The Altucher Article

     James Altucher’s piece about the death of New York City seems to me to be largely on target. Yet there are cities that aren’t suffering a comparable exodus, which “should” prompt the question: What makes the Big Apple so vulnerable? Why is Manhattan emptying out, possibly never to be refilled, when other cities are holding steady?

     The question made me reflect awhile on New York’s unique economic structure. That NYC is the densest and most populous of our cities, everyone is aware. But the city’s singular economic pyramid is something non-New Yorkers might not have pondered.

     Altucher is correct in fingering the expansion of Internet bandwidth as a key factor in the exodus. Without that expansion, the exodus would not be nearly the size it has attained. But other cities have enjoyed the same increase in bandwidth. What makes New York different?

     It “should” be “obvious” that the effect of radically increased bandwidth is to make the transmission of information of all kinds faster and easier. NYC is no longer the manufacturing hub of the Nineteenth and early Twentieth Centuries. The pinnacle of its economy is informational: finance, data processing, publishing, entertainment, communications, promotion. Information, in this context, includes such things as real-time images and sound: the stuff of the typical meeting.

     When information is the only thing being moved from person to person and place to place, physical proximity is unnecessary. Bandwidth is all that matters. So the quarter-million to half-million New Yorkers whose occupations are information-based have no need to gather in one dense, expensive, difficult-to-reach place.

     But that’s not the whole story. “Obviously,” those hundreds of thousands of information-only workers are a small minority of the eight million persons who reside in NYC. What about the others: the ones who still work with physical objects that can’t be transmitted over the Internet? Why are so many of them fleeing the Big Apple?

     In many cases, their trades are made economically viable by the people and businesses that pay their salaries and fees: the extremely profitable information-only industries and their well-compensated employees. In that regard, NYC differs from nearly every other American city. The vitality of the information-only sector, rather than being a cherry atop the economic sundae, is what sustains a great part – possibly the greater part – of the livelihoods of other city-dwellers.

     Most of those non-information workers could still make a living without the patronage of the information-only sector, but for many it would not be comfortable at NYC’s level of expense. The loss of the information sector thus induces a degree of flight among the non-information workers as a second-order consequence.

     New York City won’t die completely. It retains assets that Internet bandwidth can’t replace: in particular, a magnificent harbor and a transportation nexus that serves the whole Atlantic Seaboard. But present trends continuing – always a risky assumption, but what else do we have to go on? – it will diminish substantially and will remain diminished for a long time to come. Yes, the Wuhan virus and the media-promoted fear of it acted as triggers. Still, in an era in which ever fewer persons must interact physically with material objects to earn their livings, something with this effect was likely to happen along sooner or later.

Quickies: Economic Health

     I’ve only just come upon the following anti-Biden ad:

     It prompted an immediate quibble about phrasing.

     We’ve often heard about various politicians’ plans to “fix the economy.” There’s a terrible misconception buried in that phrase, one that’s at the root of a great deal of poor thinking about economic vibrancy. The guts of the misconception are expressed by the word fix.

     What do we speak of “fixing?” Broken machines, right? And what is a machine? A device designed and constructed to serve some specific purpose. If it fails to fulfill that purpose we deem it “broken,” and we set about trying to “fix” it. All right, Gentle Readers, enough with the preliminaries:

What is the “purpose” of “the economy?”

     Don’t all answer at once, now.

     “The economy” is not a machine. It was not conceived nor designed to fulfill some purpose. “The economy” is merely a shorthand term for the ongoing productive and commercial activities of the residents of these United States. Each individual has a purpose for his actions, no doubt, even if it’s just being able to meet the bills. But “the economy” has nothing of the sort.

     “The economy” is much more like a living creature than a machine. Only God has a “purpose” for a living creature. The creature itself merely strives to survive, flourish, and reproduce...as do we all.

     No one can “fix the economy.” No politician possesses a secret wisdom or a magical toolset by which he could tighten this “bolt,” loosen that “nut,” lubricate this “junction,” and somehow return “the economy” to the fulfillment of its nonexistent purpose! All politicians and governments can do for “the economy” is to get out of its way: i.e., to cease interfering with it through taxation, legislation, and regulation. Were they to do so, “the economy” could thereafter heal itself, returning to its full vibrancy through the natural actions of individuals and companies seeking to produce and trade with one another.

     But politicians almost never allow that “the economy” is better off without their meddling. Their egos will not permit that. If they don’t possess some sort of knowledge or skill the rest of us lack, why should we pay attention to them?

     Distrust anyone – no matter what the letter after his name – who claims to have a plan to “fix the economy.” Whatever he has in mind, it’s unlikely to be aimed at the greater good.

America’s Oily Dilemma

     There have been many expressions of amazement and bewilderment over the recent news that “crude oil is trading at negative values.” This excessively simplified statement of the situation is somewhat misleading, as oil itself is not being “sold” for a “negative price.” What’s really happening is the descent of oil futures contracts – sometimes called commodity options – into the negative numbers.

     If you’ve never played the futures market – for my sins, I have – it involves contracts with two ends: the put end, which agrees to supply the commodity at a specified price, and the call end, which agrees to purchase and take delivery of the commodity. Futures contract trading goes like this:

     Smith purchases a futures contract on commodity X from Jones. The contract entitles and obligates Smith to purchase a fixed amount of X at a price of $Y (which is normally more than X’s current market price) on the contracted date. He must complete that purchase unless he can resell his contract to another willing buyer before the contracted date. By selling the contract to Smith, Jones becomes entitled and obligated to sell Smith the agreed upon amount of X at a price of $Y on the contracted date. Let’s say the price Smith pays for that contract is $Z.

     Why did Smith do this? Equally to the point, why did Jones cooperate with him? In the usual case:

• Smith believes that he will be able to sell his contract for more than $Z – perhaps as high as $A – at some point before the contracted date. Thus he could reap a profit of $A minus $Z on the contract – possibly even by selling it back to Jones – without ever having to pay for or take delivery of the X.
• Jones believes the reverse: i.e., that the going price of a futures contract on X will be less than $Z on the contracted date. If that is so, then (unless Jones actually has X to sell) he will soon purchase a canceling contract on X at a lower price $Q, the difference ($Z minus $Q) being his profit. It will become Smith’s problem to deal with the obligations and consequences of having purchased the original contract.
• Note that in most cases, neither Smith nor Jones is actually interested in X itself. They’re merely gambling on its price movements.
• Of course this omits any transaction costs involved – there are always some – but the essence of the thing really is that simple.

     Indirectly, both players are betting on a price movement in commodity X: Smith is betting that it will go up, Jones that it will go down. If it goes far enough above $Y before the contracted date, Smith will profit as he hoped, for someone – call him Davis – willing to bet that it will rise even further will be willing to purchase Smith’s contract for more than the $Z Smith paid for it. Alternately, some other buyer – call him Brown – who actually wants to take delivery of the X might purchase it in the hope that it will lower the effective price of X to him.

     Of course, if the price of X should fall (or fail to approach $Y), the value of Smith’s contract will fall as well. In that case Smith must hurry to sell his contract at a loss...possibly even back to that smirking bastard Jones. In the worst case, Smith might have to pay someone to accept the contract and its obligations. Because far worse than a mere monetary loss on the contract might be in prospect:

Should Smith fail to rid himself of his contract by reselling it, it is he who will have to fulfill it: by paying the $Y and taking delivery of the X. For the typical futures trader, that would be a disaster.

     Remember: somewhere in the great American supply chain, X is being produced and readied for delivery. And like a pipe, every link in the supply chain must have two ends: the end being fed with the commodity, and the end that takes delivery of it, whether to make actual use of it or to resell it. No matter how many links the chain may possess, the ultimate source must deliver; the ultimate destination must pay and take delivery. The flow must remain smooth or commerce in the commodity will shudder. In the worst case, it might stop.

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     Futures contracts are traded in many commodities. Some of the best known are precious metals, oil, porkbellies, soybeans, and frozen orange juice. Dan Aykroyd’s and Eddie Murphy’s marvelously funny yet informative movie Trading Places concerns an attempt to corner the market in frozen orange juice, one of the most volatile of all futures contracts.

     Men have amassed huge fortunes in the futures markets. Others have gone to prison or committed suicide over their losses. Here’s a snippet of dialogue as Aykroyd’s and Murphy’s characters approach “the last bastion of pure capitalism: the New York Mercantile Exchange:”

     Aykroyd: Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That's the other guy's problem. Nothing you have ever experienced will prepare you for the absolute carnage you are about to witness. Super Bowl, World Series - they don't know what pressure is. In this building, it's either kill or be killed. You make no friends in the pits and you take no prisoners. One minute you're up half a million in soybeans and the next, boom, your kids don't go to college and they've repossessed your Bentley. Are you with me?

     And that, Gentle Reader, is exactly how it goes.

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     Now, concerning oil: taking delivery requires storage capacity, and just now there’s no surplus of it. So it’s deadly dangerous to trade in oil futures without due attention to the contracted dates. A single tradable futures unit of oil is 1000 barrels – approximately 42,000 gallons of oil. Most futures traders don’t have storage capacity for any oil; they’re relying on being able to resell their futures contracts before the contracted dates. So under current circumstances – i.e., the worldwide economic slowdown precipitated by the Wuhan coronavirus – where far less oil than normally is being purchased by end users, there’s a glut that’s flooding the available storage capacity.

     At this time, if Smith holds a futures contract on oil, then unless he owns a refinery he needs to pay someone to take the contract, and its associated obligation, off his hands. The alternative would be for Smith to complete the purchase and take delivery of the oil. That’s what it means to say that “oil is trading at negative $37.” The price of an actual, tangible barrel of oil isn’t negative; it’s just that at this time there aren’t enough buyers for the volume being extracted. That’s put the futures market in oil into a meltdown.

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     When I first learned about the futures market, I was perplexed. I couldn’t find a justification for it. The typical futures trader is essentially a gambler in a high-stakes game of “chicken.” While there must be an ultimate seller and an ultimate buyer for every unit of every commodity, the overwhelming majority of futures trades never come near the associated physical commodity.

     He who educated me about futures trading put it thus: When futures contracts came into being, it was for perfectly good reasons: those who bought and sold them sincerely intended either to provide the commodity or to accept and pay for it. Those contracts had a cash value that would fluctuate as the price of the commodity fluctuates. That made them something people with lower-than-average risk aversion would be willing to trade in for their own sake: i.e., for the pure possibility of profit. So while the great majority of such trades remain remote from the commodity itself, there is actual, tangible economic substance at the “far ends” of the contractual pipeline. You just have to squint to see it.

     To close this presentation, have a delightful little piece I found this morning at Ace’s place:

     For my friends who ask how oil that was trading could be negative $37/bbl last week...

     Thomson Energy analysis - UNDERSTANDING Crude Oil trading at minus -$37

     Imagine the following scenario: You pay $500 today and commit to receiving a hooker at your house in 15 days because your wife will be traveling. This is called a Futures Contract.

     Unfortunately, lockdown came and you are locked down with your wife at home for the next 60 days. This is called “now you are fucked,” and you cannot fulfill the escort company's Futures Contract.

     So now you do not want this woman to show up at your house at all, and try to find anyone of your friends to pass off this futures contract, any neighbours or, anybody. But you find no takers because now everybody is under lockdown with their wives and families. You find you cannot sell this hooker commitment because nobody can take delivery of the girl, and there is no where to stash her. Nobody can receive the hooker at home anymore. Everyone is in full storage.

     To make matters worse, not even the pimp (Chicago Mercantile exchange) who sold you the hooker contract has more room to receive girls because his house is full of girls out of work under lockdown.

     So now you will have to pay anyone just to take the girl off your hands. So someone tells you I will take the girl off your hands but you pay me $37 to do it.

     This is called negative price when you deliver the girl that cost you $500 to the willing buyer and pay him $37 to take delivery.

     Got it? This in a nutshell is what happened to the Oil Futures Market last week.

     No need to thank me.....

     Have a nice day.

Reserves

     If you’re acquainted with one or more preparationists – “preppers,” in our contemporary argot – you’re surely aware that they maintain a stockpile of goods they deem essential to survival and self-defense. Such stockpiles are not commonplace in the homes of persons unconcerned with the possibility of disaster. The prepper’s acknowledgement of such possibilities compels him to create and maintain one for himself and his loved ones. After all, should there be a disaster of the sort other citizens decline to consider, that stockpile could make the difference between life and death.

     The typical prepper and his otherwise-inclined neighbors differ in other ways, too. The neighbors reckon up their reserves by looking at their bank balances. The prepper, aware that should civilization’s bottom fall out, what we carelessly call money would be worthless, is more concerned with his stockpile. Indeed, depending on the intensity of his fears, he might not have more in the bank than is necessary to meet this week’s bills. The balance of what he earns goes to other uses, including building that stockpile higher, wider, and deeper.

     Context matters, of course. In normal times, when America is “open” and her magnificent productive and distributive systems are functioning normally, a fat bank balance is a pleasant thing. It holds out many options. In contrast, the prepper’s stockpile is fixed in application. He can’t convert it at will into, say, a Disneyland vacation. But the prepper is unlikely to value convertibility that much; it’s antithetical to the preparationist mindset.

     But should abnormal times arrive, the prepper will be ready. His neighbors’ bank balances will not avail them. In this there is a sermon applicable to our time.

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     One of the most significant changes of the past few decades has been the transition from commercial inventory management through the maintenance of a reserve-on-hand of components to a “just in time” approach in which the company trusts that it will be able to acquire what it needs when it needs it – essentially, an investment of faith in the American supply chain. This approach was made possible by a number of contemporaneous developments:

• High-speed communications;
• Flexible commercial transportation;
• Readily reconfigurable production systems.

     In the older America, today’s degree of commercial flexibility was unknown. Orders were placed by mail or phone, and moved slowly through several layers of planning. A supplier had to gauge its slow-and-costly-to-reconfigure production capacity against its ability to promise timely delivery. Transportation systems were more rigid than they are today. That America could not have supported the just-in-time approach. Companies had to keep a stock of components equal to their projected needs over an operational cycle with a monthly or quarterly period.

     But they had reserves. They could not be forced out of business by the surprise unavailability of a component. Today that sort of commercial collapse is far more possible. It’s happening throughout the American economy, owing to the Wuhan virus and the associated “lockdowns.”

     A crisis such as the Wuhan virus pandemic isn’t the only way the just-in-time approach could have been hobbled. A successful attack on our communication and computing systems would do it just as effectively. Severe impediments to our transportation networks would do it as well. But perhaps those horror stories should be saved for another campfire. Our current problems are bad enough.

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     In striking parallel to our transition from reserves to just-in-time, our financial system has transitioned from assets-based to debt-based. In effect, we’ve pyramided our economy – all of it, from our personal bank balances all the way up to the highest levels of corporate management and accounting – on faith in the ability and willingness of those who owe us something to make good on their debts in a timely fashion.

     Just as the typical private family is indebted to an amount equal to or greater than the value of its physical possessions, the very largest corporate concerns “own” very little of their substance, being indebted to various creditors for their liquidation value at least. At both the highest and the lowest levels, a significant interruption in the income stream would bring disaster. Mind you, America is not alone in this regard; virtually the whole of the First World has followed suit, even if some other nations haven’t gone just-in-time with the speed and wholeheartedness of American concerns.

     And what have we here? A hiatus of several weeks’ duration in the national economy! Essentially all income streams have been affected. Debts are going unserviced. Penalty charges are accumulating. Wipeout clauses are being invoked. Individuals, families, and institutions great and small are finding themselves at the edge of an abyss – and with no reserves to hand, those who slip over that edge might not be able to climb back up again.

     Some debts can be met from bank balances. But that doesn’t apply to physical needs: food, clothing, shelter, fuel, and the like. And as for those bank balances, none of them are bottomless. Even as the federal government borrows trillions and disburses them to relieve money-debt-based pressures, the sale of physical assets to meet financial obligations is accelerating. In this connection, keep an eye on the prices of the precious metals; it’s a barometer of fiscal health that always gives an accurate reading.

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     I was once known for prattling about “connectedness problems:” troubling matters that are too intimately connected to other matters to be redressed in isolation. Our current state of affairs is a giant connectedness problem: suspension of most industry and commerce, exhaustion of reserves, interrupted incomes, intensifying debt pressures, federal profligacy, deterioration of the dollar. The mess cannot be easily disentangled.

     We’ve been doing things the way we were because it was the easiest path to a fat return on our efforts. The hazards always seemed remote, like the prospect of an asteroid or comet hitting the Earth. The WuFlu pan[dem]ic has revealed our vulnerabilities to us in garish colors.

     If we come out of this with a recognizable resemblance to pre-WuFlu America, I expect that the preparationist ethic will gain more respect from more Americans. No, we won’t all fill our basements with survival supplies. But we will think more seriously about maintaining reserves of all kinds – and about the reduction of the debts that make us vulnerable. It would be well if the ethic were to penetrate corporate managements and boardrooms, too. Sadly, company bean-counters would likely squawk loudly enough to be heard on Pluto, as would a great many corporate executives whose vision gets blurry at the thought of a reduction in their beloved end-of-year bonuses. But those are problems for others to solve; I just write stuff.

Autarky: Further Considerations

     In all matters of economic analysis, it’s critically important – nay, vital — to keep Henry Hazlitt’s lesson at the forefront of one’s thoughts:

     The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

     In applying this lesson, one must remain aware that economic analysis faces its severest difficulties in dealing with time. Economics is about objectives, incentives, costs, and constraints as they affect the thinking of producers, consumers, and governments. While the action of those things is predictable, the amount of time it will take for them to bear fruit is not.

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     In my previous piece on this subject, I used the specter of potential enemies as the spur for my thesis. A nation that must ponder the possibility of warfare, whether of the “flying lead” variety or any other, must be braced for it. Its supply of necessities must not be in the control of any potential enemy. This much, at least, “should” be “obvious.”

     The meaning of the word necessities is, of course, subject to contention. The necessities of human life – i.e., those things absolutely required to keep people alive — are food, clothing, shelter, and energy. But very few Americans use the terms needs or necessities in that limited a fashion. This is a consequence of our prolonged enjoyment of a historically unprecedented degree of comfort and convenience.

     Comfort and convenience are sly seducers. Isaac Asimov knew that very well:

     "This is a Seldon crisis we're facing, Sutt, and Seldon crises are not solved by individuals but by historic forces. Hari Seldon, when he planned our course of future history, did not count on brilliant heroics but on the broad sweeps of economics and sociology. So the solutions to the various crises must be achieved by the forces that become available to us at the time.
     "In this case, – trade!"
     Sutt raised his eyebrows skeptically and took advantage of the pause, "I hope I am not of subnormal intelligence, but the fact is that your vague lecture isn't very illuminating."
     "It will become so," said Mallow. "Consider that until now the power of trade has been underestimated. It has been thought that it took a priesthood under our control to make it a powerful weapon. That is not so, and this is my contribution to the Galactic situation. Trade without priests! Trade alone! It is strong enough. Let us become very simple and specific. Korell is now at war with us. Consequently our trade with her has stopped. But, –notice that I am making this as simple as a problem in addition, –in the past three years she has based her economy more and more upon the nuclear techniques which we have introduced and which only we can continue to supply. Now what do you suppose will happen once the tiny nuclear generators begin failing, and one gadget after another goes out of commission?
     "The small household appliances go first. After a half a year of this stalemate that you abhor, a woman's nuclear knife won't work any more. Her stove begins failing. Her washer doesn't do a good job. The temperature-humidity control in her house dies on a hot summer day. What happens?"
     He paused for an answer, and Sutt said calmly, "Nothing. People endure a good deal in war."
     "Very true. They do. They'll send their sons out in unlimited numbers to die horribly on broken spaceships. They'll bear up under enemy bombardment, if it means they have to live on stale bread and foul water in caves half a mile deep. But it's very hard to bear up under little things when the patriotic uplift of imminent danger is not present. It's going to be a stalemate. There will be no casualties, no bombardments, no battles.
     "There will just be a knife that won't cut, and a stove that won't cook, and a house that freezes in the winter. It will be annoying, and people will grumble."
     Sutt said slowly, wonderingly, "Is that what you're setting your hopes on, man? What do you expect? A housewives' rebellion? A Jacquerie? A sudden uprising of butchers and grocers with their cleavers and bread-knives shouting 'Give us back our Automatic Super-Kleeno Nuclear Washing Machines.'"
     "No, sir," said Mallow, impatiently, "I do not. I expect, however, a general background of grumbling and dissatisfaction which will be seized on by more important figures later on."
     "And what more important figures are these?"
     "The manufacturers, the factory owners, the industrialists of Korell. When two years of the stalemate have gone, the machines in the factories will, one by one, begin to fail. Those industries which we have changed from first to last with our new nuclear gadgets will find themselves very suddenly ruined. The heavy industries will find themselves, en masse and at a stroke, the owners of nothing but scrap machinery that won't work."

     No casualties. No bombardments. No battles. War of the subtlest sort...yet the most savage. A war that turns the enemy’s habituation to comfort and convenience against it.

     Are Americans prepared for that sort of war in this Year of Our Lord 2020?

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     In composing the list of necessities, one must not go too far afield...but one must not stop short, either. Food, clothing, shelter, and energy are end-user consumables. They’re made available to the consumer by a process of production and distribution that has many components. So we must look also to the supply chains that provide those components. Are they reasonably secure, or could they be badly disturbed by some hostile power?

     The item that deserves deep consideration is food. Our food supply chain involves major technological developments unknown a century ago. Agrochemicals make possible the great productivity of our farms. Massive machines do the bulk of the labor. And of course, the food must get from the farms to the supermarkets, which requires trucks and trains.

     In recent years we’ve heard several times about China’s dominance of the supply of rare earth elements. Several of those elements are important in electronics production. Do any of them figure into agrochemicals or the machines, trains, and trucks that bring the food to us? If so, what could be done about it?

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     As I mentioned in the previous piece, much of the reason for the offshoring trend of recent decades has been federal over-regulation of our productive sector, particularly of an environmentalist variety. President Trump has already had some success in luring American firms back onshore. Perhaps he will succeed in reversing the flow – i.e., to make the U.S. a magnet for the productive enterprises of other nations, as it once was – but that remains to be seen.

     What also remains to be seen is whether the regulatory bureaucracy, like Tolkien’s Shadow, “takes another shape and grows again.” The bureaucracy is a favored destination for persons who like power but are ill-equipped to produce anything Americans actually want. Moreover, it offers that which the lazy and useless have favored throughout history: security. Changing the incentives involved by repealing the Pendleton Civil Service Reform Act and once again outlawing public-sector unions would prevent the resurgence of this “fourth branch of government” nowhere contemplated in the Constitution.

     Expect the Deep State to fight with the ferocity of a wounded lion.

Ultra-Quickies: From The “Great Minds Think Alike” Files

     For decades Americans have enjoyed access to cheap goods, due in large part to the fact that we’ve outsourced our industrial and supply capacity to cheap, overseas markets like China and Vietnam. The free traders, roosting in their D.C. think tanks and on Wall Street, worry that the U.S.-China trade war is uprooting our supply chains and that Huawei (shown to have deep connections to the Chinese intelligence apparatus) is only a theoretical threat. They tell us that we must come to terms with China’s rise, that there is no other way. But what if there was?

     My critics will more than likely dismiss this idea either insane or reckless. But throughout the late 19th and 20th century, it was a policy that led to prosperity and self-sufficiency. I’m talking about autarky. In our over-globalized world, a policy of total autarky is infeasible. But a degree of autarky should be recognized as self-evidently in America’s national interest.

     [William Upton]

     Amazing how a major medical calamity can get people to re-examine their preconceptions, isn’t it? And once again:

     “Most people are willing to give up their preconceptions, once they’ve had them tattooed on their heads with a blunt instrument.” – Keith Laumer, in one of his “Retief” novels

Re-Examining An Old Tenet Of The Free Economy

     “When the facts change, I change my mind. What do you do, sir?” – attributed to John Maynard Keynes, possibly apocryphal

     Changes in circumstances bring about changes in convictions, and why shouldn’t they? If our understanding follows from the evidence before us, and that evidence is later shown to be inaccurate or incomplete, to re-examine our previous beliefs is the only rational course.

     Some people refuse to do that. They retain their undermined – sometimes utterly refuted – prior stances with a quasi-religious tenacity. They become vitriolic when challenged on them. It can make things rather difficult for their relatives, friends, and occupational colleagues.

     Consider, however superficially, the requirements for fielding an army – a meaningful army, that can actually fight. What does such an effort require?

• Men;
• Mobility;
• Munitions.

     Now, those are very broad categories. For example, the “men” category would include many specimens I wouldn’t want in a field army: men too old to fight; men too small or weak to fight; men disinclined (whether from allegiance or self-centeredness) to defend their country; men incapable of using a weapon; or seriously sick men.

     So a nation that maintains a standing army would perforce require that those enlisted in its ranks be young, at least moderately large and strong, patriotic, and healthy. Could such a nation afford to allow its source of important pharmaceuticals to lie outside its borders? I think not, especially considering that men at arms tend to be packed together more closely than civilians, and thus are more prone to communicating infectious conditions.

     A nation can afford to allow the manufacture of many things to lie outside its borders. Consumer electronics; video games; durians; T-shirts – all very well. But a nation that has enemies, or that has had them recently enough to imagine that it might have them again one day, cannot afford to allow the requirements of maintaining an adequate armed force to be withheld from it.

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     Maximum economic efficiency does require that goods be made under those conditions where their price to the consumer will be minimized. This is a basic tenet of free-market economics. For example, if your T-shirts are being made by PhDs in physics, they’re likely to be prohibitively expensive, and thus will sell poorly. Alternately, if they’re being made by relatively unschooled, low-skilled workers, then all other things being equal they’ll be more affordable, and will sell much better. Of course, “all other things” are seldom equal, as companies that have tried to save money by exporting their software development and support activities to foreign lands have learned. Still, the core observation remains sound.

     But economic efficiency is merely one desideratum among many. It’s not nearly as important as life, freedom, or national sovereignty. In a world where two hundred quarrelsome States constantly vie to impose their wills on one another, in some contexts economic efficiency must defer to national preparedness. While this is maximally clear during wartime, even in times of widespread peace it never quite fades away. We’ve received a lesson in this from the Wuhan coronavirus, a.k.a. the Kung Flu or the Chi-Com Crud.

     Once the processes for manufacture and quality control have been sufficiently refined and automated, the production of most drugs can be relegated to less-educated, less-skilled workforces. That doesn’t make it a wise policy to allow the complete export of production to other lands. No, not even other lands that have been allies of long standing. Yet we have permitted exactly that to occur. With biological warfare concepts rising ever higher in sophistication, the notion approaches madness.

     The lives and well-being of Americans have depended for some time on drugs whose production lies outside our borders. Much of that production resides in Communist China, with which the U.S. is currently at loggerheads over trade, currency manipulation, and intellectual-property matters. This, to put it gently, is not good.

     Perhaps we are fortunate that as mild an affliction as the Chi-Com Crud appears to be has delivered the wake-up call. The openness of the world to international travel has made far worse biowar scenarios appallingly plausible. Yet some object to the reimportation of pharmaceutical production, among other things, to the United States. It will make the price of those drugs go up, they say – and they could be right. But it would be wise to remember the tale of the pork chops.

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     The world market contains many thousands of internationally traded goods. We don’t often think the ones we routinely purchase and consume in a strategic context. But it’s becoming important that we learn to do so. The counterpoised thesis, the condemnation of autarky, still has merit; just not in all contexts and things.

     A large part of the reason so much physical production has left the U.S. is over-regulation in pursuit of some unattainable goal: typically, “perfectly clean” air or water. There’s nothing that’s currently made abroad that can’t be made by Americans in American workplaces. Fanatical “pro-environment” regulations are often the reason some operation has gone offshore.

     Thankfully, President Trump understands this and is doing what he can, as fast as he can, to correct the situation. With luck and the good sense not to be terrified away from this eminently sensible policy by terms like autarky and protectionism, we’ll get back to a tolerable level of pharmaceutical self-sufficiency soon enough. The consequences of not doing so could be grave, including the specter of having to conduct a war by un-warlike means.

     Verbum sat sapienti.

Coercive Compassion Knows No Party

     The greatest instances of foolishness arise from the unwillingness to look beyond the surface – to ask “Why is this so,” to understand the process involved, and to accept that the process determines the outcome. Thomas Sowell was scathing on this point:

     [I]f the temperature has risen by ten degrees since dawn today, an extrapolation will show that we will all be burned to a crisp by the end of the month if this trend continues....In the real world, everything depends on where we are now, at what rate we are moving, in what direction, and – most important of all – what is the specific process generating the numbers being extrapolated. Obviously, if the rise in temperature is being caused by the spinning of the earth taking us into the sunlight, then the continuation of that spinning will take us out of the sunlight again and cause temperatures to fall when night comes.

     “Data” divorced from the relevant processes can be tortured into supporting any imaginable argument. The processes themselves are far more resistant to such abuse.

---

     This is on my mind because of yet another fatuous article about “income inequality:”

     Reactionary populism in its most dangerous form will tear at the very fabric of our society if we do not address the challenge of economic inequality. We see the scourge of authoritarian populist movements across the globe and believe there is a moral and economic imperative to reduce this widening gap.

     Note that the headline on this article is about income equality: the longstanding phenomenon of some out-earning others. Note also the use of the words “reactionary” and “authoritarian” to transform populism – majority sentiment as a force for political change – into a dark, destructive force. But note especially the deceitful use of religion as groundwork for coercive government intervention into the national economy:

     Both of our faiths teach us to care for the poor. Jesus taught us to be radical in our service. Gandhi drew inspiration from Jesus’ Sermon on the Mount and said his goal was to “unify the teaching of the [Bhagavad] Gita and the Sermon on the Mount.” He believed Jesus was one of the world’s greatest teachers.

     St. Peter’s recent successors call on us to focus on decreasing economic inequality. John Paul II’s encyclical, "Centesimus Annus" declared that “the free market is the most efficient instrument for utilizing resources and effectively responding to needs”, but “there are many human needs which find no place on the market.” In his 2013 New Year message, Pope Benedict XVI said he was alarmed “to see hotbeds of tension and conflict caused by growing instances of inequality between rich and poor” and called for a new approach to the economy.

     Do you think either of the authors of this piece has ever read a basic economics textbook – or (dare I suggest such an absurdity) Henry Hazlitt’s The Conquest of Poverty?

     Nope, me neither.

---

     Let us ask the question that Francis Rooney and Ro Khanna have failed to ask:

What processes lie behind income inequality?

     The answers are very well known. They start from observable differences in human beings:

1. Differences in ambition and energy;
2. Differences in creativity;
3. Differences in ability;
4. Differences in luck.

     Sometimes a single characteristic will determine the course of a man’s life. A serious enough physical handicap can do that. Yet there are cases of even the most severely afflicted persons rising to fame and fortune. Consider writer John Milton (blind), activist Helen Keller (blind and deaf), pitcher Jim Abbott (one hand), and physicist Stephen Hawking (amyotrophic lateral sclerosis). So it would be a step too far to posit that such handicaps must be determinative. However, he who lacks all four of the “success characteristics” will have to win the lottery...and then be wise enough not to squander the proceeds.

     Let it be stipulated that nothing short of complete totalitarian control over all income-earning activities could possibly equalize incomes. Is that what Rooney and Khanna seek? Possibly not...but look at what they advocate:

1. “[C]reate more career and technical training (CTE) opportunities, invest in rural broadband, expand small business loans to rural entrepreneurs and fund infrastructure improvements.”
2. “[F]acilitate job creation, entrepreneurial opportunities and increased community involvement.”
3. “Expand the Earned Income Tax Credit (EITC)”

     All of these things have been tried, and there has been no reduction in income differences. Are Rooney and Khanna prepared to admit that? What would their response be? Likely that “we didn’t do it right,” or alternately, “we have to do it bigger!” That’s what coercive compassionists do, you know. They never admit that their nostrums have failed; they merely agitate for more. Snake-oil salesmen did much the same, back when. So do today’s socialists.

     But we haven’t got to the fun part yet.

---

     What is the relationship among:

1. Income inequality;
2. Economic inequality;
3. Inequality of well-being?

     Does any one of the three cause the other two? Do any two in concert cause the third? Has anyone bothered to ask?

     Don’t bother to put those questions to a coercive compassionist. He’ll denounce you by reflex: “You must hate the poor!” It’s a silly sort of stroke that alienates more people than it persuades, but that’s what they do. However, people who strive to understand socioeconomic processes will ask – and they’ll do their damnedest to find the answers.

     First, income inequality is only loosely coupled to overall economic inequality. What matters is the balance between income and outgo: i.e., whether the individual under consideration spends less than, as much as, or more than he gets. One who outspends his income will fall ever deeper into debt, no matter how much he earns. One who spends every cent he gets will make no economic progress. One who spends less than he gets – i.e., one who saves — will steadily rise in economic assets and the security they confer. Over time his well-being will increase.

     Op-ed writer Fred Reed once noted that among those who are economically afflicted in this era, there’s a distinct lack of what he called “the skills required to be successfully poor.” Reed was spot-on: it is possible to have a low income and yet not fear the wolf at the door. It takes self-restraint, the development of certain skills that are ever less common in our time, the readiness to capitalize on opportunities, and a grasp of the toxic power of the all-too-often misapplied word “need.”

     The successfully poor – i.e., those with a low income who nevertheless meet their actual needs and the needs of their dependents – seldom remain poor. They struggle, sometimes for decades, but they make progress. Granted that some are laid low by happenstance: accidents, diseases, other phenomena individuals can neither predict nor control – but these are a minority among the successfully poor.

     One of the scurrilities of our time is coercive compassionists’ refusal to address the economic mobility of the successfully poor. It’s understandable, as it undermines their case for government meddling in the economy, but it’s evil nonetheless. The metric of interest should be what fraction of those arbitrarily classified as currently poor are making progress, not whether they make as much money as the CEO of a Fortune 100 corporation.

---

     Allow me a few words about Rooney’s and Khanna’s invocation of their respective religions as rationales for their prescriptions. Once again:

     Both of our faiths teach us to care for the poor. Jesus taught us to be radical in our service. Gandhi drew inspiration from Jesus’ Sermon on the Mount and said his goal was to “unify the teaching of the [Bhagavad] Gita and the Sermon on the Mount.” He believed Jesus was one of the world’s greatest teachers.

     But what did these “great teachers” teach? Individual action taken for the love of one’s neighbor. This is a far cry from the route preferred by the coercive compassionist, who would prefer to say “As long as you vote for the right social programs, you’ll go to heaven, no sweat!”

     Citing the teachings of Jesus of Nazareth as a foundation for government economic meddling – a course that has always done more harm than good – is a slander against the Son of God and Savior of Mankind. I can’t think of any bigger self-indictment. If your faith has taught you to “care for the poor, Republican-Catholic Congressman Francis Rooney, are you doing so with your own assets? Actually, I’d bet that you are...but that is not a license to prescribe that others should open their wallets to Big Government’s ever-grasping hand for more programs of the sort that have already been tried and have failed.

     Here is what Jesus said about charity:

     When the Son of man shall come in his glory, and all the holy angels with him, then shall he sit upon the throne of his glory: And before him shall be gathered all nations: and he shall separate them one from another, as a shepherd divideth his sheep from the goats: And he shall set the sheep on his right hand, but the goats on the left.
     Then shall the King say unto them on his right hand, Come, ye blessed of my Father, inherit the kingdom prepared for you from the foundation of the world: For I was an hungred, and ye gave me meat: I was thirsty, and ye gave me drink: I was a stranger, and ye took me in: Naked, and ye clothed me: I was sick, and ye visited me: I was in prison, and ye came unto me.
     Then shall the righteous answer him, saying, Lord, when saw we thee an hungred, and fed thee? or thirsty, and gave thee drink? When saw we thee a stranger, and took thee in? or naked, and clothed thee? Or when saw we thee sick, or in prison, and came unto thee?
     And the King shall answer and say unto them, Verily I say unto you, Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me.
     Then shall he say also unto them on the left hand, Depart from me, ye cursed, into everlasting fire, prepared for the devil and his angels: For I was an hungred, and ye gave me no meat: I was thirsty, and ye gave me no drink: I was a stranger, and ye took me not in: naked, and ye clothed me not: sick, and in prison, and ye visited me not.
     Then shall they also answer him, saying, Lord, when saw we thee an hungred, or athirst, or a stranger, or naked, or sick, or in prison, and did not minister unto thee?
     Then shall he answer them, saying, Verily I say unto you, Inasmuch as ye did it not to one of the least of these, ye did it not to me.

     [Matthew 25:31-45]

     Not a word about government or government programs can be found there. As for Democrat-Hindu Congressman Khanna’s faith, I shall refrain from comment.

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     No one has made the case against the coercive compassionist as well as Isabel Paterson:

     If the full roll of sincere philanthropists were called, from the beginning of time, it would be found that all of them together by their strictly philanthropic activities have never conferred upon humanity one-tenth of the benefit derived from the normally self-interested efforts of Thomas Alva Edison, to say nothing of the greater minds who worked out the scientific principles which Edison applied. Innumerable speculative thinkers, inventors, and organizers, have contributed to the comfort, health, and happiness of their fellow men—because that was not their objective....
     The philanthropist, the politician, and the pimp are inevitably found in alliance because they have the same motives, they seek the same ends, to exist for, through, and by others. And the good people cannot be exonerated for supporting them. Neither can it be believed that the good people are wholly unaware of what actually happens. But when the good people do know, as they certainly do, that three million persons (at the least estimate) were starved to death in one year by the methods they approve, why do they still fraternize with the murderers and support the measures? Because they have been told that the lingering death of the three millions might ultimately benefit a greater number. The argument applies equally well to cannibalism.

     [From The God of the Machine]

     It cannot be put better than that. The Rooneys and Khannas should reflect on it. The rest of us should tune them out until they’ve absorbed the lesson.

When Smart People Say Foolish Things

     “I do not need protecting,” she said. “I can take care of myself.”
     “You are a fine fencer,” I said. “Unfortunately, life is more complicated than a fair dueling situation.”
     “I know that. I'm not a child. But—”
     “ 'But' nothing! He did the same thing I'd do if you were mine. He's protecting himself as well as you. I'm surprised he let Brand know about you. He's going to be damned mad that I found out.” Her head jerked and she stared at me, eyes wide.
     “But you wouldn't do anything to hurt us,” she said. “We-we're related.”
     “How the hell do you know why I'm here or what I'm thinking?” I said. “You might have just stuck both your necks in nooses!”
     “You are joking, aren't you?” she said, slowly raising her left hand between us.
     “I don't know,” I said. “I need not be-and I wouldn't be talking about it if I did have something rotten in mind, would I?”
     “No... I guess not,” she said.
     “I am going to tell you something Benedict should have told you long ago,” I said. “Never trust a relative. It is far worse than trusting strangers. With a stranger there is a possibility that you might be safe.”
     “You really mean that, don't you?”
     “Yes.”
     “Yourself included?”
     I smiled. “Of course it does not apply to me. I am the soul of honor, kindness, mercy, and goodness. Trust me in all things.”

     [Roger Zelazny. The Guns Of Avalon]

     The above, from one of Zelazny’s justly famous Amber novels, nicely captures the internecine quarrels of the royal family of that realm. Its ruler, Oberon, has gone missing and is presumed dead. Every one of his sons and daughters wants the crown. Every one of them is willing to murder all the others to get it. For any one of them to trust any other would be an act of insanity – and therefore, trust among them is nonexistent. That’s the perspective from which Corwin, one of Amber’s princes and the narrator in the above, is speaking to his niece Dara, whom he’s only just met.

     The absence of trust makes room for the operation of other qualities that trust can – and sometimes does – obscure. One of them is dispassionate analysis.

---

     As long as I’m in a quoting mood, here’s another:

     "Excuse me, Miss," Stromberg's voice boomed out. Teresza jerked her head around to find the sociologist and most of the class staring straight at her. "Yes, you who're holding Mr. Morelon's hand in a grip of steel." A titter ran through the hall. Teresza flushed. "Do you have an opinion on the subject?"
     "Uh, no, Professor." Teresza rose and gathered her thoughts as best she could. "I was just surprised to hear that they had all that junk."
     Stromberg smiled broadly. "Everyone is, Miss...?"
     "Chistyakowski."...
     "Well, you may take my word for it, Miss. In 2061, thirty-four percent of the economy of the richest sector, which was called the United States, was devoted to entertainment and diversions. As a category, that outstripped the second largest sector, medical services, by more than two to one. If our histories are accurate, its products were consumed with an unbelievable avidity, and its customers were perpetually hungry for more." He leaned forward over his lectern and peered hard at her. "Would you care to venture an opinion as to why they wanted so many frivolities and distractions?"
     Two hundred pairs of eyes pressed against her as she groped for a response. She squeezed Armand's hand and tried to think.
     The household she and her father kept was simple and modest. They had all they needed and a handful of minor luxuries, but no one would have thought their lifestyle lavish. Yet she couldn't think of anyone she knew whose surroundings were substantially more opulent. Not even the Morelons, whose wealth would have sufficed to buy the Gallatin campus ten or twenty times over.
     But why would anyone want to be surrounded by all that junk in the first place?
     "Professor," she said slowly, "I can't help asking the question the other way around. We could have all that stuff if we wanted it, couldn't we?"
     Stromberg grinned suggestively. "Indeed we could, Miss."
     "So why don't we?"

     Teresza’s question is the question of the day. Indeed, it’s the question of our nation and our era. And apparently the answer to it, though in plain sight, is being ignored or overlooked by some very bright and articulate people.

---

     The second citation above concerns the colony world of Hope, which is utterly without governments of any description. Thus, it lacks the overheads subjugation by a government imposes: laws, regulations, armies, police forces, other agents and agencies, and the taxes required to support them. The absence of those overheads has allowed the colonists to advance from pretechnological subsistence to roughly the technological-economic status of the United States in 1960 in only twelve hundred years – and that despite an ecology that’s lethally hostile to Earth-derived life. The colonists, descendants of a group of anarchist exiles who called themselves Spoonerites, like their ungoverned status just fine. Hope society emerged as family-oriented.

     That was also American society in 1960. While certain technologies were still maturing in 1960, all the elements were present to give swift rise to every one of the fripperies of today. Yet there was no pressure for those things. Rather, American adults concentrated on making a living, maintaining peaceful and orderly households and communities, and producing and raising their children.

     America’s markets in 1960 were appreciably freer than they are today. The six decades since have seen an explosion of coercive laws and regulations, nearly always under the overt rationale of “protecting the consumer.” The emergence of virtually all the luxury consumer-non-durable goods of today followed the imposition of all those laws and regulations, and – of course – the explosion in taxation that accompanied them.

     The federal government soon discovered that taxation was not enough to fund its new voracity. The Laffer Effect defeated rates above a certain revenue-optimum level. The sole alternative was to borrow. The Federal Reserve system guaranteed that large-scale federal borrowing would result in inflation.

     The accelerating rise in the cost of living compelled Americans to embrace the two-income family. For many, overtime labor became the way of survival. The repercussions were not long in coming. The reduction in the amount of time and energy that went to family and community matters was felt almost immediately. Children needed something to substitute for the attention of their parents, and parents needed something to distract their children from their parents’ obsessive concern with expenses, debt, and their futures.

     The proliferation of consumer fripperies was a response to these things, not the cause of them.

---

     Some very smart people, quite as concerned with the deterioration of our families and neighborhoods as I, have assailed our markets as “too efficient.” The late Robert Nisbet, a towering intellect, once wrote that “our markets may be too efficient for life on a human scale.” I have no doubt that he was sincere. Nevertheless, the correlation between the explosion in luxury consumer non-durables fooled him as it has fooled others.

     You’ll see a lot of opinion writing that echoes Nisbet these days. Most of it is by self-described conservatives. Here’s a recent sample. Yet there’s nothing conservative about measures that enable the advancement of government power and intrusion. Objections to the freely chosen behavior of Americans in the American marketplace can only empower the statists among us. Rather, we should be looking at reducing the size and intrusiveness of our 88,000 governments – federal, state, county, municipal, and school district – back to pre-World War I levels.

     Would that guarantee a return to the family-oriented society of those years? No, it would not. There are no guarantees in sociodynamics. But it would remove the propellants that powered our flight from it. Moreover, it would restore a great part of the freedom Americans once enjoyed: an autonomy untroubled by fears of not being able to meet present or future bills. It would reinstitute conditions in which Americans’ paramount attention could go to things close to home, rather than to a rat race toward a potentially illusory security.

     I’ll let Professor Arne Stromberg, holder of the Edmond Genet Chair in Sociology at Gallatin University, the foremost center of higher learning on Alta, the northern continent of Hope, close this tirade:

     “Families are the fundamental building blocks of a stable society. Extended families—clans—are the best conceivable environment for the rearing of children, the perpetuation of a commercial forte, and the germination of new families and their ventures. A clan like yours, Miss Albermayer, conserves a brilliant genetic line and a priceless medical specialty at the same time. A clan like yours, Mr. Morelon, makes possible a benign agricultural empire and produces natural leaders one after another while connecting Hope to its most distant origins. And all healthy families, which cherish life and bind their members to one another in unembarrassed love, can find far more to occupy and amuse them than they need."
     Teresza's mind lit with memories of the way the Morelons had enfolded her and made her one of them. No day could have been long enough for all they had to say and do and share with one another.
     "When Earth's regard for families and their most fundamental function deteriorated, her people ceased to enjoy the sorts of ties that had held them together throughout the history of Man. Without families, and especially without children, they groped for other things to fill their time, whether to give them a sense of purpose, or to distract them from the waning of their lives. Some invested themselves in industry or commerce, but without the sense of the family line to be built up and made prominent, those things failed to satisfy. Others immersed themselves in games, toys, fripperies, and increasingly bizarre forms of entertainment, which palled on them even faster. Still others made a fetish out of sex; there was a substantial sex industry on Earth, though it tended to operate in the shadows and was seldom openly discussed. They needed emotion and substance, but all they could contrive was sensation and novelty, and they pumped an ever greater share of their effort and wealth into seeking them. That's my thesis, for what it's worth."
     The hall was silent. Teresza peered furtively at the faces of the students nearest her. The majority of them were wet with tears.
     "For us," Stromberg said, "it's enough that we're happy, secure, and free. We don't really need to know definitively why our statist forebears traveled a path so different from our own. But it's among the great mysteries of social science, and worth thinking about from time to time even in isolation."

     Indeed it is.

A Few Words About The Business Cycle

     You’ve seen that phrase before, haven’t you? I’ll bet a few of my Gentle Readers have even used it in conversation. But the ease with which it rolls off the tongue contrasts sharply with the general ignorance about the business cycle: specifically, what causes it and keeps it cycling.

     Most people look at the behavior of the economy the way an ant would look at an avalanche: from way, way down at the bottom of the mountain. For them, “business cycle” is merely an incantation used to deflect or dismiss their expressed concerns about their own financial well being: “It’s just the business cycle,” the analyst or counselor says, as if to murmur “And there’s nothing to be done about it.” And from the perspective of the average American, there really is nothing to be done about it, except perhaps to remain cautious as it peaks and to brace for its troughs. But that doesn’t mean the business cycle is a phenomenon written into the laws of the Universe.

     Many people believe the business cycle to be tied to warfare. There’s some truth in that, as warfare is one of the rationales for what really drives the business cycle. But we’re here to take a deeper look, one that respects the observable fact that the business cycle as we understand it began only about a century ago. Mankind’s been fighting wars for a lot longer than that.

     Some really interesting things started about a century ago, and you should be aware of their consequences.

---

     When financial analysts scout for the entry to the “trough” phase of the business cycle, they all look for the same thing: a retreat from investment by major corporations. That is, companies that had been spending on growth begin to pull back in a consistent fashion from such investment patterns. The key indicator is an overall decline in the purchase of capital goods: commercial land, buildings, and the equipment used to make products for sale (including products sold to other companies). It “should” be “obvious” that such a retreat presages a retreat from hiring for volume production. And indeed, that does follow.

     A retreat from hiring puts downward pressure on wage levels. It can take a while for the effect to manifest itself, as virtually no company actually cuts wages these days. But the pressure is there, and will be expressed in several ways, including overall workforce reductions and a leveling off in salary offers to persons newly hired. Frictional unemployment is swallowed by the real thing, as laid-off workers struggle to find new jobs. Financial reporters soon see the sort of trend in GDP we’ve been taught to call a recession: a period of no or negative growth.

     Now, it’s plain that even in a generally healthy, growing economy, there will always be companies that “aren’t making it” and must pull back or, in the worst case, cease to operate. That’s part of capitalism; not every venture will succeed, and those that fail must contain the losses to themselves. What matters is the overall trend among companies: toward or away from growth-oriented investment. When the trend is away, a recession will follow.

     That the trend recurs at irregular intervals suggests that the “business cycle” is only evidence of another, deeper cycle: one that businesses cannot countervail.

---

     The birth of the Federal Reserve System in 1913 produced a state of affairs which rendered the dollar a commodity of unstable quantity and value. The Fed was given the authority to create new money, supposedly to assure that the American monetary system would remain “flexible.” In point of fact, the Fed can only create new money under one condition: borrowing by the federal government.

     The federal government borrows so that it can spend more than it takes in through taxation. The annual federal deficit is the measure of how greatly Congress’s spending has exceeded its income. The federal debt is merely the accumulation of all the deficits Washington has incurred over the years. But the salient fact for this discussion is that when Congress borrows and spends, it does so by virtue of the Fed’s creation of new money for that purpose.

     The federal government doesn’t buy things at the corner store. Its purchasing is always in vast quantities, the sort that produces huge spikes in the revenue curves of companies that sell to it. Thus, the newly borrowed / newly created money enters the economy in large lumps through the coffers of large corporations. Those lumps cause their in-house analysts to foresee growth in the immediate future. They counsel corporate management to invest in anticipation of an ongoing increase in business. Capital goods are purchased. Workforces are enlarged. Wages increase.

     This brings about the “peak” portion of the business cycle. The “peak” fades into the “trough,” discussed in the previous section, when it becomes evident that Congress’s purchases are not a true indicator of continuing revenue growth. Capital goods purchases decline to previous levels or still lower ones, workforces are pared back, and the “cycle” is renewed.

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     There are other important consequences to federal deficit finance, of course, but this is not the time for that discussion. Few of those who have pontificated about this “cycle” of immense importance have delved into its causes, or reflected on why the “cycle” began only a century ago. Indeed, they speak of the “cycle” as if it were a phenomenon familiar to the Cro-Magnons. It is our mission here at Liberty’s Torch to spread useful information those others don’t want disseminated. If you’ve wondered, now you know.

     This piece was stimulated by David De Gerolamo’s roundup of some ominous economic numbers. It’s an interesting list overall, but the part that speaks most loudly to me is this one:

     This is the worst slump for core U.S. factory orders in three years.

     That suggests that we’re closing in on a new “trough” in the business cycle. It looks as if it will be a deep one. Americans should brace themselves. Don’t let your luxuries become necessities. Consider yourselves forewarned.

Price Dynamics: Two Vignettes

     It takes actual real-world experience at making at selling things to become aware of the influences that actually guide product pricing. As I’ve already written, the costs of production are insignificant contributors to such matters. Governmental intrusions can play a part, of course, as can other factors not under the control of the maker / seller of the product. But in a truly free market, the price of good X will fluctuate according to those two old devils:

1. Supply: The amount of X available within the acceptance horizon of RWA purchasers;
2. Demand: The number of RWA purchasers.

     Above and henceforward, RWA shall stand for:

1. Ready: The purchaser is ready to transact on current terms;
2. Willing: The purchaser is willing to meet the seller’s current terms;
3. Able: The purchaser is able to meet the seller’s current terms.

     The sole mysterious phrase in any of the above is acceptance horizon. That’s the length of the interval between two points in time:

1. T_commitment: The point in time at which the purchaser and seller agree to transact;
2. T_acquisition: The point in time at which the purchaser acquires what he purchased at T_commitment.

     The seller has a veto power over the price he will accept. However, the purchaser determines his acceptance horizon. The seller may attempt to influence it, as for example in the case of a car to be built to a custom order, but the last word belongs to the purchaser.

     Even if the terminology looks a little abstruse, this is essentially simple stuff: Beginning Economics for the Uninitiated. The underlying phenomena are about property: specifically, the rights that a property owner will possess and exercise in the absence of coercion. Among those rights, the most important one is the owner’s right and power to exclude others from using or making off with his property. It’s the attribute that distinguishes goods that can be owned from public goods, which lack it.

     As time passes, every aspect of the various factors mentioned above will fluctuate, and so also will the supply, demand, and price of good X in actual transactions. The classical supply-demand equilibration graph suggests that as the supply of a good increases, the price it commands will decrease. However, if the good proves to be in substantially greater demand than the maker / seller originally expected, the price of that good will rise rather than fall even if the supply of the good increases concomitantly. Our first vignette addresses this phenomenon.

     Yet at no time does the cost of production of a unit of X, however it might be determined, do more than discourage the maker / seller from lowering his price “too far.” I must emphasize this point: To discourage further production for sale is all the cost of production can do. Our second vignette addresses this factor.

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     Thorstein Veblen, a “dissenting” thinker of the early 20th Century, attempted to shoot holes in classical economics by asserting that it makes claims that don’t hold up. For example, he lampooned the supply-demand equilibration dynamic by showing that even though the supply of a particular luxury automobile had increased steadily over a period of months, its price was rising as well. That, he claimed, was enough to refute classical microeconomic theory.

     Veblen’s contention fails in two ways. First, he neglected to extrapolate his own assertion, specifically thus: Could the price of the popular auto continue to increase indefinitely? The answer is plainly no; over time the market would saturate and the price would fall to a holding level. The second fault in his argument is that he was shooting at a straw man: classical economics doesn’t insist that as supply rises price must fall. Indeed, the dynamic nature of demand – i.e., the number of RWA purchasers at any given instant – makes such a notion ludicrous on its face. The demand for a good can increase because of factors completely disconnected from its supply: publicity, fads and fashions, or a rapid increase in general prosperity are only a few.

     Veblen, an early “progressive” socialist who disliked the very idea of profit, could not cope with this refutation of his thesis. He attacked personally those who pointed it out to him, most notably H. L. Mencken, who never saw an overinflated ego he would not immediately strive to puncture.

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     In the late Seventies and early Eighties, with the microcomputer revolution just gathering steam, a number of companies that were “late to the party” attempted to enter it by introducing computers that mimicked the more successful existing manufacturers. Unless you were part of the scene back then, you probably won’t remember North Star Computers, the most successful of the CP/M-80- based machines of that time. I worked for a “late to the party” company which produced the Multivision, a computer broadly modeled on North Star’s offering.

     There was nothing wrong with Multivision. It was an example of the state of the art, though it broke no barriers and explored no unexplored frontiers. But for one reason or another, it didn’t sell. Over time the inventory of Multivisions had to be disposed of at prices well below their cost of production, merely to free up inventory space for other products. There was no help for it, and nothing to be done but to recoup what few dollars could be had by liquidating the supply on hand. This is a common phenomenon in a marketplace that’s departing its “innovation” phase and moving toward “maturity.”

     Benjamin M. Anderson also provides examples of this kind in his book Economics and the Public Welfare. He’s quite explicit about how pricing behaves: “Right prices are prices that will move goods.” For there is often a cost to not pricing a good below its cost of production. Ask any business owner who’s ever needed to fight off a bankruptcy action or clear some warehouse space.

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     The above are merely a few gentle pointers into a realm of great complexity. The mysteries of economics are essentially the mysteries of human behavior. Price dynamics cannot be decoupled from the elusive dynamics of human decision making. And of course, given that the State will nearly always intrude into the market, and that “social justice warriors” will egg it on to do ever more of that, the relative simplicity of supply-demand microeconomics can seem unrelated to the world in which we live. But one must start somewhere, and dismissing the essentially Marxist canard about how “cost of production should determine price,” uncritically accepted by far too many, is a good place to start.

Ocasio-Cortez - An Economics Major?

No. Her Wikipedia entry about her degree states:

She graduated cum laude from Boston University's College of Arts and Sciences in 2011, majoring in international relations and economics.^[24][28][29]

In the boxed summary (top of article, right), AOC's degree is reported as a BA from Boston University. So, to recap, she has a BA in International Relations. It would appear that the Economics part is a TRACK - the International Economics, Business, and Politics Track, in fact.

[NOTE: I had written Boston College above - I double-checked to see that the info on coursework was from BU - it was - and made the correction]

The students who chose that track do have to take certain Economics courses - the CAS (College of Arts and Sciences) EC 392 International Economics

Among the required coursework: [Fixed this - was not displaying well]

EC 201 Intermediate microeconomic analysis

ec 202 intermediate macroeconomic analysis

EC 320 economics of less-developed regions

EC 391 International Economics I

eC 391 International Economics II: problems and policy

Other than two courses relation to specific regions (Latin America and China), that's it for coursework in the Economics Dept., other than a few advanced level courses, two of them similar in name and number to those offered at the undergraduate level. I can't say just how skewed the teaching was in the direction of Leftist thought, but other than the first 2 courses, nothing indicates that the courses were primarily analytical.

The other coursework is in International Relations, Politics, Management, or other non-economics areas. So, it would appear that AOC had a concentration (at Boston University, called a Track) in Economics, Business, and Politics. NOT an Econ major, although that has been the implied degree in many of the stories written about her. Many of them skate over the actual major, preferring to word the details as though she were a budding Milton Friedman (only smarter and more woke).

I'm not saying that she is not smart in specific areas - given her interest in science, she likely scored rather well on the math/science areas of the ACT. Much has been made of her participation in the Intel Science Fair:

She won second prize in the Intel International Science and Engineering Fair with a microbiology research project on the effect of antioxidants on the lifespan of the nematode C. elegans.^[21]

There were 3 top finishers that year - she was NOT one of them. I would surmise that her second place finish was in the subsection of Microbiology. Not bad, but not the absolute top. I've talked to other teachers, and many of the participating students work with mentors - it's not a matter of solo brilliance. They do get some assistance and guidance from actual scientists.

The remainder of the coursework in the International Relations track she likely followed is more politically oriented in the usual Leftist slant. Her identification with Socialism is an extension of her studies, and is not based on a rigorous analysis of conditions in the less-developed world, but more on her politically-oriented viewpoint.

So - to sum up AOC's much-hyped Economics Knowledge. She likely has a bare knowledge of the basic concepts. That good beginning has been overlaid with a heavy mass of Standard College Leftism - and only the last part of that education, seemingly, stuck.

Got To Get This Off My Chest Right Away

     Peter Grant is normally a sensible fellow. All right, he’s got a couple of stupid notions, but then, most people do. To be fair, I once thought opening the borders was a good idea. But there’s stupid, and then there’s are you BLEEP!ing kidding me?

     Let's be honest: most companies are out to separate you from as much of your money as possible, as painlessly as possible. It's only because we aren't vigilant, and don't pay enough attention to what's going on, that we continue to tolerate this.

     What's more, many of the prices charged for goods bear no relation whatsoever to the actual cost of production of those goods - another con game.

     I emphasized the arrant idiocy.

     The notion that the “cost of production” should help to determine the price of a good is a Marxist idea. It cannot be found anywhere in reality. The sole participation of the cost of production, however a maker might arrive at it -- and that's a lot harder than you might imagine, Gentle Reader -- is to determine the bottom of the price range for the good: i.e., the lowest imaginable price at which he could continue to make and sell the good without going swiftly bankrupt. Even this relation has exceptions, as some manufacturers deliberately make and sell “loss leaders” to make the other goods in their lines more attractive.

     Just in case you never took high school economics, the price of a good offered in a reasonably free market is set by two factors:

1. Supply: The immediate and / or projected availability of the good at some proposed price.
2. Demand: The number of immediate and / or projected persons ready, willing, and able to purchase the good at that price.

     Except for governmental intrusions upon the marketplace, nothing else matters.

     I begin to wonder whether the rampant socialist idiocy being offered us by such...persons as Alexandria Ocasio-Cortez and Kamala Harris – say, what a presidential ticket that would make, eh? With maybe Ilhan Omar as our Secretary of State and Rashida Tlaib as Ambassador to the U.N.? — has become contagious. A mind virus, slowly taking over all our brains through the agency of the Left’s political luminaries and their handmaidens in the major media!

     Stranger things have happened. As I’m stuck here in New York, in uncomfortable proximity with Ocasio-Cortez, Bill de Blasio, and Andrew Cuomo, perhaps I should start to worry.

The Maddest Fantasy

     Good morning, Gentle Reader. I’m in an economic-history mood just now, so I hope you’re prepared to go a little further off the beaten track than Liberty’s Torch usually goes – though let it be said that I and my Co-Contributors aren’t exactly “mainstream commentators” even at our staidest moments.

     The word for the day is mercantilism. Have you ever heard it? Do you know what it means? If so, do you know the historical context in which it arose?

     The usual answers to those questions are all negatives. Mercantilism as a subject of economic inquiry died out a couple of centuries ago, though the mercantilist attitude resurfaces every now and then, to the detriment of men and nations. Here’s a pretty decent definition:

     [A] system of political and economic policy, evolving with the modern national state and seeking to secure a nation's political and economic supremacy in its rivalry with other states. According to this system, money was regarded as a store of wealth, and the goal of a state was the accumulation of precious metals, by exporting the largest possible quantity of its products and importing as little as possible, thus establishing a favorable balance of trade. [Emphases added by FWP.]

     I must inject that modern in the above definition should be read as post-Westphalian. Mercantilism as national policy had no advocates before the emergence of the modern nation-state. That required the agreements in the Treaties of Osnabrück and Münster, which are the foundation of the contemporary conception of sovereignty.

     For the great powers of post-Renaissance Europe to agree on the cuius regio, eius religio principle, the absence of which had kept them at war for many decades, certain significant changes had to be made to the most fundamental of all political matters: what institutions shall have the privilege of making war. The Westphalian agreements established that only sovereign powers – i.e., the agreed-upon monarchs of nations – would have that privilege. Private armies would henceforward be outlawed, and the use of military force by lesser nobles would be treated as treasonous.

     With the elevation of sovereignty to an internationally recognized condition came something that could not have been practiced before it: state interference in commerce. Monarchs began to meddle in production and trade, usually at the behest of commercial powers that had ingratiated themselves with the royal house.

     Return for moment to the definition of mercantilism above. Review the first emphasized clause. I did that for a reason.

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     Economic thought from Smith and Pareto all the way to contemporary Austrians and Friedmanites has emphasized the value of absolutely free trade. And indeed, in no case imaginable is absolutely free trade inferior to any variety or degree of government intrusion. Yet government intrusion in international trade has been the rule. It’s the rule today. Why?

     The simple answer, which is entirely adequate, is that sovereigns have been induced to look upon international trade as a win-or-lose proposition. That requires a static view of such trade: i.e., the ability to “halt the carousel and declare that the ride is over,” without regard for the relentless continuation of time. It also requires a considerable myopia about the nature of money.

     As I’ve written innumerable times, money is a medium of exchange and a store of value. Simple words, but what do they mean in the context of international trade?

     Money, regardless of whether it’s commodity-based or fiat, is not wealth. That is: the possession of a great quantity of money does not automatically make the possessor well off. There must be goods and services available for purchase with that money – and unless the possessor is willing to make those purchases, his money is valueless. The “favorable balance of trade” sought in mercantilist theory neglects this aspect of money.

     Instructive in this regard is the story of Hetty Howland Green, “the Witch of Wall Street.” This woman amassed an enormous monetary fortune in the late 19th and early 20th Centuries...but lived in a degree of penury almost unimaginable today. She was unwilling to spend a penny she could not somehow contrive to retain:

     Hetty Green's stinginess was legendary. She was said never to turn on the heat or use hot water. She wore one old black dress and undergarments that she changed only after they had been worn out, did not wash her hands and rode in an old carriage. She ate mostly pies that cost fifteen cents. One tale claims that Green spent half a night searching her carriage for a lost stamp worth two cents. Another asserts that she instructed her laundress to wash only the dirtiest parts of her dresses (the hems) to save money on soap.

     Green conducted much of her business at the offices of the Seaboard National Bank in New York, surrounded by trunks and suitcases full of her papers; she did not want to pay rent for her own office. Later unfounded rumors claimed that she ate only oatmeal, heated on the office radiator. Possibly because of the stiff competition of the mostly male business environment and partly because of her usually dour dress (due mainly to frugality, but perhaps in part related to her Quaker upbringing), she was given the nickname, the "Witch of Wall Street".

     She was a successful businesswoman who dealt mainly in real estate, invested in railroads and mines, and lent money while acquiring numerous mortgages. The City of New York came to Green for loans to keep the city afloat on several occasions, most particularly during the Panic of 1907; she wrote a check for $1.1 million and took her payment in short-term revenue bonds. Keenly detail-oriented, she would travel thousands of miles alone—in an era when few women would dare travel unescorted—to collect a debt of a few hundred dollars.

     Green entered the lexicon of turn-of-the-century America with the popular phrase, "I'm not Hetty if I do look green." O. Henry used this phrase in his 1890s story "The Skylight Room" when a young woman, negotiating the rent on a room in a rooming house owned by an imperious old lady, wishes to make it clear she is neither as rich as she appears nor as naive.

     Her frugality extended to family life. When her son Ned broke his leg as a child, Hetty tried to have him admitted to a free clinic for the poor. Mythic accounts have her storming away after being recognized; her biographer Slack says that she paid her bill and took her son to other doctors. His leg did not heal properly and, after years of treatment, it had to be amputated.

     Regardless of her bank balance, no sane man would regard Hetty Green as “wealthy.”

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     Compare the above story of Hetty Green to mercantilism in international trade. When all the monies of the world were backed by some commodity – usually either gold or silver – the mercantilist approach to economics regarded “a favorable balance of trade” – i.e., the quantity of money in “the nation’s” hands – as its “score” in the game of international trade. The objective was to maximize that “score.” Once again: why?

     He who holds a static view would argue that a large national monetary balance equates to economic power: the ability to secure favorable terms on future purchases. But what does that mean? And what are its implications for the mercantilist policy of “export lots, import little” that preceded such purchases?

     The lunacy of mercantilism’s premise that “money is wealth” could not be plainer. Yet nearly every country on Earth nods to such thinking to some degree, usually with import tariffs. The greatest demonstration of such thinking and its consequences arrived with the 1930 Smoot-Hawley Tariff Act. This extremely punitive tariff affected a great many imported products, and provoked retaliatory tariffs from America’s international trading partners. Those tariffs guaranteed a worldwide depression.

     Yet the Smoot-Hawley Tariff Act was by no rationale “necessary.” It was not itself a retaliation for tariffs imposed by other nations. Rather, it was at base an attempt to protect the relatively young Federal Reserve system from exposure for its fraudulent nature. As an analysis of that dynamic would take thousands of words, I’ll save the subject for another day.

     A tariff must always be answered with a counter-tariff. The failure to do so creates an imbalance that can destroy the affected industries in the-non-retaliating nation. That can put powerful upward pressures on both inflation and welfarism. Ironically, both those measures deepen and prolong the problems they purport to address. For testimony, we have the New Deal.

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     To sum up this brief exposition: Money is not wealth. The belief that money is wealth is a species of insanity. Neither is “a favorable balance of trade” favorable to anyone except the companies whose products are “protected” by mercantilist policy. Those companies make out like bandits at the expense of the rest of us. That a government should put itself in league with such companies says nothing good about the policymakers within that government. Either they know nothing about economics or economic history, or their decisions are driven by corrupt, venal motives.

     More anon.