Friday, 4 February 2011

Ethanol, bad business, bad for food prices.

Basic economic theory inevitably demonstrates that when government affords a subsidy in order to make production of a particular good or industry profitable, then the capital and other resources (including the human resources) attached to that product or service is misallocated.

Whether we are talking about the US, India, Australia or as with any other nation, if the production of ethanol based fuel products cannot be conducted profitably without government subsidisation, it is an inefficient use of valuable and scarce resources.

Profit and loss signals that come from honest market competition without intervention extend the necessary signals and evidence to those parties in the market allowing them to determine if the resources needed for the creation of a good or service are used in a manner that creates wealth and hence value for the consumer.

The push towards subsidizing ethanol is anti-market. Already, large subsidies are skewing the market mechanisms such that self-interested parties (those in the industry itself) and the politicians that have something to gain (either through the support of rural areas growing corn and other highly inefficient ethanol feed stocks or those who want to be seen as “green”) can benefit at the expense of others.

The rise in the cost of food as well as the associated higher taxes may seem to be spread thinly across the population. The result being a seemingly minor rise in a single price that can be borne by all without notice, but the fact is that one subsidy is never enough and we all pay again and again in both increased taxation and inflated food prices.

This food inflation affects the markets across the rest of the country and not just the locality it is derived from. More, the global nature of commodity markets and the fungibility of many base food products mean that an increase in subsidization in one country not only leads to a localized increase in taxation and prices, but the food costs are inflated across the world.

In this, it is the poor who suffer most. The poor have the lowest elasticity of demand for food. They are already on the edge of subsistence and an increment in prices caused by the misallocation of resources to support the corn ethanol industry and the few in it means that they have even less food.

Scare tactics work. They have driven an unfounded drive towards the misallocation of goods in the creation of ethanol markets.

It is not just the consequences we see that matter, it is also the unseen effects that change the world. Starving millions for a product that people do not want is not a good policy.

Looking for people interested in starting a new revolution in payments.

Central banks, government treasury and government in general have discredited their ability to manage the economy and maintain a steady currency. The constant currency debasement through the printing of more and more money has devalued all of our savings and capital investments.

This has again led to the gold standard regaining attention.

Gold's increasing value when measured against paper has come into prominence following the 2008 US exercise in printing till we hurt.

A monetary system based on allocated gold has a unique ability to retain its purchasing power.

A system built on allocated gold can limit any government's capability to steal your hard earned capital or even to debase and devalue it.

A gold standard stops the havoc that governments have been setting on the global economy whilst also fixing inflation to natural means and not arbitrary measures created by politicians with rent seeking in mind.

A payment measure in the form of PayPal that offers a currency exchange mechanism and a gold based currency is a solution. Allocated gold can be held and traded. When it is necessary to buy and pay for goods with those in the offline world, an exchange to the local currency could be arranged. When transmitting value for purchase and sales to networked entities, the gold currency can be used and trade could be enacted in gold certificates.

I am interested in talking with others who may be interested in starting an online gold trading system alone the lines of a PayPal.

Rent seeking and government

A good article on the government's ability to aide the economy!


There will always be those in the world who wish to gain some benefit without actually paying for it. As a result the electronic law will also cross over certain aspects of criminal law. Whether by an outsider or through the actions of disloyal employees, crime is something that is likely to remain with us for the foreseeable future. The Internet and digital networks create new vulnerabilities and methods that criminals can exploit for their own gain.

Most of the existing crimes can be replicated and transacted with the aid of an online environment. Further, novel new crimes designed to exploit the features and advantages of the Internet and other digital networks have emerged and are likely to continue to emerge in the future. Some example criminal activities that have benefited from the advances in digital technology include:

• Computer break-ins (or Trespass) including the illegal access to the whole or any part of a computer system without right;
• Illegal interception without right, made by technical means, of non-public transmissions of computer data to, from or within a computer system;
• Data Interference or the damaging, deletion, deterioration, alteration or suppression of computer data without authorization;
• Interfering with a system or the serious hindering without right of the functioning of a computer system by inputting, transmitting, damaging, deleting, deteriorating, altering or suppressing computer data;
• Possession of obscenity/prohibited pornography (e.g. child pornography and bestiality);
• Industrial espionage;
• E-mail Fraud;
• Harassment;
• Web page defacements (cyber vandalism);
• Theft of company documents.

While none of these crimes is wholly new, the ease in which they may be committed and the difficulty in capturing the offender has added a new dimension to crime. For instance, it is unlikely that law enforcement officials will be able to take action against many cyber-criminals unless the majority of countries first enact laws which criminalize the behavior of the offenders.

Some of the primary issues which face law enforcement in cybercrime cases include:
• Increased Investigative Costs due to the need for high priced specialists;
• The difficulties of conducting “Real Time” Investigations;
• The ease of Anonymity on the Internet;
• Difficulties with Jurisdictional issues;
• The rate at which Technology is evolving; and
• The Irrelevance of geographic distance.

Thursday, 3 February 2011

Government does not drive dynamic activity. Anything it does slows it.

Governments cannot take into account wide scale effects. Ask why central planning always fails? No person, department or other body can predict the course that society will go and even when it is marshaled, it still ends up being unpredictable.
A market outcome IS the view of society.

People VOTE with their dollars. They buy what they want. This idea that a few paternalistic people in government can determine and know what is best for society, i.e. the entire population is simply foolish.

The market IS society. A few public servants is NOT society and will never have a clue about society.

Central planning does not work. It is a failed experiment that pops its zombie head up time and time again.

Then again, those in this position do not want to lose this position, so as far as incentives go, those in government have strong incentives to ensure that government and all its cock-ups continue unabated.

Wednesday, 2 February 2011

Market and information imperfections

George Akerlof did us a great disservice with his unscientific rhetoric. A market for lemons and other market failures seem plausible, but how about testing the hypothesis?

Testing using empirical data is the heart of science. Then so few economists are these days. We use econometric models that are terrible and that shame many of my colleagues in mathematics.

Akerlof's paper was rejected for "triviality" by both the American Economic Review and The Review of Economic Studies and yet it is seen as something special and drove a movement against markets. The Journal of Political Economy rejected the paper as incorrect and flawed. The argument was that if this paper was correct, then no goods could be traded. The empirical studies have ALL supported this. The hypothesis was flawed. All it was is a hypothesis and a flawed one at that.

When are we going to actually start acting scientifically, a hypothesis is not truth.

As stated, the effect WAS actually empirically tested. The most cited results come from Hoffer, George E.; Pratt, Michael D. (1987). "Used vehicles, lemons markets, and Used Car Rules: Some empirical evidence". Journal of Consumer Policy 10 (4): 409–414. doi:10.1007/BF00411482.

"When market participants have the incentive to exchange, they also have the incentive to create institutional mechanisms to facilitate that exchange. The failure to recognize and appreciate these private mechanisms for overcoming asymmetric information—not the failure of actual markets—is often what leads to mistaken calls for government regulation."

J. Hall (2007) "Uneven Information Causes Market Failure? It Just Ain’t So!" FEE

Market failure, sorry, government failure!

Tuesday, 1 February 2011

How Keynes failed to comprehend Say’s Law.

John M Keynes tried to make Say’s Law into the fundamental issue defining macroeconomics. “I believe that economics everywhere up to recent times has been dominated, much more than has been understood, by the doctrines associated with the name of J.-B. Say. It is true that his 'law of markets' has been long abandoned by most economists; but they have not extricated themselves from his basic assumptions and particularly from his fallacy that demand is created by supply. Say was implicitly assuming that the economic system was always operating up to its full capacity, so that a new activity was always in substitution for, and never in addition to, some other activity. Nearly all subsequent economic theory has depended on, in the sense that it has required, this same assumption. Yet a theory so based is clearly incompetent to tackle the problems of unemployment and of the trade cycle.” [1]

In his attempt to “return to the doctrines of Montesquieu” [1, 4], Keynes completely botched the analysis and meaning of Say’s Law.

Keynes suggested that Say’s law meant that “supply creates its own demand” [2]. Basically, the infamous error that has led to so much misery in the twentieth century comes from Keynes’ unfounded belief that Say’s law leads to all produced goods being purchased and consumed. The resulting analysis derived from this irrational fallacy was that Say’s Law cannot explain the business cycle [2] and also makes an assumption of “full employment”, a point still maintained by Keynesians even today [5].

There is of course a major flaw in this logic. The circumstances that lead to high levels of unemployment do not forbid production and a resultant consumption from occurring.

A new equilibrium will come from this altered supply and demand structure.

Kates [6] extrapolated Say’s law in relation to unemployment more eloquently than Keynes ever could, “The classical position was that involuntary unemployment was not only possible, but occurred often, and with serious consequences for the unemployed”.

But what is Say’s law and why was Keynes so wrong?
Say’s [3] law of markets was defined in his grand work, “A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value”.

Simply put, this statement means that a producer in the selling of a product becomes a consumer and purchaser. The revenue obtained through the production of a good that is traded successfully creates a market in the distribution of free or disposable income. The producer does not create wealth and goods simply to collect the means of the transaction, money, but for another end. That is, the producer creates wealth in order to consume. To do this, the producer becomes a buyer and a consumer and thus creates demand.
The simple answer here is that production is the cause of consumption. Without sales, one cannot make purchases. In other words you need to not only produce in order to buy and consume, but to sell. To sell you need to produce items and services that people want and you need to do this in an economically sound manner.

This is you also need to make a profit. Marx may have thought of profit as theft from the worker, but without profit, there is no reason to produce. Worse, a loss means that the available capital is actually decreased and the ability to consume is further diminished. So profit is an essential part of the exchange process.

We see from Say’s law that improved production leads naturally to greater levels of consumer spending or:

  • The supply of X creates the demand for Y.
Here supply means not just production, but the production of goods that consumers actually wish to buy. These are goods that are sold.

Economic growth starts when productivity increases. New goods create new markets and a new equilibrium.
Logically, it is simple to see that spending for the production of goods and services must come before the spending of capital in order to consume.

Keynes’ hypothesis and greatest fallacy was a failure to understand Say’s law. He understood it to mean that recessions are caused by failure of demand.

Says had proposed that recessions are caused by failure in the structure of supply and demand.

What is means is fairly simple, recession is follows production errors. When a producer fails to determine just what a consumer really wants, they continue to make and stockpile goods that cannot be sold at a profit (if at all). This was a common situation in the USSR where goods were estimated to be worth less than the value of the materials used in their manufacture.

As the stockpile increased, producers cut back on production, income (the profit margin) shrinks and there is less capital available to buy consumption goods. The end result is that consumer spending eventually drops to precipitously low levels.

Keynes did not want to fix capitalism; he wanted to make his own tower. Unfortunately for us all it is a tower of cards that has repeatedly fallen over in the wind of change due to having been made on a foundation of logical flaws and grossly misstated errors.

[1] John M. Keynes (1939) The General Theory, French Ed. Preface
[2] John Maynard Keynes, (1936) The General Theory of Employment, Interest and Money (London: Macmillan), pp. 25–26.
[3] Jean-Baptiste Say (1832), A Treatise on Political Economy, p. 134.
[4] Devletoglou, Nicos E, 1969. "The Economic Philosophy of Montesquieu," Kyklos, Blackwell Publishing, vol. 22(3), pages 530-41.
[6] Steven Kates, (1998) Say’s Law and the Keynesian Revolution (Northampton, Mass.: Edward Elgar), p. 18

Monday, 31 January 2011

Labour is not the end goal.

I have noted a good number of people hold to the common fallacy, the same fallacy as was promoted by Marx. Labour is not a goal, it is a means. If labour can be reduced and the level of production increased, this is a good thing. 

There is an infinite amount of work and hence labour to be distributed. There is and always shall be more labour available than there are people to conduct it. There is no fixed labour pie that needs to be distributed.  
The goal is consumption. It is the creation of real wealth; this is products and services that people want. We DO NOT work to work, but rather for what we can obtain. 

Yet it seems to me that many here worship the obstacles over the end. That seeing increased productivity through advanced technology and process is a bad thing. 

Making more work (labour) is simple. Salt the fields and make agriculture far less efficient, become luddites and smash the machines. The problem in this equalisation of all people and “fair distribution” of labour is that we are just all relegated to being equally poor.

Productivity matters. 

Distributing labour just lowers productivity. Yes there can be more labour, but as there is less output we all work harder for less and we all suffer.

This fallacy that labour determines value and that there is a fixed amount of work to be done has to end. These sophisms do nobody any good.

Sunday, 30 January 2011

Why the economy is slowing, one of the many reasons.

I was on a United Airlines flight from JFK to NYC today. I flew business so had a few expectations as to service and function having paid more than double the economy rate for my travel. The seat I was in was broken. Nothing worked. This is actually four – for – four for United for me. The last four flights have all been premium and all have had something wrong.

I was offered an “apology” card for this. I fly business for two reasons, first the seat as I travel long distances and next power so I can work. An apology card gives me “miles” that I am unlikely to ever use and do not care about.

First class was far from full. The other business class section was also not full.

No offer to be moved to the forward cabin in either business or first was made, just another apology card.

Moving a customer in a broken seat in a premium service to first when it is half empty is nothing to the airline. IT costs the same once the plane is in flight. Leaving a customer in the seat on the other hand is a cost. It creates bad will. I shall actively try not to fly United from now on and when I do it will be only from necessity and under duress.

Now billions of dollars have gone to bailout the airlines.

I have flown many new international carriers that have newer jets and are able to manage their business better than the incumbent, but we persist with this idea of keeping zombie businesses alive.

Let them die.

Capitalism is about competition and change. Those that can survive will, the others need to be allowed to die. We the consumers win when we allow dysfunctional companies such as United Airlines and the many US banks to fail.

Why is the economy slow? Well one reason is that we reward failure and punish effort. New dynamic companies that could offer more are disadvantaged in order to offer a subsidy to zombie companies.

So I say, let the undead rot in peace, allow fresh new blood to emerge.

We just get companies such as United Airlines and their lack of care and service when we allow companies to live past their time.

Pull the plug. We need to stop funding failures.

Why US airlines are losing money and loyalty

For the third time in a row, I have a business class seat that is broken. It does not work. It will not return to the upright position etc etc. I am flying United, I do not really want to fly United ever again. I have not had ANY problems with any other airline in the last 12 months (and I have flown on developing country carries such as LAN from Chile and Air China and Copas etc). I have managed to have an issue with United on at least one leg of EVERY return flight in the last year. That is four business return trips and a perfect record of four cockups.

They have many options, an apology card is the biggest cop out that they could have done to fulfill these options and maintain a happy customer.

There are seats in first. If you want an apology, move the customer to a seat that works. If there are no business seats working and there are empty first class seats, use them. There is no lost cost. There will not be any more people joining mid-flight. No wonder the US airline industry is struggling, they have no clue. Treat premium service customers as if they matter and they become loyal, treat them as if they are an inconvenience and you lose them.

It is not wonder that the US Airlines are losing market share. They need to learn to treat customers as if they want them. This lack of care and respect is abysmal.
Well let us hope that the foreign carriers replace them and bankrupt them and we can have a decent level of service.

Try to avoid flying United Airlines. I will.



AGAIN I am here in a broken seat in business and I am given a crap apology card. How about MOVING ME to a seat that works?

Do not have one?
Well there are spares in first. United made the stuff up. They should show a little initiative and fix it. The cost to move me, nothing. I am already on the flight. The cost of not, another pissed off former customer who will make it a goal to bad mouth this company for the next year.

When you sell a premium service, you need to treat customers as if you actually give a shit.

Having flown on United way to many times, I can say they do not really care for their customers. Lip service is as good as it gets and that really fails to make the grade as well.

I have to say, I have managed to get better service from Air China, Air India, Air Peru, Air Chili (LAN) etc. All these supposedly lesser airlines have managed to provide a decent level of services where UNITED have FAILED.

So my recommendation, avoid United airlines like you would avoid a syphilitic leper with the plague.

Please Accept Our Apology...

And here I am in the sky again.

I have a card from United saying "Please Accept Our Apology...". I have this  yet again!

This time, the business class seat is broken. There is a reason why I would prefer Air Mongolia to United (and I do not want to fly Air Mongolia either). These guys are tools. Truly, the number of complete cock-ups they make is remarkable. I am amazed they stay in business.


Given a choice if you have one, select fly by night airlines, you could trust them more.