CRISES

Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.blog

Crashes and Crises: Lessons froma History of Financial Disasters

By: Professor Connel Fullenkamp

Great Courses Lecture Series

Connel Fullenkamp (Professor of Economics at Duke University)

Professor Fullenkamp makes one thing clear in “Crashes and Crises”. Financial disasters are an inevitable consequence of all nation-state’ economies, regardless of their form of government. Fullenkamp reaches back to the 1600s to explain how, and why financial disasters are inevitable.

In part, it is because of the nature of humankind.  Fullenkamp notes human error and criminality are facts of life. What the public must do is educate itself.  History is a teacher that tells the public there have always been hucksters that say they can make you rich with little or no risk.  From Charles Ponzi, to Ivar Kreuger, to Bernie Madoff, there have been “get rich schemes” that victimized the public.

From swindlers, to gamblers, to financial model builders, to inept leaders, Fullenkamp recounts American, French, Zimbabwean, Indian, Japanese, Taiwanese, Mexican, Dutch, and German financial disasters.  Fullenkamp’s argument is that crashes and crises are a normal part of financial activity. What he explains is that financial crashes and crises are unavoidable, but he suggests they can be mitigated.

Fullenkamp explains how and why technology increases the potential consequence of human error and criminality in financial crises.

Fullenkamp notes the danger of derivative models. They are packaged investments that can be so complicated that only the creators know how they work.

Major investors, like Warren Buffet called derivatives “financial weapons of mass destruction”. 

Fullenkamp notes that investment models are often complex. The personal motives of financial model creators, and the lucrative incomes for investment analysts and sellers can make derivatives dangerous. However, Fullenkamp is not against derivative investments. Fullenkamp’s advice is that if you do not understand a derivative investment, and its potential risk cannot be explained, the investor should walk away.

The 2008 world financial crisis is an example of a derivative model that nearly collapsed the American economy. 

The derivative model was based on real estate mortgages that were bundled and analyzed to be worth more than their value; particularly, if individual mortgagees went into default. 

Because of imprudent lender qualification of mortgagees by companies like Countrywide, more and more bundled mortgage-backed securities became over valued. Many of these mortgages were sold to FannieMae.

When several mortgages in an investment bundle went into default in 2007, investment bundles crashed. FannieMae held many of the mortgages because they were fobbed off by mortgage lenders as soon as home mortgages were closed.

Because of FannieMae’s relationship with the federal government, the U.S. treasury was at risk when mortgagees defaulted.

The federal government was compelled to buy FannieMae’s defaulted mortgages which exacerbated the 2007-08 financial crises.

The derivative’s crash caused financial institutions, investment houses, and individual investors to either fail, or sell their derivatives at a discount. That caused an international economic crisis.  It became an international crises because bundled mortgages had been purchased by world-wide investors and institutions, many of which were also invested in the American economy.

The sellers of these mortgage derivatives failed to clearly understand what they were selling or, more greedily, took advantage of their marketability. Fullenkamp implies it is as much the buyer’s as the seller’s fault by making bad investment decisions.

Fullenkamp reaches into history to show many other financial crises and crashes.  He covers economic bubbles in tulips, international trade shares, mining stock investment schemes, the economic panic of 1907, the effect of hyperinflation in Germany and Zimbabwe, the 1929 crash, and more recent events like the dotcom bubble, and rogue trader debacles.  Many of the bubbles Fullenkamp identifies are a result of investor’s “irrational exuberance”, a phrase used by the former Chair of the Federal Reserve (Alan Greenspan) in the 1990s.

Next, Fullenkamp goes into some detail about the danger of shadow banking.  Lending without government oversight becomes more tempting during an economic crises.  Shadow banking is unregulated lending that theoretically is not subject to government oversight or regulation. Without checks and balances in a market driven world, unregulated lending hides or distorts GNP growth. 

Fullenkamp ends his lectures with a warning about China’s shadow banking.  He moderates his warning by suggesting China is not near a crisis, at least at the time of these lectures. 

To some listeners, his warning gains some urgency based on China’s declining economy during the Covid19 crises. Of course, Fullenkamp implies shadow banking is a risk to all nation-states in 2020.

Fullenkamp acknowledges the importance of government regulation of financial activity.  He notes changes in American law after crises have occurred.  He notes a primary example in the secrecy of stock listings that was eliminated by disclosure requirements of the federal government. 

Some argue government actions, after the 2008 economic crisis, saved the American economy.  

What might have happened without the leadership of George Bush, Barrack Obama, Ben Bernanke, and their Treasury Secretaries, Henry Paulson, and Timothy Geithner?

With the economic impact of Covid19, one doubts President Trump, Secretary of the Treasury Mnuchin, and his administration are up to the task of dealing with 2020’s burgeoning financial crises. With the added dimension of social unrest from George Floyd’s murder and Trump’s obnoxious law and order comments, it is difficult to be optimistic.

EGYPTS REVOLUTION

Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.blog

The Buried-An Archaeology of the Egyptian Revolution

By: Peter Hessler

Narrated by Peter Hessler

Peter Hessler (American Author, and journalist.)

Peter Hessler chooses to move from China to Egypt just before the 2011 Egyptian revolution.  He, his wife, and twin newborns live in Egypt for five years.

Hessler worked for The New Yorker as a staff writer from 2000 to 2007 and became the magazine’s correspondent for China from 2011 to 2016. 

Hessler looks at Egypt through the eyes of an American who lived in both China and Egypt as a reporter.  His perspective melds Chinese and American acculturation with interesting incite to Egypt’s history, language, and politics.

Egypt is a fascinating country for anyone who has visited or read about its ancient civilizations.  With brief comments about Egypt’s historic monuments and museums, Hessler touches the culture of modern Egypt. 

Hessler notes the extraordinary ability of Egyptians to hold two opposing thoughts and adjust behavior to accommodate both beliefs.  On the one hand, there is a sense of “let it be” when minor or major events occur in the lives of modern Egyptians.  On the other, there is a history of autocratic Egyptian rulers who insist on strict control of society.   In view of the many non-Egyptian’ governments after the Pharohs, it comes as no surprise that Egyptians are adaptive.

Sadat, Mubarak, & Nasser were military dictators before the election of Morsi who is deposed in the revolution by today’s military leader, Abdel Fattah el-Sisi.

Hessler comments on the ability of Egyptians to learn languages at varying ages of maturity.  Language skill is the lingua franca of the ability to adapt. 

From ancient times of the Assyrians, Persians, and Greeks; to more modern times of the Ottomans and British–Egypt remains Egyptian despite their adaptability.

Hessler offers an understanding of Egypt through the eyes of its citizens.  He recounts the tumultuous relationship of an entrepreneurial garbage collector and his wife.  The garbage collector is illiterate.  His wife can read and write.

The garbage collector is in his 30s when he marries his 18-year-old wife.  Their marriage leads to three and then four children.  The garbage collector is exiled from his children with the threat of divorce initiated by his conservative wife.  His wife follows Egyptian culture in covering her face but rejects some of the discriminatory aspects of a patriarchal society.

Hessler’s garbage collector is a great source of information about Egyptian culture because of the details he knows of other lives based on what Egypt’s citizens throw away.  The collector is scrupulously honest about the garbage he collects.  When he finds something in the trash that has value he returns to his customer.  It is a matter of pride; stoked by belief in a cosmic or religious wheel in his mind that tells him what is right.  However, the wheel seems to stop when it comes to relationship with his wife and children.  This leads to what Hessler suggests is a fundamental flaw in modern Egypt; i.e. women’s inequality. 

Because the collector’s wife knows how to read and write, she files an appeal to the court to strip her husband of his house and property.  She files for divorce but recants after finding the consequence of such action would make her and her children destitute.

Surprisingly, their tumultuous relationship becomes less combative as their life together matures. Their personal trials seem a paradigm of Egypt’s “let it be” and autocratic culture.

Hessler reports on the ponderous, corrupt justice system that both aids and thwarts the intentions of married couples seeking help.

Women are discriminated against based on their sex in Egypt. 

Women are raised to believe their role in life is to have and raise children, and take care of their husbands and families.  Girls are not afforded the same educational opportunities as men.  Women are expected to sacrifice their entrepreneurial right to a job when they are married.  Hessler notes female children are routinely genitally mutilated. This is a tradition based on a belief that sexual pleasure and desire are a threat to society. Hessler compares the torture of genital mutilation to the Chinese tradition of binding women’s feet.

Hessler compares Chinese with Egyptian culture to expose the consequence of sex discrimination.  The potential of women’s contribution to the economy in Egypt is eviscerated by its culture of discrimination.

In an adults most productive years, Egyptian housewives cannot work for pay outside of the home.  If a woman has a good job, she is expected to relinquish it when she is married.  In contrast, Chinese women are full participants in the economy.

 

Parenthetically, Hessler notes Egyptian homosexuals are persecuted for their sexual preference.  The irony of that homosexual persecution is in Egypt’s patriarchal culture that discourages social contact between the sexes.  Putting aside genetic predisposition, without social contact with women, male relationships become the only acceptable form of intimate relations.

Egypt’s demonstration against a crackdown on LGBT’ rights.

Hessler’s book is interesting because of his firsthand knowledge of the revolution that removes Morsi from the Egyptian Presidency.  In many conversations with Egyptian residents, Hessler notes the weakness of the Brotherhood in Egypt; both in number and in qualification for political leadership. 

Hessler contrasts the military with the Muslim religion of the Brotherhood.  The military has a long history in modern Egypt.  The tradition of strong leaders has an even longer history.  The Brotherhood is characterized by strong leaders who only press religion; without understanding the nature of society that desires order, safety, and economic opportunity. Order, safety, and economic opportunity are a “good despot’s” alleged intent.

Mohammed Morsi (Fifth President of Egypt for 1 year until removed from office by General Abdel Fattah el-Sisi. Morsi dies of a heart attack in 2019.)

Hessler shows the Brotherhood as an association of religious believers that have little organizational skill.  They are not educated to lead.  They are educated to worship.  That educational limitation exhibits itself in Morsi’s weak government.  Egypt flounders economically with the election of Morsi.  One can argue it is still floundering under el-Sisi but Hessler shows the military is more prepared to lead based on the tenants of worldly desire rather than religious worship.

Egyptian Brotherhood Rally

(In a population of 80,000,000, there are an estimated 600,000 dues paying members of the Brotherhood; of which 100,000 are considered militant.)

Hessler explains there are many conspiracy theories surrounding the Brotherhood’s influence in Egypt. Their small numbers and inept management skill seem unlikely to create a successful uprising in Egypt. The Brotherhood’s revolutionary impact seems symbolic more than real. However, one realizes Russian Bolsheviks were a small minority in 1917.

Abdel Fattah el-Sisi (Current President of Egypt)

Hessler notes that el-Sisi’s popularity is diminished by missteps in funding infrastructure improvements at the expense of more direct economic need.  He cites the expansion of the Suez Canal as an example of a prudent long-term aid to the economy but a neglect of medical services, justice reform, and housing needs for today’s general population.

There is also the issue of repression by el-Sisi.  Hessler recalls the incident of a tortured, and then killed, foreign student that criticizes the current government.  The author notes that el-Sisi’s defenders suggest the murder was an accident caused by young and inexperienced supporters of el-Sisi. 

In recalling my personal trip to Egypt in 2019, the Brotherhood is a big concern of the government. Tourism is a big industry for Egypt. That industry nearly dies with the election of Morsi. Some Egyptians feel something is getting done with el-Sisi; while no economic progress happened with Morsi.

Hessler offers a glimpse of the hardship Egypt faces in the 21st century.  His observations are at a local level of Egyptian society; not at the obscure level of a thirty-day tourist.  Time will tell if el-Sisi is the answer to Egypt’s failing economy. 

Sisi is acknowledged by Hessler as a good communicator.  Sisi is truly an Egyptian focusing on his perception of what Egypt needs now; not the religious salvation of the eternal.  The biggest criticism of Egypt’s leadership in Hessler’s book is the unequal treatment of women.  There seems no action taken by el-Sisi to address that reality. One wonders if the economy is likely to grow quickly enough to avoid another revolution without gender discrimination reform.

GARDEN OF EDEN

Yarbrough (Blog:awalkingdelight)
Website: chetyarbrough.blog

New Zealand in 2019

Written by: Chet Yarbrough

Having the wonderful experience of visiting New Zealand as an America tourist was like visiting a biblical Eden. However, no country is without political controversy.

On the one hand, New Zealand has the ambition of being an ecological Eden with no natural predators and a perfectly balanced environment.

Is that realistic? How can nature be nature without predation? From times untold, wild animals have eaten each other.

And then, there are humans. Humans are by nature predators. Environmental degradation is accelerated by economic prosperity.

American media gives positive marks to the current Prime Minister of New Zealand, Jacinda Adern. In part because of her immediate response to the Christ Church mass shooting but also because of her environmental effort to reduce greenhouse gases and pollution.

Adern is also lauded for her response to the Covid19 crises.

New Zealand is blessed with renewable energy sources from geothermal-power, hydro-power, and a burgeoning wind and solar power industry. Not that this is something only the Prime Minister has done in her short term, but it illustrates the environmental sensitivity of the country.

Prime Minister Adern is not universally applauded by fellow New Zealanders. Contrary to Adern’s press coverage in the U.S., many New Zealand farmers seem quite upset with Adern. We had the happy opportunity to spend a day and night with a farming family in New Zealand.

The farming family we spent time with explains there is a conflict between New Zealand’ farmers and the current administration. Over 45 percent of New Zealand is farm land. It is distributed among farmers that have an average size farm of over 350 acres. An important distinction between our countries is that American corporations may use farms as a tax shelter while New Zealanders use farm land to produce more product. There are few if any corporate farms in New Zealand. New Zealand farms are owned by real farmers.

However, farming is a major polluter of land in America; as well as New Zealand.

Over 50% of methane and nitrous oxide in the world comes from farm animals. Adern puts the burden of correction on private farms. Over 50% of methane and nitrous oxide in the world comes from farm animals. Cattle, sheep, goats, deer, alpaca, llamas, goats, and chickens are common farm animals raised on New Zealand farms. Land, water, and air quality issues being raised by the current administration are a big concern of the farming community.

New Zealand farmland regulation is creating a furor among some farmers that are being told to change their practices to reduce pollution. The cost of these changes are to be borne solely by the farmer according to the farm family we visited.

Real farmers in both America and New Zealand have a reputation for being independent. That independence is distorted by corporate ownership in America but not in New Zealand. The New Zealand farming community is made of farmers who work the land. One gets the impression they will not re-elect Ms. Adern unless she changes direction.

The irony of what we were hearing is that farmers like all people are concerned about the environment. The problem is in the cost of adjusting farming practices to accommodate environmental concern.

From an outsider’s perspective, the solution seems simple. Farmers in New Zealand are not constrained by corporate farming practices like America. New Zealanders do not farm to shelter income but to produce product. It would seem reasonable for the government to assist New Zealand’ farmers financially to adjust to less environmentally damaging practices. The perception we had from the family we spent the night with was that the current government wants all of that cost to be borne by the farmers.

When the word subsidization is mentioned, both husband and wife of the New Zealand farm family seem to wince. Without knowing the history of farming subsidization in New Zealand, one wonders what happened in its history.

As long as real farmers are producing groceries there seems every reason for tax dollars to be used to help farmers mitigate pollution. Farmers are as concerned about the environment as environmentalists. Where would the world be without food production and real farmers?

Visiting other countries is a guilty pleasure. It is an expensive undertaking that many cannot afford. We loved our time in New Zealand. One sees there is no perfect country. Every country has its discontents; America, not withstanding.

BULLY OF THE WORLD

Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.blog

The Accidental Superpower

By: Peter Zeihan

Narrated by Peter Zeihan

Peter Zeihan (Author, American geopolitical strategist)

“The Accidental Superpower” is a wild ride.  Peter Zeihan is a geopolitical strategist and futurist who argues that geography is destiny.  His prognosis for America is perversely positive.

Zeihan suggests America is in the “cat bird” seat for this and the next (yet to be born) generation.  The “cat bird” seat implies a superior position of survival in a world headed toward crises.

“The Accidental Superpower” is a cautionary tale that suggests the tail will wag the dog. 

If America’s current actions and future intent is to abandon Bretton Woods’ history, then Zeihan implies wars will continue, famine and pestilence proliferate, millions will die, and self-interest will be humanities’ only interest.  In the era of Trump, Zeihan shows the reach and potential of bullies in the world. 

Zeihan builds a credible and terrifying argument.  The Bretton Woods Agreement was created in 1944.  Its purpose was to set up a system of rules to ensure economic stability around the world.  Zeihan notes that America has steadily abandoned the principle of Bretton Woods since 1973 when the U.S. suspended the gold standard for the American dollar. 

It is not to suggest that the gold standard should be re-instituted but that the American dollar became the new standard for world economies.  In part, because the basis for economic wealth became the American dollar.

The American dollar gives the United States an outsize influence in the world. That influence is reinforced by an unparalleled military/industrial complex.

The resources of America became a primary standard for economic stability in the world.  Zeihan argues the legitimacy of Bretton Woods is replaced by the geographic existence of the United States.  America is bordered by two oceans, blessed with an internal river transport system, natural energy resources (including Shale oil which makes the U.S. oil independent), a replenishing labor force (supplemented by immigration), and economic growth. Therein, Zeihan explains America is capable of ignoring the rest of the world.  

This is a disturbing book.  It opens the door to an America dreamed of by ignorant nationalist like the current President of the United States. Zeihan infers the United States can be the bully of the world because of its military superiority, wealth, and geographic isolation. 

Empathy is an essential characteristic missing from a nationalist credo that believes it is “my way or the highway”. With a belief system based on “self-interest”, and the mantra of philosophers like Ayn Rand, the world seems destined to destroy itself. 

Zeihan supports his future predictions with a logic borne from geographic facts, history, and philosophical belief.  Zeihan’s perception of the world’s future creates fear and trembling in any who choose to believe it.

A few of Zeihan’s predictions are:

  1. China will not grow to be a superpower and will follow the path of Japan with an aging population that cannot maintain its economic growth.  The diverse nature of its population is hidden by the false belief that the Han people are of one mind.  Internal dissension will rise.  China is subject to river flooding and hemmed in by mountains and narrow waterways.
  2. Russia will covet the land of other nations because of an economy that rests on dwindling natural resources, a harsh environment, and lack of international trading ports.  The Tatar and Chechen populations will continue to plague consolidation of power in Russia.
  3. South African nations will suffer from starvation because of its lack of arable land.  Angola is one of the few African nations that may escape that fate because of its fertile land and young population.
  4. The European Union will fail because of nationalism, a lack of a viable common currency, and its failure to consolidate political power.
  5. Great Britain will become more dependent on the U.S. for trade and survival.
  6. Turkey will strengthen its influence and control over the Middle East through military strength and a young and growing population.
  7. Uzbekistan will become a more powerful independent nation because of its relatively young population and abundant clean energy (largely from hydroelectricity).
  8. Australia and New Zealand will prosper because of its vibrant agricultural economies, and ocean-bound isolation.
  9. Saudi Arabia will fail as an economic powerhouse because of its dependence on foreign labor for all industrial development. Saudi citizens are minor participants in the labor market, and unprepared to compete in an industrialized world.
  10. Iran is demographically young but burdened by an arid climate.  Its religious intolerance will be an impediment to economic growth.
  11. Spain, Portugal, and Italy are vulnerable to outside influence, inflation, high unemployment, and growing economic weakness.
  12. Germany may once again rise as a belligerent state because of its need to expand to continue its economic growth.  Its driven and well educated population reinforces industrial and technological growth.
  13. Canada will become a failed nation because of its aging demographics and diverse population.  Failure will only be abated by its relationship with the U.S.  Zeihan suggests Alberta should consider becoming part of the U.S. because of its one industry dependence (oil).
  14. The relationship between Mexico and the U.S. will improve because of proximity and mutual trade benefits.  The drug war will continue and perversely improve the Mexican economy. Drug war areas will be isolated to narrow parts of the country.
  15. Climate change is real, but its impact will be mitigated in the U.S. with hardening infrastructure in coastal cities that will mitigate or abate flooding.  Most of Florida will disappear under water.  Many island archipelagos will also disappear.
  16. Pakistan’s diverse population will continue to disrupt political control of the country.  Its conflict with India will continue despite diminishing financial support from the U.S.
  17. India’s economy will suffer from environmental degradation.

In conclusion, Zeihan suggests America will remain a superpower with outsize influence on the success or failure of other nations. 

A caveat might be America may become the bully of the world; at least until a nuclear war or accident decimates the environment. 

There is good reason to have fear and trembling for this world’s future if “self-interest” is the only criteria for well-being.

American Capitalism

Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.blog

Americana, A 400-Year History of American Capitalism


By Bhu Srinvasan

Narrated by Scott Brick, Bhu Srinvasan

Bhu Srinivasan (Author, American citizen born in India, Emigrated at age 8 to the United States with his mother.)

“Americana” is homage to the muscular success of capitalism in the United States.  It appears it takes someone born outside America to unapologetic-ally endorse the gift of capitalism to the world. It seems Bhu Srinvasan lives the American dream in the 21st century. 

Srinvasan “leans in” by arguing libertarian-ism’s strengths outweigh its weaknesses.  “Americana” speeds through the history of great men (because women’s contribution is largely ignored) who settle America in the 17th century.  With the help of English entrepreneurs willing to risk investment in the voyage of the Mayflower, the egg of American capitalism is hatched. 

Mayflower Replica

(The Original Mayflower Sailed September 6,1620 and landed on Cape Cod 66 days later, which was 500 miles north of its intended destination in Virginia.)

The investors expect a return on their investment.  They finance the expedition based on an expectation of success from a settlement in Virginia.  The first years of the Pilgrims’ progress is nearly a bust.  The author explains the initial investment is nearly lost but recovered by an agreement among the settlers to buy out their Mayflower investors.  The buyout is a success because the settlers find a ready market for American goods in England; particularly beaver furs which were provided to settlers by native inhabitants.

With growth of the fur trade, new settlers come to America.

The beaver fur business is expanded with new settlers who learn how the Indians ply their trade.  Competition grows and undoubtedly many tribes are shut out of the trade.

This, as in many more stories told by Srinvasan, reminds one of the boon and bane of capitalism.  That is not Srinvasan’s intent, but the effect of competition from acquired knowledge, new technology, and entrepreneurship is repeated many times.  There are winners and losers in the growth of capitalism. What is one life worth?

There is an “end justifies means” theme in Srinvasan’s view of America. This is an attitude reflected by President Trump’s suggestion on March 24, 2020 to re-open America in April.  The reality of quality-of-life improvements in America makes Srinvasan’s, and some would say Trump’s view, a worthy subject of contemplation.  America is the most economically successful nation in the modern world.

Srinvasan glosses over issues of slavery, racism, and corporatism. Trump’s suggestion that America should be reopened for business in April of 2020 is a judgement that suggests ends justify means. The spread and human impact of the coronavirus is unknown.

Many of the harsh realities of a transactional economic system bare down on America with exposure to the coronavirus. Do ends justify the means? 

Carnegie, Vanderbilt, Ford, Rockefeller, Morgan, Edison, Westinghouse, Watson, Gates, and Jobs are a few examples given for the success of American Capitalism. 

What is missed is the “blood in the water” from changes wrought by these men of steel, automobiles, energy, finance, communications, transportation, and technology.  With each advance in American ingenuity, there is a general rise in America’s standard of living.  Indeed, Bhu Srinvasan himself is a tribute to the success one can have in 21st century America. But, Srinvasan tells only one side of the story.

Homelessness in America is a disgrace.  Rat infested ghettos in large American cities perpetuate poverty and crime.  A deteriorating education system is gamed by the wealthy who neglect what can be done to help the poorly educated. 

Corporations have a duty to educate people displaced by technology.  Government needs to move beyond the transactional value of health care to provide basic health services to all Americans.  Environmental degradation needs to be abated before the world’s 6th extinction. 

To ignore the price paid by a growing underclass in America, is side-stepped by Srivasan’s “…History of American Capitalism”. 

America capitalism can do better.  We are no longer a struggling economy like that which existed in the days of the Pilgrims and later so-called robber barons.

Srinvasan is an excellent primer on capitalism but that is history; not a prediction of a future where homelessness, a deteriorating environment, a failing education system, inadequate health care, and racial injustice are ignored.

AMERICAN TAXATION

Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.blog

A Fine Mess (A Global Quest for A Simpler, Fairer, and More Efficient Tax System

By: T. R. Reid

Narrated by T. R. Reid

T. R. Reid is a reporter for the “Washington Post”.  He is not an economist.  However, he suggests there are more equitable ways of taxing the American public than presently used by the government.

Reid’s travels around the world investigating other countries tax systems are the basis for his theory for cleaning up America’s “…Fine Mess”. Sadly, Reid has a futile unrealistic attitude that the British characterized as pissing in the wind.

Reid suggests a tax overhaul is due in America.  The last major revision was over 30 years ago.  He argues a mess has been created by incremental tax changes that have greatly exacerbated the wealth gap in America.  Reid illustrates the many ways in which the American tax system is a mess.  An often-quoted factoid is “Warren Buffet is taxed at a lower rate than his secretary”.

There are many economists that would agree with Mr. Reid.  The most famous is the French economist Thomas Piketty who wrote “Capital in the Twenty-First Century”. 

Reid argues the U.S. has the highest corporate tax rate in the world but the lowest corporate taxes collected.  Having the high rate and collecting it are two different things. 

Reid notes corporations like Caterpillar, Apple, Microsoft and others spent millions of dollars to set up legal tax shelters that reduce corporate tax to single digits; to as low as zero for some. 

Reid goes on to explain how billions of dollars are kept in corporate accounts outside of America to avoid taxation, and how that money is not repatriated to the U.S. because of current tax law. 

(Ironically, during Trump’s administration, corporate rate was reduced from 35% to 21%; and continues to be a significantly uncollected tax.) 

DEFINITION BBLR

Reid persuasively argues that a tax overhaul should be made based on the principle of BBLR, a “Broad Based Low Rate” tax.  The purpose of a tax overhaul would be to eliminate loopholes, broaden and reduce tax rates while equalizing citizen’ tax burden.  Schemes for creating tax shelters would be eliminated.   

As is widely known, millions of dollars are spent by American citizens and corporations to file tax returns.

Preparing and paying taxes is laborious and confusing task for many Americans.  Even basic tax return filings are difficult for many American citizens to complete.  How many do not file because of that difficulty?  Some buy software to file taxes.  Add to software purchases and there is only growing tax-preparation costs to file for others. Those costs are borne by individual tax payers. The expense of our inefficient, and inequitable tax system multiplies geometrically when you add corporation efforts to avoid taxes.

America’s taxing inequity is glaring.  Millions of dollars are spent to avoid taxation through creation of tax shelters.  The formation of these shelters costs millions in lawyer, tax consultant, and auditing fees but save billions of dollars for corporations and the super-wealthy who legally (sometimes illegally) reduce taxable income.

“Occupying Wall Street” is not a hippie “sit in” but a plea for reform of American “moneycracy” just as Thomas Paine’s “Rights of Man” was a plea for reform of Aristocratic inheritance.

Reid’s point is that America’s “…Fine Mess” can be made simpler, fairer, and more efficient by creating a completely new tax system.  He suggests the corporate tax might be eliminated and replaced by a flat rate with no loopholes.

Reid argues for a “Value Added Tax”.  A VAT would be a combination of local taxes and federal taxes on all consumable goods. 

After collection, this tax would be distributed between States, and cities, as well as the Federal Government.  The purpose of these taxes would be for maintenance of local services (like education, public safety, public works, and administration), and Federally mandated services (like national defense, health, education, and public welfare).

Reid’s argument is that VAT’ enforcement would require less supervision by the government because a VAT applies at each stage of the production of goods.  Each stage of production is rebated for taxes paid by the handler that adds value. The VAT is a combination of taxes at each stage of production which is reported to the government for reimbursement.  The reimbursements must add up to the final tax charged to the consumer.  If the numbers are not the same, the IRS will be able to tell which manufacturer failed to pay their tax.

A simple computer program would be able to monitor the collection of the tax because it must balance to all reimbursements of added value.  In theory, a VAT eliminates much of the need for a massive Internal Revenue Service which Reid suggests is unable to adequately monitor the present taxation system.  Reid notes that it is impossible for the IRS to closely monitor today’s taxing system because of the complicated nature of its Congressionally legislated structure.   

Another BBLR tax recommended by Reid is a financial transaction tax that would be low but capitalize on every financial transaction in the United States. 

This transaction tax would be less than a penny per dollar but capable of raising billions of dollars based on the many financial transactions that occur in the U.S. 

Reid offers the example of Hedge Funds that specialize in massive trades for short periods of time.  These Hedge Fund trades move the stock market by fractions that reap millions for traders.  With a tax on financial transactions revenue would be created for Federal Government programs that serve the health, education, and welfare of the nation.

What concerns a listener about Reid’s argument for a Value Added Tax is its potential for continued inequity.  The poor may have to pay the same price for food, energy, and shelter as the rich.  Reid does not adequately address that concern except to suggest a system would be established to offset that inequity.

Another concern, inadequately addressed by Reid, is the impact on Hedge Fund traders business if they lose the advantage of small changes in quick trades. Will Hedge Fund transactions disappear?

Political will is another issue not adequately addressed by Reid.  What majority of congress men and women will stand up to the many lobbyists who support them in their election?   Will most Republicans and Democrats co-opt or fight special interests that object to a massive change in the American tax system? 

Finally, how would America deal with the lost jobs for tax lawyers, tax preparers, software developers, and corporations that benefit from tax preparation and tax avoidance schemes?

One may agree with Reid’s assessment of America’s tax system.  It is a “A Fine Mess”.  The question is–Do our elected representatives have the political will to clean it up; or at least make it fairer? 

Incremental change of the tax code only makes it less intelligible. In Reid’s opinion, it is all or nothing.  Reid implies “go big” or “go home” because nothing will change if the entire tax code is not replaced.

JOB CREATION

Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.blog

The New Geography of Jobs

By Enrico Moretti

Narrated by Sean Pratt

Enrico Moretti (American author, econonomist, and Professor of Economics at the University of CA.)

Enrico Moretti suggests jobs in America have a new geography.  As a professor of economics, Moretti notes how technology reshuffles the nature and location of jobs around the world.  Great manufacturing cities like Detroit, Pittsburgh, and Chicago are losing jobs in the 21st century.  More jobs are moving to places like Seattle, Portland, Silicon Valley, and Austin.  Tech employment is creating more jobs away from historic manufacturing hubs.

Manufacturing job losses 1997 to 2012 as a percentage of working age populations.

Manufacturing jobs are declining in American cities. That decline is memorialized in a New York Times magazine; distributed in the May 5, 2019 Sunday paper.  The human cost to Lordstown, Ohio, when G.M. closes its Cruze automobile manufacturing plant, is heartbreaking.

In the early years of tech, companies like Apple, Microsoft, and Google chose business locations based on where they wanted to live; not where labor existed.

Moretti suggests new job creators choose city locations based on factors other than manufacturing labor.  Moretti suggests University locations have some effect, but decisions made by early entrepreneurs seem serendipitous; more than reasoned.  Their initial start-ups may be in any community because their ideas are new.  Their technologies are unproven. Their new employees are generally young, inquisitive, college educated, and innovative.  If these new job creators attract investor interest, they grow their companies through culturally shared purpose.

Not only is there the multiplier effect of unrelated domesticate services, there are new technology companies that choose the same communities. The culture grows to what Moretti suggests is enough density to attract the best and brightest in the world.  Incomes rise for all businesses in that community.  Even though these communities become more expensive to live in, they continue to attract tech companies because of the savvy technological depth of the area.

What Moretti notes is that if new tech ideas have legs, innovators locate in the same area.  Like germs on a petri dish, they multiply to create a new culture. 

Moretti acknowledges foreign manufacturers pay their laborers less but, more ominously, he notes foreign countries are doing a better job of educating workers to more fully embrace technology. That embrace begins in grade school and advances through higher education. China’s, Vietnam’s, India’s, Taiwan’s, and South Korea’s emphasis is on science and mathematics.  In the U.S., Moretti cites numerous studies showing the quality of American education, particularly in science and mathematics, is declining. 

Moretti notes manufacturing decline is partly based on automation, but more fundamentally on a deteriorating American education system.

Science Curriculum Ranking in the world.

The irony of Moretti’s observation is that many graduates of American universities are foreign students that are compelled to leave America when they finish their degrees.  They are unable to remain in America because of America’s restrictive immigration policies.  Adding to government immigration policy limit is America’s failing education system; not only at a graduate level, but at the preparatory level of America’s grade and high school curriculums.

As an economist, Moretti explains the multiplier effect of companies that choose to operate in the U.S. and world where labor is best educated; particularly in the field of technology.  Additionally, Moretti suggests foreign governments are proportionately outspending the U.S. in science research and development.  America is falling behind and risks its future as a multi-cultural center and economic power in the world.

Historically, most Americans are immigrants.  Moretti is certainly right in arguing America’s education system must improve, but that improvement needs children of parents who are intent on making their lives better.

What is missed by Moretti is that immigration is important to America; not only for the technological elite, but for first-generation immigrants.   From that pool of humanity, America became the most successful industrial nation in the world.  That prominent position is threatened by America’s current leadership.

JOBS TODAY AND TOMORROW

Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.blog

The Industries of the Future

By Alec Ross

Narrated by Alec Ross

Alec Ross (Author, American technology policy expert)

Alec Ross’s book about future industries is founded on world travel and observation.  Ross is an historian by education. His wide-ranging view of sociological change is from personal experience with technology and the information-age.

Ross observes social change around the world as a senior adviser to then Secretary of State, Hillary Clinton.  His dizzying travels explain how mobile phones connect the world and change economic, political, and social opportunity for both third world, and highly industrialized countries. 

Ross’s fundamental argument is that “…Industries of the Future” will be based on information technology.  The forefront of that technology rests on software (coding) and human evolution (genetics).

Despite nationalism and the horrendous consequence of Covid19 on the world, Trump-like government leaders who focus on nationalist independence and existing manufacturing jobs are job destroyers; not creators. 

New jobs will not come from expanded labor-intensive manufacturing but from the accumulation and use of data.  Ross suggests coding and genetics will determine jobs of the future. 

Ross infers creators of code are tomorrow’s laborers.  Today, learning how to code is a valuable skill that insures employment through and beyond the 21st century. 

Though there is hyperbole in Ross’s suggestion that today’s coders make a high wage of $100,000+ a year, they do make an entry level living wage with vertical mobility.  As the market matures, coder’s income will undoubtedly keep pace with expanding economies.

Ross shows how coding opens the door to automating the manufacturing world.  Human labor to make things will change to coding labor that ultimately leads to machines building machines.

Artificial Intelligence is common today and will be ubiquitous tomorrow.

The automobile industry is increasingly relying on machine assembly of automobiles.  The manufacturing process still requires human supervision, but physical labor will be increasingly code driven.

Numerous examples are noted by Ross.  Driving a car is simpler because of A. I.  Using GPS maps shorten travel time, gauge traffic congestion, and locate lost devices.   The obvious effect of information technology is reduction in physical labor with employee job change, reeducation camps, and new employment. This is a tough reality for today’s laborers; particularly those who work hard every day.  The rise of A. I. contradicts the industrial age’s moral belief that character is enhanced by hard labor. 

The laborer says, “I am not going to lose my job to a machine”.  From a production line laborer or steel worker of a certain age, it is a message once said by Luddites in the nineteenth century. In the industrial age Luddites began dismantling machinery that cost their jobs.

Job upheaval is frightening.  However, Ross suggests the information-age offers the greatest opportunity for the world since the industrial revolution. President Trump’s populist effort to turn back time creates false hope for many hard working Americans.  

Employees in dying professions should be helped by private industry and the government to retrain and embrace inevitable market changes.

What Ross shows is that industrialized nations that choose not react positively; to be proactive to the information age are destined to decline.  Ross shows how third world countries in Africa see opportunities that were never seen before because of technology. 

With a mobile phone, African men and women have become entrepreneurs because they can communicate with wider circles of influence and support. Their phones become banks for loans and payments; and more importantly, for investment in themselves.

Ross explains another opportunity presented by the information age in farming.  As has been known for centuries, farm productivity is improved by appropriate management and use of natural resources and man-made fertilizers.    That customization increases the world’s food supply in ways that could only be approximated in the industrial age.  Coded farm machines replace day laborer planting, cultivation, and harvesting,

With the advent of automated farm management systems, soil preparation, planting, and harvesting operations can be more precisely customized.

The second fundamental argument in Ross’s book regards genetics.  Understanding of genetic science and our ability to manipulate genetic markers is a wild-west opportunity. 

In theory, genetic modification can be a threat to the ecology of the earth, a monumental environmental catastrophe. 

To Ross, genetic modification is a boon for agricultural and human productivity that will lead the world out of environmental and human crises. 

Giant steps have been and are being made in genetic modification of agricultural products.    Ross notes reports of crop productivity increases due to disease resistance coming from genetically modified seeds.  Ross argues that GMO opponents are wrong in suggesting “natural” agricultural products are any safer than genetically modified food products.

Ross sites reports of GMO foods that show they are equally or more nutritionally beneficial to humankind than non-GMO foods.

Many would agree with Ross’s assessment of the success of GMO production.  However, modification of the human genome opens a much higher level of concern. 

There are moral and ethical questions raised by science and religion with experimentation on the human genome.  On the one hand, it raises the possibility of erasing the diseases of humankind.  On the other, there is the fictional account of the “Island of Dr. Moreau”.  Both concerns are expressed in the controversy surrounding the 2018 human gene editing in Hong Kong by Dr. He Jiankui, a Chinese researcher.

Dr. He Jiankui (Claims to have conducted the first human genome-editing of a human embryo)

Ross approaches “The Industries of the Future” from a more historical than scientific perspective.  His book sees great opportunity in information technology, but proof is largely unborn history.  The technological revolution is not like the industrial revolution because it goes beyond Newton’s laws and only touches Einstein’s.  Ross seems more likely right than wrong but only the future will tell, and only history will prove it.

CORPORATISM

Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.blog

The Price of Civilization

By Jeffrey Sachs

Narrated by Richard McGonagle

Jeffrey Sachs (Author, American economist, Columbia University Professor)

Jeffrey Sachs skewers modern Presidents and lionizes John Kennedy.  Written before 2016, one wonders what Sachs might have written about President Trump.

One can easily agree with many of Sachs’ observations of what is wrong with America but his solutions are academic; not pragmatic.  Sachs is too much of an idealist. Corporatism is an out sized economic benefactor for the United States but, as Sachs infers, it is also American democracy’s greatest threat.

Government checks and balances are America’s only defense against corporatism.

“The Price of Civilization” is an unsatisfying audio book.  Not because it is irrelevant but because it’s saccharine idealism and disconnection from the real world.

Though much of Sach’s criticism of Obama, George Bush, Bill Clinton, and Ronald Reagan is deserved, his professorial economics is cloying because it ignores political reality and the truth of human nature.

The father of American economics, Adam Smith, is the first to have recognized the critical role of politics in economics.

Politics is a social science of give-and-take in both democratic and autocratic societies. The difference is–politics in democracy is practiced among the many; while in autocracy, politics is practiced among the few.

Just as Adam Smith’s “Wealth of Nations” includes politics in economics, Thomas Hobbes’ “Leviathan”, introduces human nature to government. Thomas Hobbes notes Human nature is both good and bad. As logic dictates, politics in economics is both good and bad.

Sachs is spot-on as an academic economist. But he ignores political reality.  Public policy has always been a matter of “who’s ox is getting gored” whether democrats or despots are in control of government.

Sachs cleaves to Platonic and Aristotelian platitudes like “all things in moderation”. To suggest that a philosophical awakening of the millennial generation (those born between 1977 and 1992) will cure American lassitude and political apathy is naive.


Sachs optimistically believes the millennial generation will eschew the luxuries of American dreamers (owning hot cars, nice homes, and beautiful clothes) to become voters for change.  Obama represents those voter’ beliefs but fails politically for the same reason Sachs’ book is a mess.

Changing public policy is not going to occur with an American generation that magically begins believing less is more. Re-election of a new President, whether Democrat or Republican, will not fundamentally change America’s system of choosing corporate winners and losers.

One can agree with Sachs’ observation on 2010’s “Citizens United v. Federal Election Commission” decision. The Supreme Court erred in identifying corporations as individuals with the rights of unlimited corporate donation to electors.

Defeat of gun control legislation shows how entrenched lobbyist organizations can steer the course of public policy, regardless of a democratic majority’s support of policy change.

Sachs is right in his assessment of the wrong-headedness of what he calls “corporatocracy”; i.e. the institutionalization of an election process that is founded on money rather than public representation. 

Human nature gets in the way of doing the right thing.  Humankind naturally seeks freedom.  (Las Vegas demonstration to reopen the economy during the pandemic.)

When freedom of choice is impinged upon, human beings are reluctant to change.   Of course, this is an over simplification but Sachs minimizes mankind’s innate desire for freedom. 

Las Vegas mayor Goodman wants to re-open the economy in the face of Covid19. She believes freedom and survival of the fittest is a matter of human nature; not government fiat.

She infers–if its your time to die, so be it.

Regulation of human activity impinges on free choice whenever one person thinks they know what is best for another.

Human nature is not going to change; i.e. it will always contain good and evil intention. Bernard Madoff comes from the same culture as Warren Buffet. 

Trump and the Republican party’s approved tax law illustrates contempt for the middle-class, and ignores the poor.

Many Americans are disgusted with the political process in 21st century America.  Even the super rich and rich are not satisfied with the status quo.  The rising gap between rich and poor embarrasses the rich.

How can America justify a social security tax for a movie actor’s (or sports star’s) income of millions per year when a middle income family makes $40,000 to $132,900 per year and has to contribute the same amount as a multi-millionaire.

A person with a middle class income will pay 6.2 percent of their income for social security. There is a maximum cap of $8,239.80/year/person. One who makes millions of dollars per year will not have to pay more than that $8,239.80/year; i.e. the same maximum amount a middle income person pays. No wonder social security is going broke.

When one is elected to congress every two years, fund raising becomes the elector’s primary focus of attention.  When corporations speak, electors listen.  Lobbyists and corporate money are more important than the aggregate input of voters.  No wonder American voters are apathetic.

Sachs notes Oliver Wendell Holmes dictum about taxes.  Holmes wrote that he loved to pay taxes because taxes are the cost of civilization.  The weakness of that generalization is in the definition of civilization.  If civilization is that stage of human social and cultural development and organization that is considered most advanced, why does the richest country in the world:

  • 1)have citizens living on the street,
  • 2)have citizens imprisoned-to only isolate and punish, and
  • 3)have children dying because of poor medical care.

When an investor turns a portfolio over to a brokerage company, that investor has to “trust but verify” the actions of the brokerage company in regard to overall portfolio performance.  If the broker under performs the market, the investor knows it is time to change brokers. 

When a government under performs when public tax dollars are invested, voters cannot, without revolution, change governments. 

Sachs accurately notes there is no difference between Democrats and Republicans in the United States.  Both parties talk the talk but fail to walk the walk. Elected officials are too beholding to lobbyists and corporate America.

Americans are reluctant to pay higher taxes because they see no discernible improvement in their lives.  Why invest in a government (pay more taxes) that fails to produce improved results?

Sachs ideas for correcting America’s ills—

  1. Reduce the deficit by cutting military spending and increasing taxes.
  2. Reduce wealth disparity by investing in and retraining an obsolescent work force.
  3. Invest in and improve education with emphasis on primary and secondary graduation.
  4. Create jobs through infrastructure investment.  He argues that dependence on carbon-based energy is to be reduced by conservation with increased investment in alternative energy sources and more scientific research and development. 
  5. He argues that medical insurance should be provided to all Americans with a plan crafted by the medical community.

All of these goals are exemplary but to get there requires a massive (and unlikely) re-invention of human nature.   One could argue that many of these policies were promoted by the Obama administration, but little changed.

It is counterintuitive for a free society to choose moderate consumption.  Add mistrust of the American government and the likelihood of turning more money over to a government that does not work seems stupid to any rationale human being.

Hitler wrote in Mein Kampf, “Industry, technology, and commerce can thrive only as long as an idealistic national community offers the necessary preconditions.  And these do not lie in material egoism, but in a spirit of sacrifice and joyful renunciation.” 

Hitlerian characters are a threat to America when corporatism is the basis of public policy.

CAPITALIST SELF-INTEREST

Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.blog

The Great Coures: Thinking about Capitalism

Lectures by Jerry Z. Muller

 Narrated by Jerry Z. Muller

Jerry Z. Muller (Author, professor of history at the Catholic University of America)

Professor Muller offers an interesting and insightful defense of capitalism.  Jerry Muller’s “Thinking about Capitalism” is an historical account of economic theory. 

Muller explores three economic systems:  
1)market, 2)command, and 3)mixed. In his journey through the history of economic systems, market (aka capitalism) shines brightest.

Muller notes that capitalism is pummeled by many anecdotes of history.  Muller does not deny the excesses of market economies, but Muller suggests capitalism’s benefits far exceed its detriments.

Adam Smith (1723-1790, Scottish economist)

Muller argues capitalism’s storied failures distort its multifaceted values.  In the “Wealth of Nations”, a seminal work on capitalism, Adam Smith clearly explains the value of a capitalist (market) economic system based on self-interest.  Muller notes Smith’s term “self-interest” is often misinterpreted by the public as greed. 

Smith’s definition of self-interest is founded on virtue; i.e. behavior based on high moral values. However,
Self-interest comes in many forms. 

One person’s self-interest may be altruistic in helping others to feel better about themselves.  Another person’s self-interest may be to increase personal wealth to improve their family’s standard of living.  And, self-interest may be associated with greed. The fundamental point is that everyone’s self-interest is a motivation that is ungoverned by an outside force.  Self-interest is a part of human nature.

In a broader sense, there is some truth in the economic cliché of “a rising tide lifts all boats”.  It reflects Adam Smith’s belief in the “invisible hand” that guides one’s life in a market driven economy.  Every individual strives for their own self-interest which offers charity to some, employment to others, and individuated incentive to all. 

Thomas Hobbes (1588-1679)

Thomas Hobbes notes that human nature is both good and bad.  He tempers Smith’s argument for capitalism by suggesting government is necessary to mitigate self-interest that is harmful to the public.

Smith and Thomas Hobbes (author of “The Leviathan) believe self-interest is a universal human characteristic. Smith addresses self-interest as an enlightened Socratic understanding of virtue.  Hobbes is less doctrinaire and implies Socratic virtue is not common in the general population.

Smith argues that capitalism takes the essence of human nature’s natural self-interest to advance civilization.  This advance is not a smooth upward curve but an improving trend.  Bad things do happen in a capitalist society. Hobbes might agree with Smith but only in the context of “rule of law” that mitigates non-virtuous self-interest.

Edmund Burke (1729-1797, Irish statesman)

Muller does not ignore critics of Adam Smith’s “Wealth of Nations”.  Edmund Burke is a noted critic who argues that too many social conventions are sacrificed by disparate self-interests.  He argues that the French revolution is a potential consequence of an economy driven by self-interest. 

The social structure of France is decimated in the 1789 revolution.  History shows “the terror” of the French revolution murdered innocents.  On the other hand, it reformed an economy that left many behind.  Prior to 1789, only the rich owned land, never went hungry, and inherited wealth. In the 18th century, France’s poor are mired in poverty, often hungry; with little chance for advancement.

Justus Möser (1720-1794, German social theorist)

Muller also cites criticism from Justus Möser , a contemporary of Burke, who believed the rise of capitalism (mercantilism) destroys craftsmanship in local economies.  With trade from other parts of the country and world, Möser argues insular communities are harmed by prices of similar products replacing local artisan’s goods.

Möser argues mercantilism destroys the fabric of local communities; foments insecurity and social unrest.  Muller, in part, agrees with Möser’s argument. However, Muller notes Möser’s argument is right and wrong. 

With less money being spent for one thing, more money is available to buy or invest in other things.  What Möser ignores is mercantilism’s benefit to consumers and the local economy. Consumers who buy a product for less money have more money to spend or invest in the local economy.  

Möser’s argument is the same concern raised by those who support today’s trade war.  Möser is right in suggesting free trade creates insecurity in local markets.  It also demands adjustments in labor that harm local artisans, but Muller argues there is a net gain in public good and general welfare with free trade.

Max Weber (1864-1920, German sociologist, philosopher, and political economist)

Muller goes on to explain how a confluence of religion and capitalism benefits society with Max Weber’s melding of Protestant Ethic with the Spirit of Capitalism.  Weber makes the idea of living aesthetically and putting aside savings as a prudent way of living life in an uncertain environment.  Creating wealth became a religious calling to some.

Joseph Schumpeter (1883-1950, Austrian political economist)

Muller reviews Joseph Schumpeter’s contribution to the theory of capitalism.  As a 20th century Harvard Business School professor, Schumpeter lectures on the value of “the invisible hand”.  Schumpeter advances the idea of “creative destruction” as a characteristic of capitalism.

Schumpeter outlines the value of entrepreneurs who pursue new ideas, new products, and innovation that replaces dying industries.  He trumpets the growth of capitalism as an engine that perpetuates societal benefit. Some argue that today’s American governance discourages new ideas by dwelling on manufacturing at the expense of technological innovation and change.

Muller examines the other two economic systems; i.e. 2) command, and 3) mixed systems.  Muller implies they fail to meet the historical successes of market capitalism.  A command economic system is autocratic with primary economic decisions made by one ruling agency—like Mao’s communist party, Hitler’s Third Reich, and Stalin’s Great Turn. 

Short term economic benefit of a command system economy hugely disrupts society.  Economic improvement is evident in the short term, but momentum is lost as the gap between haves and have-nots grows. 

In a command economy, the cult of personality takes over and image becomes more important than substance; i.e. who you know becomes more important than productivity.

Muller implies mixed economic systems are a work in progress.  They are represented by leaders like President Xi in China, and President Putin in Russia. 

Xi and Putin retain the concept of communist control of the economy but combine command economics with “Smithian” capitalist ideals. 

China’s mixed economic policy began with Deng Xiaoping, but Xi expands its reach.

Both China and Russia have shown economic improvement in the late 20th and early 21st century.   Xi’s “Road and Belt” plan is part of a command economy, but it relies on the capitalist market principle of influencing trade between nation-states.  China’s long-term success remains to be seen.  Whether it will be a more effective form of economic improvement than Adam Smith’s market-based formula is left to history.

Russia, like Xi, uses capitalist influence to grow its economy.  Russia, in contrast to China, uses its natural resources (oil distribution), rather than a “Road and Belt” policy to expand its influence.

Fundamentally, Muller infers no modern economic system is better than capitalism.  One draws that inference by Muller’s cogent explanation of the value of capitalist self-interest.  Because Adam Smith’s concept of self-interest is an inborn characteristic of human nature, it will prevail over any economic system that requires command control. 

America has been a successful capitalist country in great part because of checks and balances that mitigate command control qualities of mixed economies.  Hobbes assessment of human nature demands some level of command control; even in a capitalist economy. 

One might argue that America’s avoidance of near economic collapse in 2008 is evidence of the importance of a mixed economic theory.  (Interestingly, a December 18, 2018 “…Economist” article, published under the Schumpeter byline, notes that China’s communist party control of businesses during Trump’s trade war have fared better than private businesses.)