A Turn of the Wheel

I have been reading, well listening as an Audiobook, Thomas Sowell’s “Basic Economics.”

Just finished a very interesting section.  Back in the 19th century, bulk shipping of goods was expensive.  As a result, it was difficult (read expensive) for stores close enough to enough to be accessible to customers for whom the height of personal transportation was a horse-drawn buggy to keep in stock all the things their customers might want.  To fill this void the mail order giant Montgomery Ward arose.  Sears followed suit.  People could look through their extensive catalogs of everything from petticoats to shotguns and have them shipped to them.

These two merchantile giants thrived for a long time on that model.  But times changed.  The urbanization started changing the face of the American economic landscape.

Enter James Cash Penney.  Working as a store clerk in a dry goods store called Golden Rule.  In 1902, he joined a partnership with the owners of Golden Rule to start his own store under his own name.  He soon had two more stores and bought out his erstwhile partners in 1907.  By 1912 he had 34 stores in the Rocky Mountain States.

In addition to urbanization, other innovations were changing the American economic landscape:  the affordable automobile.  The Model T went into production in 1908.  With the automobile it became more convenient for people to buy from a local store–which need not be so close as it had to be when one is limited to a horse and buggy–and so each store could serve a greater area.  More widespread bulk transportation in the form of burgeoning railroads made it cheaper to keep inventory in those stores.  This became more attractive to many people than paging through a catalog, making an order, and waiting for the product to be shipped to them.

Thus began the spread of the “Department Store”.  First Sears, then Montgomery Ward were forced to open their own department stores to keep up. (And both merchants, over the years, have had their struggles with Montgomery Ward closing its stores in 2000.) During this time other department stores such as KMart got their start and grew–and some fell.  Along the way, a clerk in a J. C. Penney store by the name of Sam Walton went into business for himself and…

One of the keys of all this was that each step of the way it was the consumers that benefited.  Given the difficulties of travel and transportation combined with relatively low population densities local stores could only serve a relatively small population.  With such a small customer base, the cost of providing everything those customers, who could have widely different desires, might want would be prohibitive.  It was a lot cheaper for Montgomery Ward and Sears to keep all those varied products in one big warehouse and simply provide paper catalogs to their customers.

Then, as population grew.  Larger cities became more common.  More people had motorized transportation meaning they could venture farther for their shopping.  Individual stores could reach more customers.  And with more customers per store, the stores sold more making keeping a larger and more varied inventory practical.  And, so, instead of having to look something up in a catalog, send an order across the country and wait for the product to make its slow way back to them, customers could drive to the nearby store and pick up what they want right there.  More goods available to them at prices every bit as good as the catalogs available immediately.

But, again, things were changing in the background.  A huge Interstate road system was developed.  Air travel became ubiquitous.  Travel by jet aircraft, once the province of the very rich (dubbed the “jet set”) became the default mode of long distance travel.  These same, or related, aircraft carried cargo to the point where the massive effort of the Berlin Airlift would be a drop compared to the business of any large airport.  Courier services arose promising to deliver packages anywhere in the United States overnight.  Promising and delivering.

And so at the approaching dawn of the 21st century, a vendor started selling books online.  People would browse an online catalog, select books, and have the books shipped to their homes or businesses.  The business rapidly expanded including other products until eventually the selection dwarfed the old Sears and Montgomery Ward catalogs.  Only instead of the slow delivery times provided by 19th and early 20th century transportation, products are delivered within a few days, sometimes even the same day.  Other vendors–Target and Walmart as example and perhaps mindful of the struggles and difficulties old vendors such as Sears and Montgomery Ward faced–set up their own online shopping services.  Indeed, Montgomery Ward, which closed its stores in 2000, relaunched as an online vendor in 2004.

And once again, the consumers benefit.  Enormous selection of products to meet the many and varied desires of the populace delivered quickly at low prices.  And while Amazon remains the giant in that field, as JCPenney was in its and Montgomery Ward in its,  they will remain so only until someone comes up with a new model dealing with changing conditions.  When that happens, perhaps Amazon will adapt quickly and continue, or perhaps not.

Regardless, when the next change happens, provided its allowed to happen and not stifled by excessive government restriction, the consumers will be the ones who benefit.

Advertisements

Solving Poverty by Redistribution of Wealth?

Short one today. (Listening to Sowell’s “Basic Economics” on audiobook so economics has been on my mind lately.)

People who want to “redistribute wealth” talk about the poor and people in poverty and we need to redistribute poverty to end that.  There’s only one problem:  it doesn’t work.

In 2016, the Gross World Product was just under $75.5 trillion dollars.   That sounds like a lot of money.  There’s just one problem.  In 2016 the world population* was just under 7.5 billion people.

If you redistributed all the money from all those business transactions to all the people that’s right around $10,000 for the year.  By American standards, that just means that everyone would be in poverty.

Congratulations, you haven’t redistributed wealth, you’ve redistributed poverty.

Now, most redistribution doesn’t call for complete leveling of income but that illustrates the underlying fallacy of redistribution to solve “poverty”:  there is simply no way to redistribute existing wealth that does not leave at least the vast majority of the human race living in poverty.   None.  It can’t be done, not that way.

If one wants to better the lot of mankind and end “poverty” (or, since poverty is actually a moving target, at least raise what we call “poverty” to something like we would call middle class today) it has to be another way.

Fortunately, there is another way.  Economic growth.  The pie is not fixed. (Do you really think the average person in 1750 when the population was less than 10% what it is today was 10 times as wealthy as the average person today?) And the one thing, more than any other, that spurs economic growth is economic freedom.  This unleashes the creative energies of that entire 7.5 billion people in seeking to better their own lives.  Some will fail.  Some will succeed.  Some will succeed wildly.  Others will see the ones succeeding wildly and copy them.  And the ones who failed, if they’re at all smart, will either catch a ride on the coattails of someone succeeding or try something else and keep trying until they succeed.

There will still be “poor”, as they count it.  But if we could look forward we would shake our heads in amazement at the people complaining about what to us is the wealth of Midas. (As I illustrated in a look backward.)

So, please, if you really want to help the poor, go out and start making that metaphorical pie.  Or at the very least, get out of the way of those that are.

*I’m not sure I believe those population numbers.   After all, for many locations there is a distinct incentive to over-report population numbers.  Higher populations mean more political influence or more money to the location.  There is not, however, any incentive to under-report population.  Thus, I suspect the number is high, but the basic principle remains even though the details may be off.

The Plane (part 2)

Last time we left carpenter turned capitalist John retired, with his capital passed on to his son John Jr.

This time we take a look at John Sr’s old workshop.  It’s still sitting there.  John Jr. could go into that workshop and start doing carpentry.  That’s one measure of the value of that workshop sitting there.  Another is that he could simply sell it and let someone else worry about doing the carpentry.  But there’s a third possibility.  Someone, let’s call him Andre, approaches him.  Andre wants to do carpentry but Andre doesn’t have any tools or workshop.  Andre could, in principle build his own workshop and acquire his own tools but there’s this one John Jr. has.  So he suggests John Jr. let him work in it.

There’s just one thing.  By letting Andre use the workshop John Jr. is denied any other benefit he could obtain from that workshop whether selling it–intact or parted out–or working in it himself, or even selling tickets for people to come see John Sr. the Famous Plane Maker’s first workshop.  Whatever would get him the most benefit, that’s what he’s denied by letting Andre work there.  Reasonably, then, John Jr. can justly demand recompense for that loss either in a straight fee (Andre basically rents the facility in the same way folk rented John Sr’s planes) or he can perhaps work out some other deal, perhaps some small portion of each sale would be passed on to John Jr.

In the latter deal, John would be investing in Andre’s carpentry business.  And it’s entirely valid that John be paid for this because he’s providing the means, the capital, for Andre to do his carpentry and generate an income.  By investing in Andre’s business, he’s denying himself whatever other benefit he could have obtained from that capital and deserves compensation for that.

Let’s suppose Andre, as it happens turns out to be a pretty good carpenter and gets lots of business.  He needs a bigger shop.  He could take the time and effort to build the shop (denying himself paying work in the meantime).  This is just the same thing I discussed yesterday with John Sr. and his first plane, only on a more comprehensive scale.  The principle is the same.  But another thing he could do is go to John Jr. and have John Jr. provide the expansion facilities.  And, John goes and finds somebody who can build the expansion and pays that person.  But in so doing once again, John is deprived of whatever benefit he could have gained from the resources he expends–both in the time and effort he spends and that he pays to the one doing the work–and deserves compensation for it.  This can be either a straight payment up front or a portion of future sales from the carpentry business.

Andre now has a bigger shop, and more work than he can handle.  So he finds Billy.  Billy is a carpenter too (lots of carpenters in this town–probably have a large export business with all this carpentry, or maybe it’s just a really fast growing place with lots of new construction).  Andre suggests that Billy work in his newly enlarged shop.  All Billy has to do is the work that’s provided for him.  He doesn’t have to go find customers.  He doesn’t have to negotiate prices for work.  He doesn’t have to make sure customers pay or have to deal with collections when the customers are slow in paying.  He makes the pieces and gets paid for it.  Andre does all that other stuff.  But, since Andre is doing that, he’s not doing other things that could be making him an income.  He’s losing on his personal income by doing that work that permits Billy to have an income.  So, to compensate him for that, he keeps a bit of the pay from each carpentry project (and John, by providing the facilities, keeps a bit too).

Soon Andre has a dozen carpenters working for him and isn’t doing any carpentry himself.  Instead, he’s doing all the things that let those carpenters focus on their carpentry.  And his little bit, from each of the carpenters working for him, may add up to more than any one carpenter’s income.

Billy, sees that he’s doing the carpentry and Andre is not, and notes that Andre is making more money than him and, frustrated, decides to leave and set up in business for himself.  Then he wouldn’t have to share any of his income with the “useless” manager, Andre, and the “parasitic” investor, John.  There’s just one problem.  Billy now has to do all the things Andre and John did.  He has to provide his own tools and work space.  He has to obtain his own materials.  He has to find customers, deal with setting prices, and collect payment.  And unless he’s better at those tasks than Andre and John were, he’s likely to find that he’s actually making less than if he were in the workshop (factory in fact) owned by John and run by Andre.

So the same principles that applied to John Sr. and his plane apply to John Jr. and his factory.  And it’s entirely proper that the people providing capital, the means of production, be compensated based on whatever benefit they could obtain through alternate uses of that capital.  And the people managing capital be compensated based not on the “labor” they provide but on the value they bring to the enterprise.

 

The Plane, or Why Interest is Justified.

This is my own telling of one of Frederic Bastiat’s essays.  I like it because it makes clear, why those to provide capital–the means of production–are entirely justified in receiving ongoing recompense for providing that well beyond.

Suppose there was a rough carpenter, let’s call him John.  He makes a certain amount of money in a year from his work.  John, however, decides that if he could do finer, more finished, work he could make more than he has before with which he can provide his family with a few more luxuries.  The key that John needs to do this is a plane for smoothing his work and preparing it for the more exacting tasks of sanding and the like.  A tool something like this:

carpenters plane

So, this being the case, John sets out to make himself a plane (for purposes of this exercise we’re presuming that everything is done by individual craftsmen, there are no factories.  We’ll get to what factories do to the situation in another post).  To do this, he takes some time off from his carpentry, foregoing the income he could otherwise be making but he grits his teeth and accepts that because once the plane is done he’ll be able to make more money and putting off a bit now for future gain is worth it to John who understands the concept of deferred gratification.

So, after some days, call it ten, John has his plane.  That plane has cost him what he could otherwise have made in those 10 days.  He is out ten days of income, but in return for that he has a plane.

Before John another rough carpenter, call him Karl, comes up to John and sees that plane.  He has the same idea as John, that with it he could make more money.  So Karl asks John to loan him the plane for a year.  At the end of that year Karl will return the plane–with any damage completely repaired so it’s in exactly the same condition as when he received it–for John to use.

Sounds fair, right?  At the end of the year John is out nothing.

Except John is out something.  He is out what he could have made with his carpentry if he had use of the plane.  The deferred gratification of working for something that will make him more down the road is one thing.  Deferring gratification still further for nothing?  That’s a whole different ballgame.

There is only one way that Karl can get the use of that plane for a year (I mean, other than stealing it):  that’s to offer John not just the plane back at the end of the year, but something additional to recompense John for not having use of the plane for that year.  Now it need not be all that John could have made using the plane.  After all, John isn’t having to do the work with it either.  And, of course, if Karl is just giving to John all the extra the plane provides to him, well, he’s not going to want to make that deal.  But somewhere between those two extremes they can come to an agreement.

The plane, in this case is Capital.  It is a means of production, specifically a means to produce finer, more “finished” carpentry than that provided just by hammers and saws.  And the one providing the Capital receiving compensation for providing it is only right and proper.

Now, let’s continue a bit.  Once John makes the deal with Karl, instead of going back to his rough carpentry, he makes another plane.  Because he’s done it before, the new one only takes him eight days to make.  When he’s done with this one, another carpenter, call him Edward, approaches him to make a deal like Karl’s.  John, of course, is willing, on the same terms as his deal with Karl.  Now, this might seem unfair since it only took him eight days to make this one while it took ten to make the one he rented to Karl but there are two things:  by loaning out the plane he’s giving up the same value from what he could do with the plane and Edward is gaining the same value from having use of it.  Indeed, the cost of producing the plane was completely left out of the deal with Karl, only the loss of use of that plane was considered.  So the deal is made and John goes back to making his next plane.

In the end, if there are enough rough carpenters out there looking to upgrade to doing more fine work, John soon finds that he is making his income entirely by providing planes to these other carpenters.  And everyone benefits from it.  John benefits because his return from providing means of production to the carpenters supplies his income.  The carpenters benefit from producing more value because they have access to these means of production.  They could produce their own planes as well, sure, but that would involve that up-front expenditure of time and effort and, well, it’s just easier and cheaper for them to continue paying rent to John.  And, finally, there’s more fine carpentry work available for people to obtain and appreciate.

And, when their yearly rental is done, Karl et al still want to do their fine carpentry so they continue the rentals.

And, of course, if John decides to charge too much for plane rental, why then Karl, or Edward, or any of the other carpenters (or even not carpenters) decides to make their own plane and before you know it John has a competitor.

Now, in the end, John dies and passes the ownership of all these rented out planes to his son John Jr.  After all, they’re his property and he can do what he wants with it.  John Jr., who never was a carpenter to begin with, continues to rent out the planes to all the carpenters.  And even though the person who is providing the means of production has no personal use for those means (not a carpenter) he is still providing the same value as John Sr. did.  The carpenters benefit from having a means of production provided for them  rather than have them do that for themselves.

This, then, is the essence of Capitalism.

Dealing with Bad Reviews: A Blast from the Past

I’ve had a few over the years.  Not many because, frankly, I’m not big enough to come to the attention of most reviewers.  Still, the question sometimes arises “what do I do when I get a bad review.”  The usual advice is to ignore it or even be grateful for a review (a number of writer friends of mine report getting about the same bump in sales from a bad review as they get for a good one).

Still, sometimes that’s not enough and one feels the need to do somethingmore.

Isaac Asimov had a method of dealing with bad reviews.

  • Write a clever, witty, rebuttal to the review that discusses the reviewers lack of intelligence and breeding in the most scathing of terms.
  • Read over your rebuttal.  Chortle over the best bits.
  • Share the rebuttal with your significant other.  Laugh together over how thoroughly you skewered the reviewer.
  • Print it on 100% rag paper.  Fold it neatly into thirds.
  • Put the rebuttal into a #10 business envelope.  Address it to the reviewer.  Put a stamp on it.
  • Tear it up and throw it away because you’ve gotten all the benefit you’re ever going to get out of it.

I heartily endorse this method.

Tariffs

Way back when then Presidential Candidate Donald Trump started talking about imposing tariffs I went into full facepalm mode.  Economically, tariffs are bad news.  They are a net drain on the economy.  “Protectionist” tariffs at best help a few at the expense of the many.

Let me expand on that a bit.  Take for instance iron.  A nation, call it Industria, can produce iron internally at, oh, 100 ID (Industria Dollars) per ton.  Another nation, call it Ferria, can produce iron, and ship it to Industria, at 80 ID per ton.  This makes the ironworkers (and the owners of iron producing businesses) very unhappy since either nobody buys their iron and they go out of business, or they have to find some way to match Ferria’s price.  This usually means making more with less which among other things means letting a lot of the former ironworkers go–much to their displeasure.

Enter the President of Industria.  He imposes a 20 ID per ton tariff on imported iron.  Now Ferria iron costs just as much as Industria iron.  And there was much rejoicing among iron workers and iron producing business owners.

All is good, right?

Not really.  This is what is seen.  There’s a flip side the “unseen” that Frederic Bastiat spent much time talking about.  By imposing that Tariff, the President of Industria has saved the iron making industry and lots of jobs.  But he’s done so by depriving every user of iron of the lower cost iron that Ferria would have made available.  That means everything that is made of iron and steel, everything that’s built with iron and steel machinery, everything that’s transported over iron rails, in iron and steel vehicles will cost more.  The iron workers were “saved” at the price of higher costs and lower standards of living for everyone else.  That part is “unseen” but it is nevertheless real.

Economically, there really isn’t any good justification for tariffs.

However, I have found reason to moderate my initial reaction to Trump’s talk of tariffs because while there’s no good economic justification, there can be other justifications. (Indeed, Bastiat makes that very argument–that there can be valid reasons for tariffs and other taxes, just not reasons based on economics.)

One of the reasons falls under national security.  If a nation allows itself to become entirely dependent on foreign supply of materials and industries critical to its defense, that nation is vulnerable to having that supply cut off.  In an ideal world every nation would recognize that it is in its own interest to trade freely on the open market in all these goods.  If they have a scarce resource that trade allows them to obtain the goods and services that make up the wealth of nations.  If one nation can produce goods more cheaply than another, it is in the other nations interest to trade for the cheaper goods in exchange for things the other nation cannot produce so cheaply.  In a free trade environment, everyone benefits.

The problem is, we don’t live in an ideal world.  Nations can make decisions based on things other than sound economic principles.  They may decide they are more interested in hurting you by depriving you of a resource they have than they are in reaping the benefit of that resource.  So, one needs to either have sufficient stockpiles of the critical goods to carry through a conflict, or to have the ability to produce those goods domestically, even if not as cheaply as a competitor.  An that may require a tariff on the competitor’s goods to support certain critical industries.

Another case where tariff’s might be of value is retaliatory.  If a nation has imposed tariffs on your nations goods, it might be valid to impose tariffs in rebuttal.  Ideally, the goal is to convince the other nation that tariffs to restrain trade are a bad idea and get them to the negotiating table so that you can eliminate tariffs entirely.  That may or may not work and you can end in a trade war that hurts everybody so extreme caution must be taken in when and where to use retaliatory tariffs.  But in the right circumstances, they can be valid.

And that is why I have had to moderate my position on President Trump’s proposed tariffs.  Other nations are starting to respond with suggestions of reducing or eliminating existing tariffs on American goods, which, if implemented, will have the benefit of encouraging trade generating more wealth and increasing the goods and services that make up the wealth of a nation available to people not just in the US, but in her trading partners.  A true win-win scenario.

As for the worries about a trade war?  We were already in one.  We just weren’t fighting back.