

The key word here being “might”!

Because nothing mandates that all those who have overcome the material constraints of this world and have successfully integrated themselves in the social milieu will ever become a ‘better version of themselves’.

Need examples? Have you ever heard about people like Bernie Madoff, Martin Shkreli or Myron Scholes?

‘But the last guy, Myron Scholes, was recognized by the Nobel committee as a world class economist!’
Exactly! What more could a person want? Money, fame, worldwide recognition… he was on the fast track to becoming whoever he wanted…
Yet he had chosen to associate himself with one of the deepest financial black-hole ever… Knowingly, unknowingly… doesn’t matter!

‘But what does it mean to become a full fledged human?’

To be free. To consider them-self a free person and to be recognized as such by their peers.

‘Scholes wasn’t a free person?!? Shkreli?!? Madoff?!?’

Nope. Neither was free from greed!
Greed for money, power, public recognition… or any combination thereof.

‘But “greed is good”!!! Isn’t this the current mantra? Aren’t we all driven by this sentiment?!?’

First of all, greed is not good. Read Adam Smith’s Theory of Moral Sentiment.
But yes, we are bombarded from all sides with this notion. That ‘greed is good. That greed is the engine of capitalism, which capitalism has brought us here. Where it is good.’

Yes, here it is indeed good. Only for fewer and fewer of us. It used to be better but since ‘greed has become good’ every ‘bump’ we encounter along the ‘free market’ road has proven to be quite a challenge. An insurmountable challenge for more and more of us.
An unsustainable arrangement. For us, as a community.
And yes, capitalism is the best economic paradigm to date. Only, as all paradigms, it has to be put in practice. By us, the people. In the right way. In the free market way.
Only we are no longer free! Those who cannot escape their sentiment may not consider themselves free. And too many of us have been enslaved by their greed!

‘But greed is written in our DNA!’

Indeed! So is the urge to have sex!
Only we’ve managed to teach ourselves, community wise, that while sex is good, rape is bad!
Not so long ago, rape was more or less condoned. ‘She must have enticed him’. ‘What was she doing there at that hour?’ And so on…
Nowadays, rape is shunned. By most of us.

Only we still live surrounded by rape culture. Seeped in greed.

Will we ever learn?
Will we, as a community, ‘actualize’ ourselves?

US Initial Jobless Claims, provided by the US Department of Labor, provides underlying data on how many new people have filed for unemployment benefits in the previous week. We can gauge economic conditions with respect to employment. As more new individuals file for unemployment benefits, fewer individuals in the economy have jobs. For example, initial […]

The US Unemployment Situation is Stunning — ASYMMETRY® Observations

As a species, I mean…

We’ve ‘invented’ mutual respect.
Based on it, we created the two institutions which allowed us to get where we are now. Democracy and free market capitalism.

I’ll make a short detour for those who are not ‘convinced’.

Democracy, the functional kind, starts from the premise that it is impossible for an individual to know everything. And that together we know much more than each of us. This being the reason for any democratic process starting with an intense discussion. Whoever has something to say, takes the stand and whoever is interested in the well being of the community pays attention. To learn where to cast their votes.

Free market capitalism starts, too, from the premise that it is impossible for an individual to know everything. That nobody, be it an individual or a group of people, might be smart enough to call all the economic shots needed for entire society to ‘feed itself’ on the long run.

These two fundamental institutions operate on the basis of mutual respect between those who live within them. The people exchange ideas and goods on the principle that the transactions are done voluntarily and in good faith. That deception is just an exception.

These two institutions made it possible for us to cooperate into building the present reality. We have developed enough technology that we are able to produce enough food for everybody.
We went to the moon
We have enough weapons to destroy the entire planet.
Each of us can communicate, almost instantly, with almost anyone on the planet.

And? What do we do in these conditions?
Although there still are many of us who are starving, we throw away food. For various reasons.
Most satellites are used (and) for military purposes.
Although we could not have ‘arrived’ if we hadn’t ‘invented’ mutual respect, we currently use information technology mainly to spread fake news and ‘consume’ pornography.

Is this really okay?
How much longer is this going to last?

I’m sure you’ve already learned everything worth knowing about how to flatten the curve…

My post is about something else.
About the need to think with our own heads.
Individually. Each on their own.

More damages are caused by the manner in which we have chosen to react than by the pathogen itself.

‘Then what should we do?’

I don’t know. And I just told you to stop taking cues, blindly.

There is something I do know.
Nobody can get out of something like this on its own. Alone.
And another thing. If we get out of it as a herd, we’ll very soon end up in another trap.

‘Damned if you do, damned if you don’t… I really can’t figure out what you want to say….’

OK.
We, humans, are social animals.
We not only raise our young – all mammals do that, we raise them in a social context. We live in groups and we raise our children to belong there.

Living in a social context has consequences. From being prone to infestation to having adopted specific behaviors.
Humberto Maturana is actually convinced that our very conscience – ‘our ability to observe ourselves while observing‘, a paraphrase, is a product of us leading our lives in close community.

One of these specific behaviors is the herd instinct.
Whenever in a dire strait, the members of a group pay a lot more attention to the rest of the group than in the ‘peaceful moments’.
This has two bright sides and one huge drawback.

All members of a group paying close attention to the others makes it easier for those who need it to get attention. And help.
All members of a group paying close attention to the others makes it easier for the group to follow when one of them finds a way out.
All members of a group paying too close attention to the others makes it very likely that the entire group will dash out at the first opportunity. Without checking first where they’re going to land. Nor whether there are any other opportunities.

Another specific behavior is ‘opportunism’.
Some of us have figured out that by keeping their chill in a crises they are more likely to identify whatever opportunities might exist in that moment.
And the deeper the crises, the bigger the opportunities.

Theoretically, these two should work like a charm.
The opportunists keep their chill, look around, identify the best way out and the rest of the herd follows them to safety.
A win-win situation.

Yeah… but!

Wouldn’t it be a way lot better whether all (or, at least, ‘more’) of us would keep their chill? Wouldn’t we be able to identify even more ways out?
It would take a lot more time? We’d need to discuss things over, to negotiate… we’d have to exert a lot of discretion…
True enough. Hence we’d need to evaluate two things. First, how urgent the dangerous situation is and, then, whether a better alternative would be worth searching.

And something else. In a ‘follow me blindly’ situation there’s no going back. The consequences for a hasty choice might be tremendous.

We might end up with more people being hurt by our blunder-some reaction than by the cause which had spooked us.

Yet another specific behavior is responsibility.
Living in a social context means that, sooner rather than later, individuals are censored for their actions. By the rest of the community or, sometimes, by the stark reality.
Unfortunately, sometimes entire communities are censored, by the stark reality, for not behaving responsibly. For not imposing responsibility upon their members.

For not taking enough time before choosing between flight and fight.

Let me put things into perspective.
How many of you have chosen to continue smoking despite having been warned?
How many of you have emptied the shelves despite being told there’s enough for everybody? Or that there will be soon enough?
How many of you do not smoke in the presence of your children? Because you know it will hurt them?
How many of you have taken active measures to protect the elderly? For the very same reason…

As for the economy being the main casualty of the present scourge…
I’m afraid ‘the economy’, as we know it, has been dying for quite a while now. That’s why it is so susceptible to SARS CoV-2.

The Ancient Greeks had come up with the concept of ‘oeconomia’ as the art of making the ends meet. Adam Smith had described the free market as the place/environment where competing agents made it so that people – solvent demand, could satisfy their needs.
Nowadays, too many of us understand/accept ‘economy’ as the art of getting rich. ‘Free’ in ‘free market’ is understood as ‘free’ to do anything you want. Because very few are asked to answer for the long term consequences of their actions.

The economy, as the manner in which we cooperate towards fulfilling our needs, has fallen prey to our gluttony. And to our nearsightedness.
Greed is not good. And SARS CoV-2 is only an eye opener, not the cause for the current implosion.

Liberty is freedom from being constricted, in any way, shape or form. Period.

Liberty is more of an adjective rather than a verb. A situation more than an action.

Liberty can be attached to a space, to an agent or to both.

A free space would be a space where no constriction may occur, whatsoever.
A free agent would be an individual entity outside any constriction, whatsoever.

Mathematically, both definitions are possible.
Philosophically, both definitions are imaginable. By philosophers, of course.

Oscar Hoffman, a Teacher, kept telling us, his students, “For a proposition to be true it is not enough for it to be logically correct. It also has to make ontological sense. For those of you who don’t remember what ontological means, a true proposition must describe something which has to be at least possible”

In the real world, where there is no such thing as absolute freedom, liberty has to be first noticed/invented. And then constantly negotiated.

‘No such thing as absolute freedom?!? But liberty is a (God given) (human) right!!!’

Do you remember what Hoffman had (just) said about things which can exist in practice and things which can exist only in our minds?
Liberty might be a right – for those who enjoy it, but that doesn’t mean that everybody has it. And, even more important, that there is – or ever will be, something even close to absolute liberty.
If you don’t believe me, try to fly off a balcony without any ‘mechanical’ help. Or stop eating for a day or two. The Earth will surely ‘constrict’ you back towards its center and your stomach will certainly constrict itself for lack of food. And both Earth and stomach will constrict you back to reality.

‘OK, so no absolute freedom for individuals. How about ‘free spaces’?’
‘As in spaces where no constriction, whatsoever, may be exercised?’
‘Yes.’
‘Well, that would be possible. If a space is completely empty… no constriction might be exercised in there, right? On the other hand, as soon as something, anything, populates that space, constrictions start to appear. For instance, since no two things can simultaneously exist in the very same place, the mere existence of a speck of dust in a whole stadium induces the restriction that no other speck of dust may exist in the very same spot. Sounds trivial, true, but this is it… No absolute freedom. Not for individual agents and nor for spaces.’

‘Then why are writing a post about ‘Free market’? Doesn’t make much sense, isn’t it?’

Let me finish with liberty before going any further.
I mentioned earlier that liberty must be first noticed and then negotiated.
You see, right or no right, liberty is, above all, a concept.
We’d first observed that a flying bird is freer that a crawling worm and bam!!! We realized that some of us were freer than the others. Then that freer groups/societies fared better than the more ‘stifled’ ones.
But only where liberty was more or less spread around, not concentrated in one hand. Dictatorships – where all liberty is concentrated at the top, are way more fragile than any democracy. I’ll come back to this.
Now, for the negotiation part.
‘Your freedom to swing your fist ends where my nose begins’. And vice-versa. Only this is rather incomplete.
Let me examine the situation where you are a person who likes to swing your fist. In the air, not with any aggressive intent, of course. So you were swinging your fist, after you had determined, in good faith, that there was no nose close enough to hurt. But what if I am a ‘nosy’ guy? ‘Nosy’ enough to bring my actual nose inside your reach? You having to restrict your swings – or to go somewhere else, isn’t a limitation of your freedom? An absolutely unnatural limitation of your freedom?
Has it become a little clearer? What I mean by negotiation when it comes to individual freedom?

OK, time has come for me to go to market. To the free market!

A market is a place. Obviously, right?
A place where people trade their wares. Because they have noticed that it is easier for each of them to do what each of them do better and then trade the results of their work instead of each of them providing everything for themselves. As in everything each of them needs. Or fancy.

Initially, markets were far from being free. First of all, supply was sorely limited. Transportation means were practically nonexistent so supply varied seasonally and was severely influenced by weather, soil and other similar factors. And, maybe even more importantly, supply was influenced by the sheer will of the most powerful ‘free agent’ who happened to be around. Or, more exactly, supply was heavily influenced by the whims of the most powerful free-agent who happened to be around.
Don’t believe me? Then consider the extreme famine experienced by the Bengalis in 1943. Or by the Romanians during the last years of Ceausescu’s reign.
Slowly, people have learned that freer markets tend to be a lot more stable than the less free. ‘Freer’ markets meaning freer from both exterior and interior limitations. For a market to become free(ish) the participants need to have a big enough pool of resources at their disposal and to be wise enough to organize themselves in a ‘free’ manner.

And what happens when at least one of the two conditions remains unfulfilled?
Time has taught us that while markets tend to be limited in space and that some of the participants tent to impose themselves over the rest there is one dimension where the liberty of the market is very hard to be limited. ‘Liberty’ here meaning that things tend to evolve more in their own terms rather than ‘according to plan’. Or according to anybody’s wishes.

Whenever the available resources dry up, the participants to the market move someplace else. Or die of starvation.
Whenever a market looses too much of its freedom – as in some agent controls too much of what is going on there, the market itself no longer functions properly. Whenever too many of the participants loose their ability to determine their fate/future they slowly become ‘sitting ducks’. Not as much easy to hunt down but actually unable to feed themselves.
And since hunger is the best teacher, they either learn to fight for their freedom or… die of starvation. Pol Pot’s Cambodia would be a good example, even if somewhat extreme. The fall of most communist regimes also makes a compelling case for what I have in mind.
Even more interesting, though, is what had happened to the American Automobile Industry. General Motors and Chrysler Corporation, once the dominant stars of the market – along with Ford, had to be rescued by the government. Quasi monopolistic positions tend to be bad for the monopolists also, not only for the rest of the market. Given enough time, true enough…

For a (free) market to function, at all, it needs active economic agents.
Which economic agents need, in their turn, certain amounts of concentrated resources at their disposal. A certain amount of ‘capital’. Regardless of who owns it. Or disposes of it.

In this sense, no matter where each of them finds itself on the individual to socialist spectrum, all societies are ‘capitalist’.

On the other hand, individual capitalists – economic agents, do not need a free market to thrive. The do indeed need a market to sell their products/services, only that market does not have to be free. On the contrary, even.

OK, no monopolistic market has survived for long. And all monopolies have eventually failed. Even those who had grown ‘too big to fail’!

But go and tell this to any of those who happen to be at the helm of a monopoly… be it of economic or political nature …

We, but let me start with the beginning.

First of all, I find it very interesting that Adam Smith never used the expression.
He explained the intricacies of the market without describing it as being ‘free’. For him, the market had to be free in order to function properly…

But, perhaps, no country has ever yet arrived at this degree of opulence. China seems to have been long stationary, and had, probably, long ago acquired that full complement of riches which is consistent with the nature of its laws and institutions. But this complement may be much inferior to what, with other laws and institutions, the nature of its soil, climate, and situation, might admit of. A country which neglects or despises foreign commerce, and which admits the vessel of foreign nations into one or two of its ports only, cannot transact the same quantity of business which it might do with different laws and institutions. In a country, too, where, though the rich, or the owners of large capitals, enjoy a good deal of security, the poor, or the owners of small capitals, enjoy scarce any, but are liable, under the pretence of justice, to be pillaged and plundered at any time by the inferior mandarins, the quantity of stock employed in all the different branches of business transacted within it, can never be equal to what the nature and extent of that business might admit. In every different branch, the oppression of the poor must establish the monopoly of the rich, who, by engrossing the whole trade to themselves, will be able to make very large profits. Twelve per cent. accordingly, is said to be the common interest of money in China, and the ordinary profits of stock must be sufficient to afford this large interest.”

OK, he was talking about the XVIII-th century China… but I’m sure you already know that.

Then what was it which lead Britain on what is currently known as the ‘free market path’ but blocked China, until very recently, from following suit?
After all, the participants to both markets were driven by the same self interest and their efforts were determined by the same division of work. Not to mention the fact that China’s was a many times bigger market than Britain’s. Initially, of course.

Both countries had a lot in common. Both populations were similarly stratified and class conscious, both monarchies had reached the same level of impotency, both states were run by specialized coteries … what was the difference?

“A country which neglects or despises foreign commerce…”

For a market to be truly free – as in ‘fully functional’, those who participate in it need to be free to do as they see fit and to go wherever they wish.
For this to happen the participants have to feel free – to be conscious of their freedom, and those who oversee the market need to act only as ‘arbiters’ and never as rulers.

This was the difference between the XVIII-th England and China. The British authorities were a lot more permissive than those ‘in charge of’ China and the British subjects felt a lot freer than the Chinese.
While the British authorities did nothing more than police the market, the Chinese Mandarins actually run the day to day activity.
The end result being that the British merchant men learned to deal with each-other and ask for help only when the law was broken, while the Chinese were conditioned to look up for directions at every corner of the road.
As a consequence, the free participants to the free market have learned to respect each-other, and to collectively defend their freedom, while the mainland Chinese have been conditioned to accept that bowing your head was safer.

But people learn fast.
Just look at what’s currently happening in Hong-Kong.

“Do you know why I hate capitalists?

1. All they care about is money

2. They have all the money”

This is a bi-partisan joke. Some of the haves use it to demonstrate that money is the essence of modern life while the ‘lefties’ use it to demonstrate the ‘malign’ nature of capitalism.

Both sides are wrong.

According to Adam Smith, the market consists of many specialized economic actors who sell their wares/services. Thus helping each-other lead a better/simpler life than if each of them had to ‘do everything’. Furthermore, a free market is better than a ‘cornered’ one, simply because competition keeps everybody on their toes.
In this sense, a capitalist is a guy who organizes a group of synergically skilled operators in such a manner as to increase their aggregated efficiency.
In order for the market to remain free, a.k.a. efficient, there must continue to exist a certain degree of competition between the said capitalists. And for the whole thing to remain a market, each of the capitalists must remain but an actor, not become a dictator. A.k.a a monopolist.
Differently put, for the market to remain functionally free, capitalists should remain/must be kept level with the other ‘merchant-men’. The bakers sell their bread-making skills, the brewers their beer-making skills, the butchers their ability to carve carcasses while capitalists sell their ability to organize people. Their entrepreneurial skills.
OK, there is difference. But only in our heads. While each of the others use specialized tools – ovens, vats, knives, etc., capitalists use money. Yet another tool but one which seems familiar to all of us. But very few of us see money as a tool and even fewer accept that using money, a lot of it, implies a huge responsibility.  Hence the enormous misunderstanding. No reasonable human being – except for a carpenter, of course, would dream to amass a huge number of, say, hammers, but a majority of people are convinced that having a lot of money would make them happy.

And why did I say “both sides are wrong”?

Because real capitalists are focused on the needs of their business partners – a.k.a. ‘consumers’, not on their pockets/paychecks. Because real capitalists understand that sellers would go hungry if there was no money to buy their wares.
Because free market capitalists are focused on making money go round – and getting handsomely paid for this, instead of constantly attempting to hoard all the money in their grasp.

It’s not me who says so.
Jamie Dimon, Alex Gorsky, Tim Cook, Ray Dalio….

 

This rule of thumb is also known as ‘Gresham’s Law’

At the core of Gresham’s law is the concept of good money versus bad money. The law holds that bad money drives out good money in circulation. Bad money is then the currency that is considered to have equal or less value compared to its face value. Meanwhile, good money is currency that is believed to have greater value or more potential for greater value than its face value. One basic assumption for the concept is that both currencies are equally liquid and available for use simultaneously. Logically, consumers will choose to use bad money over good money because good money has the potential to be worth more than its face value.”

‘Concept’, ‘the law holds’, ‘is considered’, ‘value’, ‘compared’, ‘is believed’, ‘assumption’, ‘logically’…
So. The way I see it, ‘Gresham’s Law’ is about people interacting according to their own ‘impressions’, ‘drives’ and ‘internal logic’.

But wait. Things are far more interesting than ‘commoners’ hoarding the potentially more valuable coins, when having the ‘opportunity’ to choose between good and bad money.

“The minting of coins provides the most basic example of Gresham’s law applied. In fact, Gresham’s law itself was built around the minting of coins and Gresham’s service to Queen Elizabeth I of England. Sir Thomas Gresham lived from 1519 to 1579, working as a financier serving the Queen and later founding the Royal Exchange of the City of London. Henry VIII had changed the composition of the English shilling, replacing a substantial portion of the silver with base metals. Gresham’s consultations with the Queen explained that consumers were aware of the change and began separating the English shilling coins based on their production dates to hoard the coins with more silver which, when melted down, were worth more than their face value.”

In fact, Gresham’s Law is about ‘commoners’ reacting in a logical manner whenever the powerful had tried to ‘trick’ the less powerful into accepting less valuable coinage.

Let’s examine the situation from another angle.

Gold and silver had been used to make coins for a number of reasons.
Both were rare enough to maintain their perceived value no matter how much of them might have been ‘suddenly’ discovered. For example, the Spaniards had brought shiploads of precious metals into Europe from South America without creating much ‘inflation’.
They, individually and or alloyed, were soft enough to be minted using primitive technology. The oldest coins made of precious metals go back almost 3000 years
Both gold and silver are impervious to the passage of time. That being the motive for those coins having survived for so long.

For these three reasons gold and silver had been the obvious choices when people had realized they needed a ‘technology’ for making payments and for preserving and transporting value.

In reality, this is the intrinsic logic for which gold and silver had been valuable for us. They had represented the most convenient manner of making payments and for transporting/preserving value. As metals, gold was basically useless until the advent of microelectronics while silver had become really useful only after Daguerre started using it to make primitive photographs.

So. Ancient people had discovered that by using gold and silver coins they could vastly accelerate their economies. The most interested being, of course, the powerful of the day.
The rulers. Those who had the means and the authority to mint.
Some of whom also had the gumption to mess with the whole process. For their own profit, of course. Why do you think Hieron, the King of Syracuse, had hired Archimedes to determine whether a piece of metal – a crown, but the shape had no real meaning, was made of pure gold – as the goldsmiths pretended, or not?

Instead of a conclusion.
Since the start of time, some people have tried to swindle the others. No matter how high their position on the social ladder. And the rest have tried to protect themselves. Or, sometimes, even to emulate the ‘bad’ behavior.

This being the beauty of the free market.
Whenever a market is truly free, the reasonable people naturally weed out the swindlers.
Whenever the swindlers happen to have the upper hand, the rest have no other option but to follow suit. To hoard the ‘good’ money.
The consequence being the slowing down of the economic cycle. To the ultimate ‘bad’ of everybody. The swindlers included. And their children/suitors!

 

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