LTUE 2016 & persentation

We have just finished up with LTUE 2016. It was a busy 2 days for me. EA (Emily) Younker and I were able to give our presentation; Faith, Followers and Fanatics: The Devine in Fantasy and Science Fiction. I would like to thank those who participated in the presentation. Some asked if they could get a copy of the paper. I will gladly send a copy, just drop me a short line at my email address; bhallredgen@gmail.com . Thanks again for coming to our presentation and watch here over the coming weeks for new posts on economic and financial concepts and thoughts.

The Colonial System and Its Impact – Part 3

The discovery of America and that of a passage to the East Indies ... are the two greatest and most important events recorded in the history of Mankind. (Wealth of Nations, Bk IV, chapter 7, paragraph 166)

 

             I have been discussing the impact of colonization on the home country and on the colonies themselves. In Part 1 of this series we looked at why nations establish colonies. Colonial expansion traditionally had three benefits to offer. First, raw land and its vegetable production. Second, animal production which is different yet linked to the first benefit. And third, mineral production which in the time of Smith and the colonization of South America by the Spanish and Portuguese was specifically for silver and other precious metals. Mother nations kept a tight rein on colonies to protect their markets and so tended to develop monopolies in trade and goods.

             In Part 2 we looked further at trade and monopolies particularly as they related to Great Britain and saw the other costs and expenses associated with colonies. The British people were bearing a tremendous cost to keep the colonies (America) in line and producing for the home markets as well as selling finished goods to them from the English side of the pond. It was costing England a very pretty penny to have a captive source of raw materials and a captive market for finished goods.

             So, if all this colonization was such a good thing why were so many, especially those ungrateful American colonies so unhappy? The idea of a fair deal and the ability to make a pound sterling at a reasonable expenditure of labor and materials was making many colonists very unhappy as they felt they were not getting what they wanted or deserved. This is where taxation comes to the forefront. As we saw in Part 2, Britain needed to be compensated for its costs of providing government including a stable courts system and for its protection against other nations (standing army and navy). Additionally, the colonies were expected t0 pay something towards the total cost of being a great nation since the colonies received the benefits of this umbrella coverage. However, as Smith points out, “colony assemblies... [will not] levy upon their constituents a public revenue sufficient not only to maintain... their own civil and military establishments, but to pay their proper portion of the expense of the general government of the British Empire seems not very probable.” (Wealth of Nations, Bk IV, ch. 7, para 155) Britain felt it had every right to establish the taxes necessary to cover the costs. How were the colonies who did not see or know the big picture going to have any idea what were necessary expenses for the defense and support of the whole empire. Smith assumes that Britain would be fair and reasonable because it is in the best interest of the Empire. Something that may or may not have been believed by the colonists. And the colonies had a firsthand example of Britain’s assumed  altruistic nature in the monopoly powers granted to various British trades and industries. Such monopoly powers were not fair and definitely not reasonable in the colonists eyes.

             What then could be done. The colonies were up in arms over taxes which were a symptom of the bigger problem that they felt they couldn’t get a fair deal (think monopolies). There needed to be another way of allocating costs of government. Smith suggests that there could be an assembly comprised of representatives from every part of the Empire. Such representation could be based on some measure of involvement in the Empire. He suggests the allocation of representatives could be based on the proportion of the produce of taxation. Where more taxes are generated, more representation is given. Produce or finished goods would be taxed consistently throughout the Empire so the area that is more efficient or larger for that matter, all other things being equal, has better representation. Let me let Smith summarize the possible outcome. Remember this is in the 1770’s. “Such has hitherto been the rapid progress of that county [America] in wealth, population and improvement, that in the course of little more than a century, perhaps, the produce of America might exceed that of British taxation.” “ The seat of government would naturally remove itself to that part of the empire which contributed most to the general defense and support of the whole.” (Wealth of Nations, Bk. IV, ch.. 7, para. 165)

             If the revolutionary war hadn’t happened, would we be speaking British English and governing the British Empire from somewhere along the East Coast of America? Who knows.

Reference:

An Inquiry into the Nature and Causes of the Wealth of Nations

Adam Smith (1723-1790)

http://www.econlib.org/library/Smith/smWN.html

Over Scheduled, Some Quick Wisdom and A Story

I have spent the last several months trying to survive my own mire. It was one of those situations that I just kept saying yes to projects and people. I have most of the brightly burning fires put out and actually have just a couple of major on-going projects.

 I need to write the final part (part 3) on the Colonial System and Its Impact and I have some new, what I think are exciting, ideas to discuss. I believe they will be helpful and interesting.

 For today’s economic thought I want to quote from Paul Volcker, former Chairman of the Federal Reserve, which he gave in a speech in 1999. “About every ten years, we have the biggest crisis in 50 years.” That statement needs to be plastered on every wall around your desk. Just a gentle reminder that every crisis is not new or earth shattering in spite of what the financial news or talking heads may insist.

 To get into the proper spirit of things I want to tell a story which happened to me at one of the activities I was involved in this past month. Wood Badge. For those unfamiliar with it, this is adult leadership training for the Boy Scouts of America. Very good training not only for scouting but also for corporate, non-profit or other organization assignments. Among other things it teaches principles of working with small and medium sized groups. All around good stuff.

 My story relates to something that happened during the second half of the course. For this story I will tell you that there are actually a couple of true facts, one  of which is that I damaged my little toe. It was black and blue and I think I probably broke it, the toe, and definitely broke a blood vessel in my foot. I had a bruise that spread across all my toes and a little bit up the inside of my foot. It hurt like all get out and is still a bit sore and swollen some 2½ weeks later. My wife asks me every so often if I am going to get it looked at by competent professionals (i.e. a doctor) or not. I am still deciding.

 So, I heard a commotion outside my tent one evening a couple of weeks ago. I was attending Wood Badge with several others and was in my tent in the staff area of camp. Now I know you will tell me that what I did was really dumb but I stepped out of my tent in my bare feet. I know, I know, really dumb but there you have it. Well, I stepped out and looked left across a small creek into a stand of quaking aspen, beautiful trees, just in full leaf. Our camp was up pretty high in the Uintah Mountains just south of the Utah border on the Wyoming side. We had received 5 inches of snow earlier in the week. Anyway, as I looked into the trees I was a bit surprised but not alarmed to see my friend KC coming toward our camp pretty fast and being tailed by a bear. Now you may find it a bit hard to swallow that KC was being chased by a bear but the bear wasn’t some ol’ grizzly, only a black bear, I would guess about 2 or 3 years old and if worse came to worse I figured the bear wasn't that much heavier than KC and KC knows how to fight dirty. I wasn’t too concerned for KC at first but became more concerned as I watched. The problem, the bear seemed to be gaining on KC. Now it wasn’t gaining real fast but appeared to definitely be gaining and KC was looking a bit worn. As KC was headed my direction I figured I should try to help a bit. So as KC and the bear came by I decided to reach out with my foot... Ah now, I see that you caught the implication of my act immediately. Bare foot, bear. Anyway, I reached out without fully thinking things through and with my foot roundhouse kicked the bear in the backside. Wouldn’t you know it, my little toe got caught in the bear's hide and it separated itself from its fellow toes like one of Spock’s Vulcan greetings. It really hurt and I went limping off as fast as I could in the opposite direction from KC. The bear was so startled that it stopped dead in its tracks and turned toward me. This gave KC enough time to get around a large tree and I hobbled to another one. The bear was so disgusted with the two of us he huffed and shambled off in another direction. I am afraid you won’t be able to collaborate this story with KC, however. If you ask KC about it he will tell you that the story isn’t true. He will tell you that the bear was not gaining on him but that he was running so as to keep the bear just behind him. Yes, he admits he was looking worn but it was a ruse to fool the bear into thinking he, KC, was getting tired. He says he was wearing it down and would have had it, the bear, all tired out in another 20 or 30 minutes and so didn’t need my help. In fact he accused me of cruelty to animals and thought about reporting me to the proper authorities. He decided in the end not to report me because he said he thought it would be hard to convince the bear to be a material witness. Well, that’s the story and I am sticking by it.

 Anyway, don’t believe everything you hear, either from me and not from the Federal Reserve or from economists. The sky may be falling or not but the news isn’t likely to know one way or the other regardless of what they say. Plus, always remember, bankers (investment or commercial) are always friendly but seldom are they your friends (in a professional capacity).

 

And that’s the rest of the story.

The Colonial System and Its Impact – Part 2 (Giving It All Up)

            In part 1 we began the discussion of colonies and the destructive nature of monopoly powers as discussed in Adam Smith’s Wealth of Nations. Smith is adamant that trade monopoly especially  relating to colonies is destructive. “All the original sources of revenue, the wages of labour, the rent of land, and the profits of stock, the monopoly renders much less abundant than they otherwise would be. To promote the little interest of one little order of men in one country, it hurts the interest of all other orders of men in that county, and of all men in all other countries.” (Wealth of Nations, book IV, chapter 7, paragraph 146) His sentiments are fairly plain even if the sentence structure is a bit mixed. Remember he was writing in the 1770’s.

             Smith finds great potential in colonies and colonial wealth generation possibilities. He suggests there are three things that greatly help a colony to properly prosper by their commerce. One, there needs to be a “general liberty of trade” as Smith describes it. The producers of goods need to have access to markets and the knowledge that those markets will treat them fairly and promptly. They need to be paid for their produce or goods in a consistent, reasonable and as timely a manner as possible. Two, the less interference, constraint or cost of moving goods and produce the better. Profits can quickly be lost with high or frequent duties or tariffs on transportation. Further, limits on exporting will greatly affect the ability to move goods and receive the best price. In France during and just prior to the time of Smith, farmers were barred or greatly hindered from moving grains from one district to another thereby forcing artificial prices and production based on district, not on best production practices. Smith was very aware of the need to move produce and goods easily without hindrance by laws or officials and with a minimum of costs (other than transportation expenses).

Third, and this is the most important, Smith suggests that there must be equal and impartial administration of justice. There needs to be an equality under the law regarding land, land use, selling and producing goods. He suggests that these are the most important things for allowing improvement and prosperity.  The laws must be administered in a fair, reasonable and consistent manner.

             So we return to the initial statement by Smith in Part 1 – “Great Britain derives nothing but loss from the dominion which she assumes over her colonies”. He has a novel solution. He suggests that Great Britain voluntarily give up authority over her colonies. Let them elect their own legislatures and establish their own laws. They can make war or peace as they see fit and trade with whomever they desire on whatever terms they can establish. Let them charge whatever prices for their goods and produce markets will bear. He suggests four advantages to Great Britain. First, she immediately is freed from the cost of providing a standing army and naval support. If the colonies want protection they can contract to provide such at some agreed on payment thus providing a revenue source for Great Britain’s military operations. Second, as a recognized government the colonies could enter into commerce treaties that would be of greater benefit to the majority of Great Britain at the expense of the current monopoly powers. The merchants with monopolies would lose their lucrative contracts but the general populous would benefit from cheaper goods and produce. Third, Great Britain would generate a great deal of good will with the colonists and her own citizens. The prospect of self-government is a potent medicine for the colonists and better and cheaper goods and produce a strong inducement for the citizens of Great Britain. Fourth, the colonies may in fact favor and even support Great Britain in war. Smith suggests that instead of the colonists being “turbulent and factious subjects” they would become “our most faithful, affectionate, and generous allies”. Here then is Smith’s answer to the problem of the colonies, however he suggests that most if not all great powers will not establish colonies just to let them become independent because it goes against the very nature and pride of a nation. He also suggests that the act of freeing a colony is “contrary to the private interest of the governing part of it”. He suggests that those who govern want to control, if only for the chance to build wealth or distinction for themselves or other personal interests. He suggests that keen self-interest is stronger than altruistic nation motives. So, regardless of the potential upside benefit the current status quo no matter how costly will likely prevail.

             Next paper, Part 3. If Great Britain won’t give the colonies their independence how do they get paid for their expenses and costs and just what that might lead to.

The Colonial System & Its Impact – Part 1

Under the present system of management, therefore, Great Britain derives nothing but loss from the dominion which she assumes over her colonies. (Wealth of Nations, Book IV, Chapter 7, paragraph 151)

 

             Adam Smith in his seminal work on economic theory, The Wealth of Nations, wrote the above in the 1770’s. He was referring to the cost of nations supporting colonies in general and the American Colonies costs to Great Britain specifically. So why was the British government willing to support the American colonies in such a situation? Colonial expansion traditionally has three things to offer the state (as Smith calls the home country) first, raw land and what it could produce. Second, animal production which he distinguishes from vegetable production but could still in some sense be considered supported from the land. And third, mineral production.

             Smith discusses this three legged stool for supporting colonization in his review of Columbus’s discovery of the new world. He suggests that Columbus entertained the notion that he had discovered the lands of Marco Polo’s travels and all the rich trade long after it became evident that was not the case. Columbus needed to show that his discovery of the America’s, if not the vast hoped for lands did have some considerable value. Columbus could not show vegetable or animal produce that was exceptional at the time so he flattered himself that he had found exception mineral wealth, namely gold and silver. Smith suggests that in consequence of this representation “the Castile determined to take possession of countries of which the inhabitant were plainly incapable of defending themselves. The pious purpose of converting them to Christianity sanctified the injustice of the project. But the hope of finding treasures of gold [or silver] there, was the sole motive which prompted to undertake it.” (Wealth of Nations, chapter VII, prt 1, page 72)

Spain and Portugal scoured most the lands of the Western Hemisphere looking for the mineral wealth and in most cases initially ignored possible land wealth. There were some that were interested in non-mineral opportunities and these people saw early the potential of land. This allowed an opportunity to get something that was not available in populated Europe or Great Britain where serfdom and lifelong servitude with little chance for improvement was much more normal. But land with its possibilities was available in the new colonies of America, especially for British subjects. Smith suggests that agriculture is the proper business of all new colonies because the cheapness of the land gives strong advantages. Cheap land allows the production and sale of cheap produce which, because of the cheapness makes it possible to export. The colonies need manufactured goods which can be imported. So why Smith’s opening statement? He suggests that granted monopolies were a significant problem and one that lead to problems of cost and eventually revolution.
             The shopkeepers and other traders of England wanted to control the power of providing all manufactured and other goods to the colonies so as to capture what they saw as the wealth being generated. If the colonists could only spend their money on England’s goods then all the benefit would flow to England. Further, they enacted that the colonies could only sell their produce to England except in certain rare cases where they had to sell it to faraway lands that British merchants didn’t care about. Thus began early price control. Smith states that the maintenance of this monopoly was perhaps the sole purpose of the control by Great Britain over the colonies. He further suggests that any cost paid to maintain this control has been to maintain the monopoly for British shopkeepers and manufacturing.  To support the monopoly, Smith states that the state was willing to cover the costs of 20 regiments of soldiers and the expense of food, pay and military provisions, the cost of maintaining a naval force sufficient to discourage smuggling along the entire American and West Indies coasts.

Additionally, there was the cost of various conflicts with other nations including the Spanish war of 1739 which should also be included in the tab charged to colonial protection. So, Smith argues that all these costs are not offset by the benefits of monopolized trade gathered from the colonies and including any taxes collected. That is why Smith suggests that the colonies are a loss to Great Britain.
             In following papers I will explore Smith’s comments on alternatives to keeping colonies (and the benefits possible) and the motives of politicians. I think you will find them interesting and provocative.

Government Statistics and Raising A Child – How Not to Read the Data

             We got the call we have been hoping for from our daughter the other day. She said, dad, we have a foster child. Our daughter and son-in-law have passed all the tests and done all the preparation to be foster parents. They have been looking forward to the opportunity with excitement and some concern. Our daughter could have said, dad we have a foster child, now what do we do? But they didn’t. It is a little interesting because they were expecting an older child and instead have an 18 month old. A little different than they were expecting but we are all pleased and so are they. I have been thinking about raising five children (really Margie raised five children and I tried to be helpful and not cause too many problems) and the attendant questions and thoughts I had when first starting out. We are now looking at being empty nesters in just a couple of years.

             So, how did we afford to raise five children? Well, it wasn’t by reading the USDA reports on the cost of raising a child, even back when we started the process. A CNNMoney article titled “Average Cost to Raise a Kid: $241,080” as quoted by Melanie Hicken, August 14, 2013 on money.cnn.com states “From day care to the monthly grocery bill, the cost of raising a child is climbing at a rate that many families can’t keep you with.” The article says that a U.S. Department of Agriculture report released Wednesday (August 14, 2013) says the cost of raising a child from birth to 18 is up 3% from 2011, not including college to as much as $441,100 ($24,505.56/yr). The average cost is $241,080 ($13,393/yr). If we assume each child cost that much (the article doesn’t differentiate between one and several children) then Margie and I would not have been able to afford 5 children during the early years we had all of them at home on my salary.

             The problem with this kind of data and other related and interesting ideas is discussed in a new book I recently picked up by Charles Wheelan titled Naked Statistics Stripping the Dread From the Data. I find his writing informative, entertaining and thought provoking. It sort of reminds me of a book from several years ago titled How to Lie with Statistics by Darrell Huff. The premise of Wheelan’s book is that we need to use statistics correctly and if we do we can gain some important insights into our daily lives and what is happening to us. On the other hand he suggests that there are some statistics that if used incorrectly lead us to very erroneous conclusions or can even kill us. The above article is one of those cases that can lead to some very poor choices. One of Wheelan’s chapters is titled The Importance of Data: “Garbage in, garbage out”, another chapter is titled, Deceptive Description: “He’s got a great personality!” and other true but grossly misleading statements. I think you can see where I am going with these chapters from Wheelan. We need to be particularly careful in just reading the news headlines or even the actual article because the information may very well not give us what we need.

             So, for example, in the above article the discussion didn’t include anything about economies of scale, meaning the 2^nd child doesn’t need all new cloths or need a new bedroom for himself. Both “facts” the government study didn’t seem to take into account. In our case Margie was good at making the money fit the needs. For the record, you don’t need to spend $13,000 / year / child (the average). One article I found more helpful (“Cost to raise a child can be much less than USDA estimate” by Sarah Gilbert, June 14, 2010) suggests costs may be as low as $2,500 / year / child (for 3 children in this article). I think the actual total for each of us may be somewhere in-between. Which also makes sense as all of us do things differently. Again, the above statistics can give us an average but that may not be very helpful. If you are familiar with the Phantom Tollbooth by Norman Juster, in one of his encounters the hero meets the fractional child from the average family. This is kind of like that, the average cost of raising a child is not likely to really give you much helpful or useful information.   

Mark Twain famously remarked that there are three kinds of lies: lies, damned lies, and statistics. I think we could also say something like that about data. There are three types of data: data, damned data, and statistics. That is important to remember whenever you are presented with the “facts”.

Playing in the Sand Pile – Observations About Sand in Your Shoes – Part II

             I really am more organized than I sometimes seem. I had an outline of the topic I wanted to write about tonight. I started about four hours ago thinking I would be done in an hour or so. Well, it isn’t an hour later (as my previous sentence suggests) and I deviated quite a bit from the original outline. However, I feel that I need to lay this groundwork tonight. I cannot over emphasize the importance of being wary of economic and financial models or money schemes or the best investment you could ever make. Regardless of what Ben Bernanke (of the Fed) or Tim Geithner (of the Treasury Department) or leading economists (with lots of letters and abbreviations behind their names) or your neighbor (it is such a hot tip) or your best friend or a member of your religious congregation or your financial planner, tells you - be suspicious (in a nice way if you think you need to).     

             Previously we touched on the idea of the sand pile effect in nature and modeling. It includes such  concepts as nonlinearity and the critical state, is often known as complexity theory and sometimes called chaos theory. These ideas and concepts are discussed by Mark Buchanan in his book Ubiquity Why Catastrophes Happen, who we looked at briefly last blog and Nassim Nicholas Taleb in Fooled by Randomness who we have discussed several times.

             Let’s illustrate nonlinearity. Suppose we are enjoying a day at the beach with nothing better to do than build a sand tower as high as we can. As the tower increases with each bit of sand we add there comes a point that one more bit of sand causes the entire tower to collapse and slide down. This illustrates a nonlinear effect resulting from a linear force exerted on an object. Our tower suffered a disproportionate collapse from a very small additional input, namely a little bit of additional sand. It the sand pile would have reacted in a linear fashion we would have expected the small bit of sand to have a small impact. There are some idioms that incorporate this idea, the straw that broke the camel’s back or the last straw, or the drop that caused the water to spill. I can remember my father saying something like “that was the last straw” as he explained to me why I was being punished for what I thought was a fairly minor infraction and not worthy of the severity of the particular punishment I was receiving.

Taleb suggests that the nonlinear dynamics has what he calls the bookstore name of Chaos Theory. Taleb further suggests this is a misnomer because the theory has nothing to do with chaos or randomness instead, chaos theory does concern itself mainly with functions in which a small input can lead to a disproportionate response. A little bit of sand generates a massive sand slide. Buchanan suggests a slightly different but similar definition in his comment on what he calls the critical state. He says it represents “…a special kind of organization characterized by a tendency toward sudden and tumultuous changes, an organization that seems to arise naturally under diverse conditions when a system gets pushed away from equilibrium.” Buchanan says this is the first landmark discovery in the emerging science of nonequilibrium physics. Remember he is science writer and has a Ph.D. in theoretical physics.

             Look at the sand pile example again. Suppose you were to apply the nonlinearity principle to your commute home. A trip could take from a few seconds to months. Or suppose you are coming to the corner of the street. What is the likely height of the next person to come around the corner towards you. If we are in the sand pile the person could be from inches to miles high. Yet we have examples that follow this nonlinearity. Why is Bill Gates so rich. Is it because he is an intellectual giant compared to the rest of humanity. Or perhaps he is so much more intelligent than the rest of us. He may very well be of above average intelligence and superior work ethics and have high personal standards. But is he so much better as to deserve to be so wealthy. An element of nonlinearity or luck would better account for it. Economies, markets and social arenas tend to be nonlinear.  There really isn’t a mathematical model that can successfully model this type of activity. The model has to have a random element. Having said that, there are many who try to model parts and bits of things but the full, rich experience which makes up the world around us is difficult and complex. Think of weather models, how successful are we in predicting how much rain will fall on our backyard tomorrow, then one month later. If weather was linear we should be able to predict both time periods with great accuracy. Taleb suggests that one reason we get in trouble with economic and financial models is that some “…intelligent people who felt compelled to use mathematics just to tell themselves that they were being rigorous in their thinking, [and] In the great rush [to develop models] decided to introduce mathematical modeling techniques… without considering the fact that either the class of mathematics they were using was too restrictive for the class of problems they were dealing with, or that perhaps… the precision of the language of mathematics could lead people to believe that they had solutions when there were none.“  The purveyors of economic and financial models may try to convince us that their models do include enough “mathematics” to describe the particular situation but from our examples of tonight it seems very unlikely that the models will stand any test of time or uncertainty.