Modern medicines for sick economies

I will prescribe regimens for the good of my patients…. and never do harm to anyone.”  
Part of Hippocratic Oath

Introduction

On December 12, 1799, at the age of 67, George Washington fell ill from an infection which, today, any doctor could easily cure with antibiotics. Unfortunately, his doctors repeatedly bled him. They knew, from standard wisdom dating back to Hippocrates, that bloodletting drained out the “bad humors” responsible for illness. Over a two day period they drained him of almost 4 quarts of blood and he died; killed by well-intentioned physicians, one of them a personal friend, using the best medical practices of the time. Had they done nothing, his immune system might have pulled him through or he might have died anyway. But, the shock of losing 80% of his blood made his death certain and swift.

In 2011, the US economy is seriously ill. It suffers from high unemployment, mounting debts, unbalanced budgets and growing class warfare. It doesn’t lack for well intentioned professional help to restore its health. Economists and politicians are eager and able to implement their traditional cures like tax cuts, budget cuts, easy money and free trade.  However, their solutions are based largely on economic theories that date back to the time of George Washington. A core thesis of this book is that these economic theories are as unscientific as the theory of “bad humors” and that blindly continuing these practices are as destructive to the economy as repeated bloodlettings were to George Washington.

Medicine became modern after the human body began to be understood and analyzed as an evolved, complex system and many of its diseases as attempts by pathogens and parasites to purloin its rich pools of resources for their own uses. The US economy and all other economies are also evolving systems with rich pools of resources. These systems have two primary functions: to produce the goods and services people need and want, and to provide a culturally agreed to means for individuals to acquire those goods and services. For example, businesses produce products and services for customers and they pay employees’ salaries, suppliers’ bills, and investors’ dividends thus enabling these people to acquire other goods and services. I will demonstrate that most of our current economic crisis comes from a 40 year untreated accumulation of people operating as parasites and pathogens rather than as healthy, functioning contributors to economic vigor. Don’t get me wrong, these people aren’t evil villains, they are us―whenever we game the economy rather than contribute to it. Parasites and pathogens drive development in complex biological systems like plants and animals, as they force them to develop ever more sophisticated immune responses. However, we’ve not only failed to develop adequate immune systems in our economies, we’ve been weakening them as they age. Consequently, loads of parasites and pathogens have reached debilitating levels in most of the older, advanced economies.

Over the coming year, I will post a series of essays―a serialized economics book― which develops a clear, quantifiable theory of economies as complex but comprehensible systems and answers these questions:  What are the essential requirements to produce and sustain a healthy economy?  What constitutes healthy economic growth? What does it look like? How should it be measured?  What must be done to restore the US economy to robust health? The essays will also demonstrate how popular solutions like tax cuts, abnormally low interest rates, easy money, deregulation, behemoth corporations and free trade have weakened, drugged, and infected the economy instead of providing it rest, nourishment and antibiotics.

Answering questions about health and growth are central to understanding and fixing economies. Traditional answers are woefully off base. For example, some pundits say that full employment is the measure of economic health, which is like saying that a normal temperature is an accurate measure of personal health. Others measure GDP (Gross Domestic Product) to define economic health and growth, which is like measuring our annual intake of food―without considering its nutritional value― to define personal health and growth. Some of those who espouse these overly simple answers have induced us to “take two tax cuts and elect them in the morning.”  Others have promoted free trade, subsidized industries and bailed out financial institutions to stimulate GDP. And yet, economic malaise lingers and worsens.

Primitive Myths

Our current understanding of economies is equivalent to 19th century medical knowledge― a time when average life spans were about 30 years, disease was rampant and medicine was a collection of myths. We operate today with primitive economic myths. One myth, for example, is that tax cuts stimulate healthy economic growth. Tax cuts might do that if taxes are crippling business and governments are bloated with revenue. But repeated tax cuts, on the principle that “lower taxes are always better” are merely economic bloodlettings, which temporarily stimulate good feelings but ultimately weaken governments and the economies which they support. Specifically, the Bush tax cuts were economically ignorant, weakening both the Federal government and the US economy while accelerating the concentration of wealth into the hands of a few. And yet… those cuts have been extended in the name of economic recovery. If prior cuts didn’t prevent our economic recession, why should extending them bring about economic recovery when they are unambiguously draining the lifeblood from government? 

Other myths have become facile economic slogans: “free markets,” “free trade,” “invisible hand,” and “the law of supply and demand”. They were first proposed in the early 19th century by thoughtful people like Adam Smith and David Ricardo as working hypotheses, not theories or axioms. They contain some elements of truth and were reasonable assumptions for their time. However, instead of being updated―like the practice of medicine has been―into modern, rational theories supported by bodies of evidence, they’ve become simplistic slogans of economic faith and political rallying cries tied to God, country and personal freedoms. Since none of these slogans correspond to reality, they mislead us about what we should do.

For example, the law of supply and demand requires us to believe that supply, demand and prices are directly and deterministically connected to eventually bring supply into balance with demand at an equilibrium price. That seems logical enough, and is still taught in first year micro-economics, even at MIT. Yet, in the real world, these three things actually display loosey-goosey relationships and are perpetually out of equilibrium. That’s because they are linked to one another only through mental systems in non-deterministic ways. Each of us buys, sells, builds and invests on what we think, hope and believe at the time, not because of facts about supply and demand. Average beliefs of individuals or of groups are always out of phase with reality and are further muddled by non-rational things like habits, status, herd thinking, skills, fear, greed and uncertainty.

Modern Medicine

Modern economic medicine requires updated concepts and new tools. To illustrate the challenges we face, consider these familiar systems: cars, houses, computers, people, cows and trees. We can answer health and growth questions about people, cows and trees, but have to torture language to connect ideas of health or growth houses, cars or computers. What is it about biological things like cows, trees and people which make for ready answers? What is it about constructed things like cars and computers which make concepts of health and growth so alien? How then can we apply concepts of health and growth to economies, which combine biological systems and constructed systems? For that matter, how do we evaluate the health and growth of other mixed and complex systems such as corporations, financial institutions, transportation systems, governments and cultures? [i]  What is a healthy relationship between a government and its economic system? What is a healthy relationship between an education system and its economic system? We will answer these questions as well with operational answers that enable us to practice modern economic medicine.

First, though, I must fess-up that the challenge is even hairier than it seems. An economy combines three classes of systems, not just the two mentioned earlier: constructed systems like cars and computers, biological systems like cows, trees and people, and mental systems like languages, skills, science, engineering, economics, religions and cultures. The Industrial Revolution marked the co-evolutionary takeoff and explosive growth of constructed systems and mental systems, each class stimulating, supporting and tailoring the growth and health of the other.

Thus, the bad news: to understand the economic system, we must also define and account for the growth and health of human mental systems, whose variety and magnitudes are at least comparable to those of constructed systems or living systems. It’s a task that will occupy several essays, in part because no one else has done it yet. The good news is that all complex systems, including companies, banks, athletic teams, communities, economies, money and governments can be understood as combinations of these three classes of systems; and we will be able to simplify their combinations and permutations to manageable levels.

Healthy economies

The economy is a comprehensible system. It is also manageable and adaptable, but only when it has adequate reserves of vital resources. The ability to manage or even to influence the behavior of any system requires that it have immediately available reserves. This is a characteristic of all systems from the simplest to the most complicated. A car needs a competent driver (appropriate mental reserves), tread on its tires, linings on its brakes, gas in its tank and time to travel from place to place. A competitive basketball team requires a coach on the sidelines, talented and conditioned players on the floor and on the bench, competent competitors, time to practice and time to eat. A competitive factory needs managers, and surpluses of skilled workers, raw materials, work in process, and finished goods. A supermarket needs enormous surpluses on its shelves and in its back room as well as access to distant warehouses storing even larger surpluses.

As we’ll explain in the book, the middle class is an irreplaceable reserve of essential mental systems. A large, educated, socially conditioned, gainfully employed middle class was an unintentional innovation of the Industrial Revolution. It is more crucial to economic health than the steam engine or printing press. Prior to the industrial revolution, educated middle classes were tiny. Consequently national economies were minuscule.

Throughout recorded history, inherited control of real property determined membership in tiny, wealthy and educated groups who controlled economic, political and religious power, and ruled over uneducated and impoverished populations. As the Middle Ages came to an end, an explosion of trade and exploration scooped new continents of real property into the economic systems of Spain, Portugal, Holland and England. In 17th century Holland and shortly thereafter in England, trade dramatically changed the balance between real property and personal property, while expanding the distribution of both. The Industrial Revolution that followed marked an explosive growth personal property in the quantity and types of constructed systems and of relatively well educated middle classes to create, to produce and to service them. Governments established new kinds of property rights including corporations, banks, stocks, bonds, patents and copyrights. Universal education, risk taking, and hard work became the path to property rights and a personal share in prosperity, social status and political power. For the first time in human history, healthy meritocracies evolved to lead the economies and politics of nations.

However, over the last 40 years in the United States, the reserves of middle class resources have been substantially reduced by three factors: the re-centralizing of every kind of property into the hands of ever fewer people who pass it on by heredity instead of by merit, a degenerating educational system, a declining interest in technical, political, social and economic education, and free trade policies which have systematically drained middle class jobs offshore. The economic recession of 2008 and our difficulties in restoring prosperity are inevitable consequences of decay and destruction of those reserves of well educated and propertied people. Until they are replenished in number and quality, not a quick or easy task, neither this economy nor its national government will be healthier or more manageable. This is not a political or idealistic statement; it is a “medical” engineering prognosis.

An educated, risk taking and hard working middle class is the gasoline, engine, transmission, wheels and chassis of our economic vehicle. Those with inherited wealth are privileged passengers going along for the ride. The poor are hanging on to the outer fringes of society, painfully dragged along the road and hoping to become passengers. The economy has been losing speed because it’s overloaded, running out of gas, losing transmission fluid, leaking oil, losing compression, sagging in the middle and running on bald tires. We’ve been trying to speed it up by flooring the accelerator instead of by refueling and repairing it. The aptness of this metaphor will become blatantly obvious once we classify, quantify and measure vital middle class resources and show how they operate in the economic system.

Getting down to basics

First we have to develop and then use fundamental tools and concepts. Learning about tools and how to use them can be tedious, much like learning arithmetic and algebra. Consequently, some of the essays that follow will not be quick reads because they carefully build a mental system and connect it to the real world. However, let me assure you that study will be worth the effort.

I suggest a helpful trick for those steeped in current economic theory or educationally challenged by personal biases: build this new mental system on a metaphorical vacant lot in your brain by treating it as a hypothetical or fictional alternative to your current convictions rather than as a threat to them. After its finished, and you have a chance to see how it fits, then either tear it down or integrate it with your other mental systems.  Perhaps you could treat this as a science fiction story about a hypothetical world. Like our bodies, our minds have immune responses which vehemently reject alien ideas, unless we swaddle them in playful attitudes.

At the very least, learning how to view the economy in this new way should treat you to a series of Aha! moments .  An Aha! moment happens when something which was hazy or invisible, suddenly becomes crystal clear; like the first time we looked through microscopes and saw tiny creatures swimming in drops of water, or looked through telescopes and saw the rings of Saturn, or came up with a novel ideas.

I’ll do my best to keep the essays simple, clear and interesting. Let’s get started.

____________________

Books worth owning

The Origin of Wealth, by Eric D. Beinhocker, Harvard Business School Press, 2006

Free Trade Doesn’t Work, by Ian Fletcher, U.S. Business and Industry Council, 2010

The World that Trade Created, by Kenneth Pomeranz and Steven Topik, M.E. Sharpe, Inc., 2006

Mastering the Dynamics of Innovation, by James Utterbach, Harvard Business School Press, 1994

Small is Beautiful, by E.F. Schumacher, Harper and Row, 1989 (originally published in 197


[i] For an excellent discussion of healthy economic growth I recommend reading Chapter 9 “Where does growth Really Come from” in Ian Fletcher’s book “Free Trade Doesn’t Work”. We’ll eventually go well beyond his discussion.

Posted in Business Health, Politics, Sustainable Economies | 2 Comments

Waiting for Superman: movie review

Waiting for Superman is a touching, sobering, inspiring and personally challenging documentary. It reveals the dismal picture of our broken education system and a hopeful one of the proven alternatives now only available to a random few. However, if you really don’t give a rat’s ass about children or about their education, by all means avoid this movie, remain blissfully ignorant and stick with FOX News.  

Waiting for Superman is superbly done. It weaves together, into vivid patterns, the lives of five children trying to learn in dead or dying inner city and suburban schools, painful statistics about the national and local school systems, valiant but mostly failed efforts to reform them and successful alternative inner city schools, which provide real, proven answers about how to provide all children with world class educations.

Waiting for Superman focuses on the daily lives inner-city children in New York, Washington D.C, and Los Angeles, and a suburban middle-school girl in Redwood City California. We see in action four of the inner city schools which condemn their students to poverty and failure. We learn that the middle-school girl has been channeled for a slow track to oblivion in an obsolete high school where only a few fast track kids qualify for college. These young children are doing everything that they can to succeed. You observe that in their daily routines. You see it in their eyes and hear it in what they say. The adults who are raising these children are also doing everything they can to motivate and support them; some of these things are heroic acts of love and self sacrifice done with deep love and humility.  However, the broken education systems, in which the inner city children are trapped, will deposit them in high school with 3rd grade educations.

Each child has an opportunity to escape the broken system to a tuition-free, outstandingly successful alternative program. However, for each available slot there are over 20 applicants. The fate of each child rests entirely on being selected at random in a lottery. Historical data shows that some 96% of those selected will go to college, over 98% of those not selected will never qualify for college and most of those not selected will have dropped out of school by 10th grade.  We are privileged to follow each child and his or her parents or grandparent Continue reading

Posted in Movie Reviews | 3 Comments

Supreme Court Justices sold-out democracy in the name of free speech

On January 21, 2010, the Supreme Court, in a 5 to 4 decision, effectively put Federal, State and local governments up for sale to the highest bidders by muzzling our ability to communicate freely. Their “Citizens United” ruling gutted the Federal Elections Commission and its legislative foundation, which had partially balanced the free speech rights of the average individual with those of the rich and powerful.

The five― Chief Justice John Roberts,  Anthony Kennedy (who wrote the majority opinion), Samuel Alito, Anton Scalia, and  Clarence Thomas (the court’s intellectual light weight)―  effectively chose the rich and the CEOs of corporate America over the rest of us.  Political races across the country saturate communication channels with slick ads, which amplify fears, attack incumbents, shout down the average citizen and undermine government. These ads are paid for with massive, shadowy donations from corporations like News Corp (courtesy of CEO Rupert Murdoch, Esquire) and wealthy individuals like the Koch brothers of Texas.

This year’s advertising blitzkrieg supports poorly educated demagogues and opportunists who, if elected, will further weaken our Democracy. However, these individuals do support the agenda of Wall Street and the rich which includes: cripple and eliminate social safety nets, weaken government, deregulate business, allow monopolistic control of communications channels, lower taxes on the wealthiest 1% and continue Bush’s zero taxes on estates of the wealthy.  Most, but not all, of these candidates are Republicans or Tea Party operatives; as are these Justices and the rich and corporate executives who control over 95% of the private wealth of the United States.

I’m not suggesting that the five justices are malicious or part of a conspiracy. It’s simply that their dogmatism is destructive of the freedoms they’re supposed to protect.  They may share this dogmatism because they share a Catholic heritage in which dogma is both the source and the prison of rational thought, and because they were appointed by Republican Presidents, who screened them for interpreting the Constitution as though it were divinely inspired and perfect. I’m certain that they are also applauded as courageous and wise in defense of liberty, by those they hang out with.

Free speech and freedom to drive are similar kinds of rights
Free speech is a treasured right. So too is the freedom to drive safely and rapidly when and where we choose. However, neither freedom is absolute. Each requires enforced restrictions on how it is exercised; particularly by the more powerful among us. To have these freedoms at all, we are required to educate and condition every citizen who speaks freely or drives safely on how to exercise these personal freedoms in limited ways that sustain them for everyone else. Free speech and the freedom to drive Continue reading

Posted in Politics | 1 Comment

Review of the movie “Wall Street: money never sleeps”

I thoroughly enjoyed the latest Oliver Stone movie Wall Street: money never sleeps. I highly recommend it as both entertaining and thought provoking. It is a fictionalized account of the collapse of Lehman brothers and the Wall Street bailout in 2008 and 2009. It provides a chilling and realistic view of the Wall Street culture, its isolation from the rest of humanity, its tribalism, its collective gross ignorance and self centeredness, and its worship of money as the only sign of success or failure. It is a picture that corroborates my own experiences with the titans of banking and industry as CEO of a smaller company.

As the real tribe of Wall Street bozos pays itself another $144 billion in Christmas bonuses, forecloses on homes using shady procedures, sucks up to government for more bailouts and for more freedom to plunder, while simultaneously screaming―through its lackeys at FOX, CNBC and the Wall Street Journal― that Obama is anti-business, I was inclined to think that Oliver Stone pulled his punches and portrayed them too sympathetically.

The term moral hazard is both explained and amply demonstrated in this movie. Moral hazard comes about when people control huge amounts of money, can easily dip into those money pools for personal gain and can hedge away any personal risk for what happens to the money.  The entire leadership of the financial community operates in moral hazard because they control their organizations with the unregulated power of petty tyrants, because they’ve developed complex derivatives which farm-out huge risks to unsuspecting individuals and pension funds, and because they’ve successfully manipulated the government to bail them out with public funds when all else fails.

The fictional story― into which real events, pundits and journalists are woven and put on display, mentally destitute and trivial― is built around the character of Gordon Gekko, played with Oscar potential skills by Michael Douglas. It portrays his initial state of disgrace and ostracism from the Wall Street Tribe; not because if what he did in 1987―his actions were commonplace then and the actions of a piker by Continue reading

Posted in Business Health, Politics | 3 Comments

From paper routes to entrepreneur

My dog, Toby, forced me to get my first paper route at the ripe old age of 10. My father, a no-nonsense Naval officer on duty in Washington DC, was against adding a dog to our family of three kids. He grew up without a dog, and we moved too often, on average at least once a year since WWII. He finally relented under one condition: I was to be completely responsible for the dog, and I had to pay for its food.  My allowance of 25 cents a week was already going to ice cream and candy to satisfy an undisciplined sweet tooth. Besides, it could only pay for one can of horsemeat, the conventional dog food of 1948. I had to get a job before I was allowed to go to the local pound and pick out my puppy from a litter of mutts.

In those days paper routes were the small business ventures of many suburban kids; and I landed a route in my Arlington Virginia neighborhood. Paperboys delivered papers on foot or on bikes, signed up customers, collected from them each month, paid the newspaper companies and kept the differences as profits. Thus, my first paper route paid for Toby’s food, and it initiated me into the world of business, cash flow and profits. From it, and other paper routes, I learned funny and painful lessons about myself, my customers and my father. 

Two lessons stand out:  It’s easier than you might think to successfully cook books and excellence is its own reward.

Cooking the books
My father kept detailed records of everything he spent. I never found out whether this was a habit developed in his childhood, or the result of Navy discipline as a carrier pilot and an executive officer in the Pacific Theater during WWII. For example, in the glove compartment of every car he ever owned was a little black book in which he dutifully entered every purchase of gasoline or oil: date, gallons purchased, price per unit, total purchase price, and mileage on the odometer. He then computed miles per gallon since the last purchase and entered that result. He never once drove off until he had completed this routine.  He was highly disciplined. I wasn’t.

Shortly after I started delivering papers, he ordered me to keep detailed records of my business dealings and personal expenses. He gave me a ledger book, showed me how to set up accounts and then audited my records once each month. On the appointed Sundays, I brought my record book of income, expenses and net cash position down from my room, handed it to him and waited while he carefully read it over.  Keeping these books created two problems for me:  I was not a record keeper by nature, and I was actually spending far more on candy and other treats than my parents would tolerate.  I solved both problems by cooking the books in what I thought were devious and subtle ways.

I seldom made entries as things happened. A day or so before each of his audits, I would start with my cash on hand and work backwards to develop Continue reading

Posted in Business Health | Leave a comment

Tax cuts are bloodlettings of primitive economics

George Washington, fell ill from an infection on December 12, 1799 at the age of 67. He was treated by a bevy of doctors, one of them a close friend. They repeatedly performed the age old ritual of bloodletting to reduce his fever and let out “bad humors.” Within two days they had drained him of almost 4 quarts of blood. He died. He was killed by well intentioned doctors using the best medical practices of the time. He might have died anyway, but the shock of losing 80% of his blood made death certain and swift.

•  Bloodletting killed George Washington
•  Tax cuts and low interest rates debilitate governments and people
•  Stop the bloodletting, provide economic transfusions
•  Raise taxes and interest rates
•  Form and fund Skunk Works teams to modernize economic theory

Primitive economic hypotheses are the problem
Now we know that bloodletting is almost always destructive. However, until the late 19th century, it was the common practice, based on a hypothesis that “bad humors” were released by slicing open veins or attaching leeches. Tax cuts and anemic interest rates are likewise destructive practices based on a laughable hypothesis of trickle-down economics, which was first proposed by the humorist Will Rogers during the Great Depression and then adapted to supply side economics by Republicans during the Reagan Administration. They drain money out of governments, personal savings and pension funds to fund large corporations and the rich. They are supposed to stimulate the GDP by hypothetical, untested mechanisms.  A few economists who advocate these primitive practices actually care about the economy and the public. Many others use them to serve partisan politicians, partisan think tanks or wealthy clients. In the end, their sincerity or lack thereof really doesn’t matter; they’re all killing the economy.

Ben Bernanke and other Federal Reserve board members may be sincere, like the doctor who was Washington’s good friend. But they too lack an adequate theoretical base for sustaining low interest rates and Continue reading

Posted in Politics, Sustainable Economies | 3 Comments