Daniel Brockman

A reckoning of my price and my merchant's intended profit

2022-05-11T13:06:00.000-07:00

Degas, 1873, Le Bureau du coton a la Nouvelle-Orleans

Suppose we have some quantity of good A on hand, and we will trade it for a suitable quantity of good B. We have a prior notion of the values of A and B by some knowledge of the world or levels of our inventories or our costs or other experience.

Notation:

a = The quantity of A that I offer for trade.

La = prior notion of value of A, expressed as units of essential value per unit of A.

Lb = prior notion of value of B, expressed as units of essential value per unit of B.

P(L) = Lb/La, the “natural” or “fair” price without profit.

b = The quantity of B that I want to receive in trade for a.

r = the rate of profit (or margin) that I intend to realize on the trade, expressed as a fractional increment of a.

p(r,{A,B}) = the price at which I receive a unit of B, that is, the number of units of A per unit of B, given a profit r. p(r,{A,B}) = p(r) if no ambiguity results.

Identities:

La * a = Lb * b for a trade without profit.

La * a * (1+r) = Lb * b for a trade with nonzero profit.

p(r,{A,B}) = a/b = (Lb/La) / (1+r) = P(L) / (1+r)

a = b * p(r)

b = a / p(r)

-end-

UBSS, Unconditional Business Subsidy System

2020-08-14T20:11:00.000-07:00

“Fanuc Robots at Work” (2010)

UBSS, the Unconditional Business Subsidy System, is a new concept (assembled from a few old ones), and now is an ideal time to establish it.

UBSS is an opportunity for Republicans and Democrats to forge an agreement for economic stabilization. It is simple in design, it subsidizes businesses, it maintains fiscal discipline, and it helps the people who need it the most.

UBSS makes an opportunity to resolve the discussion of the $600 per week emergency unemployment benefits boost. We can remove the $600 boost and replace it with UBSS.

Consider for a moment the existing system. We may suppose the prevailing view of economic stimulus tax cuts, grants and loans to business is that these are methods of improving the prosperity of the people. That’s not entirely false, but studies (for example, Gale and Samwick) show that the owners of the businesses enjoy 75% or more of the stimulative benefit, with the rest distributed to employees. In the existing system, the owners of the businesses get most of the money, not the employees, and not the general public.

In the existing system, despite stimulus, prosperity doesn’t improve. Our existing economic system supplies goods and services passably well to around 80% of the people. That’s quite a good accomplishment, but nevertheless, 15% live at the edge of personal financial disaster, and perhaps 5% often go to bed hungry, if they can find a bed.

In the existing system, tens of millions of people don't prosper, which limits the prosperity of businesses and their owners. Prosperous customers make prosperous businesses.

We need an improved approach.

Here is the idea of UBSS:

UBSS systematically connects the subsidy for businesses with new government revenue, so that the money paid out in business subsidies is systematically recaptured in taxes, giving it budgetary neutrality without risk of inflation.

UBSS subsidizes businesses via their customers. Each woman, man and child who resided in the United States the entire previous calendar year receives a uniform and equal payment each month, deposited by the Federal Reserve System (on behalf of the Treasury) in each person’s checking account (established, if necessary, for the purpose of receiving UBSS deposits). Each person chooses without constraint how to spend the money, generating transactions for businesses. The many transactions will subsidize all businesses and genuinely create jobs to supply the goods and services to these customers. The owners of businesses will be entitled to a fair profit from these transactions with customers.

Prafcke, “Automatic warehouse for small parts” (2003)

The aggregate distribution of subsidies in the current year can be known with high accuracy as the number of people multiplied by the uniform equal amount of the individual payment. In the current calendar year (2020), we collect the revenue based on incomes in the previous calendar year (2019), and we know with high accuracy the revenue collected on income in the second calendar year previous (2018).

For the current tax year, we can calculate a surtax on the largest ten percent of taxable incomes. The total surtax is the total population, multiplied by the uniform equal individual payment per month, multiplied by 12 months, less a compensating adjustment for the difference in surtax collected and the subsidies paid in the second year previous. To the largest one percent of taxable incomes, UBSS assigns two-thirds of the surtax. To the next largest nine percent of taxable incomes, UBSS assigns one-third of the surtax. The IRS will express the surtax as a percentage of taxable income.

Let’s consider specific numbers for UBSS. I suggest the uniform equal amount of $250 per month for each woman, child and man in the United States, indexed to the larger of the change in CPI and the change in income of the largest one percent of incomes. Here are some estimates.

Assuming the uniform equal amount of $250/month per person...

$990b/year = 330m population * $250/month * 12 months

$660b = two thirds of $990b

$2,500b = aggregate of the largest one percent of taxable incomes

26% = UBBS surtax rate on the largest one percent of taxable incomes

$330b = one third of $990b

$2,500b = aggregate of the next nine percent of taxable incomes

13% = UBBS surtax rate on the next nine percent of taxable incomes

Alternate assumption of the uniform equal amount of $125/month per person...

$495b/year = 330m population * $125/month * 12 months

$330b = two thirds of $495b

$2,500b = aggregate of the largest one percent of taxable incomes

13% = UBBS surtax rate on the largest one percent of taxable incomes

$165b = one third of $990b

$2,500b = aggregate of the next nine percent of taxable incomes

7% = UBBS surtax rate on the next nine percent of taxable incomes

I'm grateful for the work of Scott Santens for inspiration and for ideas contained herein, and to Dr. Linda Cunningham for suggestions and editing.

Images

Andreas Prafcke, “Automatic warehouse for small parts” (2003, Wikimedia, CC-BY-3.0 license, https://commons.wikimedia.org/wiki/Automation#/media/File:Automatisches_Kleinteilelager.jpg)

“Fanuc Robots at Work” (2010, Mixabest, Andrew J. Kurbiko, Wikimedia

https://commons.wikimedia.org/wiki/File:FANUC_R2000iB_AtWork.jpg#/media/File:FANUC_R2000iB_AtWork.jpg, Public Domain )

Steve Jurvetson, “Tesla Auto Bots” (2013, Chrishmt0423, Flikr, Wikimedia, https://commons.wikimedia.org/wiki/File:Tesla_auto_bots.jpg, CC-BY-2.0 license)

Sources

William Gale and Andrew Samwick, “Effects of Income Tax Changes on Economic Growth”, Nov 2015, http://eml.berkeley.edu/~burch/Gale%20Samwick%2020151105.pdf)

Encyclopedic Glossary of the Fairy Tale of Capitalism

2020-06-02T18:19:00.004-07:00

Historically, economics served to explain the virtue and justice of the Aristocracy.

FTC Ring: <Previous | Next>

Noah Webster, ca. 1825

Aristocracy -- a.k.a. the One Percent. The wealthiest 1% of the people. No one is wealthier than the Aristocracy. Some Aristocrats work and some don’t. On average, about half their income arises from their Capital, that is, the things they own and their investments in businesses, stocks and loans and their claims on the Labor of others. Their own Labor produces the other half of Aristocratic income.

Board of Directors -- See Corporation.

Business School Professors -- Also known simply as the Professors, they study the FTC and the Economists and the Old Ones and sing the Tales. Professors love an audience. They will sing for anyone who wants to listen. Most often, however, they sing to instruct aspiring Professors, Economists and the Staffs in the characters and dynamics of the FTC.

Buyer -- In our advanced era, a trade typically involves money offered in exchange for a good or a service. In these money trades, we call the the two participants the Buyer and the Seller. The Buyer gives money to the Seller, and the Seller gives something to the Buyer.

Capital -- “Capital” has multiple meanings. It starts as something of value, usually money in a purse. The owner of the purse and money exchanges some of the money for Land, buildings and equipment, known as “fixed Capital” to the Old One Ricardo and the Professors, and exchanges some of the money for the wages of workers, tools, materials and supplies, known as “circulating Capital” to Ricardo and “working Capital” or "current assets" (depending on context) to the Professors. The workers combine the fixed and working Capital with their Labor, transforming the Labor and Capital into goods and services the owner sells at a higher value, called the surplus, than the combined costs of Labor and Capital from which the goods and services were produced. From the proceeds of the sale, the owner pays the costs of Labor and replaces the expended Capital, and adds the surplus to the ending Capital in the purse. In FTC, Labor has no claim on the surplus, which wouldn’t exist without the combination of both Labor and Capital. The surplus increments Capital, the property of the owner.

Capitalism -- The process by which the owner of Capital (the “Capitalist”), dependent on the defense of private property, invests owned Capital in expectation of replacing the invested Capital and receiving the surplus as an increment of owned Capital. Until 1848, the process had been described by the Old Ones Smith and Ricardo, and it was widely regarded as the unremarkable, undifferentiated natural condition of humanity. As a tree may divide into two branches, a differentiation attended the publication of the “Communist Manifesto”, by the Old Ones Engels and Marx, which called for the abolition of private property. Few words ever so nearly resembled a thunderbolt. After the “Manifesto”, there existed both “Communism”, which was a splinter of Socialism, and “Capitalism” which described both (a) the Capital-Labor-Capital transformation process and (b) the political anti-Communism movement. Marx himself used “Capitalism” on pages 307 and 314, in a chapter on the conversion of surplus value into Capital, of his little-read book “Capital” as a synonym of what he called the “capitalist system”. However, the word “Capitalism” didn’t enter common parlance until 1900.

Capitalist -- See Capitalism and Socialism.

Capitalist's Fallacy -- See Socialism.

Capitalist of View -- See Socialism and Downward Trickle.

CEO -- See Chief Executive Officer.

Chairman -- We could refer to this person as the Chairwoman or Chairperson or Chair. In our enlightened modern age, however, the Chairperson is still, quaintly and almost always, a man. The Chairperson presides over the Board of Directors. See Corporation.

Chief Executive Officer or CEO -- a.k.a. President, the CEO is the manager who outranks all other Managers and Workers in a Firm. The CEO works to improve the Shareholders’ part of GDP10, and incidentally the CEO’s part of GDP10.

Conflict of Interest -- “A preposterously unlikely scenario in which the employee of a financial firm who could earn ungodly amounts of money by acting against a client's best interest might proceed to do exactly that. Conflicts of interest are pervasive, if not universal, on Wall Street.” (Zweig, 2015)

Corporation -- In 1600, Elizabeth I of England chartered the first Corporation, the East India Company. A Corporation is a collaboration among Shareholders, each Shareholder possessing one or more Shares. Each Share is a receipt for money contributed to the Corporation, showing the holder is a fractional owner of the Corporation. Each Share has equal value and one vote in matters of concern to the owners. The Shareholders appoint a committee, called the Board of Directors, of their number to oversee the activities of the Corporation. The Board of Directors choose the principal officers of the Corporation. The Corporation resembles a person, because it can autonomously conclude contracts, trade, incur debt, declare bankruptcy, and contribute to political campaigns. If the Corporation can’t pay its debts or fulfill contracts, then by law the Shareholders aren’t responsible.

The Curve of Laffer (artist's reconstruction) 2020

Curve of Laffer -- An ingenious explanation of the relationship between income taxes, the growth of GDP and the magnitude of government revenues. During the time of Reagan, the Economist Arthur Betz Laffer sketched the graphic Curve of Laffer on a paper napkin during a lunch with Dick Cheney and Donald Rumsfeld. Rumsfeld claims to retain the original in his private collection. The Curve shows that if the rate of taxation is zero, then government revenues are zero, because there is no tax, and if the rate is 100%, then government revenues are zero or nearly zero, because nobody wants to observably produce income, because the government would take it all. But if the tax rate is somewhere in between, then people have incentive to make more money, because high taxes don’t disincentivize them. Government revenues are higher, and there is some tax rate, not too low like point A on the graph, and not too high like point B, which maximizes government revenues. So, from point B on the graph, government revenues would increase if the tax rate was decreased! The increase in revenues would eliminate the fiscal deficit and reduce the national debt. Fully incentivized businesses would prosper, and the Downward Trickle would distribute the prosperity to everyone. Cheney, Rumsfeld and Laffer went to Reagan, the leader of their political party, the Tea Party, then known as the GOP. They showed Reagan the graph, and persuaded him the Sweet Spot was probably about 5%. In accordance with the Curve of Laffer, Reagan worked to reduce the top marginal income tax rate. The principal opposition party, the Dems, reluctantly accepted the lower tax. Revenues didn’t increase. They fell. National debt and fiscal deficit increased. Businesses did undertake some marginal projects they wouldn’t have ventured at a higher rate. GDP accelerated for about a year. On Black Monday, October 19, 1987, the prices of stocks on the Exchange crashed, and GDP subsequently declined. After Reagan, the Great Wars ended. The fiscal deficit continued, aggravated by a new war in Iraq. With chagrin, the Tea Party, that is, the GOP, raised the tax rate. GDP remained sluggish. Unemployment was a problem. The Dems gained dominance and raised the tax rate. Resulting budget surpluses suggested the Sweet Spot was probably greater than 30%. GDP rose. Unemployment fell. National debt fell. The Tea Party, still known as the GOP, regained power and reduced the tax rate, in accordance with the Curve of Laffer, to increase government revenues, and invaded Afghanistan and Iraq, and the fiscal surplus became deficit, and the prices on the Exchange crashed in the DotCom Crash of October 9, 2002, followed by higher unemployment and sluggish growth of GDP. The prices on the Exchange peaked on October 9, 2007, and began a slow decline.

A financial crisis ensued. Journalist Rick Santelli of CNBC revived the old name Tea Party in February 2008. Exchange prices hit bottom on March 9, 2009, about 6 weeks after the Dems took power. The Great Recession ensued. Unemployment was extensive in 2009, but it improved slowly. GDP grew, throughout the time of the Dems. Dem political power wasn’t sufficient to raise the tax rate until 2012 when the rate increased to 40%. With the continuing wars, deficits continued. GDP rose to record levels, Exchange prices rose to record levels, unemployment declined steadily. The Tea Party regained power, declaring themselves alternately the GOP and the Trump Party. In accordance with the Curve of Laffer, they reduced the income tax rate sharply for businesses in 2018. Unemployment continued to decline. GDP grew. Exchange prices rose to record highs, then tumbled in the Christmas Present MicroCrash of December 24, 2018. Exchange prices recovered over the next year to new highs, GDP grew, and unemployment declined to levels not seen since the late 1990s. Exchange prices fell about 40% in the Great Trump Crash of March 23, 2020, losing all the value gained since the Tea Party assumed power in 2017. Even in our enlightened modern era, you may hear from time to time a Professor or unintelligible Economist, sympathetic to the Tea Party, declare the Sweet Spot lies not at the current top marginal rate, nor at a higher top marginal rate, but at a lower top marginal tax rate, and that reducing the top marginal tax rate, in accordance with the Curve of Laffer, will produce a fiscal surplus, businesses will prosper, and the Downward Trickle will distribute the prosperity to everyone. The Dems, however, seem willing to agree the Sweet Spot lies somewhere around 55 to 65%.

Dotted line estimates the Sweet Spot.

Directors -- The Fairy Tale of Capitalism includes two meanings of “Director”. The first meaning is a level of Management. A Director is a Manager of Managers, though the Director usually isn’t an Executive. In the second meaning, a Director is a member of the Board of Directors that oversees the activities of a Corporation. Often, the Directors are nominated by the nominating committee of the Board of Directors. The shareholders elect the nominees because shareholders vote against the Board of Directors only in the most rare circumstances. The nominating committee, and the entire Board for that matter, are usually chosen from among the friends of the CEO, the Supercompensated CEOs of other Corporations, and from the spouses, children, nieces and nephews, siblings, and significant others of the Directors. See Corporation.

Ayn Rand, 1925

Downward Trickle -- The waste stream of the Aristocracy from which the 50 Percent may pluck a subsistence and an occasional boon. The Downward Trickle results from natural inefficiences in the Firehose Up. The Staffs work to improve the Firehose Up, which includes mitigating the Downward Trickle. The Old Ones knew of the Downward Trickle. Capitalists of View and Staffs often laud the Downward Trickle when seeking reduced taxes for the Aristocracy or less stringent regulation of their businesses. They say, as did Ayn Rand, that the Downward Trickle of Capitalism raises the standard of living of all people, which is why the inhabitants of slums in her era, the time of the Great Wars, lived like monarchs compared with ancient Egyptian slaves. Rand didn’t explain why slums exist and why children starve. See Firehose Up.

Economists -- Composers of Tales. Professors sometimes created tales, and sometimes other members of Society created tales, but Economists originated most of the Tales. The Old Ones wrote a few early Tales that became enduring classics.

Engels, Friedrich -- Sometimes called the “forgotten” Old One, Engels was Marx’s lifelong collaborator and source of financial support. His book “The Condition of the Working Class in England”, is an economic history describing the English industrial revolution in detail. It’s also a polemic, advocating for better treatment of Workers by their employers, the Ingenious Innovative Job Creators. Engels edited Marx’s grand work “Capital”, and may have contributed some sections. After Marx’s death, Engels completed the last volume of “Capital” from Marx’s notes. Engels remained an active Socialist until his death in 1895.

Exchange -- A big building housing a club of members who, acting on behalf of other persons for a fee, buy and sell shares of Firms “listed” on the Exchange. In our enlightened modern age, some members' fees charged to the general public have diminished to zero, a nice round figure popular with the public, and a "Free Lunch" in the argot of the Exchange, but that's another story. The Exchange is a Monop, de jure or de facto. If the Executives of a Firm wish to “go public”, that is, to sell shares of the Firm to the public, they deliver the shares to several of the members of the Exchange, and the members, for a fee, “list” the Firm and sell the shares to other members who, for a fee, buy the shares on behalf of persons in the general public. Sometimes Firm A acquires Firm B, in which case, Firm A buys all (or nearly all) of the shares of Firm B, and the Exchange “delists” shares of Firm B, and the members of the Exchange no longer buy and sell the shares of Firm B.

Executives -- A small subset of Managers, typically no more than a half-dozen per Firm. The Executives are the most highly ranking employees. They include persons with titles such as Chief Executive Officer (CEO), President, Chief Operating Officer (COO), Vice President, Chief Administrative Officer (CAO), Controller, Chief Technology Officer (CTO), Chief Financial Officer (CFO), Treasurer, and generally any Manager who reports directly to the President or CEO. The Executives have authority over all the other Managers of the Firm.

50 Percent -- The least wealthy half of the Society.

Firehose Up -- The Fairy Tale of Capitalism sometimes uses one term for multiple meanings. One meaning of "Firehose Up" refers to the more or less complex system of an Aristocratic household’s incomes from Capital (owned properties and wealth), Supercompensation, and all other income.
A second meaning of “Firehose Up” is the modern system of complex conveyances transporting portions of GDP and the greater part of GDP growth to the Aristocrat, with legal authority maintained by the might of the government’s ships, soldiers and police.
A third meaning of "Firehose Up" refers to all Aristocrats’ income sources as enabled and optimized by law, regulation, public policy, custom, convention and tradition.

See Downward Trickle.

Firms -- The Society organized itself into groups called Firms to find, gather, produce and distribute stuff.

Free Market -- In the Free Market, many buyers and many sellers compete. Any seller (or buyer), dissatisfied with a price (or product and price) offered by a buyer (or seller), can readily find another seller (or buyer) with whom to fairly trade. The Unfettered Free Market suffers from bandits, frauds and Monops who diminish competition, or defeat the buyers’ and sellers’ possession of the goods and services they trade, or defeat fair trades. Hence the Unfettered Free Market ceases to be a Free Market. Regulators, usually provided by Governments, inspect to assure safety and prevent abuses, and make rules to prevent harmful assymetries of information.

GDP -- See Gross Domestic Product.

Average Tax Rates (all taxes, divided by income) by Income Groups
Saez, Zucman "Progressive Wealth Taxation" (2019)

Government -- Government is the dominant coercive power in any region or other area of potential contention. Because government decides the prevailing law, government influences economic organization, taxes and regulation. The area of dominance of a government is its jurisdiction. The jurisdiction may be indistinctly defined. Government is inevitable, because always some one person or group of persons will have dominating coercive power. It’s not uncommon among the nation-states that the state security forces (military and police) will dominate, yet the security forces pledge loyalty, cede decision authority, and convey effective coercive power to a monarch, a dictator, a president, a prime minister or a parliament. In the case of “military Government” or martial law, the senior officer of the security forces decides the use of the dominant coercive power. Even in a region that has large, wealthy, well established institutions of government, a gang or militia may be the effective government, the dominant coercive force, in a neighborhood or subregion. Sometimes the region of a nation-state will have no powerful force authoritative throughout its territory. The militias of contending warlords divide the exercise of coercive power among themselves, such as Afghanistan at the times of the Soviet and American invasions, and Somalia at the time of the American invasion, and northern Europe during the era of the Roman Empire. American and European critics of such regimes sometimes call them “failed states”, a condescending term used to excuse invading the “failed state”. The mutual influence of the government and the economy, and the pertinent sphere of decisions, is often called Political Economy.

Average Tax Rates (all taxes, divided by income) by Income Groups
Saez, Zucman "Progressive Wealth Taxation" (2019)

Gross Domestic Product or GDP -- When a news announcer mentions the “Economy”, they most often refer to GDP in our modern enlightened age. Often unintelligible Economists speak of GDP as the fundamental measure of social well being. GDP is GNI Gross National Income plus some other stuff. GNI is the sum of all the incomes in a national subset of the Society. To get GDP, we can start with GNI, add the depreciation of capital equipment (usually about 16% of GDP in the USA), plus all the stuff sold to foreigners, minus all the stuff bought from foreigners (foreign transactions net about +/- 2% of GDP for large modern countries). Since the Ten Percent own nearly all the depreciating capital, the Aristocracy has a bit larger share of GDP than of GNI. Typically, all the news announcer knows about GDP is whether GDP is larger this quarter than the previous quarter (good news) or smaller (bad news). The Professors sing many versions of the perennial hit “Growth of GDP”. The Old One Adam Smith wrote the Tale of the Invisible Hand distributing income more or less evenly among the people, though he knew that Workers’ incomes were so small and unsteady that Workers sickened and starved during business cycles. In our modern enlightened era in the USA, the income of the Aristocracy is about 20% of GDP, the income of the Nine Percent is about 30% of GDP, and the income of the 90 Percent is about 50% of GDP.

“..., the top 10% income share is 50.5% in 2018, … . The top 1% income share increased from 20.7% in 2016 to 22.0% in 2017 and remained stable at 22.0% in 2018.” -- Emmanuel Saez, February 2020

Growth -- Usually implying growth of GDP. (Coincidentally, one of the most frequently covered songs of the Professors is “Growth of GDP”.) You may often hear the word “Growth” used as though it were a synonym of “Prosperity”, but it isn’t. See Prosperity.

Growth of Real Incomes -- Per the United States Census Bureau, household income in the United States in constant 2018 dollars was

in 1967

$ 47,085 for the 50th percentile (median)

$ 99,141 for the 90th percentile

$ 125,244 for the 95th percentile

in 2018

$ 63,179 for the 50th percentile
$ 184,292 for the 90th percentile
$ 248,728 for the 95th percentile

The increase from 1967 to 2018 was

34% for the 50th percentile

86% for the 90th percentile

98% for the 95th percentile

The ratio of the household income of the 95th percentile was

in 1967, 1.3 times the 90th, and 2.7 times the 50th
in 2018, 1.3 times the 90th, and 3.9 times the 50th.

Income Disparity -- a.k.a. Income Inequality, describes large differences in incomes between the wealthiest people in the Society and the poorest people. The existence of dramatic Income Disparity corresponds with undemocratic dominance of the Government by the Aristocracy.

Income -- See Growth of Real Income

Income Inequality -- See Income Disparity.

Inequality -- See Income Disparity.

Ingenious Innovative Job Creators -- A term in FTC generally applied to Employers. But also, when the Staffs seek tax reductions for their Aristocrats, they present the Aristocrats as Ingenious Innovative Job Creators. In any case, the goal of reducing taxes almost always motivates those who use the term. Ingenious Innovative Job Creators need not be ingenious, nor innovative, nor need they create jobs. The key element of the term, of course, is “Job Creator”. Since a job is a transaction of work to be done in exchange for compensation, a job always involves two or more persons. Further, it’s not obvious that an employer actually creates a condition of work to be done, rather than recognizing a pre-existing condition which, perhaps, a Worker points out to them. In the case of the Aristocrat whose Staff seeks a tailored paragraph in the tax law, the Aristocrat may well be completely unaware of the condition. Workers, as the Old One Adam Smith knew, were often the first to recognize productive improvements, so the modifier “Ingenious Innovative” almost always properly applies to them, not to their employer. In FTC, the Workers are never called Job Creators, a term reserved only for the Capitalists possessing large amounts of money. Workers didn’t create jobs either, since they generally lacked the ability to compensate. Thus the term “Job Creator” is an absurdity.

Janissary Recruitment in the Balkans
Ali Amir Beg (ca. 1558), image: Wikimedia.org

Intellectual Property -- A government grant, to a person or Firm, of an exclusive monopoly on use of an idea. The right to use may be rented (via “royalties”) or sold to others by the owner of the Intellectual Property (IP). Ostensibly, IP compensates artists and scientists for bringing new ideas into the world. However, IP disincentivizes use of the idea, discourages new ideas the idea may inspire, contributes to monopoly practices, and creates an industry of lawyers and accountants who challenge or defend IP in court and oversee the collection of royalties.

Invisible Hand -- An articulation by Adam Smith of the notion that an individual, by pursuing their own interest, does thereby improve the Society. Usually taken out of context from a subtopic of a discussion of domestic versus foreign trade in Smith’s book “Wealth of Nations” (1776). That context sprawls across several paragraphs, which we abbreviate here, in Smith’s words:

But it is only for the sake of profit that any man employs a capital in the support of industry; … He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. … he intends only his own security; … he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.

Adam Smith
by John Kay (1790)

Marx, Karl -- Marx and his collaborator Friedrich Engels are two of the Old Ones. Their “Communist Manifesto”, which they wrote in 1848 on behalf of the Communist League (disbanded in 1852), clearly called for abolition of private property and overthrow of government, and less prominently advocated a graduated income tax, abolition of child labor, and free education in public schools. The Manifesto was printed in dozens of languages throughout the world. Also, they described in detail, and with scorn, what they called the “capitalist system” in their immensely influential economic treatise “Das Kapital”. Marx taught that the economic system of a society (the means of production) determines the political character of the society. Marx advocated for the superstition that communist revolution was scientific and inevitable. He lived and died in poverty. His grave is in a cemetery in Highgate, London, UK.

Labor -- As often seen in the FTC Fairy Tale of Capitalism, a word will have two meanings. “Labor” and “Worker” are synonyms. Also, “Labor” is the productive activity of the Workers. In the sense of activity, Labor transforms Capital into valuable and useful products. The wage, the cost of Labor, is the cost sufficient to get a Worker to show up for work next week, and relates rarely and temporarily to the value of the products. See Workers.

Labor Theory of Value -- One of the Tales of the Old One Ricardo. “In estimating the exchangeable value of stockings, for example, we shall find that their value, comparatively with other things, depends on the total quantity of labour necessary to manufacture them, and bring them to market.” (Ricardo, 1817)

David Ricardo
by Thomas Phillips (1821)

Land -- The Old Ones Adam Smith and, especially, David Ricardo, wrote of three indispensable factors of production: Labor, Capital, and Land. Ricardo gave much attention to the Rent a landlord can collect from their agricultural Land, which amount is determined by the value of crops grown on the land of poorest quality. If the poorest tilled land produces 10 tons per season per acre of tomatoes, then the value of those tomatoes is the cost of Labor to produce them, which is the cost of feeding the Labor sufficiently that they will show up for work during the next week, and the Rent available from this poorest Land is nothing but a ceremonial fee to acknowledge permission to farm and ownership. If the next poorest land produces 20 tons per season per acre of tomatoes, with the same Labor of cultivation, then the Rent on this next poorest Land is equal to zero (the value of the Rent on the poorest Land), plus the value of the additional production of 10 tons of tomatoes. If the best Land produces 50 tons per season per acre of tomatoes, with the same Labor of cultivation as the poorest Land, then the Rent on the best Land is equal to the value of 40 tons of tomatoes. The Professors often sing variations of Ricardo’s tales of the Labor theory of value and the value of Rents on Land. They remain key Tales of economics with numerous analogs in realms of thought far removed from agricultural Land, such as the value of obsolete computer equipment, even in our enlightened modern era.

Managers -- Managers oversee the planning and operation of Firms and the direction of workers. Owners may also Manage, if they wish, but Ownership doesn’t require it. The notion of Management originated early in the period of the Great Wars. From then until our enlightened modern era, four types of Manager have evolved: Supervisors (a.k.a. “Managers”), Directors, Executives and the Chief Executive Officer (CEO).

Monop -- A Monopoly or Monopsony, depending on context. See Monopoly. See Monopsony.

John D. Rockefeller (ca. 1875)

Monopoly -- A general economic condition in which buyers have no choice but to buy from a single seller. In pure form, which seldom occurs without government controls, there is exactly one seller. In free markets, if there are fewer than seven sellers, then usually, the economic effect is so similar to pure Monopoly that each of the sellers is considered a Monopoly. Or, if one seller sells more than 30% of the product in a market, then usually, that seller is, effectively, a Monopoly. If there is a Monopoly in some product or service, then no fair trade can exist, because a buyer gets no improvement in terms of trade by choosing another seller. See Monop. See Monopsony.

Monopsony -- A general economic condition in which sellers have no choice but to sell to a single buyer. In pure form, which seldom occurs without government controls, there is exactly one buyer. In free markets, if there are fewer than seven buyers, then usually each of the buyers is considered a Monopsony. Or, if one buyer buys more than 30% of the product in a market, then usually that seller is, effectively, a Monopsony. If there is a Monopsony in some product or service, then no fair trade can exist, because a seller gets no improvement in terms of trade by choosing another buyer. See Monop. See Monopoly.

Nine Percent -- The Nine Percent and the Aristocracy, considered together, are the Ten Percent of households that have higher incomes and greater wealth than anyone else in the Society. In the USA, the Nine Percent get roughly 30% of national aggregate household incomes. About 7% to 10% of their incomes arises from ownership of Capital and businesses, and most of their income arises from their Labor.

90 Percent -- The least wealthy 90% of the Society, that is, all of the Society except the Ten Percent. The 90 Percent includes most of the Workers and small business owners, and all of the poor people. Nearly all of their income arises from their Labor.

99 Percent -- All of the Society except the Aristocracy, that is, the 90 Percent and the Nine Percent, combined.

Occupy Wall Street -- A protest movement that began on September 17, 2011 in Zuccotti Park in New York City and spread from there throughout the world. OWS had no formal leadership and no clear agenda. Wikipedia attributes predecessor protests at the University of California in 2008, and Kalle Lasn of the Canadian group “Adbusters” as the initiator of the call for protest in New York. Extreme inequalities of wealth and incomes, greed, unfair influence of large corporations, and corruption in government were principal concerns. Observers of OWS often heard the slogan “We are the 99%”.

Old Ones -- The Old Ones wrote the most significant early Tales, in both small and immense volumes of unintelligible prose. The Old Ones were Adam Smith, David Ricardo, Karl Marx, and Friedrich Engels.

One Percent -- See Aristocracy.

OWS -- See Occupy Wall Street.

Piketty, Thomas -- An unintelligible Economist of our enlightened modern age and author of the intensively researched book “Capital in the Twenty-First Century” and the subsequent “Capital and Ideology”. Dr. Piketty’s writings provide the most detailed information on the inequality of incomes and wealth from times before the Old Ones to the present.

Potential Conflict of Interest -- “An actual conflict of interest.” (Zweig, 2015)

Professors -- See Business School Professors.

Prosperity -- Thriving with comforts and happiness. Not a synonym for “Growth”. See Growth.

Rand, Ayn -- Rand escaped from Stalinist Russia and took refuge in New York City, where she established an anti-communist intellectual salon. She advocated for the superstition that virtuous selfishness is objective and rational. She wrote a lucid defense of capitalism in her book “Virtue of Selfishness”. Her books remain widely read in our modern enlightened era, including “Fountainhead”, “Atlas Shrugged”, and others.

Real Incomes -- See Growth of Real Incomes.

Portrait of Ricardo
by Phillips (1821)

Ricardo, David -- The Old One Ricardo acquired great wealth trading shares on the Exchange. He wrote the treatise “On the Principles of Political Economy and Taxation” (1821), expostulating precise and enduring economic theories. Among these was the profound, but hardly obvious, “Tale of Comparative Advantage”, in which he showed that two countries, with their Workers unable to travel between them, could maximize their aggregate incomes if each concentrated their Workers’ efforts on making those products which they were best able to produce, selling what excess they couldn’t use to inhabitants of the other country. Economists of our modern enlightened era labeled another tale "Ricardian Equivalence", which implies that a stimulative government subsidy doesn't save, because the people save the money received, which more or less describes the behavior of the Aristocracy, the usual recipients. Ricardo also explained that the natural level of Workers’ wages is the price that enables the Workers to subsist.

Sachs, Jeffrey -- A Professor and, oddly, a relatively intelligible Economist of our enlightened modern era. Dr. Sachs advocates collaborative relationships between governments and privately owned organizations. During the late 1900s, Sachs advised new governments, including the government of Russia, that emerged when the Soviet Union ended. He advises the Secretary-General of the United Nations.

Saez, Emmanuel -- An unintelligible research Economist, Director of the Center for Equitable Growth at the University of California in Berkeley, and a collaborator with Piketty and Zucman. Economists hold Saez in high regard for the arcane mathematical runes with which he always punctuates his expressions. Saez also has talent for pictures, unusual among Economists.

Seller -- See Buyer.

Shareholders -- See Corporation. Synonym: Stockholders.

Smith, Adam -- The earliest of the four Old Ones. Often remembered for his Tale of the Invisible Hand. Smith also articulated the principles of division of labor and of the wealth enhancements through technological innovation. Some Capitalists of View may be heard to assert that Smith was a capitalist, which he was not. However, Smith described the economic system of his time, which was in his day accepted as the only economic system, a natural condition, and the default condition if the state protects private property and doesn’t participate in distributing wealth or income. Smith wrote that workers compete, bidding against one another for employment, which competition keeps their wages to a “scanty subsistence”.

Socialism -- An amorphous social and political movement, historically manifested in various forms, clustered around the concept that all persons have the right to a sustaining share of the political participation and economic benefits of the general Society. Socialism has no primary leader who dictates the principles and beliefs of Socialism. An early organized form was Chartism in the 1800s, a rallying of Workers around the People’s Charter of 1838, a list of six democratic political reforms, including universal male suffrage and secret ballots. Closely associated with labor unions, Chartists organized some of the earliest strikes of workers against their employers, seeking higher wages and improved working conditions among other things. Early Socialism included benevolent organizations providing housing for workers and communally owned businesses. From Socialism emerged the concepts of universal public education, the graduated income tax, and abolition of child labor. The “Communist League” was an organized political splinter party that commissioned the Old Ones Engels and Marx to write the party’s program in 1847, which was published as the “Communist Manifesto” in 1848. The League was formally dissolved by the remaining members in 1852. Nearly all of the Communist League would have regarded themselves as Socialists. Twentieth century autocrats including Stalin, Mao and some autocrats of our enlightened modern era have called themselves Communists. Some Capitalists of View assert with invalid inference that Socialism is or leads to autocracy. Stalin was an autocrat, Stalin was a Communist, Communists are Socialists, so Socialists are autocrats, which is the Capitalist’s Fallacy. Some Capitalists of View assert that Capitalism is or leads to personal freedom, despite the numerous counterexamples including Hitler's Germany, Pinochet's Chile, Franco's Spain, the Atlantic slave trade, 21st century China, Ernesto Geisel's Brazil, Duvalier's Haiti, Videla's Argentina

Society -- All of the people, the Aristocrats, the Nine Percent, the 90 Percent, everyone. The Society organized itself into groups called Firms to find, gather, produce and distribute stuff.

The Denmark Staff, Maersk Lines, 1914, shared per license

Staff -- Aristocrats and their families have Staffs. A Staff is one or more people, including accountants, lawyers, financial experts, lobbyists, administrators and others, who supervise the household finances and the owned businesses of the Aristocrats. Staffs report regularly to their principals on their after-tax income during the latest quarter ended, and they hope always to be able to report some increase in income from the prior period. The Aristocrat may know little about managing money or running a business, but they understand the significance of increasing or decreasing income. Staffers who report the Aristocrat’s family’s income increasing reliably from quarter to quarter will likely enjoy increases in their own incomes. Staffers who report income declining from quarter to quarter may not remain in the employ of the Aristocrat the following year. Staffers always seek to reduce their employer’s tax burden, because reduced taxes increase an Aristocrat’s income. They seek to reduce or eliminate government regulations that interfere with the Aristocrat’s businesses’ opportunities to profit by increasing the businesses’ revenues or by reducing the incomes of suppliers, workers and customers or by exploiting a public resource. For the same purpose, the Staff work to persuade legislators and regulators to create special amendments to laws and regulations that favor the income of their Aristocrat. The aggregate efforts of all the Staffs of all the Aristocrats maintain and intensify the inequality of incomes in the Society. The Staffs produce inequality of incomes.

Stiglitz, Joseph -- After the Great Wars, the unintelligible Economist Dr. Joseph Stiglitz received high awards and wrote many widely read books on assymetrical information (where parties to a trade have differing knowledge of the character of the goods exchanged) and on the economic costs of extreme inequality of incomes.

Stockholders -- See Shareholders.

Supercompensation -- Money that Firms pay to their CEOs far in excess of the money paid to other employees of the Firm, far in excess of the value they produce for the company, and far in excess of the value of a human life. In our enlightened modern era, not infrequently, the CEO (or other highly-compensated employee) will receive pay more than 160 times the value of the median amount of money paid to individual employees. In the United States, if the typical Worker does excellent work every year and so earns substantial wage raises every year for 50 years, then the Worker will have approximately the same level of pay as the typical CEO.

Supervisors -- Managers who manage Workers directly.

Tales -- See Old Ones.

Boston Tea Party
by Cooper (1789, USA Public Domain)

Tea Party -- An old political party for Capitalists of View. The primary policy objective for hundreds of years has been to increase the net income (after taxes) of the Aristocracy during the next two or three years. All other policies are subordinate, less important, reversible, and generally adopted or opposed or ignored at one time or another for expediency. Most of the Staffs prefer the Tea Party, though Aristocrats don’t necessarily. The Tea Party, also called at times the GOP and the Trump Party, flourished during the time of Reagan, then faded, revived with vigor in February 2008, and persists in our enlightened era. See also Curve of Laffer.

In the US, the Ten Percent collect about 2/3 of total income growth,
and the 40 Percent capture nearly all of the rest.

Ten Percent -- The wealthiest tenth of the population of the Society. The Old Ones Marx and Engels called this tenth the Bourgeoisie, and referred to them as the owners of Capital.

Trade -- In a trade, there is always at least one buyer and one seller. These are the parties to the trade. Each of the parties gives up something they want less in exchange for something they want more. Each party benefits from the trade. The benefit is the difference between the thing wanted more and the thing wanted less, a kind of profit for each party. Each party has a choice whether to participate in the trade. Each party may decline to participate. Each party may choose some other person with whom to trade. Usually, the buyer is the party who gives up cash, and the seller is the other party. If both parties have a wide range of counterparties from whom to choose, and if they both participate freely, without coercion or deception, then we call it a fair trade.

Transaction -- Synonym of Trade.

Unemployment -- The Old One Engels noted in his “The Condition of the Working Class in England” that the factories would build up their operation, sometimes at a high tempo, and continue producing for six to ten years. Then a waning of revenues would affect most of them more or less simultaneously so that the product of a factory working at capacity couldn’t be sold at a price sufficient to pay the costs. Among these costs was the wages of the workers, since the workers weren’t considered legally interested in the ownership and profits. Simply reducing the wages did not go well with the workers. For the better paid workers, their pride suffered, and they felt unjustly rewarded for their efforts, kindling resentments and animosity. But for most workers, since their wages just barely sufficed to feed their families for a few more days, a reduction in wages implied insufficient food to sustain them, and some of them would become desperate and unpredictable. The level of wages, like all other choices in the Firm, were the decision of the managers, the executives, the board of directors, the Staffs, the Ingenious Innovative Job Creators, and ultimately the Owners. Given the adverse effects of reducing wages, the Ingenious Innovative Job Creators typically chose to dismiss some of the Workers so that the number of remaining Workers corresponded with the level of production. “Dismiss” meant discontinuing the employment and the wages. The people of the general Society described the dismissed Worker as “unemployed” and existing in a state of “unemployment”. Since multiple factories in the region would dismiss Workers at about the same time, the Workers contended with each other. Few Workers could find quickly a new job and a new stream of wages. Since they didn’t participate in the profits of the Firms, and since their wages had dropped to zero, “unemployment” meant “starvation”.

Wealth -- Wealth has multiple meanings in the Fairy Tale of Capitalism. Most often, Wealth refers to a kind of property capable of becoming the Capital component in the transformation of Capital by Labor into product exchanged for incrementally larger Capital for the owner. More than half the income of the Aristocracy consists of the increments this kind of Wealth produces. Another usage of “Wealth”, usually in the adjectival form “Wealthy”, pertains to a person with a relatively large income, especially when that income is Supercompensation. The Aristocracy are always considered Wealthy. Not uncommonly, the Ten Percent are considered Wealthy, depending on the context. The 90 Percent are never considered Wealthy. The unintelligible economists Chetty and Hendren found that children of households in less wealthy neighborhoods that move

Albert Parsons,
leader of a railway strike in 1877

to wealthier neighborhoods become wealthier adults than children of households in less wealthy neighborhoods that don’t move.

Workers -- People for whom nearly their entire income arises from compensation for their Labor. Labor is the productive activity of the Workers. Nearly all of the 90 Percent are Workers or dependents of Workers. Most of the Ten Percent are Workers, too, though they tend to derive some income from their property. See Wealth. See Labor.

Working Class -- See Workers.

The Staffs told their children that the Old Ones Karl Marx and Friedrich Engels were the bad guys, and Adam Smith and David Ricardo were the good guys.

FTC Ring: <Previous | Next>

Unless I'm mistaken, this Encyclopedic Glossary is the (chronologically) last chapter of the Fairy Tale of Capitalism.

I will always have deep gratitude for the prepublication reviews, the editing, the advice and the encouragement of friends and associates. While I prefer think of all of them as significant, I must mention explicitly the kind help and interest of Mr. Don Zirulnik, Dr. Doug Stetson, Mr. Richard Leaf, Mr. John Brockman, Ms. Nancy Flack, Dr. James Reeves, Dr. Dennis Martin, and
especially Dr. Linda Cunningham.

Images

All images are either in the Public Domain or used as allowed under Fair Use doctrine.

“Adam Smith” by John Kay (1790, Library of Congress, Public Domain, Wikimedia, https://commons.wikimedia.org/wiki/File:AdamSmith1790b.jpg)

"Albert Parsons" (undated photo, Public Domain, published 2020 by Chicago Tribune, http://www.chicagomag.com/city-life/May-2020/The-Battle-of-the-Viaduct-1877/)

“Average Tax Rates by Income Groups” (from Saez, Zucman, “Progressive Wealth Taxation”, Oct 2019, Brookings Papers on Economic Activity, final draft, emlab.berkeley.edu/~saez/saez-zucmanBPEA19slides.pdf)

“Ayn Rand” (1925, USSR passport photo, Public Domain, https://commons.wikimedia.org/wiki/File:Ayn_Rand.jpg)

"Bottom 50% national income share" (Saez, Piketty and Zucman, "Distributional National Accounts: Methods and Estimates for the United States", NBER Working Paper NO. 22945, Dec 2016, https://eml.berkeley.edu/~saez/PSZ2016Slides.pdf)

“David Ricardo” by Thomas Phillips (1821, National Portrait Gallery, Public Domain, Wikipedia, https://en.wikipedia.org/wiki/David_Ricardo#/media/File:Portrait_of_David_Ricardo_by_Thomas_Phillips.jpg)

The Denmark Staff (Maersk Line, 1914, Wikimedia.org, shared with attribution under Creative Commons Attribution-Share Alike 2.0 Generic license, https://commons.wikimedia.org/wiki/File:The_staff_(1914)_(7312784848).jpg)

"Ford - Moving Assembly Line" (ca. 1913, Public Domain, http://www.westernslopeauto.com/blog/ford-assembly-line-history-in-vintage-pictures/)

“Janissary Recruitment in the Balkans” by Ali Amir Beg (1558, Wikimedia, https://commons.wikimedia.org/w/index.php?curid=22361418 )

"John D. Rockefeller" (ca. 1875, Public Domain, https://commons.wikimedia.org/wiki/File:John-D-Rockefeller-sen.jpg#/media/File:John-D-Rockefeller-sen.jpg )

“Optimal Tax Rate on Comprehensive Income” (from Stantcheva, Saez, “A Simpler Theory of Optimal Capital Taxation”, Journal of Public Economics, 2018, https://emlab.berkeley.edu/~saez/saez-stantchevaJpubE18optKtax.pdf)

“Portrait of Noah Webster” (Samuel F. B. Morse, circa 1825, Wikimedia, https://commons.wikimedia.org/wiki/File:Portrait_of_Noah_Webster.jpg )

“Top 1% Wealth Share 1890-2017” (Saez, Zucman, et al, from Alvaredo, Chancel, et al, “Global Inequality Dynamics: New Findings from WID.world”, 2017, https://eml.berkeley.edu/~saez/ACPSZ2017AER_Slides.pdf)

“Wealth shares of bottom 90% and top 0.1% of families” (Jan 18, 2019, Saez & Zucman, letter to Senator Warren, https://emlab.berkeley.edu/~saez/saez-zucman-wealthtax-warren-online.pdf)

Sources

Raj Chetty, Nathaniel Hendren, “The Impacts of Neighborhoods on the Intergenerational Mobility I: Childhood Exposure Effects” (Quarterly Journal of Economics, Feb 10, 2018, https://doi.org/10.1093/qje/qjy007)

Raj Chetty, Nathaniel Hendren, “The Impacts of Neighborhoods on the Intergenerational Mobility II: County-Level Estimates” (Quarterly Journal of Economics, Feb 10, 2018, https://doi.org/10.1093/qje/qjy006)

Raj Chetty, Nathaniel Hendren, Patrick Kline, Emmanuel Saez, “Where is the land of Opportunity? The Geography of Intergenerational Mobility in the United States” (Quarterly Journal of Economics, Sep 14, 2014, https://doi.org/10.1093/qje/qju022)

Friedrich Engels, “The Condition of the Working Class in England” (1845, http://amzn.to/2snelK9)

Thomas Piketty, “Capital and Ideology” (2020, https://www.amazon.com/dp/0674980824)

Thomas Piketty, “Capital in the Twenty-First Century” (2017, https://www.amazon.com/dp/0674979850/)

David Ricardo, “On the Principles of Political Economy and Taxation” (1817, 1821) http://www.econlib.org/library/Ricardo/ricP.html

Emmanuel Saez, “Striking it Richer: The Evolution of Top Incomes in the United States (Feb 2020, UC Berkeley, https://emlab.berkeley.edu/~saez/saez-UStopincomes-2018.pdf)

Rick Santelli, “We’re thinking of having a Chicago Tea Party in July” (Feb 19, 2009, CNBC video, https://youtu.be/FLLC8ER9a54?t=2m8s, for Santelli's full statement https://youtu.be/FLLC8ER9a54 )

Semega, Kollar, Creamer & Mohanty, “Income and Poverty in the United States: 2018” (2019, United States Census Bureau, https://www.census.gov/content/dam/Census/library/publications/2019/demo/p60-266.pdf)

Jason Zweig, “Devil’s Financial Dictionary” (2015, PublicAffairs, https://smile.amazon.com/Devils-Financial-Dictionary-Jason-Zweig/dp/1610397762/)

Ford - First Moving Assembly Line, ca. 1913

AI & Asset Allocation, Part 3

2019-08-20T11:49:00.000-07:00

Third part of an opinion in three parts

< Part 1 | Part 2 | Part 3 | Appendix 1 | Appendix 2 >

image: Fischchen, Breeding Ostrich (May 2007, shared per license)

In Part 1, we considered and opined about:
1. The strenuous life of the beach investor.
2. Artificial intelligence (AI).
3. The appearance of low risk with investments in cash and bonds.

In Part 2, we considered and opined about:
1. Using some of your investment portfolio for investing in cash and bonds.
2. Getting higher rewards by taking risks with investment in stocks.
3. Managing increased risks through diversified stock investments.
4. Managing increased risks through broadly diversified stock index ETFs.
5. Getting higher rewards with broadly diversified growth stock index ETFs.
6. Offsetting personal medical expenses with health-and-pharma sector funds.
7. Metrics for choosing among broad stock index funds.

In this article, Part 3, we will take a close look at making small bets in individual stocks and sector ETFs. Appendix 1 considers another view, investing in actively managed funds. Appendix 2 discusses definitions and formulas for some terms and calculations.

On Placing Small Bets

There are no sure things in sector funds and individual stocks. You MUST be ready to accept some significant (perhaps total) permanent losses on some or many of your choices when you invest in sector funds or individual stocks, for the sake of making extraordinary profits on a few. If you can't do that, then go back to the paragraph on “Sensibility and Prudence” in Part 2, and choose the 100% solution. By investing in broadly diversified stock index ETFs, you use diversification of holdings to reduce the risk you bear. You avoiding putting all your eggs in one basket. When you buy a S&P500 index ETF, you put your eggs in 500 baskets.

The investor in sector funds and individual stocks makes many small investments so that lightning has many chances to strike somewhere in the portfolio of holdings, and there ignite the next Microsoft or Google or Netflix or Facebook. But most of these hoped-for bolts of lightning never strike, so you want keep your losses small by keeping the initial investment small.

Be skeptical. Don’t rely on “sure things”. Jettison your vanity, and think small. Invest on the order of $1000, $2000, $5000, $10000, definitely no more than 1% of your portfolio in any one stock or sector ETF, and 1% seems too much to me. Smaller is better.

If you rely on your intuition, or reading about hot stocks in the news, or unverified information you heard from a friend, then you won’t find a better motto than “Smaller is Better”, and you should keep your maximum cash investment in any individual stock or sector ETF to $1,000. If you intend to make larger investments in individual stocks or sector ETFs, then to outperform the index ETFs, you MUST read a lot of detail, have some understanding of basic financial statements and their line items, do some calculations, and have the ability and willingness to seek and find information you don’t already have. If you can’t or won’t do these, then save your money, go back to Part 2, forget about individual stocks and sector ETFs, put your money in broad stock index funds and go back to the beach (see Part 1).

You might wonder “How small is too small?” Two disincentives push against smaller holdings. First, the broker’s commission should be small enough to ignore. In days of yore, we would allow 2.5% for the commission. In our modern enlightened era, you can easily find reliable brokers that charge less than $5 per trade. If you pay much more than $5, then change brokers. If your trades are $1000 or more in size, then the commission will be less than 0.5%. You can generally ignore that level of commission, because the price of almost any stock can unsurprisingly vary more than 0.5% in one trading day, making the commission a relatively insigniicant cost for the long term investor on the beach. So keep your buy orders to $1000 or more.

A platoon of assistants
(The Denmark Staff, 1914, Wikimedia, shared per license)

Second, small sizes of investments can, with time, produce a portfolio holding many different stocks. If you have a platoon of assistants, you can instruct them to attend to portfolio operations. But if you manage your portfolio between dips in the sea (see Part 1), then personnel management may crowd your schedule uncomfortably. Then, someday, while doing an end-of-quarter review, you find a stock or fund in your portfolio that you didn’t know you had. This implies either that some other person trades in your account, or more likely that you forgot about it and your chosen investment size is too small. If you are trading $1000, then switch to perhaps $5000 or $10,000. If you are trading $10,000, switch to $50,000 or $100,000, but always an amount well less than 1% of your portfolio.

Sector funds

Sector funds specialize in particular industries. Look for index funds intended to track the performance of all, or of the largest, companies in the industry. Beware of arcanely contrived indexes, synthetic strategies, and leveraged indexes unless you lust for risk injected directly into your central nervous system. Play it safe. Look for long-established indexes managed by long-established firms, including but not limited to MSCI, S&P Dow-Jones and FTSE Russell.

Telecom, Petroleum, Robotics, Biotech and other fairly indexed sector funds can grow less quickly in value than individual stocks, but since the many individual stocks held in these funds will offset the ups and downs of each other, the fund will fluctuate more moderately. While an individual stock can lose nearly all its value in a few months, the fund will probably take decades to decay to oblivion, if it comes to that.

For choosing sector index funds, I have found these metrics relevant:

1. 10-yr price growth (ignore younger funds, prefer more rapid growth, positively correlated),
2. Rate of dividends per share (negatively correlated, a low number is better, as in golf),
3. Beta (negatively correlated, a low number is better, as in golf),
4. Book value divided by price (negatively correlated, a low number is better, as in golf).

Individual stocks

If investing in stocks bores you, or if you seek certainty, or if you fear losing money more than you look forward to gain, or if you perceive mere randomness governing choices in the madhouse which is the stock exchange, or if it takes more time than you want to spend on it, or if you expect that what you might choose likely won’t beat the S&P500, then stay away from investing in individual stocks.

There are good people who will treat you well, and they are honest, phronetic, well-intentioned, knowledgeable and fair-dealing traders in the market for individual stocks. And you will also find troublesome people, charlatans, hucksters, rogues, chislers, persons with conflicts of interest, ignorant persons, incompetents and the well-intentioned misguided. Think, judge and choose. Seek and work with the good people and abandon the others.

The stock market is where, if you put all your money in one investment, then you can lose all your money. This is the school of hard knocks for people who have more money than they want to spend for the next few years. This is the land of opportunity that can produce millionaires from people who make serendipitous choices. This is the arena in which you see all kinds of ugly and beautiful, wild and crazy, useless and fabulously enriching stuff. This is the midway where you can invest in stodgy insurance companies, or skyrocketing disruptive high tech, or old reliable industrial giants, or lithium mines in Chile, or a breakthrough in next-generation atomic fusion electricity, or small companies currently managed by the third generation of the family that produce profit year after year, or brilliant business models that will turn profitable any day now, or companies that never earned a profit or sold one unit of product, or the next Microsoft.

You won’t be able to choose with certainty, so cast your net widely, and keep your losses small. See "On Placing Small Bets", above.

For choosing individual stocks, I have found these metrics and practices relevant:

1. Ignore any company that reported a loss (negative net income available to common stock including extraordinary items) in any of the last five fiscal years reported in their latest annual report, a publicly available document. (If your broker doesn’t offer this information on their website, then get another broker, seriously.) If you are eager to invest in companies that have lost money in recent years, then expect that you will lose on most of these bets, and keep the amount of your investment utterly minimal.
2. Price change between Oct 9, 2007 and Mar 9, 2009 (ignoring stocks too young to measure, prefer higher growth and less decline, positively correlated).
3. 10-yr growth of price, credibility weighted, giving more credibility to all-stocks average versus specific stock observation for stocks younger than 10 years (prefer higher rates of growth, positively correlated). If you don’t know how to do the credibility calculation, then use the 10-year growth of price, ignoring stocks younger than 10 years.
4. 10-yr growth of price, ignoring stocks younger than 10 years (prefer higher rates of growth, positively correlated).
5. Number of years during the last 5 that the annually reported revenue has increased from the prior year, using the 5 most recently reported years, and ignoring stocks for which you can't find reliable numbers for all 5 years. You will find, at most, 4 increases (a perfect score) in 5 years. (positively correlated).

On Selling

Trim your holdings once every year or two so that no one stock or sector fund is more than 25% of all the individual stocks and sector funds you own. When any one stock or sector fund is more than 25% in value of your stocks-and-sector portfolio (the stocks-and-sector portfolio is all the individual stocks and sector funds you own) then it is too much. Sell it (trade it for cash) down to 10% of all your stocks-and-sector portfolio, and trade the cash for something else.

Otherwise, sell the stocks and sector funds that have lost the most value, but only when metering out steady income in your old age, when paying unusually large medical bills, or when buying a house to live in.

If there is a stock market crash, don't sell. The broadly diversified portfolio, historically, usually recovered fully within two years, rarely more. People who tried to sell to avoid further loss were usually too late or too early. Those who tried to buy just before the upturn were usually too early or too late. Those who tried to time their trades for just the right moments seldom became richer for the experience than those who just held on.

Before investing in individual stocks, re-read the "Sensibility and Prudence" paragraph in Part 2.

Concluding remarks

Almost all investments in our modern era involve the use of computers. Some of the calculations and algorithms might be called AI. Whether it’s AI or not, it helps to have some idea of what services it provides you, and you should definitely seek some understanding of pertinent risks and rewards before investing your money in any bonds or stocks. We think of cash as an investment of low risk, because the price never changes. A dollar is worth one dollar. A euro is worth one euro. However, cash has no promise of big earnings or investment returns. We think of bonds backed by governments or large, well-managed companies as having little risk, especially when we buy many different bonds aggregated in broadly diversified index ETFs or funds. Generally the bond funds have better return than cash, but bonds fall in value when interest rates rise. We expect that broadly diversified stock index funds will have much larger returns than bond funds in the long (5+ years) run. We also expect the risk of wider fluctuations in price with stocks and stock funds. Sector funds invest in stocks of particular industries. They fluctuate more widely than the broadly-diversified index funds, so we call them riskier, and they can provide bigger returns in the long run. Individual stocks can produce thunderously wonderful returns in the long run, but at risk of partial or total loss. With individual stocks, seek to keep your losses small by never putting more than 1%, at most, of your portfolio (all the stocks, bonds, ETFs, mutual funds, and cash you own) into any one stock. With individual stocks, you give good fortune a chance to visit your portfolio and greatly increase your wealth. If your investments are so risky that you can’t sleep at night, then sell off enough of your riskier holdings so that you can sleep easily.

Full Disclosure

I own shares of Alphabet (Google, GOOGL), Netflix (NFLX), and Facebook (FB).

< Part 1 | Part 2 | Part 3 | Appendix 1 | Appendix 2 >

Images and Sources

See Part 1.

Michigan, USA, Aug 2019
Image: Daniel Brockman, Public Domain.

AI & Asset Allocation, Appendix 1

2019-08-20T11:23:00.000-07:00

History is opaque. You see what comes out, not the script that produces events.
-- Nassim Taleb, "The Black Swan" 2008

< Part 1 | Part 2 | Part 3 | Appendix 1 | Appendix 2 >

A Selection of Actively Managed Funds

Image: Belfius, Scales
(2012, shared per license)

Mr. Rock Brockman, ChFC, CLU, principal of WHB Financial Advisors of Rockville, Maryland, on reading Parts 1 and 2, wrote to me identifying seven mutual funds, with their performance measures, that outperformed the S&P500 over the last 40 years. These are “actively managed” funds, in which the manager chooses investments according to some method that depends on her own principles of good investments. They aren't “passively managed” funds based on an index the manager seeks to match. (Those funds we have discussed in Parts 1, 2 and 3 of this article are “passively managed” funds, for which the method can be duplicated.)

This table shows seven funds that have, from 1976 to 2019, increased in value more than the S&P500. The table shows the cumulative growth of a $10,000 investment, assuming reinvestment of dividends. Mr. Rock Brockman provided these figures from sources he believes to be accurate. (VFINX, a S&P500 index fund, is shown for comparison).

Fidelity Magellan	FMAGX	$3,910,000
American Funds Growth Fund	AGTHX	$2,610,000
T. Rowe Price New Horizons	PRNHX	$2,390,000
Fidelity Contrafund	FCNTX	$1,960,000
American Funds	AMCPX	$1,950,000
Dodge & Cox Stock	DODGX	$1,620,000
Davis NY Venture	NYVTX	$1,040,000
Vanguard 500 Index Investor	VFINX	$822,541

No one can assure that these funds will perform similarly in the future.

< Part 1 | Part 2 | Part 3 | Appendix 1 | Appendix 2 >

Images

See Part 1.

Image: Daniel Brockman, Public Domain

AI & Asset Allocation, Appendix 2

2019-08-20T11:22:00.000-07:00

"... when you can measure what you are speaking about, and express it in numbers, you know something about it;"

-- Lord Kelvin, 1883

< Part 1 | Part 2 | Part 3 | Appendix 1 | Appendix 2 >

Guide to Terms and Calculations

Lord Kelvin 1824-1907
Image: Messrs. Dickinson
London, New Bond Street

Here we have an extremely brief look at some arcane but useful terms and simplified useful techniques, and a little guidance toward more information for readers interested in further investigation. Generally, the research pages of your broker’s website are the easiest place to find this information (except what you must calculate yourself). You can readily find most or all of these terms and calculations using your favorite search engine or reading about them in Wikipedia.org.

Find explanations of some additional terms in Part 2.
For additional readings, see the sources list in Part 1.

Assets: All the company’s money, amounts loaned to or invested in others, property, supplies and materials on hand, funds set aside to pay future employee benefits, tax refunds expected but not yet received, and amounts billed to customers but not yet paid.

Bond: A debt owed by a company or government and divided into many uniform shares called “bonds”, having a maturity value (a.k.a. face value) to be paid at a future “maturity” date. Most bonds pay interest, a stated percent of maturity value, though some pay no interest. Some bonds are traded on securities exchanges.

Book value (a.k.a. Equity or Stockholder’s Equity): Assets minus liabilities. For a stock, see the company’s balance sheet, published annually. For stock ETFs for the long term beach investor (see Part 1), book value is the sum of the book values of the stocks held in the ETF, and the ETF has no significant liabilities (ETFs that have significant liabilities are called “leveraged” ETFs, and if you are wary of risk, then know that leveraged funds are playing with fire.).

Book Value Divided by Price: Your broker’s website will probably show the price per share divided by book value per share, or maybe they will show a blank or “N/A”. If the broker shows you price divided by book value, then calculate book value (b) divided by price (p) as

b/p = 1 / (price divided by book value).

If the broker shows you a blank or “n/a” or the like, then they feel challenged by b less than or equal to zero, in which case you should calculate book value manually from the most recently reported quarterly balance sheet (provided by the broker). Then, using market capitalization for the entire company, calculate

b/p = book value divided by market cap

If your broker reports multiple versions of book value, I recommend using "tangible book value (MRQ)", or something like that. "Tangible" means goodwill and intangible assets are excluded, two features of financial accounting that one may easily confuse with hot air. "MRQ" means "Most Recent Quarter" reported by the company.

Positively Correlated.
Image: Wikimedia, "Ordinary Least Squares", Public Domain

Correlated: If the price change usually goes up when the metric goes up, then we say the price change and the metric are “positively correlated”. If the price change goes down when the metric goes up, then we say they are “negatively correlated”. Correlation doesn’t tell us whether one causes the other, or how certain we are, or how intense is the effect. Correlation is a number between -1 and 1. Nearly all spreadsheet apps include the correl() function which calculates correlation, or the equivalent pearson() function. Example: For sector ETFs, we say beta (the metric) and the price change are negatively correlated, the correlation is a negative number, meaning that as beta decreases, we expect the future price change will increase, and as beta increases, the future price change declines.

Credibility: A weighted average of a useful, though not fully believable, measurement and a standard value, though general and non-specific and less relevant, such as the average for all stocks. The credibility calculation allows us to compare a stock like TWTR, which began trading about 5 years ago, with a stock like MA which has been around for decades. If you think an 5-yr price growth metric (g) is a more believable predictor than a 2-yr price growth, but you would need a 10-yr growth of price metric to believe it “completely” and compare it with other stocks, then we can base the weighting on the number of years available (y), divided by 10. Then we calculate the credibility (c) as

c = square root of the number of years available divided by 10

c = sqrt( y / 10 )

("sqrt()" is the spreadsheet software function for square root)

Example: TWTR has price history since 2014, so y=5, and then c=0.707.

What we take as the standard (s) could be the average for all stocks for which we have 10 years of information, or the median, or the S&P500, or whatever we are prepared to believe if we don’t know the 10-yr metric for the specific stock, knowing we aren’t exactly right, but knowing the standard is a better estimate than “n/a”. Then we weight the partial growth information (g) we do have by the credibility (c), and for the information we don’t have, we use the standard (s) weighted by (1 - c).

Credibility weighted 10-yr price growth = c * g + ( 1 - c ) * s

Example: if TWTR, y=5, g=1.1, s=3.1, then c=0.707

and

credibility-weighted 10-yr growth = 1.7.

Liabilities: Money owed to others, salaries and benefits owed to employees, advance payments from customers, amounts billed to those few customers that probably won’t pay (doubtful accounts), bills for purchases not yet paid, taxes not yet paid, and payments promised to lenders, stockholders and investors.

Market Capitalization (a.k.a. Market Cap or Capitalization): Generally, price multiplied by the number of shares outstanding. If a company has more than one kind of stock, then the market cap of the company (your probable topic of interest) is the sum of the market caps of the various kinds kind of stock.

Price: Unless otherwise indicated, these articles refer to the price of the last trade when the exchange closes for the day, the “closing price” or “last price” on a given day.

Rate of dividend increase (or decline) per share: I take the most recent five years of dividends reported by the company, summarize them by 12-month periods, and apply exponential least squares regression to get the average annual rate of increase. NO, you don’t need to do that. All you need is some way to come up with an unambiguous, repeatable, generally applicable estimate of what rate of increase to expect in the future, so that you can compare one stock with another. If you don’t know exponential least squares regression, and you don’t feel like reading how to do it on Wikipedia https://en.wikipedia.org/wiki/Ordinary_least_squares, or asking a friend, there are satisfactory alternatives.

Here is one. Use the slope() function included with nearly all spreadsheet software. A stock with larger (steeper) slope number has dividends increasing faster.

s = slope of least squares line

= slope(y1:y5,x1:x5)

For more information, type “slope function” into your favorite search engine.

Here is a second. Divide the year 5 (most recent) dividend (d5) by the year 1 (earliest) dividend (d1), take the square root of that, then take the square root of that. That is, you can get an estimate of the future rate by either of the following two equivalent calculations.

Estimated rate = sqrt( sqrt( d5 / d1 ) ) = ( d5 / d1 ) ^ ( 1/4 )

Reinvestment of dividends: Using dividends you receive to buy additional shares of the investment that produced them. Many or most brokers will automatically reinvest dividends for you, at no charge, on your request.

Return: The amounts of money you get from an investment, usually compared with what you pay to get it in the first place. That is, how much money do you have when you get out of this investment, compared with how much you put into this investment in the beginning. Includes the dividends you receive while you hold it, and the price you get when you sell it, less the costs of holding and keeping and selling it, including taxes and broker’s fees and your time. For many purposes, the price you sell for, compared with the price you buy for, gives you a good approximation of the return.

sqrt(), square root. The square root of x is sqrt(x). Nearly every spreadsheet app provides sqrt(), and you probably have a square root function on the calculator app on your phone, and you can type “square root of 0.93” into your favorite search engine to get the calculation, and you can calculate it by hand (ask your favorite search engine).

Ticker (a.k.a. Ticker Symbol): A standardized few letters or numbers representing a stock or bond or ETF or mutual fund or something else traded on an exchange. Examples: AMZN is the ticker for Amazon.com, IYR is the iShares U.S. Real Estate ETF, LUV is Southwest Airlines, VOO is the Vanguard S&P500 ETF, STZ/B is the Constellation Brands Inc. class B shares.

10-yr growth of price: the most recent price divided by the price on this date ten years ago.

< Part 1 | Part 2 | Part 3 | Appendix 1 | Appendix 2 >

Images and Sources

See Part 1.

Alma, Michigan, USA.
Image: Daniel Brockman, Aug 2019, Public Domain

AI & Asset Allocation, Part 2

2019-06-20T19:23:00.000-07:00

Second part of an opinion in three parts

Snapshot of Edwin Lefevre in 1907

"You remember Dickson G. Watts' story about the man who was so nervous that a friend asked him what was the matter.
'I can't sleep,' answered the nervous one.
'Why not?' asked the friend.
'I am carrying so much cotton that I can't sleep thinking about it. It is wearing me out. What can I do?'
'Sell down to the sleeping point,' answered the friend."
-- Edwin Lefevre in 1923

< Part 1 | Part 2 | Part 3 | Appendix 1 | Appendix 2 >

In Part 1, we considered and opined about:
1. The strenuous life on the beach of your kind of long-term investor.
2. It’s hard to consistently beat the investment performance of the S&P 500 in the long term.
3. Questioning the value of AI (artificial intelligence) for tax-loss harvesting,
4. Doubtful value of AI’s daily portfolio rebalancing.
5. AI portfolio choice, of specific investments, not proven, yet.
6. Costuming assessment of investor’s risk preferences to look like AI.
7. We don’t know AI’s adequacy for the next big crash.
8. Bond values fall when interest rates rise, and vice versa.
9. You probably already own some bond equivalents, like Social Security.

Continuing from Part 1 with our discussion of bonds...

Have a good, clear reason for buying bonds, otherwise you forfeit the higher return available in, say, stocks. Verify your good, clear reason with someone whose financial advice you respect. (If you wouldn’t ask a hairdresser if you need a haircut, then why ask a person who sells bonds if you need to buy bonds? The person who urges you to buy bonds from them may have much wisdom and may be the most honest person you know, but if they get a commission on the sale, then let's bear in mind their conflict of interest.)

about ETFs…

An ETF (Exchange Traded Fund) is a pool of assets in the care of a manager who issues share certificates in the pool and who buys and sells investments for the pool consistent with the prospectus (every ETF has a prospectus, a document stating the organization of the ETF). Each certificate represents a proportional claim on the assets of the pool. The shares trade on an exchange, such as the NYSE (New York Stock Exchange) or NASDAQ, so you can buy or sell them like stock certificates. In this article, we consider three kinds of ETFs:

Bond index ETFs - The manager buys and sells bonds for the pool to match the performance of an independently determined index. There exist many indexes, but we are interested in indexes of broad classes of government or high grade corporate bonds.

Sector index ETFs - The pools contain common stocks managed to match the performance of an independently determined index of a particular industry, country or other narrow category. For instance, you can buy sector index ETFs to match the performance of the health care, telecommunications, real estate, and petroleum industries, and of the publicly traded companies in Switzerland, China, Japan, United Kingdom, Eurozone, and Chile, and of many other countries and industries.

Broad Stock index ETFs - The pools contain common stocks managed to match the performance of an index reasonably defined to specify “the entire market”. The classic, oldest examples are S&P500 index funds VOO and SPY, which match the 500 largest companies traded in the US. There are broad stock index ETFs that attempt to match all the publicly traded companies in the world, and more specialized in the largest companies of particular countries (indistinguishable from country sector index ETFs), and in large-capitalization (big) companies, small-capitalization (little) companies, and mid-cap (medium sized) companies. Also, we find “growth” stock variations, which contain the cross-section of companies with low book-to-price ratios, and “vaue” index ETFs, which contain companies with high book-to-price ratios.

On the other hand, as long-term investors, we have little interest in ETFs which aren’t managed to match the performance of an index, but which are managed according to the manager’s judgement, also called “actively-managed” or sometimes “hedge” funds.

See more definitions in Appendix 2.

If you decide to buy bonds, then buy bond index ETFs (Exchange Traded Funds), plain vanilla bond index funds invested in US govt securities or high-grade US corporate bonds, such as ticker symbols SCHZ, ILTB, SPTL or VTIP. Use ETFs, because selecting individual bonds is tedious and arcane, requires frequent attention to your holdings to reinvest on maturity of a bond, and because only those who trade hundreds of thousands of dollars in each trade can justify the time spent on this work. With ETFs, you avoid those concerns.
If your concern about whether you have enough invested in bonds and cash keeps you awake at night, then buy enough bond ETFs that you can sleep at night. Cash has nearly no investment return, but it won’t lose its face value, so many regard it as extremely low risk. If you are more than 30 years old, then keep enough cash to pay your living expenses for 3 to 6 months, and invest the rest of your cash in something.

That leaves us with stocks...

A definition ... when talking about stocks, "cap" is "capitalization", which is the number of shares multiplied by the price.

To get significant rewards, you must take risks. Use diversification of investments and long-term holding periods to moderate the risks you must take.

For investments outside of the US: Mr. Mark Hulbert has found that returns on US versus ex-US stock indexes ran, historically, in long 5+ year episodes where one is higher than the other. Generally, there is no reason to buy ex-US stock ETFs at this time.

Your portfolio should consist of ETFs of broadly diversified stock index funds and perhaps some bond funds (see warning about bonds above), unless you want to invest in some individual stocks (see Part 3), in which case, reduce the stock ETFs to 95% of your stock investments, or to 90%, if you must.

If you are shy about risking fluctuating prices, then buy a S&P500-indexed large cap fund like VOO or SPY to avoid extreme fluctuations. If getting as much increase in value as you can reasonably expect interests you more, then get a large cap growth index fund like VUG or a small cap growth index fund like SLYG. Higher rates of growth come with increasingly large expectations of fluctuations of prices over the next 2 or 3 years, but if you are going for the long 5+ years horizon, then your long 5+ years holding period mitigates the price fluctuation risk. The relative return advantage of a growth fund, such as VUG, is significant over a ten-year period, compared with its vanilla siblings, such as VOO. Small cap growth funds show only small return advantage versus large cap growth variants.

So, for broadly diversified stock index ETFs, in order from higher rates of value increase (return) to lower:
1. Small cap growth -- expect highest price fluctuations, highest rates of growth in value.
2. Mid cap growth.
3. Large cap growth.
4. Large cap S&P 500 -- expect lower price fluctuations, lower rate of growth in value.

You can also buy value index ETFs, instead of "blend" growth+value (plain vanilla like the S&P500) index ETFs or growth index ETFs. I don't think the value index ETFs are worth the price fluctuation risk forgone, but if you are worried, put 2%-points of your stock portfolio in bond ETFs and buy growth index ETFs.

My recommendation for stock index ETFs: Go for growth.

Exception: if you expect high (a large part of your personal budget) and rising medical expenses, then you might like to have an investment that would increase in value with your medical expenses, and then you might substitute health-and-pharma sector funds (for example XBI, IHF or VHT) for a large portion (up to 1/4) of your investment in broad stock index funds.

For choosing broad stock index funds, I have found these metrics relevant:

“When forced to choose, I will not trade even a night’s
sleep for the chance of extra profits.” -- Warren Buffett

1a. 10-yr growth of price (credibility weighted, giving more credibility to all-funds average versus specific fund observation for funds younger than 10 years, and if you can't do that calculation, then ignore this metric, and ignore funds younger than 10 years),
1b. 10-yr growth of price (ignore funds younger than 10 years),

2. Book value divided by price (inverse of price divided by book). Book value divided by price correlates negatively with future performance, that is, a low score is better, as in golf.

Sensibility and Prudence: It's sensible and prudent and low in effort to put 100% of your stock portfolio into ETFs of broadly diversified stock index funds. You may give up a percent point or two of returns in many years, but the 100% solution is a lot easier and a lot less labor than trying to get just a little more return. If you choose this 100% solution, then you can make your portfolio choices, order your trades, and never sell. (And if it allows you sleep better, put a portion of it in bond funds, but see warning about bonds above). Then go outside and play, and stop reading here.

On placing small bets on sector funds and individual stocks… see Part 3.

Disclosure

I own shares of VTIP, XBI, VOO, VUG, SLYG and VHT.

I want to thank my proofreader,

whose corrections and comments were

indispensible.

< Part 1 | Part 2 | Part 3 | Appendix 1 | Appendix 2 >

Images, notes and sources

See complete list in Part 1.

Wild foxglove. Gig Harbor, Washington, USA, June 2019.
Image by Daniel Brockman.

AI & Asset Allocation, Part 1

2019-05-24T11:48:00.000-07:00

First part of an opinion in three parts

< Part 1 | Part 2 | Part 3 | Appendix 1 | Appendix 2 >

The Turk marvelously won at chess

Imagine the sun warming you on the beach. You check the financial headlines on your mobile phone. A down day. You put the phone under the umbrella and take a dip in the sea. Returning to the umbrella, you ask the waiter to bring another cold one for you and your companion. This feels good. The next day, you check the financial headlines on your mobile phone. Stocks gained on the exchange. You log in to your brokerage. A few down and a few up, and a respectable increase overall for the last few years. You put the phone under the umbrella and take a dip in the sea. Returning to the umbrella, you ask the waiter to bring another cold one for you and your companion. This feels good. Just another couple of days for your kind of investor.

This triplet of articles is about the roles of AI (Artificial Intelligence), cash, pensions and Social Security, bond funds, stock funds, and individual stocks in your personal investment portfolio, that is, asset allocation.

Ample research shows almost no humans can consistently beat the S&P500 in the long term, when adjusted for risk (price fluctuation). Those humans who seem to do so (Warren Buffet, George Soros, a few others) can be explained by the luck of the draw.

I'm skeptical about the value of AI investing.

Parijat Garg asks good questions about AI investing. Considering the Turing Test, the message I take away is that when robots choose stocks like humans choose stocks, then we should expect similar results.

To take one example, some of the benefits identified by Schwab, a highly reputable firm, for their “Intelligent Portfolios” product include these (enhanced by my opinion):

1. Tax-loss harvesting: it's probably good during relatively stable markets, but I doubt what value this provides, compared with waiting till the end of the year, selling your losers, waiting long enough to avoid IRS wash-sale rules, then buying them back. I wonder what effect tax-loss harvesting will have on your net worth during a crash and recovery.

2. Daily portfolio rebalancing: Rebalancing assures portfolio allocation to avoid excessive concentrations of relatively risky assets. I question whether there's significant value produced, compared with quarterly rebalancing, and I doubt the value of quarterly versus annually, and even if you miss a year, there's not much to gain by remembering it instead. An advanced researcher at Mellon, Mr. Jeff Ricker, studied the effect of rebalancing and asset reallocation on taxable accounts and found negative effects on portfolio value. That is, the implicit advice is: Make the best decision available to you when you buy, then don't sell (unless you have major personal need for cash or major change in investment strategy). If you think rebalancing gets more valuable with increasing frequency, then rebalance daily, or perhaps hourly, and AI robotic methods do rebalance correctly with little cost.

3. Portfolio content selection: Using AI has no value compared with human choices or buying a copy of Barron's and throwing darts at the stock list pages. There is some dispute about the value of choosing investments by throwing darts (Mr. Ricker, when at Wells Fargo Investment Advisors, preferred a professional competition grade blowgun) or taking financial advice from blindfolded chimpanzees. Rick Ferri writes in Forbes that the monkeys easily beat the Dow Jones Industrials, time after time. Alex Mayyasi writes that the professionals beat the monkeys, though maybe by having their picks published in the Wall Street Journal or by taking risks or by cheating.

I skeptically want to see how AI portfolio management does in a crash before I do anything more than a minimal exploratory speculative investment.

Before putting you into their AI product or any other investment product, your broker, with some prudence and regulatory compliance, puts you through a risk preference interview or checklist. If called "AI", that is pure marketing nonsense. Some one or some computer looks up your answers in a table or chart or calculates a simple linear formula or merely applies human judgement to the risk and reward preferences of a person “like you”. Very like putting a small person inside an "automaton" that marvelously wins at chess.

My own advice for fortunes under $10m in the USA, taking a long 5+ years view:

Bonds and cash...

Your Social Security (national pension in the United States) and other pension payments provide the effect of a long-term government bond with the present value of the future payments. You already own these future payments. An investment in bonds will do no better for you. Bond prices fall when interest rates rise, a mathematical equivalence. Currently we remain at generational low levels of interest rates. The rate on a 30-year US Treasury bond is about 3% at April 30, 2019. Expect bond values to fall as interest rates rise in the future. Even if there is no change in rates and value, you may want a higher return on your invested money. If your social security payment is $1,000 per month, and if you want 5% per year or more from your investments, then your future social security payments are about equal to a bond that pays $12,000 per year forever (or until your death, whichever comes first), and the value of your forever bond is about $240,000 (=$1,000*12/.05), or very slightly less for the probability of death in 30 years or so. If you aren’t old enough to collect Social Security, then the forever bond is worth somewhat less, and will grow as you approach the qualifying age.

In Part 2, we will consider using Bond ETFs (Exchange Traded Funds) and Stock ETFs.

< Part 1 | Part 2 | Part 3 | Appendix 1 | Appendix 2 >

Images

Fischchen, Breeding Ostrich in Berlin Zoo (May 27, 2007, shared with attribution under GNU Free Documentation License, Wikimedia.org, https://commons.wikimedia.org/wiki/File:Breeding_Ostrich_Berlin.jpg)

Mark Hirschey, Warren Buffett portrait (2005, used with permission, retrieved Jun 14, 2019 from https://en.wikipedia.org/wiki/Warren_Buffett#/media/File:Warren_Buffett_KU_Visit.jpg)

Lord Kelvin (circa 1900, Messrs. Dickinson, London, New Bond Street, Public Domain, https://en.wikiquote.org/wiki/William_Thomson)

Edwin Lefevre snapshot (published in “The Bookman”, v.25, 1907, Public Domain, retrieved Jun 14, 2019 from http://babel.hathitrust.org/cgi/pt?id=uc1.$b623112;view=1up;seq=137;size=200)

Maersk Line, The Denmark Staff (1914, Wikimedia.org, shared with attribution under Creative Commons Attribution-Share Alike 2.0 Generic license, https://commons.wikimedia.org/wiki/File:The_staff_(1914)_(7312784848).jpg)

"The Turk:, engraving, published in Gottlieb von Windisch, "Inanimate Reason" (1784, Wikipedia, https://en.wikipedia.org/wiki/The_Turk, retrieved May 24, 2019, Public Domain)

Images in Appendix 2 are from Wikipedia.org and in the Public Domain or made available via Wikipedia's Creative Commons Attribution-ShareAlike License

Sources

Warren Buffett, Chairman’s Letter to Sharelholders, Feb 27, 2009 (published in Berkshire Hathaway, Inc., “2008 Annual Report”, letter copyright 2009 by Warren Buffett, retrieved Jun 14, 2019 from http://www.berkshirehathaway.com/2008ar/2008ar.pdf)

Department of the Treasury, “Daily Treasury Yield Curve Rates”, (https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield, retrieved Apr 30, 2019)

Rick Ferri, “Any Monkey Can Beat The Market” (Dec 20, 2012, Forbes, https://www.forbes.com/sites/rickferri/2012/12/20/any-monkey-can-beat-the-market/#4acf7191630a, retrieved Apr 29, 2019)

Parjat Garg, “Discretionary Investing in the Age of Artificial Intelligence” (retrieved Apr 29, 2019, CFA Institute, https://www.the-right-question.org/en/discretionary-investing-in-the-age-of-artificial-intelligence/)

Johnathan Hoenig, “Find Your Stock Market 'Sleeping Point'” (May 9, 2011, Marketwatch, retrieved Jun 16, 2019 from https://www.marketwatch.com/story/find-your-stock-market-sleeping-point-1304958203774)

Mark Hulbert, "Almost all retirees make this mistake" (Jul 27, 2019, Marketwatch, retrieve Jun 26, 2019 from https://www.marketwatch.com/story/almost-all-retirees-make-this-mistake-2019-07-26?siteid=nbch)

Edwin Lefevre, “Reminiscences of a Stock Operator” (1923, https://www.amazon.com/Reminiscences-Stock-Operator-Edwin-Lefèvre/dp/0471770884/ retrieved Jun 14, 2019)

Burton G. Malkiel, “A Random Walk Down Wall Street” (1973-2019, https://smile.amazon.com/Random-Walk-Down-Wall-Street/dp/1324002182)

Alex Mayyasi, “How Well Do Blindfolded Monkeys Play the Stock Market” (Jan 31, 2014, https://priceonomics.com/how-well-do-blindfolded-monkeys-play-the-stock/, retrieved Apr 29, 2019)

Charles Schwab & Co., "Intelligent Portfolios" (2019, https://intelligent.schwab.com/)

Alan Turing, pp. 3-5 (1951, transcript, BBC broadcast 1952, conversation with M.H.A. Newman, AMT, Sir Geoffrey Jefferson and R.B. Braithwaite, The Turing Archive, http://www.turingarchive.org/viewer/?id=460&title=5)

Dickson G. Watts, “Speculation as a Fine Art (, https://www.amazon.com/dp/1607962659, retrieved Jun 14, 2019) ; nb. The story has been retold many times, of course, and attributed to various persons, no doubt apocryphally, and may predate Watts by centuries. As Watts told it, it's much more terse: "One man told another that he could not sleep on account of his position in the market; his friend judiciously and laconically replied: 'Sell down to a sleeping point.'" As the legend came down to me, a man approached J.P. Morgan on Wall Street, saying "I worry I am overinvested in bonds. Is the market going down? Should I sell it all and hold the cash? Please tell me what to do, Mr. Morgan. I can't sleep at night!". Morgan replied "Sell until you can sleep at night." And Mr. Hoenig, writing in Marketwatch, seems to have heard the same attribution, but a slightly different story than I.

Wikipedia, “The Turk” (retrieved Apr 29, 2019, https://en.wikipedia.org/wiki/The_Turk)

Image by Daniel Brockman, May 2019

The Fairy Tale of Capitalism: Growth and Income Disparity

2019-03-24T18:54:00.001-07:00

FTC is a dramatization and a comedy.

FTC Ring: <Previous | Next>

“Income disparity is something we must address.”

-- Nancy Pelosi, Speaker of the United States House of Representatives

“The income disparity deal is real in our country, and the question is,
‘What are we going to do about it?’”

-- Bill Haslam, Governor of Tennessee

“The rapid rise of oligarchy and wealth and income inequality
is the great moral, economic, and political issue of our time.”

-- Bernie Sanders, United States Senator

GDP approximates the income of the Society. The amount of GDP, average or per capita GDP, and rate of increase of GDP tell us nothing about the disparity of income in the Society.

When we hear the news announcer say something like “GDP grew at an annual rate of 3.4% during the 3rd quarter of 2018”, it seems good news. The Professors sing “Growth of GDP”, a perennial hit. Politicians brag about it. GDP is “the economy”. GDP growth is good.

GDP is Gross Domestic Product. People who measure GDP collaborated on the SNA System of National Accounts, 664 pages defining GDP and its components.

GDP equals GNI Gross National Income, all the income of a national subset of the Society, plus the depreciation of capital equipment, usually about 16% of GDP, plus all the stuff sold to foreigners, less all the stuff bought from foreigners (these foreign transactions adjustments net +/- 1% or 2% of GDP for the larger countries). When we consider the things that will make a big change in GDP or GNI, the main idea is

GDP = GNI + depreciation = the value of all the stuff produced in a country

GNI = GDP - depreciation = about 84% of GDP

The remaining value of a large asset is, for accountants, the purchase price less prior depreciation. Accountants deduct from income a fraction of the purchase price each year as depreciation. Accountants put appreciation in income when and if the owner sells the asset. But that’s another story.

GNP Gross National Product includes the worldwide income of citizens and excludes the local income of foreigners. GNP differs a little bit from GDP, but that’s another story.

The news announcer seldom mentions how we distribute GDP unevenly. According to the World Inequality Lab, in the United States, the average real after-tax income of the 50 Percent grew 21% during the 35-year period from 1980 to 2014. For the 40 Percent it grew 49%, for the Ten Percent it doubled, for the One Percent it tripled, and for the top 0.001 Percent, average real post-tax income increased 616%.

Some people get much more income than others. We call this “income disparity”. The OWS Occupy Wall Street movement circa 2011-2 called it “income inequality”, a phrase that caught on. Some dictionary definitions of “inequality” connote unfairness, leading to conversational confusion over small, insignificant differences. Both “income inequality” and “income disparity” mean about the same thing, that is, a possibly unfair difference in incomes, with “disparity” connoting a large difference and a disregard for fair insignificant differences.

From birth, individuals have differing talents, life experiences, and desires. As adult participants in the Society, their incomes aren’t mathematically equal.

The differences among incomes are consistent, we may suppose, with the condition of our ancestors when they descended from the trees. If we can imagine ourselves there with them, one member of the tribe is good at hunting antelope, while another is good at sharpening arrows. Then the sharpener trades some arrows to the hunter for antelope meat. The sharpener gets food, and the hunter gets good arrows with which to kill more antelope. Together, they have more food to eat, and they are better equipped, than before they traded, but they aren’t equally provisioned with meat and arrows.

The motif of trade recurs ubiquitously in FTC. The participants in a trade each exchange something they have for something else they want more. After the trade, each has more of that they valued more highly.

A trade changes the distribution of goods in the Society. The Society can’t maintain equality of incomes, if ever achieved. We haven’t good reason to expect mathematical equality. Individuals will find things to trade.

GDP and GNI in the United States being roughly the same thing, we can map out fuzzily how GDP and GNI apportion disparately in the Society...

…, figures +/-5%, depending on the year. Thus, we can see there are significant subdivisions of GDP by who receives it, and in FTC we call them GDP01, GDP10 (= GDP09 + GDP01), GDP90 (= GDP40 + GDP50), the 2-digit number indicating the income stratum that gets the subdivision of GDP. See “The Fairy Tale of Capitalism: Workers, GDP and Economists” for details.

When GDP grows, who gets the benefits? During the 38 years from 1980 to 2018, in the United States, about one-half of growth was captured by the Ten Percent, and the other half by the 40 Percent, together the half of the people with the higher incomes. The bottom 50 percent got about zero, and some less than that. In her book “The Divine Right of Capital”, journalist Ms. Marjorie Kelly calculated that some groups’ slow-growing slices of the pie enabled the corporate profits slice to grow three times as fast as GDP in the United States in the late 20th century.

The Staffs of the Ingenious Innovative Job Creators and the Aristocracy asserted that GDP growth brings a bright future. They urged lowering levels of taxes to cause growth of GDP, enabling the Downward Trickle (the waste stream of the Aristocracy) to distribute abundance to all. There were significant income tax reductions in the time of Reagan and thereafter through 2017. Moderate GDP growth occurred, though at gradually lower rates than earlier in the period that followed the Great Wars. Ordinary fluctuations accompanied the moderate growth, plus two booms and three big crashes. In the early period of the Great Wars, in the time of Harding, the United States Congress lowered taxes markedly. A boom ensued, then the Crash of 1929, and then the Great Depression.

In our enlightened modern era, GDP growth enlarges the pie, but about a fifth of the people get less pie ultimately, only half the people get any additional pie at all, only one tenth get significantly much, and one percent get abundance.

Professor Younkins didn’t mention Growth of GDP, nor its distribution, in his hymnbook “Commerce and Capitalism”, although FTC benefits from his many contributions. But that’s another story.

As evening turns to night, in our current Society, the Aristocracy lullabies their babies with “Competition among Workers makes certain that no one is underpaid” and other lines from the song “No One is Underpaid”, included in Professor Younkins’ hymnbook.

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I am indebted to my kind family members and friends who provided comments, guidance and critiques that shaped this article.

Images

“Cumulative Growth in Average Incomes” (Congressional Budget Office, https://www.cbo.gov/)

“Share of growth captured by income groups, 1980-2016” (WID.world 2017, World Inequality Lab, wir2018.wid.world)

“Top 10% National Income Share across the world, 2016” (2018, World Inequality Report, https://wir2018.wid.world/files/download/wir2018-full-report-english.pdf)

“US GDP in billions of chained 2012 dollars” (US Dept of Commerce, bea.gov)

Notes and Sources

Definitions of “inequality” and “disparity”:

Cambridge Dictionary (https://dictionary.cambridge.org/us/dictionary/english/inequality, https://dictionary.cambridge.org/us/dictionary/english/disparity)
Merriam-Webster (https://www.merriam-webster.com/dictionary/inequality, https://www.merriam-webster.com/dictionary/disparity)
Oxford Dictionaries (https://en.oxforddictionaries.com/definition/inequality, https://en.oxforddictionaries.com/definition/disparity)

Daniel Brockman, “The Fairy Tale of Capitalism”, topics addressed in other articles:

GDP, GDP01, GDP09, GDP10, etc. (Mar 17, 2017, https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-workers.html)
Income strata, Aristocracy, Nine Percent, Ten Percent, etc. (Mar 11, 2017, https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-buyer-of.html)
Professors (Jun 12, 2017, https://daniel-brockman.blogspot.com/2017/06/ftc-managers-professors-engels.html)
Society (Mar 31, 2017, https://daniel-brockman.blogspot.com/2017/03/ftc-ceos-growth-prosperity-society.html)

Bureau of Economic Analysis, Department of Commerce, “Measuring the Economy” (2015, Public Domain, https://www.bea.gov/sites/default/files/methodologies/nipa_primer.pdf)

Bureau of Economic Analysis, Department of Commerce, “News Release, Gross Domestic Product” (Dec 21, 2018, Public Domain, https://www.bea.gov/system/files/2018-12/gdp3q18_3rd_1.pdf)

Jose DelReal, “Pelosi defends income equality push” (Jan 8, 2014, Politico, Fair Use, https://www.politico.com/story/2014/01/nancy-pelosi-income-inequality-101899, retrieved Mar 1, 2019)

European Commission, et al, “System of National Accounts 2008” (2009, https://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf)

Marjorie Kelly, “The Divine Right of Capital” (2003, Berrett-Koehler, Fair Use, https://www.amazon.com/Divine-Right-Capital-Dethroning-Aristocracy/dp/1576752372)

Bernie Sanders, United States Senator (Mar 16, 2018, The Guardian, https://www.theguardian.com/commentisfree/2018/mar/16/corporate-media-oligarchy-bernie-sanders, retrieved Mar 1, 2019)

Shobhit Seth, "GDP vs. GNP: What's the Difference?" (Mar 10, 2019, Investopedia, https://www.investopedia.com/ask/answers/030415/what-functional-difference-between-gdp-and-gnp.asp)

Benjamin Wermund, “The red state that loves free college” (Jan 16, 2019, Politico, Fair Use, https://www.politico.com/agenda/story/2019/01/16/tennessee-free-college-000867, retrieved Mar 1, 2019)

The World Bank, GDP & GNI data series (retrieved Jan 28, 2019, https://databank.worldbank.org/data/reports.aspx?source=2&series=NY.GNS.ICTR.ZS#)

World Inequality Lab, “World Inequality Report 2018” (Non-commercial use by CC license https://creativecommons.org/licenses/by-nc-sa/4.0/, https://wir2018.wid.world/files/download/wir2018-full-report-english.pdf)

Edward Y. Younkins, “Capitalism and Commerce” (2002, Lexington Books, Fair Use, https://www.amazon.com/dp/0739103814)

Mt. Rainier, 2019, image: Daniel Brockman

Draft Articles of Impeachment

2018-12-21T12:27:00.000-08:00

Draft Articles of Impeachment

Against Donald John Trump, President of the United States

Donald Trump Jan 28 2017

1. DIGNITY. Mr. Donald John Trump, unmindful of the high duties of his high office and the dignity and proprieties thereof, and of the harmony and courtesies which ought to exist and be maintained, has, in speeches to gatherings of citizenry, in messages to the general public (especially with the electronic media of Facebook and Twitter), denounced his political opposition, and especially members of the Democratic Party, individually and as a group, with utterances, declarations, threats and harangues, which utterances, declarations, threats and harangues, highly censurable in any, are particularly indecent and unbecoming in the Chief Magistrate of the United States, by means whereof the said Mr. Trump has brought the high office of the President of the United States into contempt, ridicule and disgrace, to the great scandal of all good citizens, whereby said Mr. Trump did commit, and was then and there guilty of a high misdemeanor in office.

2. DISCRIMINATION. Mr. Trump has excited and incited discrimination against persons according to their race, national origin, ancestry, religion especially the religion of Islam, and sex and sexual preferences, thereby intentionally impairing justice and mitigating the right of these persons to equal treatment under the laws.

3. MISTREATMENT OF PRISONERS. Mr. Trump has urged mistreatment and harm to prisoners and detainees. He has urged police and military officers to treat persons in custody “rough” and to torture them, and to punish them without lawful authority, in violation of the Constitution and several treaties to which the United States is party, including the Geneva Conventions and the Universal Declaration of Human Rights.

4. GLOBAL WARMING PERIL. Mr. Trump has refused to acknowledge the human causes of the globally warming climate, including the release of carbon dioxide and other gases into the atmosphere and oceans, despite nearly universal scientific findings affirming these gases trap heat, imperiling the United States and all human life. He has withdrawn the United States from participation in the Paris Climate Agreement and other international agreements to act to remedy the warming. He has declined to heed the severe national security implications of global warming identified by the Defense Department. He has curtailed scientific investigation into climate by United States government agencies.

Trial of Andrew Johnson in the Senate, Mar 13, 1868. Senate Collection.

5. NUCLEAR WEAPONS PERIL. Mr. Trump has withdrawn or evidenced intention to withdraw from agreements with Russia and Iran to regulate the development and use of nuclear weapons, imperiling the United States and all human life.

6. NATO ALLIANCE. Mr. Trump has threatened to refuse to defend allies in NATO, North American Treaty Organization, should they come under attack, disrupting the most powerful alliance that defends the United States, thus weakening the defense of the United States.

7. FREEDOM OF THE PRESS. Mr. Trump has repeatedly denounced journalists, individually and as a group, even declaring them enemies, in direct retaliation against them for publishing articles unflattering to him. Thus has Mr. Trump endangered journalists and acted with animosity to the Constitutional protection of the press.

8. EMOLUMENTS. Mr. Trump has used the office of the President, exchanging changes in public policy for personal financial enrichment. Cloaked as commercial transactions, Mr Trump has received emoluments from the governments of Saudi Arabia, Russia and other countries, either directly, or via family members or compromised commercial organizations. Mr. Trump privately negotiated a business deal in Moscow for his personal profit. At the same time, he advocated relieving Russia of economic sanctions that were intended to impress upon the government of Russia the policy of the government of the United States.

9. TRADE WITH CLOSE ALLIES. Mr. Trump has used the powers granted to him by the Congress to disrupt Trade agreements with our most trusted, peaceful and democratic friendly governments, imposing harsh tariffs on imports from those regions, arousing unnecessary concern among them, with adverse effects on the strategic defense and economic vitality of the United States.

10. TRADE WITH CHINA. Mr. Trump has imposed tariffs on goods imported from China. The tariffs interfere with private commercial transactions, and increase the effective cost of goods to Americans. The cost of steel, for example, is higher under the tariff, but products of American steel producers are favored, which protects employment and profitability in United States steel companies. Predictably, the higher cost of steel increases the cost of producing automobiles, reducing the profitability and employment of automobile production. The government of China, predictably, retaliated with tariffs on agricultural and other products from the United States, effectively reducing the market and the profitability for American farmers. Thus the tariffs on imports from China have been predictably detrimental to the people of the United States.

Nixon presents transcripts of taped conversations. Apr 29, 1974.

11. WALL ON THE BORDER WITH MEXICO. Mr. Trump advocates for the United States government to build a large wall to block the passage of civilians from Mexico to the United States, despite the United States having proudly opposed the presence of a large wall in Berlin to block the passage of civilians from East Berlin to West Berlin. He has separated children from their parents at the border, harming those children and families, to provide a disincentive to potential migrants hither, in violation of the United Nations Declaration of Human Rights. Defending individual liberty and justice as fundamental elements of democracy, and defending the Constitution as the method of democracy in the United States, requires the President to oppose such walls.

12. ABUNDANT FALSE STATEMENTS. Throughout his presidency, Mr. Trump has nearly every day made false statements to the public and the news media. Often, he has not bothered to check the truthfulness of statements before he asserted them as facts. Often, he has contradicted his own statements made not long previously. Often, he has spoken words he knew were false when he spoke them. Often, he has negotiated agreements with members of Congress, cabinet members and other government officials, then violated those agreements within days. His betrays no intention to tell the truth.

13. RELIGION. Mr. Trump proclaimed executive orders to deprive Muslims of equal treatment under law, especially with regard to their entry to the United States from other countries, without any authority granted to him by Congress, and without Congress having any authority to grant him that authority, due to the First Amendment to the Constitution prohibiting recognition of establishment of religion, and without significant hostile threat to national security.

14. DECLARATION OF DEMOCRATIC PARTY AS ENEMY. Mr. Trump, in his public statements, has declared the Democratic Party as enemy of the nation, a direct threat to the right of the people to representation by persons they elect, a direct threat to democracy and republican form of government, a direct violation of Article 4, Section 4 of the Constitution.

15. THREATS TO POLITICAL OPPONENTS. Mr. Trump has multiple times threatened to imprison Ms. Hillary Clinton, his political opponent, a direct threat to democracy and republican form of government, a direct violation of Article 4, Section 4 of the Constitution.

Bill Clinton by Bob McNeely

16. OBSTRUCTION OF JUSTICE - FLYNN. Mr. Trump sought to obstruct justice by asking the FBI, Federal Bureau of Investigation, to abandon its investigation of Mr. Michael Flynn’s activities with persons associated with the government of Russia.

17. OBSTRUCTION OF JUSTICE - COMEY. Mr. Trump sought to obstruct justice when he fired the director of the FBI, Mr. James Comey, when Mr. Comey did not cease investigation of persons, including Mr. Flynn, associated with Mr. Trump’s political campaign for President.

18. OBSTRUCTION OF JUSTICE - SESSIONS. Mr. Trump sought to obstruct justice when he harassed the Attorney General Mr. Jeff Sessions for recusing himself from the FBI investigation of illicit interaction of Mr. Trump’s political campaign organization with agents of the government of Russia, though Mr. Sessions was part of Mr. Trump’s campaign organization.

19. SLANDER. Mr. Trump has often charged Mexicans, Guatemalans & Hondurans with murder, rape and other grave crimes without evidence, a grave slander on the character of innocent people.

20. REFUGEES. Mr. Trump has refused to grant refugees safe haven, and failed to expeditiously administer their applications for refuge and asylum. He has imprisoned many of them for long periods of time, pending administrative processing of their applications, and without probable cause or threat to national security, denying them rightful liberty and simple justice.

21. IMMIGRANTS. Mr. Trump has imprisoned immigrants without trial, including children, without probable cause or threat to national security, denying them rightful liberty and simple justice.

22. PUTIN OF RUSSIA. Mr. Trump has, on several occasions, shown deference to Mr. Putin, the autocrat of Russia. Mr. Putin is known to the Congress and should be known to Mr. Trump as antagonistic to the interests of the United States, antagonistic to NATO, antagonistic to the European democracies, vital defender of the autocrat of Syria, and rivalrous contender for dominance in Syria. Mr. Trump proposed a joint investigation by Russian and United States government agencies to investigate Russian efforts to influence the outcome of the United States presidential election in 2016. Mr. Trump revealed United States national secrets to the ambassador and the foreign minister of Russia. In withdrawing United States forces from Syria, Mr. Trump yields strategic advantage to Mr. Putin. Mr. Trump has astonished his friends and his critics by his persistent accommodation and generosity toward Mr. Putin.

23. GRATUITOUS ABRIDGEMENTS OF LIBERTY. Mr. Trump gratuitously used his office to criticize and discourage NFL, National Football League, players from exercising their rights of free expression by urging their employers to terminate their employment and discharge those who declined to stand during the national anthem, despite the employers’ protections from their property, their businesses, being taken for public use without just compensation, in violation of Amendment 5 of the Constitution, and despite the players’ protection of free speech and expression, in violation of Amendment 1 of the Constitution.

Andrew Johnson

24. FAILED EXECUTION OF OFFICE. Mr. Trump, as described in others of these articles of impeachment, has failed to faithfully execute the Office of President, in apparent lack of understanding of the Constitution, in violation of the President’s oath to preserve, protect and defend the Constitution of the United States, as specified in Article 2, Section 1 of the Constitution.

25. SYRIA. Mr. Trump, has misused the Constitutional power of the President as Commander in Chief of the armed forces by ordering United States forces to withdraw from Syria, on the ostensible but false pretext that United States forces have defeated the Islamic State. In withdrawing forces, he abandons our allies in the region. He renders doubts in the reliability of the United States among allies. He leaves the fierce religious autocracy, Islamic State, capable of recovering significant power in the region, thus giving Islamic State the opportunity to establish a base of operations from which they can threaten our allies and the United States. He surrenders the territory to the autocrats with whom United States forces have contended there, including Islamic State, Mr. Assad of Syria, Mr. Putin of Russia, Hezbollah of Lebanon, the high imams of Iran, and he leaves the ultimate outcome to their decisions. He fails to protect the population of Syria and leaves them at the mercy of autocrats. He has failed to establish democracy in those parts of Syria controlled by United States forces and allies. Snatching defeat from the jaws of victory, he has failed to reap the benefit of the military gains achieved by United States forces, rendering futile that expenditure of treasure and blood.

Afterword

I intend by the above draft to provide a checklist against which the members of the House of Representatives may compare the Articles of Impeachment that I hope they will write.

I have omitted lists of descriptions of specific acts of the president, which were part of the articles for presidents Johnson, Nixon and Clinton. I’m hopeful the Congress has well-qualified staff who will supply those essential elements.

Also, I trust those staff will combine the Articles I’ve written with proposed Articles written by others, and to edit the combined Articles, correcting my errors and omissions, and assuring understandability, accuracy, effectiveness, and legality.

Finally, I’ll explicitly state my opinion. Mr. Trump’s High Crimes and Misdemeanors are abundant and obvious. He is, by far, the most impeachable president in the history of the US. Let ours be an example to all the world of the workings of a great democracy. Through the fundamental document they left to us, with the checks and balances, the founders of the republic charge the Senate to perform its role and remove this president.

Donald Trump on 150th Anniversary of Trial of Andrew Johnson Mar 13, 2018

References

Constitution. https://www.law.cornell.edu/constitution
Declaration. https://www.archives.gov/founding-docs/declaration-transcript

Articles of Impeachment:

Green’s Articles. https://algreen.house.gov/press-release/articles-impeachment-against-donald-j-trump-president-united-states

Images

Joyce N. Boghosian, Donald Trump on 150th Anniversary of Trial of Andrew Johnson (March 13, 2018, Official White House Photo, https://www.whitehouse.gov/briefings-statements/photos-of-the-week-2/. Public Domain.)

Trial of Andrew Johnson, President of the United States, in the Senate, 1868 (Frank Leslie's Illustrated Newspaper, 1868. Collection of the United States Senate. Copyright expired. https://www.senate.gov/artandhistory/art/common/image/Ga_chamber_38_00290.htm)

Nixon presents transcripts of taped conversations. Apr 29, 1974. (Wikipedia. Public Domain. https://en.wikipedia.org/wiki/File:Nixon_edited_transcripts.jpg)

Bill Clinton by Bob McNeely (Official White House Photo. Public Domain. Wikipedia. https://commons.wikimedia.org/wiki/File:Bill_Clinton.jpg)

Donald Trump Jan 28 2017, (White House. Wikimedia. Public Domain. https://commons.wikimedia.org/wiki/File:Trump_first_weekly_address_(cropped).jpg)

The Fairy Tale of Capitalism: The Old Ones and the 50 Percent

2018-06-17T18:29:00.001-07:00

Each person judges for themselves the truth and meaning of FTC.

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David Ricardo
by Thomas Phillips (1821)

The grandest characters of FTC, the Fairy Tale of Capitalism, are the four Old Ones Adam Smith, David Ricardo, Karl Marx, and Friedrich Engels, Marx’s collaborator. The Old Ones wrote the most significant early Tales, in immense volumes of unintelligible prose.

The capitalists of political view often call Smith the originator of capitalism, but they exaggerate. Smith sketched out profound economic components and dynamics. Ricardo, Marx and Engels cited Smith’s works, disputed some minor points, refined and elaborated others, and used Smith’s terms, and all four agreed on the nature of the economic system, which Marx and Engels named "capitalism" in their book “Capital” in 1867. Marx and Engels articulated the political ideology of “Communism” in their book “Manifesto of the Communist Party” in 1858.

Smith describes how the wages of Labor merely suffice for the Worker to subsist. Under stable conditions, he writes, a man and his wife, both employed, have just enough income to maintain themselves and four children, two of whom die before adulthood. Employers choose among Workers bidding against one another for employment, and competition among Workers keeps their wages to a “scanty subsistence”, he wrote.

Friedrich Engels
by William Hall (1879)

Adam Smith
by John Kay (1790)

When employers expand production rapidly, their need for Workers increases, writes Smith. Wages may rise a little, a comfort encouraging some Workers to marry and have children. If Labor becomes abundant, due to expanded population, introduction of improved machines or a decline in production, then employers dismiss Workers, and wages decline. Smith describes prevalent beggary, crime, starvation, and death among the unemployed until the population declines sufficiently that revenue from production can maintain it.

Smith writes “The liberal reward of labour, therefore, as it is the necessary effect, ... is the natural symptom of increasing national wealth. The scanty maintenance of the labouring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition, that they are going fast backwards.”

Ricardo echoes Smith. “The natural price of labour is that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution.” The prices of food and necessities determine the natural wage level. And “When the market price of labour is below its natural price, the condition of the labourers is most wretched: then poverty deprives them of those comforts which custom renders absolute necessaries.”

Marx and Engels echo Smith. “The value of labour-power is determined by the value of the necessaries of life habitually required by the average labourer.”

The Tales of Marx and Engels are consistent with the concepts articulated by Smith and Ricardo. The capitalist advances Capital (which Smith calls “stock”) for equipment, for materials and for employment of Labor, they write. Labor transforms the means of production into product sold in the market. The product fetches a price sufficient to reimburse expenditures on Labor and equipment and materials, plus a little more, because otherwise production stops. For Marx and Engels the “plus a little more” is “surplus value”, the residuum, after replacing production expenditures. The capitalist claims the surplus value, increasing the Capital. Smith and Ricardo would have agreed fully and called surplus value the capitalist’s profit. Marx and Engels say the capitalist should share surplus value, which is Capital and Labor transformed, with the Worker. Marx and Engels write that capitalism requires many Workers to live in conditions so desperate that some of them die, while the capitalist lives in comfort.

Karl Marx
by John Jabez Edwin Mayall (1870)

Marx and Engels fully agreed with Ricardo and Smith on the functioning of the existing general economic system, which they described in great detail and named "capitalism" in their book "Capital". In their book "Manifesto", they called for abolition of private property. That call immediately aroused a political movement opposing communism, Engels, Marx, and everything associated with them, including, alas, people who wrote about them. Engels and Marx became the high villains of FTC. The political movement opposed to communism adopted the name "capitalism", instantly conflating the movement with the economic system, and the members called themselves "capitalists", whether they personally owned significant capital or not.

In their Tale of the Yeoman, Marx and Engels write that the Crown granted nobles authority to clear their domains of families that had cultivated small inherited plots since antiquity. The Land clearing coincided with invention of new machines, such as automated looms, centralized in urban factories where the displaced country people sought employment. Marx and Engels suggest there was no poverty in England before capitalism introduced modern employment in the factories.

Marx and Engels romanticize the good old days. Poverty long predated capitalism. In Seville, at the time Christopher Columbus landed in America, the predawn of capitalism, about 50 Percent of the people weren’t wealthy enough to tax. In our enlightened era, the 50 Percent are the least wealthy half of Society. In 2012, Mitt Romney, the unsuccessful Republican candidate for U.S. President, said 47 percent of the people don’t pay income taxes. Most of the 50 Percent don’t have enough income to tax, because taxing the 50 Percent could raise political problems by starving many constituents and their children. Indeed, some are starving without taxation. In the United States, 1/8th (12%) of households were food-insecure in 2016. 1/20th (5%) had “very low food security”, meaning they didn’t have enough food at times during the year for lack of money or other resources.

A fair trade, as between a buyer and a seller, produces benefits for both parties. Smith and Ricardo saw the deaths of some Workers as the natural, necessary and useful result of a complex system of production and distribution which benefits the entire Society by increasing the wealth of the nation. Marx and Engels wrote, with outrage, that the customary trade of Labor for wages was unfair to the Worker; systematically unfair, because no trade could be fair when the death of one of the parties so frequently results.

Note: In 2016, the U.S. Census Bureau poverty level for a household of 4 people was about $24k, which is, coincidentally, approximately the highest household income in the 20th percentile of incomes, and also, $24K is about the 2018 level of the U.S. Department of Health & Human Services poverty guideline (determining eligibility for various government programs) for a 4-person household. The U.S. Department of Agriculture estimates, based on census data, state proportions of people in poverty, ranging from 8% in New Hampshire to 21% in Mississippi, and of children in poverty, from 9% in New Hampshire to 30% in Mississippi, as of 2016.

My gratitude goes to my friends who encouraged me and helped me clarify the text to better convey the meaning.

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Images

William Hall, “Friedrich Engels” (1879, Brighton, Public Domain, Wikimedia, https://commons.wikimedia.org/wiki/File:Friedrich_Engels_portrait_(cropped).jpg)

John Kay, “Adam Smith” (1790, Library of Congress, Public Domain, Wikimedia, https://commons.wikimedia.org/wiki/File:AdamSmith1790b.jpg)

John Jabez Edwin Mayall, “Karl Marx” (circa 1870, UK National Portrait Gallery, http://www.npg.org.uk/collections/search/portrait/mw75680/Karl-Marx, Public Domain in USA, https://commons.wikimedia.org/wiki/File:Karl_Marx_by_Mayall_c1870.jpg)

Thomas Phillips, “David Ricardo” (1821, National Portrait Gallery, Public Domain, Wikipedia, https://en.wikipedia.org/wiki/David_Ricardo#/media/File:Portrait_of_David_Ricardo_by_Thomas_Phillips.jpg)

United States Census Bureau, Current Population Survey (2016 and 2017 Annual Social and Economic Supplements, https://www2.census.gov/programs-surveys/demo/tables/p60/259/table2.xls)

U.S. Department of Agriculture, “U.S. households by food security status, 2016” (https://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-us/key-statistics-graphics.aspx)

Sources

Gerald Auten & Geoffrey Gee, “Income Mobility in the United States: New Evidence from Income Tax Data” (June 2009, National Tax Journal, https://www.ntanet.org/NTJ/62/2/ntj-v62n02p301-28-income-mobility-united-states.pdf)

Gerald Auten & David Splinter, “Income Inequality in the United States: Using Tax Data to Measure Long-term Trends” (2018, New York University, http://www.law.nyu.edu/sites/default/files/upload_documents/Income%20Inequality%20in%20the%20United%20States%20-%20Auten_1.pdf)

Daniel Brockman, “Demonstrating Disparity” (April 2018, https://daniel-brockman.blogspot.com/2018/04/demonstrating-disparity.html)

Daniel Brockman, “The Fairy Tale of Capitalism: The 90 Percent" (November 2016, https://daniel-brockman.blogspot.com/2016/11/the-fairy-tale-of-capitalism-90-percent.html)

Daniel Brockman, “The Fairy Tale of Capitalism: The Buyer of Labor and the Nine Percent” (March 2017, https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-buyer-of.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Land and Ricardo” (April 2017, https://daniel-brockman.blogspot.com/2017/04/FTC-Land-and-Ricardo.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Managers, Professors and Engels” (June 2017, https://daniel-brockman.blogspot.com/2017/06/ftc-managers-professors-engels.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Rand, Marx and the Downward Trickle” (November 2017, https://daniel-brockman.blogspot.com/2017/11/FTC-rand-marx-downward-trickle.html)

Friedrich Engels, “The Condition of the Working Class in England” (1845, Penguin, http://a.co/6DAD9JW)

Robert Farley, “Dependency and Romney’s 47 Percenters” (September 2012, FactCheck.org, https://www.factcheck.org/2012/09/dependency-and-romneys-47-percenters/)

Felipe Fernandez-Armesto, “Amerigo: The Man Who Gave His Name to America” (2007, Random House, http://a.co/cI3Q6mw)

Jacob Goldstein & Lam Thuy Vo, “The 47 Percent, In One Graphic” (September 2012, National Public Radio, https://www.npr.org/sections/money/2012/09/18/161337343/the-47-percent-in-one-graphic)

Thomas Piketty, Emmanuel Saez, Gabriel Zucman, "Distributional National Accounts: Methods and Estimates for the United States" (May 2018, Quarterly Journal of Economics, https://eml.berkeley.edu/~saez/PSZ2018QJE.pdf)

Karl Marx & Friedrich Engels, “Capital” (1867, http://a.co/fdu68Kb)

Karl Marx and Friedrich Engels, "Manifesto of the Communist Party" (1858, 1908 New York Labor News Edition, http://amzn.to/2hl0LCS)

Molly Moorhead, “Mitt Romney says 47 percent of Americans pay no income tax” (September 2012, Politifact, http://www.politifact.com/truth-o-meter/statements/2012/sep/18/mitt-romney/romney-says-47-percent-americans-pay-no-income-tax/)

David Ricardo, “On the Principles of Political Economy and Taxation” (1823, http://a.co/9BOWay8)

Adam Smith, “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776, http://a.co/e3KmVXG)

Adam Smith, “The Theory of Moral Sentiments” (1759, 2010 republication by Digireads, http://amzn.to/2ADCAYL)

U.S. Census Bureau, “Income and Poverty in the United States: 2016”, Table A-2 (https://www.census.gov/library/publications/2017/demo/p60-259.html, https://www2.census.gov/programs-surveys/demo/tables/p60/259/tableA2.xls)

U.S. Census Bureau, “Number in Poverty and Poverty Rate: 1959 to 2016” (1960 to 2017, Current Population Survey, https://census.gov/content/dam/Census/library/visualizations/2017/demo/p60-259/figure4.pdf)

U.S. Census Bureau, “Poverty Thresholds” (2016, https://www2.census.gov/programs-surveys/cps/tables/time-series/historical-poverty-thresholds/thresh16.xls)

United States Department of Agriculture, Economic Research Service, “Key Statistics & Graphics, Food Security Status of U.S. Households in 2016” (https://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-us/key-statistics-graphics.aspx)

United States Department of Agriculture, Economic Research Service, “Poverty, Percent of total population in poverty, 2016” (retrieved Jun 11, 2018,

https://data.ers.usda.gov/reports.aspx?ID=17826)

United States Department of Health & Human Services, “U.S. FEDERAL POVERTY GUIDELINES USED TO DETERMINE FINANCIAL ELIGIBILITY FOR CERTAIN FEDERAL PROGRAMS” (retrieved Jun 11, 2018, https://aspe.hhs.gov/poverty-guidelines)

Demonstrating Disparity

2018-04-21T18:30:00.000-07:00

Increasing disparity of incomes has occurred in the United States during the last 50 years, and we can show it.

Some of us suffer little from the gain of national income share by the One Percent. We feel that our income is good and stable. We may see our own fortunes and comfort increasing, which we attribute to our own efforts, talents and deserved rewards.

But some of us do suffer. Our fortunes are crushed. We go to bed hungry. We suppose we made serious mistakes, or didn’t have the knowledge, or the necessary personal connections, or the lucky breaks.

While you might not feel the One Percent absorbing the income, it does happen. You can’t observe it by looking at one person or one example, such as yourself, because idiosyncratic events with multiple explanations interweave with less obvious societal evolutions to shape individual circumstances. And each of us imagines most of the people live much as we do. We have little natural awareness of people who live in economic circumstances different from our own.

One must consider people in groups. One must take a macro view. For this purpose, consider three graphs. They come from different researchers. Let's look at the period 1970-2014, which appears on all 3 graphs on the horizontal axis. For all 3 graphs, the vertical scale shows percent-points of aggregate national income.

In the first graph, we see the aggregate income of the less wealthy 50 Percent of incomes, as a share of national income, declined by about 9 percent-points pretax and 6 percent-points posttax from 1970 to 2014. Share given up by the less wealthy 50 Percent is share gained by the wealthier 50 Percent.

The second graph shows, on the the line studded with black triangles, the share of the One Percent (incomes in the 100th percentile) increased about 13 percent-points of national income between 1970 and 2014. The Nine Percent (incomes in the 91st through 99th percentiles) gained about 4 percent-points pretax. So, these Ten Percent gained about 17 percent-points. Percent-points gained by the Ten Percent are percent-points given up by the 90 Percent (1st through 90th percentiles).

Now, the first graph showed us the less wealthy 50 Percent gave up 9 percent-points, and the second graph shows the Ten Percent gained 17 percent-points.

Since the total of all income shares is always 100 percent, a increase in share by one subgroup compensates for the net decreases in share by other groups, and the increases and decreases must add to zero. 9 percent-points given up by the less wealthy 50 Percent and 17 percent-points acquired by the Ten Percent means the remaining 40 Percent (51st through 90th percentiles) gave up 8 percent-points of national income share (-9 + 17 - 8 = 0).

The 3rd graph shows the top Ten Percent acquired 13 Percent-Points, and the Next Ten percent (81st to 90th percentiles) gave up 4 percent-points.

Though prepared by different researchers, if we allow a percent-point or two of minor and technical differences, the three graphs don't conflict with each other or contradict each other. We can understand a consistent story.

Summary:
From 1970 to 2014...
1st to 50th percentiles of income: gave up 6 percent points of aggregate national income share.
51st to 80th percentiles of income: gave up 7 percent points of aggregate national income share.
81st to 90th percentiles of income: gave up 4 percent points of aggregate national income share.
91st to 99th Percentiles of income: gained 4 percent points of aggregate national income share.
One Percent: gained 13 percent points of aggregate national income share.
(Figures approximate.)

The Ten Percent took what the 90 Percent gave up.
The One Percent took what the 80 Percent gave up.

This analysis doesn’t imply that the One Percent are malevolent, generally speaking. There are a few criminals among them, as with any group of thousands of people. If their behavior is legal and conventional, that doesn’t contradict this analysis. If they seek to increase their personal incomes and wealth, as any humans might do in similar circumstances, then they behave as humans do. This analysis doesn’t explain why the shifting of income shares has occurred among societal subgroups, but it shows the shifting has occurred.

I'm grateful to Dr. Stetson for his communications that inspired this article, and to other friends for their helpful comments in preparation of this article.

Images and Sources

Images may be freely used in reproduction of this article. They are used here in compliance with fair use doctrines of copyright law.

Alisha Coleman-Jensen, Matthew P. Rabbitt, Christian A. Gregory and Anita Singh, "Household Food Security in the United States in 2015" (Sep 2016, United States Department of Agriculture, https://www.ers.usda.gov/webdocs/publications/79761/err-215.pdf?v=42636)

Pay Ratio

2018-04-13T10:50:00.000-07:00

Michael Milken (image: US Congress, 2006)

Having thought it over for seven years, government took a step. On September 21, 2017, the SEC Securities and Exchange Commission announced that, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed into law in 2010, publicly traded corporations must disclose publicly the “median employee” compensation along with the pay of the “principal executive officer”, and the ratio of the highly paid officer’s pay to the median employee pay, every year beginning with the company’s fiscal year that began in 2017.

Economist Piketty wrote in 2014 the supercompensation of senior corporate executives, exacerbated by rent seeking, contributed importantly to the disparity of incomes in advanced economies, especially in the United States. The Occupy Wall Street movement, chanting “We are the 99 Percent!” protested the disparity in 2011. Nobel economists Akerlof and Shiller in 2015 attributed to Michael Milken the beginning of supercompensation in the 1980s as the indirect effect of his pioneering corporate acquisitions financed by junk bonds. Nobel economist Stiglitz in 2013 wrote of corporate CEOs Chief Executive Officers taking a disproportionately large share of the wealth of the companies over which they presided. And now, the US government has acted to measure supercompensation.

Early reports are in. I’ve looked at 24 of them. (You can find them yourself by searching up the company website, finding the link to “Investor Relations” or “Investors”, then the link to “SEC Filings”, and then the link to the 2018 “DEF 14A” or “Proxy”. (Or you can just apply your search engine to all those keywords plus the name of the company.) Here I present some highlights of what I found.

The regulation requires companies to report the CEO’s total compensation, the median employee compensation, and the ratio. For example, for AXP American Express, in 2017, the CEO got $19m, the median employee got $57k, and the reported ratio was 327.

We suppose a company would prefer to report a low ratio, because the executives wouldn’t want to appear overly avaricious. A company can report a lower ratio than you might expect if the CEO isn’t the most highly paid employee. The most highly paid employee must be disclosed in what most companies call the “Summary Compensation Table” in the proxy statement. For WHR Whirlpool, the CEO Marc Bitzer’s pay was $7m, but the most highly paid employee was Jeff Fettig who got $16m. The SEC regulation calls for calculating the ratio of the CEO’s pay to the median employee pay, so WHR calculated a ratio of 356 ($7m/$20k), not 800 ($16m/$20k). Another example was OSTK Overstock.com, where CEO Patrick Byrne got $445k, and the most highly paid employee was Saum Noursalehi who got $968k.

Companies need not consider contractors, leased workers and similar “gig economy” workers to be employees. Thus it’s possible for a company to obtain a lower ratio by hiring a contracting firm which then hires all the employees paid less than, say, $150k. I found no clear evidence of an occurrence. Companies can also decline to count some workers outside the US, up to 5% of the employees. Some companies have done so.

The company with the highest ratio was LEA Lear, which makes car seats. The highly paid employee got $15m in 2017, and the median employee got $10k, and the reported ratio was 1,452.

The company with the lowest ratio was perennial startup OSTK Overstock.com. The highly paid employee got $1m, and the median employee got $52k, and the reported ratio was 8.

I found no significant correlation between pay ratio and market capitalization (size), but there was significant positive correlation between highest pay and market capitalization.

Graph: Daniel Brockman, 2018

I found very mild negative correlation between highest employee pay and the increase in stock price during the last 10 years. I found mild positive correlation between ratio and 10 year price increase, but with the small sample size, the extraordinary case of LEA Lear, with a ratio of 1,500 and a price increase of 16 times, strongly influences the correlation measure. Remove LEA and the data are uncorrelated.

Why does this matter? In the US, we have a narrative that if a person works diligently and loyally and energetically, works pleasantly with others, does work of highest quality, and deals honestly and fairly with others, then she or he can expect to prosper and to rise to even the highest office. But the disclosed pay ratios tell us a different story. What kind of annual raise in pay could such a good worker expect, with consistent performance year after year? 10%? 15%? With that kind of annual raise, after how many years will the good worker have pay equal to the most highly paid executive? This formula gives us the answer, assuming the good worker starts at the median employee pay:

Years = log( pay ratio ) / log( 1 + annual raise fraction )

At ALGN Align, for example, we calculate using an annual raise of 10%:

72 years = log(923) / log(1 + .10)

At OSTK Overstock.com, the good worker could attain the high pay after 22 years, a lifetime of work. At no other company in my set of 24 is such a short time possible. At INTC Intel, the figure is 56 years. At T AT&T, it’s 62 years. This exceeds what a person can do in a lifetime, meaning a person must do something more than or different from good work to reach the highest levels of monetary reward. Put differently, the CEOs get paid for something other than good work.

Disclosing the median employee pay alongside the highest employee pay is an important development. Some European governments require disclosure of corporate officers’ pay, though none publish typical employee pay to my knowledge. Asian companies don’t disclose these numbers. The US SEC requires the most detail and provides an example to other regulators. It will be interesting to see what diligent future researchers find in the pay ratios.

My data set of 24 companies is available at https://docs.google.com/spreadsheets/d/1M9OYJuBHkVdnFKAXq8oDDd0Neqq0-DvPE-VwoIRlr6c/edit?usp=sharing

Images

U.S. Congress, "Michael Milken" (2006, Public Domain, Wikipedia)

Daniel Brockman, Graph (2018, freely use with attribution)

Sources

From the SEC Securities and Exchange Commission …

“Press Release: SEC Adopts Interpretive Guidance on Pay Ratio Rule” (Sep 21, 2017, https://www.sec.gov/news/press-release/2017-172)

“Commission Guidance on Pay Ratio Disclosure” (https://www.sec.gov/rules/interp/2017/33-10415.pdf, retrieved Apr 12, 2018)

“Inflation Adjustments and Other Technical Amendments” (https://www.sec.gov/rules/final/2017/33-10332.pdf, retrieved Apr 12, 2017)

“Division of Corporation Finance Guidance on Calculation of Pay Ratio Disclosure” (Sep 21, 2017 https://www.sec.gov/corpfin/announcement/guidance-calculation-pay-ratio-disclosure)

“Code of Federal Regulations, Title 17 - Commodity and Security Exchanges, Section 229.402 (Item 402) Executive compensation” (Apr 1, 2017,
https://www.gpo.gov/fdsys/pkg/CFR-2017-title17-vol3/xml/CFR-2017-title17-vol3-sec229-402.xml)

“Commission Guidance on Pay Ratio Disclosure” (Sep 27, 2017,
https://www.federalregister.gov/documents/2017/09/27/2017-20632/commission-guidance-on-pay-ratio-disclosure#footnote-16-p44918)

“Regulation S-K, Questions and Answers of General Applicability” (Sep 21, 2017,
https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm)

“Public Statement, Additional Dissenting Comments on Pay Ratio Disclosure” (Aug 7, 2015,
https://www.sec.gov/news/statement/additional-dissenting-statement-on-pay-ratio-disclosure.html)

“Item 402 of Regulation S-K -- Executive Compensation, Questions and Answers of General Applicability” (Aug 8, 2007,
https://www.sec.gov/divisions/corpfin/guidance/execcomp402interp.htm)

Other sources ...

George A. Akerlof and Robert J. Shiller, “Phishing for Phools” (2015, Princeton University Press, http://a.co/6uww373)

Carola Frydman and Raven E. Saks, “Executive Compensation: A New View from a
Long-Term Perspective, 1936–2005” (2010, Oxford University Press, http://web.mit.edu/frydman/www/trends_rfs2010.pdf)

Thomas Piketty, “Capital in the Twenty-first Century” (2014, Harvard University Press, http://a.co/fdt8GiZ)

Joseph E. Stiglitz, “The Price of Inequality” (2013, W.W. Norton, https://amazon.com/dp/0393345068)

Wikipedia, "Michael Milken" (retrieved Apr 13, 2018, https://en.wikipedia.org/wiki/Michael_Milken)

Investing for Growth and Value

2018-04-09T09:16:00.000-07:00

Image: Google Books Ngram Viewer, books.google.com/ngrams

Last week, two good friends with whom I discuss investing more or less every week wanted to know: “What is the difference between growth stocks and value stocks?”

With American parochialism, I turned to the products of three grand investment firms that have managed growth and value mutual funds and ETFs for decades:

BlackRock, www.blackrock.com, manager of iShares ETFs.
State Street Global Advisors, us.spdrs.com, manager of SPDR ETFs (pronounced like “spider”).
Vanguard, www.vanguard.com, manager of Vanguard ETFs.

Here are the ticker symbols of 18 ETFs I considered:

	iShares	SPDR	Vanguard
Large Cap
Growth	IVW	SPYG	VOOG
Value	IVE	SPYV	VOOV
Mid Cap
Growth	IWP	MDYG	VOT
Value	IWS	MDYV	VOE
Small Cap
Growth	IJT	SLYG	VBK
Value	IJS	SLYV	VBR

Searching the websites of the three firms, one immediately encounters disappointing non-definitions of Growth and Value, such as, in the case of IVW, “INVESTMENT OBJECTIVE. The iShares S&P 500 Growth ETF seeks to track the investment results of an index composed of large-capitalization U.S. equities that exhibit growth characteristics.”

Growth and Value are “style” characteristics of investment strategies. By perusing the prospectuses of the funds, I find that each of the 18 ETFs defers the question of the definition to the index the ETF tracks. All 6 large cap ETFs use the S&P 500 Growth and Value Indexes (us.spindices.com). These indexes don’t define Growth and Value, but they use a process to determine whether a stock is a Growth stock or a Value stock. The Index Construction section of the Methodology document describes giving each company a Growth score and a Value score.

The Growth score summarizes three measurements:
Three-year change in earnings per share, excluding extraordinary items, divided by price per share.
Three-year sales per share growth rate.
Momentum, 12-month percent price change.
The 500 companies in the S&P 500 are ranked from 1 to 500, the company with the highest score having a rank of 500.

The Value score summarizes three measurements:
Book value to price ratio.
Earnings to price ratio.
Sales to price ratio.
The 500 companies are ranked with the company having the highest Value score having a rank of 500.

The 500 companies are then sorted in ascending order of the ratio of the Growth rank to the Value rank (G/V). The companies in the top third of the list will have the highest G/V values. These are the “pure” Growth companies. Similarly, the companies with the lowest G/V value are the “pure” Value companies near the bottom of the list. And the companies in the middle of the list are hybrids.

The S&P indexes put portions of a hybrid’s market capitalization in both the Growth and Value indexes, which is why you can find some companies among the holdings in both ETFs. This bothers some of us, so the three firms offer “pure” Growth and Value ETFs as well, but I digress from the question of definition, and I want to get back to that.

The iShares mid cap Growth ETF IWP uses the Russell Midcap Growth Index (www.ftse.com/products/downloads/Russell-US-indexes.pdf). Russell combines one ranked Value variable, book to price ratio, and two ranked Growth variables, the I/B/E/S Institutional Broker’s Estimate System (financial.tr.com/ibes) 2-year earnings growth estimate, and 5-year sales per share historical growth, to produce a composite value score (CVS). A stock with high CVS is a Value stock, and a stock with low CVS is a Growth stock. Both the Growth and Value indexes contain proportions of the same stock, weighted according to its CVS.

For VOE and VOT, Vanguard uses the CRSP U.S. Mid Cap Value Index and Growth Index (www.crsp.com/products/investment-products/crsp-us-mid-cap-value-index) which builds a Growth metric from long and short term future earnings growth, 3-year historical earnings growth current investment-to-assets ratio, and return on assets, and a Value metric from ratios of book to price, future earnings to price, historic earnings to price, dividend to price and sales to price.

Each definition of Value seems to include some form of high book value to price ratio. Each definition of Growth seems to include earnings growth (historical or forecast) and historical sales growth. The differing definitions implicit in methodologies continue as one looks at additional ETFs and their indexes.

So there are no standard definitions of Growth and Value stocks. I think that, historically, the terms were invented to appeal to investors’ emotional hopes for their investments. Dr. Dennis Martin points out the term “value stock” was seldom used before World War I, after which people used it most frequently in the 1930s. “Growth stock” emerged in frequent use only after World War II. Marketers, quantitative analysts and lawyers have tortured the definitions ever since.

Take caution, dear reader, of the numerous and diverse hazards of investing.

Disclosure: I own some shares of SLYG.

My thanks to friends who inspired and critiqued early drafts of this article.

Images

Ngram by Google Books Ngram Viewer, used with permission (https://books.google.com/ngrams/info).

The Fairy Tale of Capitalism: Capital and the Chairman

2018-03-31T18:26:00.000-07:00

FTC consists of anecdotes confirming to some people that universal laws of human behavior and circumstance imply their views.

FTC Ring: <Previous | Next>

The Chairman -- and in our enlightened age, nearly all chairpersons are male -- knew that, as representative of the shareholders, he set an example for others even here in the directors’ private dining room.

Annually, the company paid him a modest few tens of thousands of dollars in director’s fees for attending four meetings a year and signing a few reports. As one of the larger owners, he received several millions more in dividends, stock buybacks, and unrealized gains, of course. He put his napkin on the table, placed the napkin ring upon it, and stood up.

The Chairman’s Staff had suggested the man who was CEO, and the man had talent for his role. Despite the recession and declining revenues and dismissing 8,000 employees last quarter, the CEO preserved the company’s rising trend of profit, the return on Capital. He whined unceasingly about the stress of his job. Still, this man’s value to the firm far exceeded the couple of million the directors voted to increase his Supercompensation, as they voted when the CEO whined every year.

The Chairman moved toward the door, with quick goodbyes to other directors. These were the faces of Capital. Some were wealthy individuals. Others represented investment funds, insurance companies and non-profits. Several were chosen by the CEO, including CEOs of other companies. How predictable the directors! How predictable the meetings! How predictable the decisions, always consistent with the accumulation of Capital!

The Chairman was eager to get to Los Angeles for a swim before sundown and a good sleep before the predictable director’s meeting of another Corporation the next day. The CEO approached him at the door.

“You visit Washington, tomorrow, right?” said the Chairman, hoping to minimize the conversation, it being perfunctory anyway.

“Yes, our industry is vital to the nation and creates so many good jobs for the middle class. I’m optimistic right-minded senators understand the stressful economic environment. I think they’ll consider our indispensable service to the country and accommodate the unique characteristics of our industry by extending the research tax credit or otherwise easing our crushing tax burden. If they want more employment -- and who doesn’t? -- then why tax the innovative job creators?”

“Good,” said the Chairman, shook the CEO’s hand with a false smile, and strode quickly to the car.

8,000 employees dismissed last quarter, mused the Chairman. If sales increased, and the remaining workers couldn’t produce enough product, the company would miss profit opportunities. If sales declined with further recession, then would 8,000 dismissed have been not enough? The CEO made the decision. Any of the faces of Capital would have decided similarly with the same information. The dismissed employees would grumble, but employees always grumble. They’ll be all right. It was unavoidable. If Capital growth slows, then the capitalist must dismiss Labor to preserve the profit which is the growth. Growth is good. Growth means an ever more prosperous society. They’ll soon have new jobs with new employers. Any competitive worker will get snapped up right away.

The capitalist buys Land, buildings and equipment. These were “fixed Capital” in the Business School Professors’ songs. The capitalist also acquires raw materials, parts and small tools, stuff that gets used up within a few months' making the product. The Professors sang of this as “working Capital”.

The capitalist acquires Labor by hiring employees. If a worker can gather the tools and materials at home to make, say, a table, then he can contribute his Labor to build a table for the use of himself and his family and get the full utility and value from his Labor. If, in the same way, he builds a second table, and takes it to the market, then he can sell it in exchange for money which will more or less suffice to replace the materials, compensate for the wear of the tools, and compensate him for his Labor, and perhaps save a little money.

If the worker becomes the employee of the capitalist, and makes a table, then the employer receives the money from the sale in the marketplace. From this money, the capitalist replaces fixed Capital and working Capital, and takes a portion for profit which is his property, and pays the worker the smallest wage that will keep the worker alive and working through the next day. If the capitalist pays the worker more, then he must raise the price of the table, or reduce his own profit. If he raises the price of the table, then he will sell fewer tables than competitors, who will sell similar tables for less by paying their workers less. If he reduces his own profit below normal levels, then he will close the table factory and seek normal rates of profit in other businesses.

Every five or 10 years, manufacturers of tables and other manufacturers will come on hard times. It becomes hard to sell a table. The capitalist can't readily sell the full production of the factory, so he reduces the level of production, say by half. Reducing the working hours of each employee by half won’t reduce Labor costs by half, since he must still pay some costs per employee. So he discharges half the employees. Our society confers authority, derived from government protecting Capital as private property, on the capitalist. He may seek counsel from colleagues and workers, or he can decide on their future income without them. So half the employees join what the Old Ones called the unemployed reserve, or as we modernists know it, the natural level of unemployment.

In a fair trade, each of the parties to the trade give up something they want less in exchange for something they want more. After the trade each party has something they wanted more than what they had. Each party benefits from a fair trade.

The Old Ones described how wages may rise somewhat during periods of high production or for a few years for a few employees with special skills, but in the long run, a worker’s wage barely suffices to keep his family alive. If the worker is discharged, his income stops. How will he and his family eat? Circumstances favor families differently. Some starve. 13m people in Europe and North America hadn’t sufficient food in 2016.

The worker’s wage doesn’t suffice for a fair trade. Not only does the capitalist take all the benefit of the trade, but he also takes a bit of the worker’s portion of the trade. The worker knows there are hungry people at the factory door. The worker knows it is better to eat today and take a chance on starving tomorrow, than to starve today. So the worker agrees to the wage which leaves him yet hungry rather than to no wage at all.

Arrived at his hotel suite, the Chairman changed clothes. Daydreaming, he made his way to the pool. Artificial intelligence couldn’t substitute for employees, yet. Someday, robotic Capital would minimize the wage bargaining nuisance and bring spectacular economic growth.

The capitalist takes money from his vault of Capital to pay the costs for buildings and machinery and tools and materials, and for Labor at Labor's diminished wage. Crucially, Labor transforms Capital into product. The capitalist receives money from the sale of the product, more than enough money to replace the Capital expended on Labor, buildings, machinery and the rest. The additional money is profit added to the property of the capitalist, an excess of transformed Labor beyond that necessary to replace the Capital. The capitalist replaces the Capital in the vault and adds a portion of the profit to the Capital, increasing the accumulation in the vault of Capital.

The Old Ones Marx and Engels told their Tale of the Ever-Repeated Transformative Cycle of Capital, the inexorable iron tendency of Capital to grow by transforming Labor into Capital. With each cycle, a portion of Labor transforms into additional Capital. The possessors of Capital, whoever they are, however bad or good they may be, act consistently. Their faces are the face of Capital.

The face of Capital glanced at the L.A. Times on the poolside table. “Thousands Laid Off” said the headline. He smiled as he sank into the warm oxygenated pool of the Biltmore Hotel. It had been a long day.

I thank my dear friends who read and critiqued the pre-publication draft.
They preserve my relevance.

FTC Ring: <Previous | Next>

Images

United States Department of Agriculture, Economic Research Service, “U.S. households by food security status, 2016” (Public Domain, retrieved Mar 27, 2018, https://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-us/key-statistics-graphics.aspx)

Sources

George A. Akerlof, Robert J. Shiller, “Phishing for Phools: The Economics of Manipulation and Deception” (2015, amazon.com/Phishing-Phools-Economics-Manipulation-Deception/dp/0691168318)

Christopher B. Barrett, “Measuring Food Insecurity” (Feb 12, 2010, Science,
Copyright © 2010, American Association for the Advancement of Science,
http://science.sciencemag.org/content/327/5967/825, downloaded on March 25, 2018)

Daniel Brockman, “The Eric Tetralogy: 1: Rents and Monops” (Aug 11, 2017, https://daniel-brockman.blogspot.com/2017/08/FTC-eric-tetra-1-rents-and-monops.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Land and Ricardo” (Apr 27, 2017, https://daniel-brockman.blogspot.com/2017/04/FTC-Land-and-Ricardo.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Rand, Marx and the Downward Trickle” ( Nov 13, 2017, https://daniel-brockman.blogspot.com/2017/11/FTC-rand-marx-downward-trickle.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Supercompensation, Income and the Exchange” (Apr 6, 2017, https://daniel-brockman.blogspot.com/2017/04/ftc-supercompensation-income-the-exchange.html)

Eric M. Eckert, “Q&A with Texas Hunger Initiative Director Jeremy Everett” (Oct 26, 2016, https://www.baylor.edu/mediacommunications/news.php?action=story&story=174243)

Friedrich Engels, “The Condition of the Working Class in England” (1845, http://amzn.to/2snelK9)

Food and Agriculture Organization of the United Nations, “The State of Food Security and Nutrition in the World 2017” (2017, FAO, IFAD, WFP, UNICEF, WHO, https://docs.wfp.org/api/documents/WFP-0000022419/download/?_ga=2.21619323.1163254190.1522086563-1964562919.1522086563, https://www.wfp.org/content/2017-state-food-security-and-nutrition-world-sofi-report)

Karl Marx and Friedrich Engels, “Capital” (1867, https://smile.amazon.com/Capital-One-Critique-Political-Economy/dp/0486477487)

Karl Marx and Friedrich Engels, “The Communist Manifesto” (1848, http://a.co/9uFRbiw)

Victor Oliveira, “The Food Assistance Landscape: FY 2017 Annual Report”, Report Summary, (Mar 2018, United States Department of Agriculture, Economic Research Service, Public Domain, https://www.ers.usda.gov/publications/pub-details/?pubid=88073)

David Ricardo, “On the Principles of Political Economy and Taxation” (1823 http://amzn.to/2ogjuFs)

Joseph E. Stiglitz, “The Price of Inequality: How Today’s Divided Society Endangers Our Future” (Apr 8, 2013, amazon.com/Price-Inequality-Divided-Society-Endangers/dp/0393345068)

United States Department of Agriculture, Economic Research Service, “Key Statistics & Graphics” (retrieved Mar 27, 2018, https://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-us/key-statistics-graphics.aspx)

Fall Creator, a.k.a. Windows 10 v 1709

2018-01-29T18:22:00.000-08:00

Franz Kafka (1883-1924)

In May 2017, the WannaCry virus locked hundreds of thousands of vulnerable Windows computers, displaying a ransom demand payable in Bitcoin. Total damages were hundreds of millions of dollars. The government of North Korea seems the prime suspect of security experts, with some blaming US intelligence agencies’ negligence as a secondary cause.

In the autumn of 2017, Microsoft began distributing the “Fall Creator” Windows 10 update, also known as version 1709.

One day in December 2017, on our machine LILY, Windows Update invited me to install updates and shut down. We use 10-year-old LILY to watch Netflix and Amazon movies and Reuters.tv. I clicked the button. I went to bed. On restarting LILY, it ran 1709 normally. LILY continues to run normally.

On or about January 15, 2018, Windows update, running on 3-year-old ORVILLE, asked me did I want to install a new update "tonight" or "now". I use ORVILLE for writing and for big spreadsheets of analytical stuff. ORVILLE’s Nvidia GeForce GT 730 video card provides 4K HD signal to a Sharp TV via HDMI.

I chose to update "now", after which ORVILLE displayed patterns of colored lines even after many reboots. About 2 hours later, after swapping out the HDMI cable (unnecessarily), and installing new Nvidia drivers by using user interface on still-functioning regular HD channel, and rebooting a few times, ORVILLE worked fine in 4K HD.

Daniel Brockman, "Pinstripe" (Jan 2018, using Fall Creator)

On January 24th, as I buckled on my helmet for a bike ride, my heavenly girlfriend said, “Dan, I did the update, and now something’s wrong with my computer. I have two articles to write and a thesis to review and, oh yes, I’ve got to update my website. Will you fix it?”. She gave me a quick kiss, walked out the door, and vanished. I looked at the blue screen of her machine, 5-year-old TULIP. It showed 5 buttons, including one labeled “Power OFF”, which worked perfectly. When I restarted TULIP, it showed the blue screen with 5 buttons. I tried each button. One labeled “Troubleshooting” led to 3 more buttons. I went through the buttons systematically. Each eventually led to 3 buttons: “Roll back to Windows 10 on Volume 7”, “Roll back to Windows 10 on Volume 7” (just like the other one), and “Roll back to last version”. Each eventually led to the blue screen with 5 buttons. I thought of the 1962 Anthony Perkins movie of Kafka’s book “The Trial”. My old colleague, a systems manager and engineer with decades of experience advised me to buy a new machine.

I found two articles on https://answers.microsoft.com, one of Dec 24, 2017, and the other of Jan 6, 2018, that helped me make a flash drive for installing Windows 10 v 1709 cleanly, replacing the old Windows 10. The future of my data was in doubt, but I had backups and a feeling I could resurrect TULIP. The guys who sold me TULIP, Dell, offered to fix it for $129. I said I wanted to pay nothing. The supervisor told me it wasn’t possible, which merely means someone decided not to do it. Microsoft, offered to fix it for $499. I declined. I thought of the economic incentives for tacit or explicit collusion to spur customers to buy new machines and customer service. I thought of my economic incentives colliding with theirs. I thought of WannaCry.

Daniel Brockman, "Bridge Out" (Jan 2018, using Fall Creator)

I’ve no good estimate of the numbers of computers affected by 1709, but you can google “Windows 10 1709 Fall Creator trouble” or search your favorite social media to see many instances.

My darling returned home. “Did you fix it?” “No.” “I want a new computer.” She threatened to write a letter about ransomware to Bill Gates. “There’s one more thing I want to try. Then we’ll buy a new computer if you want.” “I need a new computer.” We put the matter aside for the night.

The next morning, I put the flash drive in the computer and booted. It came to the blue screen and offered me a new button for using the USB device. I clicked. It asked several baffling questions with yes/no answers. I tried each choice but the clean install, hoping I could still save the data. All took me back to the blue screen. Then I went for the clean install. That went well. I set up some users. I set some settings. It was much like a new machine.

I downloaded and installed the applications that no longer existed: Avast antivirus, Chrome browser. Searching for the Microsoft Office download, I discovered that, for a 1-year subscription, in July 2017, I had paid $99. I called customer service, getting a sparklingly helpful agent who set it up nicely. Then the Western Digital SmartWare and encryption lock for the backups. I restored critical directories from the backup disk, congratulating myself for my foresight. My princess returned home. We installed Quicken together. Everything seemed ok. She was glad we didn’t have to buy a new computer.

Daniel Brockman, "Mario Brothers" (Jan 2018, using Fall Creator)

I have two more computers:
12-year-old LILAC which Windows Update hasn’t yet invited to update to 1709. LILAC still runs the predecessor 1703. LILAC is shut off, unused, most of the time.
15-year-old HONEYBEE, which runs XP most reliably, automatically playing music via Winamp all day, plugged into an old boom box with great speakers.

My recommendations on updating to Windows 10 v 1709:
Block the 1709 (OS build 16299) update till Microsoft releases a later one.
If already broken down or not, prepare what you can of these:
Get a full backup.
Set a system restore point manually.
Make a flash drive for clean install. See http://windows.microsoft.com/en-us/windows-10/media-creation-tool-install .
Update all video and audio drivers.
Be aware you can’t predict how or if the 1709 update will fail for you.
Check your backups.
When ready, proceed with the update. If setting up a fleet of systems, then do the first 10 machines 1 at a time, 1 per day to gain experience. If the update fails, try rollbacks first. Use the flash drive after you have tried everything else. You rely on your backups. Good luck.

Daniel Brockman, "Rings of Saturn" (Jan 2018, using Fall Creator)

If two students in a dorm room release some software into the world that locks thousands of computers and displays a screen saying “Send us $129 and we will release your machine”, then we call them “criminals” or “agents of sinister foreign powers”. But if two large commercial organizations do it, then we want to think they meant well, but nobody’s perfect, and we call it “customer service”.

My thanks to my dear friends who critiqued prepublication drafts.

Images

Daniel Brockman, “ORVILLE” series (Jan 2018, Use with attribution, Pinstripe_Fall-Creator_201801_IMG_1252.JPG, Bridge-Out_Fall-Creator_201801_IMG_1254.JPG, Mario-Brothers_Fall-Creator_201801_IMG_1258.JPG, Rings-of-Saturn_Fall-Creator_201801_IMG_1262.JPG)

Sigismund Jacobi, “Portrait of Franz Kafka” (1906, Public Domain, https://commons.wikimedia.org/wiki/File:Kafka1906.jpg)

Sources

Google search, “Windows 10 1709 Fall Creator trouble” (retrieved Jan 29, 2018, https://www.google.com/search?q=Windows+10+1709+Fall+Creator+trouble)

Franz Kafka, “The Trial” (1925, https://read.amazon.com/kp/embed?asin=B003N2P42G&preview=newtab&linkCode=kpe&ref_=cm_sw_r_kb_dp_edrBAbZN7HJ53)

Microsoft, Support Pages (retrieved Jan 27-29, 2018):

http://windows.microsoft.com/en-us/windows-10/media-creation-tool-install

https://answers.microsoft.com/en-us/windows/forum/windows_10-update/latest-update-122417/957b9e7e-25fc-4855-b58f-a028a7cde557?auth=1

hhttps://answers.microsoft.com/en-us/windows/forum/windows_10-update/blue-screen-of-death-after-windows-10-update-on/77d3c81c-6a1d-4259-955a-07021d084fd7?messageId=94b6b021-e983-4de4-8578-2b8a7b66ad98

https://support.microsoft.com/en-us/assistedsupportproducts

https://partnersupport.microsoft.com/en-us/par_clientsol/forum/par_win/fall-creators-update-version-1709-failed-to/19db936d-8644-4dff-ad6c-d27143335a5e?auth=1

Wikipedia, “WannaCry ransomware attack” (retrieved Jan 27, 2018, https://en.wikipedia.org/wiki/WannaCry_ransomware_attack)

Investing Cash in January 2018

2018-01-18T20:01:00.000-08:00

I know a fellow who had two homes. He sold one of them to raise some cash. He’s now looking for a better house for him and his wife to move into. When he finds it, he will buy it, and sell the other house. He says he’s investing the pile of cash in bonds. Indeed, short term bonds or cash is the place to put a few tens or hundreds of thousands of dollars if you expect you will want to make a down payment on a house with it during the next two or three years. You will miss some of the higher yields available in stocks, but if the stock market crashes, short term bonds will retain nearly all of their value or maybe even increase in value a little, and you will still have your down payment.

S&P 500 Jan 18, 2007 to Jan 18, 2018

If you are buying bonds, remember that as interest rates rise, the value of a bond (especially a long term bond) will go down. These phenomena resemble two sides of the same coin. They are literally inseparable. So, if you’re stashing your cash in bonds, buy short term bonds, like VTIP Vanguard Short-Term Inflation-Protected Securities ETF, with 2.5 years average duration.

VTIP Vanguard Short-Term Inflation-Protected Securities

But if you have a longer time horizon, you might seek a suitable investment in real estate, on the theory that it might not crash so much if the stock market crashes, and might even go up. Now, that’s not a recommendation exactly, but a hypothesis. If you take that view and base your thoughtful speculation on it, then you have some good choices.

I'm currently aware of two ETFs of good quality invested in REIT indexes of many REITs so that they more nearly approximate the wisdom of a real estate index than the brilliant ideas of 3 or 4 analysts running an actively managed fund that the market can easily outperform. These have a good combination of book value to price, low expense ratio, high & consistent rate of dividend growth.

VNQI Vanguard ex-US Real Estate

SCHH Schwab US Real Estate

Some brokerages might well have their own indexed fund of REITs, probably with the promise of commission-free trades for their own products. However, with the commission on a trade being $5 (at Fidelity and Schwab, for example) for even fairly large (non-institutional) trades, the value of "commission-free" is among the most trivial things. Indeed $5 is overwhelmed by the expense ratio and the dividends paid and the price movements in the market. So, "commission-free" shouldn't guide your choice of investment.

Individual stocks necessarily have a deeper potential downside than REIT ETFs. They also have a more spectacular potential upside. Some stocks I'm aware of that we can expect to move with the general value of real estate include the following three.

DLR Digital Realty Trust, REIT specialized in Data Centers.

DHI D. R. Horton, House builder.

HHC Howard Hughes Corp., Large-Property Development & Management

HHC is rather more speculative, in my opinion. While the company has made a profit in only the last two reported years, the level of profit has increased monotonically during each of the last 4 reported years, suggesting they have learned to manage making profits consistently and at increasing levels.

DLR and DHI survived the last market crash. HHC didn't exist at that time. The S&P 500 peaked on Oct 9, 2007, then declined to bottom on Mar 9, 2009. I find it interesting to look at the change in price between these dates afterward to Mar 9, 2010. DLR lost 32% of value, and DHI lost 47% of value from market peak to bottom, so that both performed better than the median stock during the decline. In the recovery from bottom to a year later, DLR increased by 97%, slightly above the median of 81% for stocks, & DHI by 70%. Overall, from peak in 2007 to the 2010 anniversary of the bottom, DLR increased in price by 34%, and DHI decreased by 9%. During the last 10 years, DLR increased in price by 200%, and DHI by 290%, both above average for stocks, and both have increased in price in 8 of the last 10 years, rather more consistently than all but 3% of stocks.

Regarding the resilience during the crash of 2007-9 and aftermath, there are two stocks that performed well during this period which I regard as good long term investments.

EBIX Ebix, insurance exchange software, increased 15% from Oct 9, 2007 to Mar 9, 2009 & 154% from Mar 9, 2009 to Mar 9, 2010.

PCLN Priceline, travel services, decreased 14% from Oct 9, 2007 to Mar 9, 2009 & 204% from Mar 9, 2009 to Mar 9, 2010.

All that said, There's nothing too foolish about buying the S&P 500 and never selling it. Crash or no crash, just hold on to it. Warren Buffett recommended that specific strategy for his heirs and further specifically the Vanguard S&P 500 fund (VOO on NYSE).

VOO Vanguard S&P 500 fund.

See page 20 of his 2013 letter to shareholders 2013 letter to shareholders, or the short version in the news article from Mar 13, 2004 MarketWatch. The shares of Mr. Buffett's company Berkshire Hathaway sell for about $210 (BRK.B on NYSE). I regard BRK.B as a better long-term investment than 2/3 of stocks, provided you put just a small fraction of your life’s savings in it. In case of a crash, just hold on to it.

Disclosure: I own shares of SCHH, VNQI, VOO, EBIX, PCLN, and BRK.B.

The Fairy Tale of Capitalism: Corporations, the Free Market and the Invisible Hand

2017-12-17T11:49:00.000-08:00

“The first function of a mythology is to waken and maintain in the individual a sense of wonder and participation in the mystery of this finally inscrutable universe.”

-- Joseph Campbell, quoted by Michael Toms in “An Open Life” (1988)

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James Lancaster VI, commander
of the first voyage of the
East India Company (1601)

Long before the Old Ones, an ingenious new production organizing technology appeared. Elizabeth I of England chartered the first limited liability Corporation, a “company of merchants of London trading into the East Indies”, known as the East India Company. 125 shareholders contributed the initial 72,000 pounds of capital. The year was 1600.

The shareholders (a.k.a. stockholders) control a limited liability Corporation. The Corporation begins when the Corporation’s CFO Chief Financial Officer receives something of value, usually cash or an existing business, from the initial investors. The CFO gives them ownership shares, each share having same value. Each investor owns part of the corporation in proportion to the number of shares she owns. Almost simultaneously, the investors choose the CFO, the CEO Chief Executive Officer, who makes day-to-day decisions for the owners and manages employees, and a committee called the Board of Directors, which hires and fires the CxOs and decides questions for the owners.

The Corporation resembles a person, because it can autonomously conclude contracts, trade, incur debt, declare bankruptcy, and contribute to political campaigns.

"Limited liability company" means if the Corporation gets in trouble, then it’s the Corporation’s fault, not the shareholders’ fault. The shareholders bought their shares from the Corporation or on the Exchange. Their liability is limited to what they paid for their shares. Having already paid, they have no further liability.

East India Company Chop

If customers sue the Corporation for making a dangerous product, and the judge orders the Corporation to pay, then the shareholders pay nothing. If the Corporation borrows excessively and can't pay the debt, the Corporation pays what it can, and shareholders have no obligation.

That means shareholders aren’t responsible for the Corporation they own. That means the Corporation is a "moral hazard". That doesn't mean the Corporation is a bad thing. The big knives in your kitchen are physical hazards. They aren't bad things. You must be careful with knives and Corporations. But that’s another story.

Even before Elizabeth I, a Corporation was a more or less formal group of people, organized for some purpose, and empowered by law to act as an entity or person. The Old One Adam Smith described the economic role of trade guild corporations. Since the Great Wars, "Corporation" has referred usually to business Corporations, organized by investors to dodge taxes and increase their personal wealth. In our modern Society, we use Corporations for the purpose of supplying many, perhaps most, of the goods we use.

The Corporation’s CEO outranks other Managers. If the Corporation’s profit usually increases somewhat from year to year, then the Staffs advise their Aristocrats to allow the CEO a free hand. And if the Corporation’s profit isn’t so good, then the Staffs usually sell their Aristocrats' shares, to avoid the excessive paperwork of dismissing the CEO. The remaining apathetic and hopeful shareholders usually allow the CEO a free hand. Corporations owning Corporations and other ingenious legal elaborations of the art add further distance to the shareholders from the CEO. The authority of the CEO with a free hand grows perhaps so much that she chooses members of the Board. But that’s another story.

Certificate for Six shares of stock in a Corporation (1887)

In the Free Market, many buyers and many sellers compete. Any seller (or buyer), dissatisfied with a price (or product and price) offered by a buyer (or seller), can readily find another seller (or buyer) with whom to trade.

Adam Smith observed that, when we as buyers approach a seller in the Free Market,

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity, but to their self-love ..."

The buyer gets the product, in exchange for the money she gives up.

The seller gets the money, in exchange for the product she gives up.

In the Free Market, each person gets what she wants more, in exchange for what she wants less. This is a public service distributing to all what they need.

Each buyer and seller, says Smith,

"... intends only his own gain; and he is in this, as in many other cases, led by an Invisible Hand to promote an end which was no part of his intention."

Smith also wrote that the Invisible Hand guides an employer to distribute the necessaries of life in roughly equal quantities to the employees by the natural cascade of the Downward Trickle, so each person gets an approximately even portion. But that is another story.

The Economists George Akerlof, Michael Spence and Joseph Stiglitz wrote of snakes in the garden of the Free Market: information asymmetries. The holder of a product knows better than others the quality of the product. The seller of the used car knows if the car is a low-quality "lemon" or a high-quality "peach". The prospective buyer, knowing less, discounts her offered price, to mitigate the inferior quality of a "lemon". But if the seller knows the car is a "peach" then she hesitates to reduce her price. The seller’s price exceeds the buyer’s price. So no trade occurs. Neither party benefits. Each trader benefits in a fair trade.

Market, Padua, Italy (1891)

When the CEO goes to the Free Market to hire Managers and Workers, information asymmetry accompanies each hire. The current employer knows the individual employee's ability well. The prospective employer discounts the wage offered the prospective employee, as Stiglitz says, "knowing that they will succeed in luring him away from his current employer only if they bid too much. If they bid less than his productivity, his current employer will match. Labor mobility is impeded."

And negative externalities inhabited the Free Market. When people of the same industry meet, even at parties and entertainments, wrote Adam Smith, “the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

The Professors sang to their students: "The only purpose of a Corporation is to serve the interests of the stockholders!"

In our next episode of FTC, we will consider the curious relation among Capital, the Chairman, and the 50 Percent.

Several friends read and critiqued the pre-publication draft, for which I am most grateful.

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Images

“Chicago, Burlington & Quincy Railroad Stock Certificate” (1887, Public Domain, https://commons.wikimedia.org/wiki/File:Chicago,_Burlington_%26_Quincy_Railroad_Stock_Certificate_1887.jpg)

The East India Company, “Chop” (17th Century, Fair Use, https://www.theeastindiacompany.com/wp-content/uploads/2016/08/EIC-Chop.jpg)

“James Lancaster VI” (1596, National Maritime Museum, Greenwich, England, Public Domain, https://pt.wikipedia.org/wiki/Ficheiro:Jameslancaster.jpg)

Paolo Salviati (1818-1894), “Palazzo della Ragione, Padua, Italy” (1891, Hallwyl Museum, Public Domain, https://commons.wikimedia.org/wiki/File:Fotografi_fr%C3%A5n_Padua,_Sala_della_Ragione_-_Hallwylska_museet_-_102990.tif)

Sources

George A. Akerlof & Robert J. Shiller, “Animal Spirits” (2009, Princeton University Press, http://amzn.to/2iar4Mz)

George A. Akerlof, “The Market for ‘Lemons’” (Aug 1970, The Quarterly Journal of Economics, http://www.unc.edu/~shanda/courses/plcy289/Akerlof_Market_for_Lemons.pdf)

Daniel Brockman, “The Eric Tetralogy: 2: The Tea Party” (Aug 29, 2017, https://daniel-brockman.blogspot.com/2017/08/FTC-eric-tetra-2-tea-party.html)

Daniel Brockman, “The Eric Tetralogy: 4: Ideas as Monops” (Aug 29, 2017,
https://daniel-brockman.blogspot.com/2017/09/FTC-eric-tetra-4-ideas-as-monops.html)

Daniel Brockman, "The Fairy Tale of Capitalism: CEOs, Growth and Prosperity of Society" (Mar 31, 2017, https://daniel-brockman.blogspot.com/2017/03/ftc-ceos-growth-prosperity-society.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Managers, Professors and Engels” (Jun 12, 2017, https://daniel-brockman.blogspot.com/2017/06/ftc-managers-professors-engels.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Rand, Marx and the Downward Trickle” (Nov 13, 2017,
https://daniel-brockman.blogspot.com/2017/11/FTC-rand-marx-downward-trickle.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Supercompensation, Income and The Exchange” (Apr 6, 2017, https://daniel-brockman.blogspot.com/2017/04/ftc-supercompensation-income-the-exchange.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Workers, GDP and Economists” (Mar 17, 2017, https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-workers.html)

The East India Company, “The East India Company’s Timeline” (http://www.theeastindiacompany.com/home/timeline/ retrieved Nov 18, 2017)

Adam Fresco, “With one eye firmly on the past, new chapter begins for East India Company" (Feb 8, 2010, The Times, London, https://www.thetimes.co.uk/article/with-one-eye-firmly-on-the-past-new-chapter-begins-for-east-india-company-6dmjkrdmwmr)

George E. Hoffer & Michael D. Pratt, “Used Vehicles, Lemons Markets, and Used Car Rules: Some Empirical Evidence” (1987, Journal of Consumer Policy, https://link.springer.com/article/10.1007%2FBF00411482)

Adam Smith, “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776, Public Domain, http://amzn.to/2jjusby)

Adam Smith, “Theory of Moral Sentiments” (1759, http://amzn.to/2Aq8wQL)

A. Michael Spence, “Signaling in Retrospect and the Informational Structure of Markets” (Prize Lecture, Dec 8, 2001, https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2001/spence-lecture.pdf)

Joseph E. Stiglitz, “Information and the Change in the Paradigm in Economics” (Prize Lecture, Dec 8, 2001, https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2001/stiglitz-lecture.pdf)

Michael Toms, "An Open Life" (1990, Harper Perennial, http://amzn.to/2Bz3Cnw)

The Fairy Tale of Capitalism: Rand, Marx and the Downward Trickle

2017-11-13T12:38:00.000-08:00

FTC the Fairy Tale of Capitalism is deeply, but inconsistently, sarcastic.

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Once upon a time, ...

Ayn Rand, 1925, Public Domain

... economics described the behavior of people as observed by the Economists. The Economists included Old Ones David Ricardo and Adam Smith. They set their tales in scenes of the emergent industrial age and described human behavior for all time. Both were aware of the Downward Trickle, the waste stream of the Aristocracy, though neither of them named it that. The name arose in the time of Reagan as the Great Wars drew to a close, but that’s another story.

Smith wrote that the Invisible Hand guides the rich to divide necessities into equal parts for all. Ricardo wrote that the capitalist employs Workers from the unemployed reserve to operate the highly productive machines of the new technologies. The capitalist pays wages of Labor to the Workers for their necessities of life, just enough to keep the Worker working for another week. When the business cycle flattened or turned down, as it did every 8 or 10 years, the employer capitalist dismissed the employee Worker, who would then join the unemployed reserve, receiving no wages, ready to work all day for bare necessities, and suffering privation. From this economic background emerged Karl Marx.

The Old One Karl Marx was a well educated newspaper editor, active in the hodgepodge of socialist political movements of post-Napoleonic Europe. He read Ricardo and Smith, understood them well, and didn’t dispute the main character of their descriptions.

Karl Marx, circa 1870, Public Domain

Marx and the Old One Engels met as young men and began a lifelong collaboration. Legend informs us they were dividing the bar bill with some anarchist friends in a Parisian bistro just after Christmas 1857, when Engels overheard one word which was the punchline of a joke, the word "capitalism".

Marx and Engels compiled factual detail of the Downward Trickle of wealth and income from the Ten Percent to the Workers. They saw chronic starvation among the Workers and their families, with some starving to death during business downturns. They said these deaths were the unavoidable consequence of private property. A minor political party commissioned them to write a mission statement, the "Manifesto of the Communist Party", in which the word “capitalism” appeared in print for the first time. The word “capitalism”, with the tranquility of a thunderbolt, cleaved modern governments into two parts. [Note: on re-examination of the text, I don't find the word "capitalism" in the "Manifesto" at all. Instead it occurs on p.307 of "Capital": "... under capitalism, where the social wealth becomes in an ever increasing degree the property of those who are in a position to appropriate to themselves again and again the unpaid labour of others." --D.B. Jun 15, 2018]

Capitalism, wrote Marx and Engels, was the scientifically unavoidable result of private property. Communists opposed capitalism. Communists called for the abolition of private property beyond the modest house, garden, storefront and workshop of an ordinary household. The coercive powers of government defended capitalism, so that peaceful reform would never overcome capitalism. For Marx and Engels, Workers had no choice. Workers would rise imminently, unavoidably, inevitably in violent revolution to replace Capitalism with a new social structure featuring the control by the Workers over the means of production.

As you know, not uncommonly FTC uses a word with two different meanings. "Capitalism", named by Marx and synonymous in his work with "capitalist production" and "capitalist system", means the way a capitalist (person wealthy in private property) uses her capital (wealth in private property) to establish and operate a Firm with intent to increase her capital, employing Workers when necessary to operate the equipment. "Capitalism" also means a political view advocated by persons who favor the capitalist system, who may or may not have great wealth of their own. Perhaps you can easily imagine a capitalist of much private property would likely consider herself a capitalist of view, advocating for private property. Let's also remember that a poor person can be a capitalist of view, but can't be a capitalist of great wealth.

Skyline of New York City, circa 1950, Public Domain

Marx's christening capitalism stirred a shiver of alarm among the capitalists of wealth at the time. Though capitalists controlled the governments, socialists and other friends of communists successfully got legislation over the next decades to abolish child labor, to limit the hours of the workweek, to legalize labor unions, etc. Capitalists of wealth and their allies self-identified as capitalists of view and organized to preserve private property and to prevent impairment of profits.

A century after Marx's midwifery of capitalism, during the Great Wars, Ayn Rand emerged to write gigantic novels and host an intellectual salon of capitalists of view in Manhattan. She gave the most lucid defense of capitalism. She sang like a Professor, but she was not one. She was not an Old One, nor an Economist, but she wrote long unintelligible tales. Like Jeanne d’Arc, she evades classification.

Rand claimed virtuous selfishness was objective and rational with the same superstition that Marx claimed communist revolution was scientific and inevitable. Rand conflated Stalinist and Maoist tyrannies with communism and socialism. Stalin and Mao were dictators. Stalin and Mao were socialists and communists. Therefore, all socialists and communists are dictators, so her reasoning went.

Rand said private property was necessary for human rights. Marx said the 90 Percent had no rights, and that only the Ten Percent (whom he most frequently called the "bourgeoisie"), the possessors of capital (which he called "bourgeois property"), enjoyed rights.

Marx said capitalism had produced wonders of production far surpassing the Egyptian pyramids. Rand said capitalism produced the grand skyline of New York.

Pyramids of Egypt, circa 1900, Public Domain

Rand said the Downward Trickle of capitalism raises the standard of living of all people, and the inhabitants of the slums lead a life of luxury compared to an ancient Egyptian slave. Marx said the slums are where the workers die under capitalism. Marx explained why slums exist under capitalism. Rand did not.

The word "slum" was seldom used after the death of Reagan. Earlier, when the children of the Ten Percent asked "Daddy, what's a slum?", they were told "That's where the poor people live."

The Staffs, promoting enhancements to the Firehose Up, describe how the Downward Trickle, the waste stream of the Aristocracy, conveys a rising standard of living to all people. Several verses of the Professors' song "Growth of GDP" focus on per capita GDP, Adam Smith’s promised equal parts for all by the Invisible Hand. As the 50 Percent pluck their rising standard of living from the Downward Trickle, children starve.

In our next episode of the Fairy Tale of Capitalism, the amazing Invisible Hand will guide the Corporations as they frolic in the Free Market.

My kind friends who read the prepublication drafts and sent me their comments have my sincerest thanks.

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Images

“Ayn Rand” (1925, USSR passport photo, Public Domain, https://commons.wikimedia.org/wiki/File:Ayn_Rand.jpg)

Gottscho-Schleisner, Inc., “New York City skyline” (Mar 14, 1950, Library of Congress, LC-G613- 56750, Public Domain, http://www.loc.gov/pictures/item/gsc1994001246/PP/)

John Jabez Edwin Mayall, “Karl Marx” (circa 1870, UK National Portrait Gallery, http://www.npg.org.uk/collections/search/portrait/mw75680/Karl-Marx, Public Domain in USA, https://commons.wikimedia.org/wiki/File:Karl_Marx_by_Mayall_c1870.jpg)

“U.S.S. Raleigh, sailors at the pyramids” (circa 1900, Library of Congress, LC-D4-20921, Public Domain, http://www.loc.gov/pictures/item/det1994010117/PP/)

Sources

Crane Brinton, “The Anatomy of Revolution” (1965, Prentice Hall, https://www.amazon.com/Anatomy-Revolution-Crane-Brinton/dp/0394700449)

Daniel Brockman, "The Eric Tetralogy: 3: The Firehose Up" (Sep 9, 2017, https://daniel-brockman.blogspot.com/2017/09/FTC-eric-tetra-3-the-firehose-up.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Land and Ricardo” (Apr 27, 2017, https://daniel-brockman.blogspot.com/2017/04/FTC-Land-and-Ricardo.html)

Daniel Brockman, "The Fairy Tale of Capitalism: Workers, GDP and Economists" ( Mar 17, 2017, https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-workers.html)

Alisha Coleman-Jensen, Matthew P. Rabbitt, Christian A. Gregory and Anita Singh, “Household Food Security in the United States in 2016” (2017, U.S. Department of Agriculture, https://www.ers.usda.gov/webdocs/publications/84973/err-237.pdf?v=42979 )

Friedrich Engels, “The Condition of the working Class in England” (1886 American Edition, first published 1845, republished by Penguin 1987, http://amzn.to/2zzUygE)

Karl Marx (Friedrich Engels, ed.), “Capital” (1867, 2010 republication by Digireads, http://amzn.to/2jmOjac)

Karl Marx and Friedrich Engels, "Manifesto of the Communist Party" (1848, 1908 New York Labor News Edition, http://amzn.to/2hl0LCS)

P. J. O’Rourke, “On the Wealth of Nations” (2007, Grove/Atlantic, http://amzn.to/2zDk9Uc)

Ayn Rand, “Atlas Shrugged” (1957, Penguin, 1168 pages, http://amzn.to/2ytJpuy)

Ayn Rand, “The Virtue of Selfishness” (1961, Penguin, http://amzn.to/2hmkC4u)

David Ricardo, “On the Principles of Political Economy and Taxation” (1817, 2013 Heraklion Press edition, https://smile.amazon.com/Principles-Political-Economy-Taxation-ebook/dp/B00EINTMBI)

Adam Smith, “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776, http://amzn.to/2jjusby)

Adam Smith, “The Theory of Moral Sentiments” (1759, 2010 republication by Digireads, http://amzn.to/2ADCAYL)

The Eric Tetralogy: 4: Ideas as Monops

2017-09-14T12:11:00.000-07:00

A subsaga of FTC the Fairy Tale of Capitalism

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Hansen, "Coronation of Eric of Pomerania" (1884, Public Domain)

Who could object when governments, such as Elizabeth I of England and Eric of Pomerania, granted or allowed Monops to their subjects, their citizens or themselves? Complaints did arise, as we saw a few episodes back. The government receives the loyalty of the Monop, possibly taxes or part ownership, political campaign contributions, opportunity to trade on the Exchange in advance of news, and perhaps some undisclosed deposits in foreign bank accounts. The Monop receives suppresson of competitors by the coercive powers of government. As with all fair trades, both parties gain benefits from the trade. Some governments, citing the peoples’ right to pursuit of happiness, didn’t generally require advance grant of permission to operate a Monop, and benefits to government weren’t visible.

Each gets something valuable in the trade for something less valuable. From where do complaints arise? While the counterparties to a trade do benefit, the trade may have pros and cons, called “externalities”, for people who don’t participate in the trade. If your neighbor establishes a bakery on her premises, you may enjoy the “free ride” (positive externality) of delicious aromas when she removes bread from the oven each morning, though you never buy anything. If your other neighbor establishes an unlicensed retail pharmacy, though you never buy the wares, you may suffer the negative externality of strange people shooting each other in your neighborhood at all hours to resolve customer service issues.

The Monop’s customers don’t participate in the cozy trade between the Monop and the government. With each customer trade, the Monop gathers Rent, which diminishes the net benefit the customers receive. Their diminution of benefit, which Sam Adams called tantamount to tax, is a negative externality of the Monop’s trade with the government.

With sufficient political opposition to negative externalities, governments acted against Monops. Sometimes, governments broke them up into multiple smaller firms, as with Standard Oil Company and AT&T. Among other actions were monetary fines, regulation, mandated sharing of intellectual property or changes in operations, requiring compatibility with component parts from other companies, and disclosure of secret business information and software.

On the other hand, governments protected, even enabled, some Monops, like the IPRs we mentioned in the last episode. A government granted to an applicant an IPR on an idea. Of course you know what an idea is. You probably had an idea recently, like today, and maybe it was “original”, that is, no one ever thought of it before. The government granted IPRs only for original ideas. If a person had an IPR, then government protected the idea like property, and no one could use the idea without permission from the holder of the IPR. Before governments began granting IPRs, anyone could use a idea, whether they thought of it themselves or knew of it from someone else.

With the IPR, the protected idea became artificially scarce, thus enabling a Monop. Before the great wars, the grand Monop J. P. Morgan said

A man always has two reasons for what he does --
a good one and the real one.

J. P. Morgan (Public Domain)

The “good” reason for IPRs was to reward persons with good ideas by giving them a potentially lucrative Monopoly, and the reward would enable people to think. Security had to escort out a few impolite people who observed that humans thought for thousands of years before IPRs were granted. The “real” reason, of course, was the IPR allowed unlimited income from Monopoly Rents. After the great wars, the most esteemed dean of the Staffs, himself an unintelligible Economist, asserted that “conceptual products” (IPRs) increasingly dominated “the economy” (GDP). The Staffs acquired and tended and leased IPRs for their client Aristocrats, thereby increasing Firehose Up capacity, making more likely they could describe increasing after-tax income in their quarterly reports to their Aristocrats, and thus Staffers anticipated enhanced future personal income.

If 40% of the workers in a small town work for your company and can’t easily get jobs elsewhere, or if you own nearly all the oil refineries in America, or if no one can buy tea unless they buy it from your company, or if 90% of all new computers won’t work except with software sold by your company, or if every telephone call runs through your company’s switching network, or if all the merchant vessels must pass through your strait and pay your toll, then you have a Monop, by which the Firehose Up delivers a stream of Rents to you.

As a professional courtesy, the other Great Powers didn’t object to the negative externalities of King Eric’s magnificent Monop, for they also had Monops to enrich their treasuries and keep their wealthier nobles compliant.

Further, the monarchs tempered professional rivalries with nepotism. When Eric was in his twenties, his aunt Margaret arranged Eric’s marriage to the twelve-year-old Princess Philippa of England. Their marriage continued 24 years. Philippa died.

Love blossomed publicly between the recently widowed Eric and Philippa’s lady-in-waiting, the beautiful Cecilia, scandalizing the kingdom. Seeking relief from the critics, Cecilia wed Eric with a brief pre-nuptial agreement by which she got nothing but Eric, which was all she wanted. But the scandalmongers persisted. Ten years after Philippa’s death, exasperated, Eric said “Cecilia, the scene drags. Let’s split.” Cecilia said “We can’t. You’d lose the Sound Dues Monop and the throne.” Eric said “But I’ll have you.” Cecilia gasped and threw herself into his arms.

He was heard to mutter something like “fake news”, and off they went to Visby on the island of Gotland in the Baltic Sea, a centuries-old pirates’ and smugglers’ hideout. Supposing the ever-intemperate Eric had yet another tantrum, the nobility waited for him to return to Copenhagen. But he didn’t. Eric took up piracy. The nobility elected Christopher of Bavaria to the throne.

Epilog

Monops are components of the Firehose Up, conveying streams of Rents extracted from trade counterparties. The Monop gets a better price than would prevail in competitive markets.

Tea Party votes politically supported Staff efforts to enhance the Firehose Up, the Aristocracy’s stream of income.

Royal officers collected the Oresund Sound Dues until, four centuries later, Denmark limped, diminished by wars. The Great Powers demanded and got zero toll for their vessels, in exchange for a one-time payment. Likewise, the young government of the United States paid $400,000, which was less costly than sending a warship to Denmark. Made ineffective, the Sound Dues Monop ended.

In Eric’s time, a contemporaneous Silk Road bandit might have started with ambushing travelers in a defile, then building a fortress on a high hill to secure the takings, then driving competitors from the lands visible from the fortress, then establishing orderly customs houses for bloodless loot collection at the periphery of lands he claimed. He would end his life the greatest and most serene of kings.

But Eric lived his kaleidoscopic adventures in reverse. He ended his life a pirate commandeering merchant vessels in the straits, preceded that with a levy on travelers passing his tax collector in the fortress at Helsingor. Before that were wars with contentious foes, and he began his life as the splendid dashing Prince and King of the unsurpassed Kingdom of Denmark, Norway and Sweden.

In our future episodes of FTC the Fairy Tale of Capitalism, we’ll meet Ayn Rand and Karl Marx and tell the story of the Downward Trickle, the Aristocracy’s waste stream.

The Workers told their children that money can’t buy love.

Thus ends the Eric Tetralogy. Cecilia and Eric lived happily every after.

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I appreciate friends. Their criticisms of prepublication drafts improved FTC.

Notes on images and sources: https://daniel-brockman.blogspot.com/2017/08/FTC-eric-tetra-1-rents-and-monops.html

The Eric Tetralogy: 3: The Firehose Up

2017-09-09T09:57:00.000-07:00

A subsaga of FTC the Fairy Tale of Capitalism

Our planet is much like the Fairy Tale of Capitalism, but not quite.

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Oresund Map (1888, Public Domain)

In our last episode we envisioned Eric’s future Monop emerging from a future war. We saw the Boston Tea Party disrupt the British East India Company tea Monop. We saw Rick Santelli’s modern Tea Party align Workers with the Aristocrats and their Staffs to influence government. The Workers brought votes, and the Staffs brought intellectual charm. The Tea Party gained political power via seats in the legislature. The Staffs used that power to minimize government interference with the income source for their patron Aristocrats, the Firehose Up.

As you probably know, the Fairy Tale of Capitalism sometimes uses one term for two meanings. One meaning of "Firehose Up" refers to the more or less complex system of an Aristocratic household’s incomes from Capital (owned properties and wealth), Supercompensation, and all other income. The household employs a Staff, also known as the “family office”, of accountants, investment advisors, business managers, lawyers, portfolio managers, and lobbyists (or contracts with providers of some of these services) to assure the assets are well managed, with optimal accounting and legal practices applied to the Capital and Labor income of the household. Thus the Staff assures they can give quarterly reports of increasing after-tax income from the household’s well-maintained Firehose Up. King Eric’s Firehose Up evolved from ancient customs maintaining the King’s property and incomes by the might of the King’s ships, soldiers and police. With centuries of improvements, the modern Firehose Up became a system of complex conveyances transporting portions of GDP and the greater part of GDP growth to the Aristocrat, with legal authority maintained by the might of the government’s ships, soldiers and police.

The other meaning of "Firehose Up" refers to all Aristocratic income sources as enabled and optimized by law, regulation, public policy, custom, convention and tradition.

In generations preceding Margaret and Eric, after disappointing results from war, hard times befell the monarchy of Denmark. To make ends meet, the King pawned southern counties. After a large part of these debts were paid, Margaret presented the pawn tickets. She wanted the lands back. Many kings and Aristocrats who loaned money to Denmark conveniently forgot the pawns and repayments. They said “What collateral? Those weren’t loans. Those were sales!” Via many meetings, letters and conference calls, she reacquired some lands, but negotiations continued tediously.

On coming to the age of majority, the handsome, strong, daring and impetuous Eric of Pomerania lept to the saddle without touching the stirrups, like a western movie white-hat pursuing the bad guys. He declared diplomacy had produced little, and something about “make Denmark great again”. Then he went to war to get the lands back. The wars drained the treasury, weakened the military, and lost a little more land rather than reclaiming it.

King Eric retreated to long, sulking strolls on the cold, foggy beaches of northern Denmark. One annoyingly sunny day, he saw the bluffs of Sweden on the far side of the Oresund and a merchant ship moving through the strait, having no other way to navigate from the Baltic to Holland and Britain. For centuries, pirates had waylaid vessels in this strait. In a flash of insight, King Eric realized he could chase out the pirate riff-raff, and make the strait safe, and make the Oresund a valuable thing no one else had, and collect Monop rent! “Set up a toll booth!” he ordered an officer.

Eric levied a clever toll. He required masters to stop their vessels at Helsingor and declare the value of the hull and cargo to the officer there. Eric’s officer determined the Sound Dues rate depending on origin and destination of the voyage, the nature of the cargo, applicable treaties, bribes and other considerations, but in any case a small fraction, like 0.5% or 1%. Multiplying the rate by the master’s declared value gave the amount of Sound Dues the master had to pay to transit the Oresund. But there was a catch. The officer could choose to buy the hull and cargo at the declared value. If master declared a low value to minimize the Sound Dues, and if the officer chose to buy, and if the declared value was less than costs, then the master couldn’t repay his investors. If the master declared too high, then the amount of Sound Dues was high, then the officer took the toll, and the master kept the vessel, and the high toll reduced the profits of the voyage. These incentives kept the masters’ declarations close to marketplace value. The masters grumbled and paid the annoying but tolerable toll.

The Sound Dues conveyed robust royal income from the merchants to King Eric’s treasury. Eric used his possession of scarce feasible alternate trade routes to shift to himself part of what would otherwise be the merchants’ profit from each voyage. Eric was a Monop. Eric was an Aristocrat. Eric had an excellent Firehose Up.

Elizabeth I of England (circa 1590,
National Maritime Museum,
noncommercial use with attribution permitted)

As with Eric, Monops dated from the most ancient times, though FTC tends to overlook them. A monarch (as with Eric) or local gangster (as also with Eric as we will later see) would protect an underling in her role as sole provider of some article of trade. The monarch would get a devoted ally, and maybe an additional source of revenue. On the other side of this trade, the underling gets the services of some police or soldiers to suppress competition and the opportunity to maximize profits without limitation.

Monopolies emerged in grand style during the reign of Elizabeth I of England, decades after Eric’s Oresund Sound Dues got underway. She’s dead now. She granted a variety of monopolies. Interesting among others was what later people would call an IPR Intellectual Property Right granted to Tallis and Byrd to print and publish music. But that’s another story.

Luridly and directly affecting matters of state, Elizabeth loved the 2nd Earl of Essex. No one could imagine why, since his volatile personality made Essex the most ill-behaved courtier in her realm. Anyway, he needed an income, so she gave him the Monopoly on sweet wines, by which he received the taxes levied on the wine. When he rebelled and attempted to depose her, she came to her senses and chopped his head off.

Elizabeth ruled long before the Old Ones. You may remember, for the Old Ones, competing buyers and sellers always existed, and so it is in FTC. However, some heretic Professors deviated from orthodox FTC with apocryphal songs about Monopolies and Monopsonies. The more elaborate songs told how these existences were trivial or beneficial to the Society. These songs spun off a subgenre on “natural Monopoly”, Monops for which the scarce good is a huge network, but that’s another story.

Even in Elizabeth’s time, complaints of abuses of Monopoly were heard in the House of Commons. During the decades before the great wars, legislatures began emitting general anti-Monopoly laws. Governments used these laws to constrain or take control of Firms acting as Monopolies.

Even so, Staffers would tell their children “Wise children try to corner a market.”

We come to the end of another episode. Will Eric find happiness in Cecilia’s arms? What happens when ideas become Monops? Who is Cecilia anyway? All will be revealed in the next episode of FTC the Fairy Tale of Capitalism.

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Several friends read my prepublication drafts. They provided criticism and comments that improved this article. I'm grateful for their help.

Notes on images and sources: https://daniel-brockman.blogspot.com/2017/08/FTC-eric-tetra-1-rents-and-monops.html

The Eric Tetralogy: 2: The Tea Party

2017-08-29T13:02:00.001-07:00

A subsaga of FTC the Fairy Tale of Capitalism

FTC’s important characters and concepts appear in the titles of episodes that describe them, and are Capitalized wherever they appear in FTC.

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Image: Cooper (1789, USA Public Domain)

In our last episode King Eric became King of Denmark, Norway and Sweden. With his ships and shore batteries, he would one day acquire and enforce a Monop controlling passage through the Oresund and the Denmark Straits. For large merchant ships, there was no feasible passage from the Baltic to the North Sea other than the Oresund. To obtain the safety and speed of passage that King Eric could make scarce, the master of a vessel had to pay Eric’s toll, the Sound Dues. King Eric would collect Monop Rents, reducing the benefit of the trade for the master and increasing the benefit of the trade for himself.

In other kinds of products than marine shipping, and the agricultural Land of Old One Ricardo’s Tales, a Monop escapes the constraints of competition and, within limits, controls the trade. To oversimplify slightly, the Monop names the price at the expense of the counterparty. The difference between the Monop’s price and a hypothetical competitive market price is the Monop Rent, the benefit of the trade the Monop shifts from the counterparty. Consider tea, for instance.

One night, the Sons of Liberty, a political group, dressed as American Indians and rowed into Boston Harbor. They sneaked aboard ships of the British East India Company (chartered by Queen Elizabeth I as the first limited-liability corporation). They tossed the cargo of tea into the water, an event remembered as the Boston Tea Party.

British East India Company Flag (William Downman, 1685)

Most inhabitants of the Massachusetts Colony lived in Boston, the third largest city in British America. Massachusetts had no representative in the British Parliament, which recently had enacted the Tea Act of 1773. By the Tea Act the East India Company paid an import tax on tea, and the Company got a Monopoly importing tea to the colonies. Ships and soldiers of the Crown prevented smuggling and competition.

Eric’s Sound Dues toll was intentionally small to avoid provoking significant opposition. Likewise the British Parliament intended the Tea Act duty would arouse little opposition.

Though the Tea Act tax was small, “No taxation without representation!” became a slogan of the Sons of Liberty. Sam Adams, one of their leaders, said the Monopoly, even without a tax, was tantamount to a tax. He recognized Monopoly as a burden the State enforced on the people who could buy only from the Monopoly. The Boston Tea Party was a foreshock of the American Revolution, but that’s another story.

Long after the Boston Tea Party, and some old timers said it was even later than the great wars and the death of Reagan, clouds darkened the windows of banks throughout the world. The banks had lent money to many people who now lacked income because their employers, the Ingenious Innovative Job Creators, had dismissed them from their jobs. The dismissed employees stopped paying the banks.

For a long while, the bankers were certain all would be for the best. The bankers had bought Puts. They had confidence, financial expertise, and many reasons why Puts reliably rise when other investments fall. “The risk actually undertaken is very modest and remote,” the bankers said. Despite the confidence, sellers emerged. In October, prices of shares on the Exchange hit a record peak, then meandered downward day after day for many months, a period remembered as the year of the confident bankers.

On a Thursday in February more than a year following the price peak, television journalist Rick Santelli, reporting on current trading from the floor of the Chicago Mercantile Exchange, expressed exasperation that governments were giving money to people who seemed undeserving, because they should have the wisdom and personal responsibility to provide for themselves. Mr. Santelli pronounced an unusually entertaining and memorable editorial, culminating with “We’re thinking of having a Chicago Tea Party in July”. In these few words, Mr. Santelli ignited a new political movement, called the Tea Party.

In the Fairy Tale of Capitalism, we often find one term with two meanings. In this case, Santelli’s Chicago Tea Party opposed taxes and the government giving money to people they thought didn’t deserve it. The Boston Tea Party opposed taxes and the government giving a Monop to a Firm, which was utterly different. Incidentally, each week, King Eric’s job included sending soldiers some place or other in his vast realm to suppress peasant uprisings and rebellious nobles. The chronicles are silent on rebel opposition to Eric’s taxes.

In the year of the confident bankers, the bankers explained that the declines in prices reflected mere paper accounting losses. In the second winter after the October peak, many mere paper losses became real money losses. Some people, such as bankers and householders, urged government intervention to make good the debts the dismissed employees stopped paying, especially after some Puts failed. Then, less than a month after Santelli’s proclamation, prices’ long meander downward became a financial cascade. Prices on the New York Stock Exchange sank to their lowest level following the peak.

The Tea Party favored minimal taxation, because with less taxation, they would have more money to spend on cars and houses in foreclosure, as Mr. Santelli had explained. They favored property rights, Capitalism and minimal government. They disfavored ideas like government economic stimulus spending, universal public education, universal health care, public fire departments, government food for starving children, and other undeserved or unnecessary government expenses that taxation would ultimately fund.

Image: Nathaniel Currier (1846, Public Domain)

The next episode describes the Staffs (yes, plural) more, but for now, know that each Aristocratic household had their own Staff of people to care for its Firehose Up, the household’s income stream. The Staffs applauded the rise of the Tea Party. Property rights, Capitalism, minimal government and minimal taxation favored their work on the Firehose Up. If a Staffer did her job well, then she could describe increasing profits in her quarterly reports, which would please her Aristocrat employer, who would keep her on the payroll and increase the Staffer’s pay. But a disappointed Aristocrat could dismiss a Staffer from her job.

Property rights meant governments would protect the Aristocrats’ Capital, so no one else could divert it. Capitalism, of course, was that virtuous confluence of free markets and private property that the Old Ones Smith and Ricardo had described and the Old Ones Marx and Engels had named. The Firms owned by the Staffs’ employers, the Aristocrats, manifested the virtuous confluence.

The Staffs valued minimal government. Big government would impose laws regulating how the Managers treated the Workers. Big government forced them to do something with production waste other than release it in the convenient river adjacent to the factory. Big government required they expose their accounts and explain their Firms in public disclosures. Government regulatory meddling required truckloads of reports implying expenses of document preparation and handling. Regulation by big government helped sometimes, but mostly it caused significant expenses from unnecessary (because honorable Managers ran the Firms) work.

Profits were the revenues, minus the expenses, and minus the taxes. (Technically, any payment by the Firm reducing the profit of the Capital is an expense, including Rents paid to landlords, wages paid to Workers, and taxes paid to government.) Not only did big government regulation burden the Firms with expenses, the Staffs explained, big government also required unnecessary government expenses, financed by taxes.

Without the “job-killing” regulation and taxes of big government, said the Staffs, the Managers might raise the wages of the Workers, and the Ingenious Innovative Job Creators might hire more Workers. The Staffs omitted to mention they might not. And, of course, expenses reduced the current quarter’s profits the Staffs reported to their Aristocrats.

The Staffs and the Tea Party fell in love from the start. The Staffs provided dazzling verbosity and graphs to the Tea Party. The Staffs urged Professors to sing “Growth of GDP” and other songs about how lower taxes increased government tax revenues and about how magnifying the flow of incomes through the Firehose Up, the Aristocracy’s income stream, enabled the Ingenious Innovative Job Creators to hire more Workers. The Professors sang innumerable ballads on the Firehose Up conveying GDP growth to Aristocrats so the Downward Trickle would benefit the Workers.

The Staffs arranged their Aristocrats political contributions so the Tea Party could get control of government. They arranged the charitable contributions to business schools to provide incomes for esteemed Professors. The Professors and the Staffs, having been educated by the Professors, provided intellectual allure to the non-intellectual Tea Party. The Tea Party welcomed anyone who favored Capitalism, ideologists of the respectable William Buckley and Ayn Rand styles, Supercompensated CEOs, Aristocrats, the Staffs, and small-government Libertarians, because these people saw the unnecessary and undeserved expenses of big government. They also welcomed survivalists, gun enthusiasts, religious zealots, advocates of unscientific points of view, anti-intellectuals, lonely people adopting new friends’ views, self-styled “conservatives”, and others. Together their large influential minority voting block had power. Tea Party members came mostly from the 90 Percent. In the Tea Party, the Workers aligned with the Aristocracy, the Staffs and the Managers.

Every Staffer knew her future income could depend on the next quarterly report.

The chronicles tell us that on coming to the age of majority, the handsome, strong, daring and impetuous King Eric of Denmark declared diplomacy had produced little, and something about “make Denmark great again”. He made war for territory, draining the treasury, weakening the military, and losing a little land rather than gaining it. War for land would lead to his great Monop by sea, the principal component of his Firehose Up, about which we will learn more in the next episode.

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My deep thanks goes to editor and friends who critiqued my prepublication drafts.

Notes on Images and Sources for the Eric Tetralogy: https://daniel-brockman.blogspot.com/2017/08/FTC-eric-tetra-1-rents-and-monops.html

The Fairy Tale of Capitalism: Author's Note

2017-08-21T17:34:00.001-07:00

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From the first episode of the Fairy Tale of Capitalism, readers sent me comments such as
“I understand GDP now!”, and
“Interesting and certainly topical”, and
“The capitalism that you are describing IS what happens”, and
“Another delight that kept me entranced.”
These were good words, because others liked my writing FTC.

Other comments included
“I understood neither the economic fundamentals described in the article nor its goals”, and
“It’s not clear that it’s sarcastic”, and
“Am I missing something?”, and
“This particular blog doesn’t seem to be a Fairy Tale at all”, and
“So what?”, and
“I understood this! Is there more to the story? What happens next?”
These were good words, because they signaled I might improve the story.

I know nothing with certainty. The reader should draw her own conclusions about the Fairy Tale of Capitalism. I see my vanity in my uncertainty and hesitation to state my conclusions. I don’t know what to do about it. Hence this note acknowledges my dear readers’ views, yet still offers no certainty.

I first used the term “Fairy Tale of Capitalism” in an email to my good friend Dr. Stetson. I wrote that Republicans seemed to rely on the Fairy Tale of Capitalism. (In fairness, not only Republicans, but also Democrats and the smaller parties indulge in numerous economic fantasies.) My articulation of FTC didn’t then exist, but the term "Fairy Tale Capitalism" had been used. The Republicans asked us to believe that Capitalism (or something called “Capitalism”, or “private enterprise”, or something along these lines), with its Invisible Hand and Downward Trickle and other characteristics, will produce improved lives for all, if only the U.S. Congress will reduce regulation and income taxes. I noted the Republicans sincerely believed this, apparently, as did Joe the Plumber, many of the Tea Party, and many of Mr. Trump’s supporters in his presidential campaign. I think this notion of Capitalism breaks up on rocks of measured empirical reality.

https://eml.berkeley.edu/~saez/lecture_saez_chicago14.pdf

Empirically, historical tax cuts and deregulations hadn’t produced improved lives for all. In recent decades, in the United States, for the wealthiest ten percent of the people, incomes improved. For the next 40 percent, there was relatively little change. For the remaining 50 percent, incomes declined and one-eighth of households were “food-insecure” (that is, starving or nearly so) . For the wealthiest one percent, income growth and relative wealth were fabulous, spectacular and colossal. Where was the Invisible Hand distributing goods to the 50 percent? Where was the Downward Trickle’s distribution of prosperity? Instead, weren’t the Invisible Hand and the Downward Trickle in a class with Santa Claus and the Eight Flying Reindeer?

If my words are provocative, it is to challenge, not to insult. Competitive markets and private property are powerful tools. They can provide incentives and disincentives that encourage vigorous production and distribution of useful goods. Our society, collectively, devised them. Not to use them would be negligence, for the goods they provide are useful to many people. But they are merely tools. They aren’t innately virtuous. Both bad and good things have been accomplished with them. Some things they can't do. Let us seek wise usages.

One evening during a long bike ride, my brother Rock and Dr. Stetson and I stopped at the Third Base Tavern. While sampling a delicious unique house-made firewater, we conversationally arrived on the topic of Job Creators, a term widely (though incorrectly, in my opinion) used as a rough synonym for business owners or entrepreneurs. I said there was no such thing, that while business owners and entrepreneurs existed, they didn’t “create jobs”. My companions said on the contrary that, “obviously”, they did. I could only shake my head and inarticulately mutter “It’s just not so.” I felt I must find a better way to state my case. That moment was the call, and I answered the call. A few days later I returned home and wrote the first episode “The Fairy Tale of Capitalism: The 90 Percent”. Incidentally, that first episode isn’t about the Ingenious Innovative Job Creators, for that’s another story.

In the Fairy Tale of Capitalism, I want to describe some of the numerous regions of economics. The episodes of FTC should be understandable. Each should explain some arcane complexity. Sometimes I don’t achieve that, though I try. If the story begins to make no sense, just skip to the next paragraph. Much of FTC doesn’t matter much, for it is a dramatization and a comedy. Much of it presents central economic concepts. I flatter myself to think I write FTC with lucid infallibility, but as a child of the Enlightenment, I’m honored knowing read with skepticism. Ultimately, I want to explain how the Downward Trickle is merely a diminishing feeble trickle, how the Invisible Hand can punch you in the nose, and how the Ingenious Innovative Job Creators don’t create jobs. The episodes occur in random order, more or less. There is no conclusion but yours.

I hope you enjoy reading the Fairy Tale of Capitalism.

Dan
Petaluma, California, August 21, 2017

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I'm indebted to my friends who gave me the benefits of their comments on prepublication drafts, their corrections, their criticisms and advice, and their encouragements.

Images and Sources

Images may be freely used in reproduction of this article. They are my own or used in compliance with fair use doctrines of copyright law.

Alisha Coleman-Jensen, Matthew P. Rabbitt, Christian A. Gregory and Anita Singh, "Household Food Security in the United States in 2015" (Sep 2016, United States Department of Agriculture, https://www.ers.usda.gov/webdocs/publications/79761/err-215.pdf?v=42636)

Emily Eisenlohr, "Fairy Tale Capitalism: Fact and Fiction Behind Too Big To Fail" (2010, http://amzn.to/2x7cBqS)

Mihir Shah, "Fairy tale capitalism" (Apr 24, 2014, The Indian Express, http://indianexpress.com/article/opinion/columns/fairy-tale-capitalism/)

The Eric Tetralogy: 1: Rents and Monops

2017-08-11T22:49:00.001-07:00

A subsaga of FTC the Fairy Tale of Capitalism

FTC provides a way to explain our circumstance.

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Eric of Pomerania 1381-1459 (Public Domain)

Long before the Old Ones, the sorcerer of strategy selected her great-nephew Eric of Pomerania to be King of Denmark, Norway and Sweden. His future held trials and adventures and triumphs, wars, the Monop shifting the benefits of trade to enhance the Firehose Up, the eventual grandeur of his kingdom, the woman he would marry, the woman he would love, his flight from the throne, and piracy. In his Wikipedia portrait, he looks as though his lunch distressed his belly, and he was known for his troublesome temper. But he could be more handsome and charming than any Hollywood hero. Pope Pius II wrote “all women were drawn to him.”

What is the Firehose Up? What is a Monop? I’m glad you asked. Let’s start with what a Monop is, how it works, and where Monop Rents come from.

A Monop is a Monopoly or a Monopsony or a person who benefits from them. A marketplace having a single seller Monopoly has no competition among sellers. A Monopsony has no competition among buyers.

King Eric established a long lasting Monop, so we know Monops existed. But the Tales of the Old Ones give little attention to Monops. In their minds, monops didn’t exist, except possibly as transient or trivial phenomena of no importance. There were many competing buyers and sellers who quickly undercut any advantage gained from a strong market presence. Monops couldn’t endure.

In a trade, each of two parties gives up something they want less in exchange for something they want more. When a grocer gives up a tomato in exchange for money, the counterparty gives up money in exchange for a tomato. The buyer wants the tomato more than the money which he can’t eat, while the grocer prefers money because she has more tomatoes than she can eat, and she has many uses for money. Each party gets a benefit from the trade, the difference between the thing wanted more and the thing wanted less, a kind of profit for each party.

The manager of the only factory in a small town is the single buyer in a Monopsony. She gives up money in exchange for a Worker’s Labor. Generally, considering trades of all kinds, nothing distinguishes the buyer from the seller, except that the seller receives money. Monopoly and Monopsony have the same essential character.

The Monop controls something scarce. The Monop can give up the scarce item in exchange. No one else can. Since the counterparty can’t get the item from anyone else, the Monop dictates the price. A Monop grocer can price the tomatoes so high that most customers choose cheap beans instead. A Monop employer can pay the employees just enough to meet immediate necessities if they get second jobs somewhere. In practice, some traders dominate their markets, participating in 60% or 80% of the transactions, with nearly the same influence they would have with 100% dominance. They have much of the same market character as Monops, and we call them Monops, too.

Monops figure but tangentially in the Old Ones’ Tales, specifically in Ricardo’s parables of Rent. Here’s how it goes in FTC.

The farmer’s role is that of Ricardo’s Capitalist who brings investment, her own or that of her investors, and the Capitalist’s return is the profit. The farmer-Capitalist may hire Workers or perform some of the Labor role herself. For an insignificant ceremonial permit fee to the landlord, a shilling or so in Ricardo’s time, the landlord can claim the land as property, and with the fee receipt the farmer can claim permission to use the land.

Good land becomes scarce when demand for product rises, and the best land can’t produce enough. Then farmers cultivate the second-best land. The second-best land produces less crop than the best land. Now competing landlords of the best land can collect Rent, in addition to the ceremonial fee, from competing farmers, but the second-best land gets zero Rent, just the ceremonial fee. (The farmer and landlord don’t know the future market price nor the quantity of harvest, so they agree to Rent as a fraction of crop at the time the plow hits the dirt.)

If the competing landlords ask too much Rent, then the competing farmer tenant moves cultivation from the best land to second-best land. If the profit from the second-best land equals the profit from the best land, then there’s no difference to the farmer between cultivating the best land and the second-best land. The landlord can collect Rent until the farmer comes to the point of no difference, but not more.

That is, the competing farmer will trade some portion of the crop as Rent to the landlord, until the Rent reduces the farmer’s profit from farming a unit of the best land almost to the level of the profit of farming a unit of the second-best land. In this case, the scarcity of the best land (and property rights) gives one party the ability to transfer some benefits of the trade to herself from the counterparty. The ability to shift the benefits of the trade is the key character of Rent.

The marketplace demand for product creates Rent. If demand for product grows to exceed the capacities of the best land and the second-best land, then the competing farmers will cultivate the third-best land. Only then can competing landlords demand Rent on the second-best land based on the market value of product from the third-best land. Landlords do nothing to produce Rent other than collect the ceremonial fee that maintains their property rights to the Land.

Ricardo’s parable of Rent ends here with competing landlords and farmers and no Monops. We elaborate on implications of Monops without the wisdom of the Old Ones.

The competing landlord can’t get more Rent than the neighboring landlord for land of the same quality, for the competing farmer chooses the landlord with the lesser Rent. But a farmer with a Monop landlord has no choice. No competition from other landlords constrains the Monop landlord. The Monop can enlarge her benefit from the trade by shifting to herself some of the farmer’s benefit from the trade.

Despite paying high Rent to the Monop landlord, the farmer must maintain her level of profit, her benefit from the trade, to continue in business, lest her investors take their Capital to other ventures. The farmer may try raising the price she asks for product in the marketplace. If buyers of product will pay sufficiently more, the farmer restores her profit by getting some of the benefit of trade from the buyers of product. The benefit of the marketplace trade shifts via the trades to the Monop landlord who collects the shifted benefit as Rent. And if the buyers of product won’t pay the higher price, then the Monop landlord can’t get more Rent, because the farmer can’t pay. Characteristic of Monop Rents, the maximum price the Monop can ask exceeds the maximum under competition. Another definition, succinct though pivoting on “dominance”, is Paul Krugman’s “monopoly rents: profits that don’t represent returns on investment, but instead reflect the value of market dominance.”

Workers taught their children that competing buyers and sellers bring happiness for everyone.

King Eric collected Monop Rents. Eric, with his shore batteries and ships, controlled passage of merchant vessels through the Oresund and the Denmark Straits. Eric increased the benefit of the trade to himself by reducing the benefit of the trade to the masters of the vessels. The next episode of FTC will be an author's note, after which we’ll follow with the story of the Tea Party and more about King Eric. Oh yes, and the Firehose Up.

I'm most grateful to my friends who gave me the benefits of their comments on prepublication drafts, their corrections, their advice and their encouragements.

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Images for the Eric Tetralogy

W.D. Cooper, “Boston Tea Party”, published in “The History of North America” ( 1789, E. Newbury, London https://en.wikipedia.org/wiki/Tea_Act#/media/File:Boston_Tea_Party-Cooper.jpg, Public Domain in USA, copyright may apply in Switzerland, Mexico, Germany, Mainland China and Canada)

Nathaniel Currier, “The Destruction of Tea at Boston Harbor” (1846, Public Domain, https://commons.wikimedia.org/wiki/File:Boston_Tea_Party_Currier_colored.jpg)

“Elizabeth I of England” (circa 1590, National Maritime Museum, Greenwich, England, Creative Commons Non-Commercial Share with Attribution, http://collections.rmg.co.uk/collections/objects/14154.html)

“Eric VII of Denmark” (a.k.a. Eric of Pomerania, Southerly Clubs of Stockholm Sweden, Public Domain https://en.wikipedia.org/wiki/Eric_of_Pomerania#/media/File:Eric_VII_the_Pomeranian_of_Denmark_(photo_2010)_crop.jpg)

William Downman, “Flag of the British East India Company” from “Notebook” (1685, Public Domain, https://commons.wikimedia.org/w/index.php?curid=4118976)

Hans Peter Hansen, "Coronation of Eric of Pomerania" (1884, Wikimedia, Public Domain, https://commons.wikimedia.org/wiki/File%3AErik_af_Pommern.jpg)

Nicholas Hilliard, “Portrat eines Junglings unter Rosen, Robert Devereux 2nd Earl of Essex” (circa 1588, Collection of the Victoria and Albert Museum, Public Domain, Wikimedia, https://commons.wikimedia.org/wiki/File:Nicholas_Hilliard_013.jpg)

J. P. Morgan portrait, (Wikipedia, Public Domain, https://en.wikipedia.org/wiki/J._P._Morgan)

Oresund Map (Karte des Öresund / Quelle: Meyers Konversationslexikon von 1888, Band 10, Seite 61, Public Domain, https://commons.wikimedia.org/wiki/File:Karte_der_Umgebung_von_Kopenhagen.jpg)

“Theodore Newton Vail” (circa 1918, Library of Congress, Wikipedia, Public Domain, https://commons.wikimedia.org/wiki/File:Theodore_Newton_Vail_circa_1918_cropped.png)

Sources for the Eric Tetralogy

AT&T

AT&T, “History of AT&T” (http://www.corp.att.com/history/)

CNNMoney, “The story of Ma Bell” (Jul 9, 2001, http://money.cnn.com/2001/07/09/deals/att_history/)

Dealbook, “Back to the Future for AT&T” (Mar 21, 2011, New York Times, https://dealbook.nytimes.com/2011/03/21/back-to-the-future-for-att)

Joseph D. Kearney, “From the Fall of the Bell System to the Telecommunications Act: Regulation of Telecommunications Under Judge Greene” (Jan 1, 1999, Marquette Law Scholarly Commons, Marquette University Law School, http://scholarship.law.marquette.edu/cgi/viewcontent.cgi?article=1503&context=facpub)

Jason Manning, “Ma Bell Breaks Up” (2000, The Eighties Club, http://eightiesclub.tripod.com/id310.htm)

New York Times, “AT&T’s History of Invention and Breakups” (Feb 13, 2016, New York Times, https://www.nytimes.com/interactive/2016/02/12/technology/att-history.html?_r=0)

Eli M. Noam, “Viewpoints: 10 Years After Bell’s Breakup; The Split-Up Worked. No, It Didn’t” (Jan 23, 1994, New York Times, http://www.nytimes.com/1994/01/23/business/viewpoints-10-years-after-bell-s-breakup-the-split-up-worked-no-it-didn-t.html)

Larry Press, “A short history of the telephone industry and regulation” (California State University, http://bpastudio.csudh.edu/fac/lpress/471/hout/telecomHistory/)

Jane Bryant Quinn, “Ma Bell’s Breakup Means Big Changes Ahead for Phone Users” (Jan 31, 1983, Washington Post, https://www.washingtonpost.com/archive/business/1983/01/31/ma-bells-breakup-means-big-changes-ahead-for-phone-users/185c55de-505f-4f1b-98e8-e1e2bf3b67b2/?utm_term=.cfdfacfd0e32)

Tim Wu, “The Great American Information Emperors” (http://www.slate.com/articles/technology/technology/features/2010/the_great_american_information_emperors/how_theodore_vail_built_the_att_monopoly.html)

Tim Wu, “The Master Switch” (Nov 2, 2010, Knopf, http://amzn.to/2gUXtsM)

IBM

Associated Press, “U.S. dropping its long, costly antitrust suit against IBM” (Jan 9, 1982, Chicago Tribune, http://archives.chicagotribune.com/1982/01/09/page/4/article/u-s-dropping-its-long-costly-antitrust-suit-against-ibm)

G. David Garson, “Public Information Technology and E-governance: Managing the Virtual State” (2006, Jones & Bartlett Learning, https://books.google.com/books?id=OwYnTHQC4e0C&pg=PA229&lpg=PA229&dq=eu+ibm+bundling+monopoly&source=bl&ots=9CCNvs6On9&sig=ATB3jWKv_nmVlxVlxgsYoSxpXaI&hl=en&sa=X&ved=0ahUKEwjn0v6vnqLVAhWhilQKHYoyBBoQ6AEITTAH#v=onepage&q=eu%20ibm%20bundling%20monopoly&f=false)

Hagley Museum and Library, “Richard Thomas deLamarter collection of IBM antitrust suit records: Historical Note” (http://findingaids.hagley.org/xtf/view?docId=ead/1980.xml)

Bob Johnson, “U.S. Drops IBM Suit” (Jan 18, 1982, Computerworld, https://books.google.com/books?id=rx3ssrOcCTkC&pg=PA6&lpg=PA6&dq=justice+drops+ibm+case&source=bl&ots=VaR4pZF0p_&sig=_u3PpzkzZbu3trTa0O_sZuxb9zE&hl=en&sa=X&ved=0ahUKEwiW7_XZnaLVAhXqwlQKHRScCkwQ6AEIPDAF#v=onepage&q=justice%20drops%20ibm%20case&f=false)

David Levy and Steve Welzer, “System Error: How the IBM Antitrust Suit Raised Computer Prices” (1985, Cato Institute, https://object.cato.org/sites/cato.org/files/serials/files/regulation/1985/9/v9n5-6.pdf)

Microsoft

James Kanter, “European Regulators Fine Microsoft” (Mar 6, 2013, New York Times, http://www.nytimes.com/2013/03/07/technology/eu-fines-microsoft-over-browser.html)

John R. Wilke and David Bank, “Microsoft Is Found to be Predatory Monopolist” (Nov 8, 1999, Wall Street Journal https://subscribe.wsj.com/microexamples/articlefiles/MicrosoftIsFoundtoBePredatoryMonopolist.doc)

Standard Oil Company

The Learning Network, “May 15, 1911 | Supreme Court Orders Standard Oil to Be Broken Up” (May 15, 2012, New York Times, https://learning.blogs.nytimes.com/2012/05/15/may-15-1911-supreme-court-orders-standard-oil-to-be-broken-up)

“Standard ogre” (Dec 23, 1999, The Economist, http://www.economist.com/node/347251)

Ida Tarbell, “The History of the Standard Oil Company” (1904, amazon.com/History-Standard-Oil-Company-Volumes/dp/1519455860, https://play.google.com/store/books/details?id=zaYZAAAAYAAJ&rdid=book-zaYZAAAAYAAJ&rdot=1)

Other sources

Christian Ahlborn, David S. Evans and A. Jorge Padilla, “The antitrust dynamics of tying: a farewell to per se illegality” (2004, United States Department of Justice, https://www.justice.gov/atr/antitrust-economics-tying-farewell-se-illegality)

Magnus Bjornsson, “Ebay: A Concise Analysis” (2001, http://www.cs.brandeis.edu/~magnus/ief248a/eBay/)

Daniel Brockman, “The Fairy Tale of Capitalism: CEOs, Growth and Prosperity of Society” (Mar 31, 2017, https://daniel-brockman.blogspot.com/2017/03/ftc-ceos-growth-prosperity-society.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Land and Ricardo” (Apr 27, 2017, https://daniel-brockman.blogspot.com/2017/04/FTC-Land-and-Ricardo.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Managers, Professors and Engels” (Jun 12, 2017, https://daniel-brockman.blogspot.com/2017/06/ftc-managers-professors-engels.html)

Daniel Brockman, “The Fairy Tale of Capitalism: The 90 Percent” (Nov 30, 2016, https://daniel-brockman.blogspot.com/2016/11/the-fairy-tale-of-capitalism-90-percent.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Supercompensation, Income and The Exchange” (Apr 6, 2017, https://daniel-brockman.blogspot.com/2017/04/ftc-supercompensation-income-the-exchange.html)

Daniel Brockman, “Intellectual Property and The King of Denmark’s Rule” (Oct 11, 2016, https://daniel-brockman.blogspot.com/2016/10/intellectual-property-and-king-of.html)

The Chapel Royal, “Tallis and Byrd - Musicians of Tudor Renaissance” (2017, The Chapel Royal at Hampton Court Palace, England, http://www.chapelroyal.org/tallisbyrd.html)

Andy Conigliaro, Joshua Elman, Jeremy Schreiber, Tony Small, “The Danger of Corporate Monopolies” (1996, https://cs.stanford.edu/people/eroberts/cs201/projects/corporate-monopolies/index.html)

Financial Times, “A giant’s strength is valuable - if not used like a giant” (Nov 28, 2006, http://www.ft.com/cms/s/0/00c04180-7e86-11db-84bb-0000779e2340.html)

Independence Hall Association, “The Tea Act, 1773” (http://www.ushistory.org/declaration/related/teaact.html)

James Gipson, “Electronics Threaten NYSE Monopoly” (Nov 16, 1980, Washington Post, https://www.washingtonpost.com/archive/business/1980/11/16/electronics-threaten-nyse-monopoly/95c22fb4-90c2-47ea-9b91-d94e9dac3b14/)

Alan Greenspan, “Intellectual property rights” (Feb 27, 2004, The Federal Reserve Board, https://www.federalreserve.gov/boarddocs/speeches/2004/200402272/)

Paul Kiel, “AIG’s Spiral Downward: A Timeline” (Nov 14, 2008, ProPublica, https://www.propublica.org/article/article-aigs-downward-spiral-1114)

Paul Krugman, “Profits Without Production” (June 20, 2013, New York Times, http://www.nytimes.com/2013/06/21/opinion/krugman-profits-without-production.html)

“Maria of Mecklenburg”, (Geni.com, retrieved Jul 21, 2017 from https://www.geni.com/people/Maria-of-Mecklenburg-af-Mecklenburg/6000000001009244901)

Andrea Renda, “Catch Me if You Can! The Microsoft Saga and the Sorrows of Old Antitrust” (2004, Erasmus Law and Economics Review, http://www.eler.org/include/getdoc.php?id=4&article=1&mode=pdf)

Rick Santelli, “We’re thinking of having a Chicago Tea Party in July” (Feb 19, 2009, CNBC video, https://youtu.be/zp-Jw-5Kx8k?t=128, for Santelli's full statement https://youtu.be/FLLC8ER9a54 )

Rosemary Sgroi, “Monopolies in Elizabethan Parliaments” (1917, http://www.historyofparliamentonline.org/periods/tudors/monopolies-elizabethan-parliaments)

Laura Shin, “Why McDonald's Employee Budget Has Everyone Up In Arms” (Jul 18, 2013, Forbes, https://www.forbes.com/sites/laurashin/2013/07/18/why-mcdonalds-employee-budget-has-everyone-up-in-arms/#5e592aa15216)

Lisa Trei, “Intellectual property the next big thing, Greenspan predicts” (Mar 3, 2004, Stanford Report, Stanford University, http://news.stanford.edu/news/2004/march3/greenspan-33.html)

Wikiquote, "A man always has two reasons..." (quote attributed to J.P. Morgan by Owen Wister in 1930, https://en.wikiquote.org/wiki/Reason)

Wikipedia, “Boston Tea Party” (1917, https://en.wikipedia.org/wiki/Boston_Tea_Party)

Wikipedia, “Robert Devereux, 2nd Earl of Essex” (1917, https://en.wikipedia.org/wiki/Robert_Devereux,_2nd_Earl_of_Essex)

Wikipedia, “Samuel Adams” (1917, https://en.wikipedia.org/wiki/Samuel_Adams)

Wikipedia, “Tea Act” (1917, https://en.wikipedia.org/wiki/Tea_Act)

The Fairy Tale of Capitalism: Managers, Professors and Engels

2017-06-12T18:04:00.000-07:00

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The motifs of FTC the Fairy Tale of Capitalism give hope and value to many people.

Friedrich Engels 1820-1895 (Wikipedia)

Once upon a time, a German boy dropped out of high school. His father sent the boy to Bremen to take a job we of modern times would call an intern office clerk in a commercial business. He read the philosopher Hegel in his spare time and wrote newspaper articles. His mother begged him to stop writing such scandalous ideas. His name was Friedrich Engels, the “forgotten” Old One. At 21, he joined the army which ordered him to Berlin. Thus began his adventure. He would shake the world. The aftershocks continue even in our modern times.

In his spare time, the young man attended university classes but never got a degree. He hung out with a group called the “Young Hegelians”. He wrote controversial articles. The editor of a political newspaper published the articles.

Engels wasn’t in Berlin long. He went to Manchester in Lancashire, England to work with his father’s partner in the Manchester office of the family business, a thread factory in that city. At the time, Manchester and the surrounding Lancashire County were the world’s manufacturing center. The city was the throbbing innovative edge of the most advanced technologies, using steam and water to power spindles and looms for manufacture of textiles. The city also hosted an array of other industries as well. It was full of factories, each employing several hundred workers, a way of working made possible by powered machinery. Manchester was a boom town.

Engels took great interest in the lives and working conditions of the factory Workers. He went down from the company office to get to know them. He visited them on the job. He wandered the streets at all hours, ate and drank with the workers, and learned their ways. He took copious notes. To his German editor, he sent several articles which he subsequently collected into the book “The Condition of the Working Class in England” , both a detailed economic history and a polemic.

Engels wrote “Condition” in the style which the times favored. You may recognize this style from your reading his contemporary Charles Dickens. Long strings of words form sentences that cascade over two or three pages.

Engels documented the utter poverty in which many Workers died from starvation and disease. The Workers typically shared a bed of rags with six or eight comrades in a leaky house without furniture. He saw children, women and men working 70 or 80 hours per week for wages of pennies. He read reports of doctors, police and government agencies describing the illnesses of Workers living in squalor. In the factories, strained working postures and dangerous equipment injured Workers. Bad light and detailed work blinded makers of lace and fine threads. If they survived, infirmities often disabled them for work. They sometimes lived to 40 or 50 years of age.

The Workers, or “proletarians”, in the textile factories of Manchester had no, or very little, property from which to get income. Engels included the petite bourgeoisie, the people who owned small shops selling modest goods, among the proletarians. Their lack of property distinguished them from the bourgeoisie, the capitalists who owned property, among whom he included the nobility. To sustain their lives, the proletarians had only their Labor. The wages of Labor sufficed to sustain their lives for at most the next few days.

Technical innovation enabled lower product prices, because the new methods could produce much more product with the same quantity of Labor. People who wove cloth by hand in their cottages fell on bad times. They couldn’t sell their product at the low prices of machine-made goods. The cottage weavers moved to Lancashire to find work in the factories.

Samuel Compton's Spinning Mule (circa 1779), image by Pezzab

The owners of property, the bourgeoisie or middle class, as Engels called them, began to receive orders for manufactured goods from distant markets, colonies and other countries where buyers couldn’t get similar goods so cheaply from local sources. To meet demand, they would activate idle factory capacity, hiring Labor from the “unemployed reserve” to operate the machines. As orders continued, owners invested Capital to buy the latest versions of automated spinning machines and hired more Labor from the reserve.

Orders grew in size and number. Commerce boomed. Workers were a bit more scarce during short periods of the boom. To to entice them to fill the last vacancies in the factory, the bourgeois owner offered a little more pay for short periods. The Workers liked the modestly improved diet and housing the higher wages made available. The slightly better pay brought more Workers to the factories of the bourgeoisie. The factory owner called for additional production in anticipation of future orders, which continued to arrive for a few years. Bourgeois neighbors, encouraged by the example of the successful factory, set up their own factories, too. Times were good.

It came to pass that production outpaced the slowing stream of buyers’ orders. Overproduction resulted in glut of product. Factory owners reduced prices to clear unsold inventories. They dismissed some Workers and reduced hours of operation. The money Workers got from wages fell even below the cost of sustenance. In some cases, the owners ceased operation and closed the factory.

The bad times returned. Discharged Workers joined the “unemployed reserve”. Having no wages, they had no means to pay for rent and food. Landlords evicted many. Starvation and disease reduced the numbers of the “unemployed reserve”. New orders for goods didn’t cease entirely, but sank to low levels easily met by remaining inventories and the production from remaining factories.

A new machine would lower the cost of making product, often by more advanced automation requiring fewer Workers for operation. Initially, the owners had higher rates of profit with the new machines, even while the lower prices of product attracted more orders. A new period of good times began.

We aren’t certain Engels knew the works of Sismondi who wrote an early description of episodic economic crises. Engels traced the repetition of boom and bust in the factories of Manchester and figured it to recur every ten years plus or minus a few years. Later Economists also considered these fluctuations. A widely shared consensus view developed during the time of the Great Wars, and the Professors began singing the song “The Business Cycle Goes Up and Down”.

The Professors, and we mean the Business School Professors, studied the Tales of the unintelligible Economists. The Professors interpreted the Tales and composed their understandings in the more marketable form of songs. Some of the Professors were themselves Economists, but that’s another story.

Sir Richard Arkwright 1732-1792,
one of Lancashire's early capitalists.
Portrait by Mather Brown.

The Professors performed their songs in the business schools for the students who listened carefully so they could become Managers or Professors or Economists. Some of the students would become Supercompensated CEOs and would donate large amounts of money to their favorite business schools to employ Professors. Thus, in the songs, the CEOs were Ingenious Innovative Job Creators, great leaders, and the vital sina qua non of the Society. The Professors published their songs in the journals. Hoping for tenure, many also composed long chansons de geste (or sagas) which they published as books, not uncommonly sold to students at high prices. Few of the published chansons were ever sung at all except for a selected stanza or two. None were ever sung in their entirety.

In our modern age, the Professors’ repertoire includes songs ranging from the classic “Led by the Invisible Hand” to the recent hit “Quantitative Ease”, still popular at this writing. As a historical note, there is a list of songs, believed to be an all-time greatest hits list, compiled, we think, by a Professor “Captain” Ed Murphy of Caltech in Pasadena, California circa 1965. Per legend and rumor, at Edwards Air Force Base in California during the great wars, after a scientific experiment performed by his assistant, a Dr. Stapp, Murphy articulated the well-known natural law “If anything can go wrong, it will.” A rumored many times photocopied one-page biography bore his portrait. Unfortunately, due to a fire that destroyed department records, we know nothing more of Professor Murphy. Here is the list of songs from Murphy's list:

“...High Plateau” [Song not recognized. Initial part of the paper is burned away.]

“Growth of GDP”

“Corporations Serve the Interests of the Shareholders”

“Mark to Market”

“Led by the Invisible Hand”

“Inelastic Supply Blues”

“Total Quality Control”

“Looking for my Marginal Return”

“Debits on the Left”

But we digress. People who wanted to be Managers learned many of the songs (at least long enough to take the exam). Managers oversee the planning and operation of Firms and the direction of Workers. Peter Drucker, a highly esteemed Professor and composer of dozens of chansons, taught that the main job of a Manager was to choose, according to candidates’ best capabilities, the subordinates who could best do the job. The notion of Management originated early in the period of the Great Wars. Before then, there were overseers and Workers. In our modern times, four kinds of Managers have evolved.

Supervisors - Managers who manage Workers directly.

Directors - Managers of Managers. Not to be confused with the members of the Board of Directors.

Executives - A small subset of Managers, typically no more than a half-dozen per Firm. The Executives have authority over all the other Managers of the Firm.

Chief Executive Officer or CEO - Equivalent to President. The most highly ranked Manager in the Firm. The CEO can tell any of the Workers or other Managers what to do.

In Engels’ Manchester, each factory had a single manager, similar to a modern CEO, usually the owner or a relative of the owner. The only other kind of manager in the factory was the overseer, something like our modern Supervisor.

Thomas High's Spinning Jenny circa 1764

Ricardo said the value of Labor equaled the cost of subsistence. The capitalist collected the full price of the product, less the rent paid for the Land and the wages paid to Labor. The capitalist’s profit captured the value of changes in price of product. The rent on Land depended on its usefulness relative to other tracts of Land. The wages of Labor tended toward the value of necessities to sustain the Workers’ human lives, which seldom changed much. Wages and rent didn’t vary with the price of the product. If a high product price or lower cost of production occurred, neither rent nor wages would increase, but the additional value would go to Capital.

Engels saw that, at the factories of Lancashire, in the course of a business cycle, to maintain or improve their profits, the bourgeoisie would seek to reduce wages or to get more Labor for a given wage. In “Condition”, Engels diagnosed the private ownership of property, lying at the core of the “factory system” or “capitalist system”, as the cause of the Workers’ distress. Since higher wages reduced Capital’s profit, Engels saw the interests of the Workers in direct opposition to the interests of the bourgeoisie. He saw that the state served the bourgeoisie who sustained and directed the state. The Workers interacted with the state only when imprisoned or beaten by the police. Engels predicted that the bourgeoisie would accord Workers no improvement of their condition, and that the Workers would, with certainty, wrest control from the bourgeoisie by violent revolt, for they had no other recourse.

Violent Workers’ revolt to effect change in the treatment of Workers wasn’t a new idea with Engels. Perhaps he had heard of the Merthyr Rising of 1831 or the Newport Rising of 1839. In any case, his writings usually mentioned violent revolt.

Engels’ Berlin editor was the Old One Karl Marx. In our story, FTC the Fairy Tale of Capitalism, these two great villains threatened the Society. The two young villians had hit it off from the start. “Condition” was first published by Marx in a series of articles subsequently compiled as a book in 1845. Four years later, they collaborated to produce “Manifesto of the Communist Party”.

“A spectre is haunting Europe”, they wrote. The “Manifesto” encouraged Workers worldwide to overthrow the bourgeoisie with violent revolution.

“The Communists disdain to conceal their views and aims. They openly declare that their ends can be attained only by the forcible overthrow of all existing social conditions. Let the ruling classes tremble at a Communistic revolution. The proletarians have nothing to lose but their chains. They have a world to win. Workingmen of all countries unite!”

And capitalists worldwide did tremble and oppose the Communists. Engels, the scion of a bourgeois capitalist, had called out his foe. In decades to follow, capitalists, monarchies and empires fell to revolutionaries quoting Marx and Engels. In various regions of the world, some form of collective ownership of the means of production replaced the private property of the bourgeoisie.

In 1867, Engels and Marx published their collaboration, the immense book “Capital”, identifying Louis Blanc’s notion of “Capitalism” as the current phase of the evolution of civilization. The Old Ones Adam Smith and David Ricardo simply described the economic system of private property and free exchange by which the world worked. Engels and Marx said there was an alternative. They called the existing system “Capitalism” and said “Communism” was an alternate and “inevitable” successor system.

In our Fairy Tale of Capitalism, no good comes from Communism, and it threatens the Society. Capitalists adopted the term “Capitalism” to describe themselves, their adherents, and the Old Ones Adam Smith and David Ricardo (who had never heard of Capitalism). Communists, said the Capitalists, were all those who challenged Capitalism, and by challenging Capitalism, they threatened the civilization on which Society depended.

Marx and Engels challenged Capitalism. They predicted a violent proletarian revolution (though Engels wrote in his preface to the 1886 English edition of “Capital” that England might effect the revolution peacefully). Communism is the evil menace in FTC that the CEOs and Aristocracy feel called to conquer.

Notably, Engels and Marx articulated an idea that was then novel but seems quite natural in our modern times: that history has an economic basis. They said innovations in economic means of production shape social systems and the trajectory of history. But that’s another story.

“Causes of Civil War are also, that the Wealth of the Nation is in too few mens hands, and that no certain means are provided to keep all men from a necessity either to beg, or steal, or be Souldiers.”

-- William Petty 1623-1687

I wish to thank my several good friends who read prepublication drafts and offered corrections and advice.

FTC Ring: Previous | Next

Images

Image: [Public domain] Sir Richard Arkwright (1732-1792) portrait by Mather Brown (1790, Wikipedia)

Image: [Creative Commons Attribution-Share Alike license] Samuel Compton’s Spinning Mule (circa 1779, image by Pezzab, Wikimedia)

Image: [Public Domain] Friedrich Engels 1820-1895 (Wikipedia)

Image: [Public Domain] Thomas Highs’ spinning jenny (circa 1764, Wikipedia), published in Edward Baines, “History of the Cotton Manufacture in Great Britain” (1835)

Sources

Daniel Brockman, “CEOs, Growth and Prosperity of Society” (Mar 31, 2017, https://daniel-brockman.blogspot.com/2017/03/ftc-ceos-growth-prosperity-society.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Land and Ricardo” (Apr 27, 2017, https://daniel-brockman.blogspot.com/2017/04/FTC-Land-and-Ricardo.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Supercompensation, Income and the Exchange” (Apr 6, 2017, https://daniel-brockman.blogspot.com/2017/04/ftc-supercompensation-income-the-exchange.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Workers, GDP and Economists” (Mar 17, 2017, https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-workers.html)

Peter Drucker, “The Essential Drucker” (2001, https://smile.amazon.com/dp/0061345016)

Friedrich Engels, “The Condition of the Working Class in England” (1845, http://amzn.to/2snelK9)

Friedrich Engels, Paul Sweezy (tr), “The Principles of Communism” (1847, Creative Commons Attribution-ShareAlike 2.0 license, https://www.marxists.org/archive/marx/works/1847/11/prin-com.htm)

Andrew Hill, “The management revolution” (Jun 12, 2013, Financial Times, https://www.ft.com/content/25def0a6-d352-11e2-b3ff-00144feab7de)

Mark Hulbert, “New CEO is Ford’s Hail Mary pass” (May 23, 2017, Marketwatch, http://www.marketwatch.com/story/new-ceo-is-fords-hail-mary-pass-2017-05-23)

Karl Marx, Friedrich Engels, Samuel Moore (tr), “Capital: Critique of Political Economy” (1867, http://amzn.to/2sEPAsr)

Karl Marx, Friedrich Engels, Samuel Moore (tr), “Manifesto of the Communist Party” (1848, Marx/Engels Internet Archive, Creative Commons Attribution-ShareAlike license, https://www.marxists.org/archive/marx/works/1848/communist-manifesto/index.htm)

Pedro Schwartz, "Capitalism and Its Names" (Nov 7, 2016, Library of Economics and Liberty http://www.econlib.org/library/Columns/y2016/Schwartzcapitalism.html)

"J.C.L. Simonde de Sismondi” (Biography.com https://www.biography.com/people/jcl-simonde-de-sismondi-37535)

Note: We regret we have mislaid our note citing the source of our information regarding Professor “Captain” Ed Murphy.