Capitalism

 

Mary Poppins - Fidelity Fiduciary Bank

You can purchase first and second trust deeds
Think of the foreclosures!
Bonds, chattels, dividends, shares
Bankruptcies, debtor sales, opportunities
All manner of private enterprise

Are the interests of investors the interests of society?

In economics, a production equation that determines the quantity of goods from a seller/producer is often given as

quantity=function(capital, labor). 

For example, if a child sells lemonade from a stand, the production function might include the cost of pitcher, the cost of the lemons, and the cost of the labor.  The lemons are the raw materials in making lemonade and do vary with the amount sold, but the pitcher is only purchased once.  Thus capital is the investment in the pitcher, which is a one-time cost, and costs of the lemons, which is a variable cost . The investment in the pitcher should have a return on investment, ROI, but the lemons don’t require the same return on investment, (e.g.  if you sell less, buy fewer lemons). Additionally economists classify goods as private (exclusive and priced) and common/public (exclusive and non-priced) goods.  You can’t make lemonade without water, a common good. Therefore the expanded production function should be

quantity= function(investment, private goods, public goods, labor).

Producers/sellers want to maximize the amount that they produce,  since revenue is quantity sold times price, and thus they will receive  more revenue.  If they reduce the unit cost for labor, then then can produce more goods. But slavery is illegal and there are minimum wage, maximum hours and child labor laws.  If the labor is not supplied by the producer, then society has an interest in requiring that there is a reasonable cost for that labor, to protect itself, other producers, and those laborers.  Similarly the cost of using common goods are regulated/priced by society to ensure that these common goods are used responsibly.  Producers should not lower the price of private goods. There are anti-trust and anti-competitive laws to prevent producers from lowering the price of private goods for only themselves.  If there were no controls on private goods, public goods, and/or labor, or these controls are violated, then the Return On Investment, ROI, could be higher.

But this is only from the perspective of the investors.  Society can, and often does, ensure a reasonable ROI, e.g. for regulated utilities, but it also can not ignore protecting private goods, public/common goods, and labor.  Protecting only the interests of investors is not in society’s interest. Supply side stimulus is NOT ensuing a higher ROI on investment, e.g. by reducing taxes on investment.  That is only an investment stimulus and ignores the other components of supply. Capitalism is support for free markets.  Those free markets do NOT consist only of investors.

Voting Rights

 

19th Amendment

They thought we were a joke
They tried to dash our hopes
With every word they spoke
They tried to revoke
A woman’s right to vote
But we made it

Restricting anyone’s right to vote is no joke.

In Georgia, a driver’s license can be renewed by mail. In Texas, a driver’s license renewal form is mailed to every driver, even if that driver does not intend to renew his license.  In Florida, it is not illegal for someone else to mail that driver’s license renewal form.  In Alabama, a photo ID is required to buy alcohol but it does not require a special photo ID.

A driver’s license allows a person to use a deadly weapon (e.g. a vehicle weighing many hundreds of pounds, which travels at high speeds) but that driver is expected to act responsibly.  Alcohol can be purchased by adults because they are expected to consume responsibly.  Renewal of a driver’s license is often not confined to business hours in recognition that many people are working or otherwise occupied hours during the RMV/DMV office hours.  I have paid my local, state, and federal income taxes by mail for over 60 years, and in fact I don’t know if, or how, they can be paid in person.

And yet voting is considered such a dangerous activity that the right to vote is restricted.  Mailing ballots to those who are registered, but may not choose to vote, is often prohibited.  Handling a ballot of another, by mail or in election drop boxes, is restricted.  The ID to vote does not include many forms of photo IDs.

Let’s be honest.  Voter restriction laws are enacted because the people who vote by mail, vote not during poll booth hours, or don’t have the right kind of proof of ID, etc. are the “wrong” people. If only the “right” people were voting, these restrictions would not have been enacted.

If these same restrictions were put on driver’s or other government licenses, paying taxes, buying alcohol or tobacco, etc. they would be viewed as a joke and would not be even considered. Placing restrictions on the right to vote is no less of a joke,…. but it is a very poor joke.

 

Debt Ceiling

 

Tomorrow

When I'm stuck a with day that's gray and lonely

I just stick out my chin and grin, and say, oh

The sun'll come out tomorrow

So you gotta hang on 'til tomorrow

Come what may

Tomorrow, tomorrow

I love ya tomorrow

You're always a day away.

It is shame that not everyone believes in tomorrow. 

“Senate Minority Leader Mitch McConnell, R-Ky., said if Democrats “want to tax, borrow and spend historic sums of money without our input, they’ll have to raise the debt limit without our help.”(NBC News  , Sahil Kapur, NBC News, Sept 25, 2021)Recommended

Debt is not inherently bad, despite what Republicans may say.  I have lived in my home since 1981 because I took out a mortgage ( long since paid off, but I was able to live in the house while I paid off that mortgage).  I have taken out loans to pay for all of my cars ( long since paid off, but I was able to drive while I paid off the loan.).  I took out student loans to attend college, (but I was able  to work and use those degrees while those loans were paid off). I took out loans for my children to attend college but those are also long paid off.  The point is debt that is an investment in the future is never bad.  I imagine that many Republicans own some corporate bonds, which is after all corporate debt, so just holler Emerson at them ( "a foolish consistency is the hobgoblin of little minds" and boy are they foolish.) 

The debt limit needs to be raised because the spending that has already been approved can not be paid by the taxes that have been collected. ( and do remember that Tax Cut and Jobs Act of 2017!).  This is not about new taxes or new spending.   It is about old spending and old taxes.

 One of my favorite scene in the movies is the bank run in It's a Wonderful Life.  
https://www.youtube.com/watch?v=iPkJH6BT7dM&t=42s.

Don't sell out to Mr. Potter.  I don't want to live in his slums. I want to invest in the future and I will get by on $17.50 as Mrs. Davis did in It’s a Wonderful Life.    Belief in the future used to be a bi-partisan issue.  Do Republicans really wanted to cede the future to Democrats.

Social Security

 

Illegal Smile

Last time I checked my bankroll
It was gettin' thin
Sometimes it seems like the bottom
Is the only place I've been
I chased a rainbow down a one-way street dead end
And all my friends turned out to be insurance salesmen

Is insurance a bad thing?

People who say that Social Security Insurance is a Ponzi scheme neither understand Insurance nor a Ponzi scheme.  Insurance is a method to pool risk.  And as I have written in previous postings, risk is the product of likelihood and consequences.  If there is one chance in a thousand of losing a home (e.g. the likelihood) and that home is worth $100,000 (e.g. the consequences) , then 999 individuals would have a cost of $0 and one unlucky individual would have a cost of $100,000.  But if those 1000 individuals pool their risk, they would each pay $100 and the manger of the risk pool ( e.g. an insurance company) would pay the $100,000 cost to replace the home. You would use your own money to pay into the risk pool ( i.e. the insurance company), but once you paid, it is no longer your money.

A Ponzi scheme is not insurance, it is an investment.  Your money is your money even after it has been invested.  You expect to get back your money plus a Return, e.g. interest, On that Investment,  ROI.  If both your investment and its ROI comes from the investments paid by others, then it is a Ponzi scheme. 

Saying that you have “paid” into Social Security is one way that the Social Security benefit is computed, but the amount that you paid is NOT your money and ceased being your money once you paid it.  That makes it insurance (which is after all its name) rather than an investment. The fact that the government is serving as the insurance company does not change this.  Just because you call it your money, doesn’t make it your money. It used to be your money but is no longer your money.  If it is not your money, then it can’t be a Ponzi scheme.

The fact that government required you to purchase this insurance ( and your “contribution” to Social Security IS a purchase), does not change this fact.  My favorite sign in the last few years was “Government keep your hands off my Social Security!”  The irony was lost on the carrier of that sign.

Reverse Engineering

 

Impossible

And if they said I'd find you beyond the rainbow's end
I would have said "Impossible, impossible, my friend"

To dream about what might have been
Is strange enough for me
But now it seems I'm living in
A dream too beautiful to be

So what is impossible?

“Man will never fly”.   “Bumble bees in flight violate the laws of aerodynamics ”.  “A man will never walk on the moon”  So said science at the time, according to how science understood it.  But engineers are asked to go beyond science all of the time.  Roman engineers built roads that we still use today, even though they did not yet have the benefit of Newton’s Laws.  The Sea Battalion, SeaBees,  the engineering arm of the US Navy, has the motto. "CAN DO" and the phrase "With willing hearts and skillful hands, the difficult we do at once, the impossible takes a bit longer." . 

Engineers are fine with doing the “impossible”, even if it takes a bit longer.  That is why man flies, bumblebees fly, man walked on the moon”, etc., because it really was possible.  Engineers observe something and then reverse engineer how it must have been done.

One of my favorite reverse engineering stories involves the original Star Trek ( yes, the William Shatner version). To make the Starship Enterprise seem more futuristic, there were automatic sliding doors in the corridors.  Today, this is commonplace. When I go to the supermarket, the front door automatically slides open when I approach it. However at the time of Star Trek, in the 1960s, these did not exist and a special effect created the illusion by having an off-screen technician manually slide the door.  But engineers looked at this effect and reverse-engineered how you would create an automatic sliding door, not knowing that in this case it was only a special effect.  If it doesn’t violate real laws of nature, and not just mankind’s current understanding of those laws, which is after all what science is, then reverse engineering may be useful.  Maybe the reason that scientists have to be careful about saying that something is impossible is because they were tired of engineers proving them wrong.

Economics III

 

Certs Jingle

Certs is a breath Mint
Certs is a candy Mint
Cert is two, two, two mints in one.

Is Keynesian or Monetary economics correct?

John Maynard Keynes supported progressive income taxes, state provided health care, retirement pensions, and  government deficits, and opposed high tariffs and the gold standard. Friedrich von Hayek, one of the founders of the Chicago School of Economics, opposed progressive income taxes, state provided health care, retirement pensions, and government deficits and supported high tariffs and the gold standard.  So who is right? They both could be considered to be correct. Keynes was describing a System Optimal solution and Hayek, a major proponent of Monetarism  along with Milton Friedman, was describing a User Optimal solution.

Differences between User Optimal solutions and System Optimal solutions are common.  For example, absent any ban on this behavior, taking goods from others is a User Optimal solution, e.g."Might makes right".  However those who are stronger have no incentive to produce goods, if they can simply take goods that others produce.  And those who are weaker have no incentive to produce goods, if those goods will only be taken from them.  Society wants to maximize the production of goods, and society has banned any stealing goods from others as one means to ensure that the User Optimal solution will be closer to the System Optimal solution, e.g. "Might for right"

Commandments, laws, regulations, policies, programs, etc. are society’s way of imposing shadow prices such that User Optimal solutions are closer to  System Optimal solutions.  Knowing what the User Optimal solutions are, and what the System Optimal solutions are, is necessary in order for society to enact commandments, laws, regulations, policies, programs, etc. that can bridge any gaps between System Optimal solutions and the User Optimal solutions.

Labels such as capitalism/free markets or socialism/Marxism/communism/collectivism serve little purpose.  Neither system is fully adopted anyway.  Capitalism requires a level playing field and perfect knowledge by both the producers/sellers and consumers/buyers.  But the playing field is not level, and knowledge is not perfect, and this why what we have is more properly regulated capitalism.  Similarly collectivism presumes that the system can plan for the best solution.  But there is no perfect system or solution, just the plans from the individuals managing the system, and one plan cannot work for every individual. In practice, there are no purely capitalist, or purely communist, economic systems. At best what we observed is regulated capitalism or unplanned socialism.

In practice society can regulate sellers and buyers.  It regulates the investment/capital used by producers. It regulates the goods that are used by producers, including common unpriced goods, and regulates labor ( i.e. no slavery,  minimum wages, a 40-hour work week, etc.).  It can regulate the quantity and prices of goods.  But the ownership of capital, goods, and labor can vary.  In the United States, all capital is owned by individuals, labor is owned by individuals, common goods are protected, but private goods are owned by individuals.  In Scandinavian socialism, the capital in some industries is owned by society, but the labor and private goods are owned by individuals.  In state socialism, the state can let individuals own some capital, but labor and outputs might belong to the state. If those managing the system have a higher standard of living than those subject to the system, then those managing the system are themselves following a User Optimal solution for themselves instead of a System Optimal solution for all.

So the question may not be is a solution capitalist or socialist?  It may be is the solution User Optimal or System Optimal?

Winning II

 

Step to the Rear

Will everyone here kindly step to the rear
And let a winner lead the way
Here's where we separate
The notes from the noise
The men from the boys
The rose from the poison ivy

So what does it take to be a winner?

The Ultimatum Game is an instrument in Economics and Game Theory. One player, the proposer, is given a sum of money, say $100. The proposer must split it with another player, the responder. Once the proposer makes his offer, the responder may accept it or reject it. If the responder accepts, the money is split according to the offer. If the responder rejects the offer, both players receive nothing.

A “fair” distribution would be a 50/50 split by the proposer.  That is not the User Optimal solution for the proposer.  The User Optimal solution of the proposer should be to offer the lowest non-zero amount and keep the balance. The User Optimal solution of the responder is to accept any non-zero offer by the proposer.  In the case of a $100 gift and integer offers, an offer of a $1 from the proposer to the responder should be accepted, since it would be the User Optimal solution of both players.

However in experiments, (Güth, Schmittberger, & Schwarze, 1982), responders typically rejected offers of less than 30%.  This was verified in different societies and cultural settings (Henrich, 2004) (Oosterbeek, 2004). Why did responders reject offers of less than 30% when that was not their User Optimal solution? With the User Optimal solution, a responder would at least have the offer, instead of both players having nothing.

The answer is that in that offer, the proposer is not only making an offer.  He is also conveying his expectation for repeating this game with the roles reversed, and if the game is repeated, then the proposer is conveying the discount rate that the proposer places on the future.  The System Optimal solution is the sum of the accepted offers in repeated games.  If the offer is 50/50 in each game, and the roles are reversed after each game, then after two games each player would have $100 and the System of all players would have $200.  If each player follows the User Optimal Solution in each game and makes an unfair offer and that offer is rejected, then after two games both players have $0 and the System has $0.

If the offer follows a User Optimal strategy and offers the bare minimum, then in addition to that offer the proposer is conveying information that he does not expect to ever repeat this game with the roles reversed OR if the roles are reversed and the game is repeated that he has a very high discount rate (i.e. places a very low value on the future).  The System Optimal solution requires that the game be repeated and that a reasonable discount rate is used to value that future.

If the offer is a 50/50 split then the offeror may be conveying that he does expect the game to be repeated with reversed roles or his discount rate is 0% CAGR.  If the offer is $30, then the proposer is also conveying that he expects the game to be repeated with roles reversed,but if it is repeated once per year then his discount rate is 40% CAGR, ( $50-$30)/$50.  When the responder rejects an offer, then the responder is responding not only for himself as a User, but for the System of all potential players.  By rejecting the offer, the responder is indicating that the proposer should be excluded from the System because the proposer either does not believe in a future, or if he does believe in the future he places a low value, i.e. a high discount rate, on that future.

Even though the System does not appear to have a role in the Ultimatum game, the responder is playing not only for themselves as a User,  but for the entire System. The winner is the System, not the player.

References

Güth, W., Schmittberger, R., & Schwarze, B. (1982). "An experimental analysis of ultimatum bargaining". Journal of Economic Behavior & Organization. 3 (4), 367–388.

Henrich, J. R. (2004). Foundations of Human Sociality: Economic Experiments and Ethnographic Evidence from Fifteen Small-Scale Societies. Oxford University Press.

Oosterbeek, H. R. (2004). "Cultural Differences in Ultimatum Game Experiments: Evidence from a Meta-Analysis". Experimental Economics. 7 (2), 171–188.