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05/03/2011

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bestmishu

Taiwan is not a country, it is a part of china.

an observer

Jack

Seriously, dude, you are a dull blade

specialization is knowledge.

think about it

Xavier L. Simon aka Xavier

Observer, I suggest you have a major block if you can’t see the importance of trade in the specialization equation. Specialization leads to a need to coordinate and organize the new specialized functions. What good is a lot of additional agricultural product if you can’t then get it to the right people efficiently? Would those two surplus guys of Jack’s example in Alaska a few comments back then be employed by walking to the nearest town to deliver and try to sell those extra fish or whatever it was, I suppose by stopping each townsperson they come across? Wouldn’t they try to figure less strenuous and cheaper, more effective ways to do it? Perhaps set up a store and advertise for it? That’s all part of trade.

an observer

Xavier

trade is a zero sum game, absent one side engaging in opportunistic behavior.

The corn I swap to you is equal in value to the wool cloth you give to me.

trade did not increase either the amount of corn or wool. The act of trading merely facilitates exchange.

Traders may have some efficiency. Let's assume that corn and wool are swapped through a third party (a broker). If the broker knows who has wool (and who doesn't) he adds some small measure of efficiency by not wasting time making a trip to a wool maker (who has no wool)

When one starts thinking of trade in terms of knowledge, one can see why real estate brokers try to keep information about houses for sale away from the buying public. Such permits opportunistic behavior.

Again, specialization is just another word for knowledge. I concentrate on growing corn and get more efficient at such by learning more and more (eventually knowing everything about nothing) about growing corn.

Having to make these points shows why this country no longer works. We have too many people who think they know something (for example, by saying, you left out specialization) when then don't. Instead, they should just read, learn, and start realizing all they don't know.

Xavier L. Simon aka Xavier

Observer,

I am afraid you have trapped yourself by your own assumption of proximity. What do we want trucks, barges, ships, and airplanes for? If not to trade then I suppose that you would accept that they are not part of a manufacturing base that is necessary and therefore don’t add value or knowledge either.

But if you accept that there is some distance between the corn and wool producers, then the extra corn produced is of absolutely no value to its producer if he can’t get it to the potential wool buyer. And if he does get it to him then the wool buyer will still not be able to buy it if the cost of the corn plus the transportation is higher than the surplus wool available. The corn will still have no value unless the cost of the transportation can be made more efficient.

And so on. I hate to break it to you but trade is an important activity and historically one of the main determinants or engines of development and growth.

Xavier L. Simon aka Xavier

PS Observer,

The fact that you accept that the broker has knowledge that allows him to add some efficiency, however minute, tells me that deep down you accept that trade, or at least this particular element of trade does add some value. Maybe your problem is really one of trust. I hope you haven’t succumbed to nihilism and lost complete hope in man, at least non-goods-producing man. By the way, why would the broker who arranges a swap be more trustworthy than a real estate broker?

One of your problems seems to be with what economists call information asymmetry. Economists, including when they use game theory, assume a rational man with perfect information (except to the extent that Joe Stiglitz has been able to screen imperfect information). The whole rationale for government intervention in healthcare begins with the seminal 1963 paper of Kenneth Arrow.

http://www.who.int/bulletin/volumes/82/2/PHCBP.pdf

The bottom line is that there is too much uncertainty, information asymmetry, and we can’t trust our doctor anyway since although he is not certain of what he is doing, he nevertheless knows more than we do. The solution has become for the government to save us from those nasty doctors. But we know how well government did keeping licensed real estate brokers honest.

So where have values and trust gone?

You seem willing to trust some people but not others, and all, almost by definition, have different or imperfect information and, therefore, there is always an asymmetry of information. If in your world nobody is to be trusted I have to wonder where that leaves you. A nihilist? Government? Why would you trust them any more than the next guy or gal?

But now let’s take it to the next step and let’s accept, and actually I do accept, that knowledge is everything. What do you do on the way to having everybody acquire perfect knowledge? Who do you trust along the way and why? What makes one person better than the next? For that matter, why should we trust government any more than a doctor? Why should a Democrat trust a Republican government or even panel of experts, or vice versa?

Or maybe I should just take comfort in being just one of those “who think they know something,” one who therefore will go blindly and happily to his death at the hands of an unscrupulous doctor. As the saying goes, ignorance is bliss!

an observer

Xavier

trade adds no value

what is the point of arguing that it does?

It is self evident that some things are merely means to an end---trucks are a good example.

the more efficient one is at making a truck, the more ultimately is available for true consumption.

this is also self evident

last, what is particularly self evident is how wasteful it is dealing with points that ought to be self-evident to anyone who would first think them through

the point, stated earlier, is that an effective government (my short hand for Fukuyama's argument is necessary to create the conditions where: (1) ideas (knowledge) are formed and (2) applied.

To me, the world limits both in unlimited ways. For example, the South, before the Civil War, de-funded state universities so as to protect the institution of Slavery from intellectual attack (Mark Twain once explained to an ardent slave holder why slavery was bad by saying, "I'm smarter than you." (The offered premise for slavery was that slaves were dumber than the slave owners).

You asked, appropriately, what information should one trust? Before, in other notes, I have explained not much, offering the best public example of which I know of the use of filters to remove bad information. Warren Buffett and his partner, Charlie Munger, use a long checklist and pay no attention to most all sources of information based upon sound psychological principles. Read Munger's speech the Psychology of Human Misjudgment.

To pay attention to a bad source, in Munger's view (and my view) is to make a human misjudgment or mistake.

Based on those principles, I pay no attention to any conservatives (Burke was not conservative, albeit he is claimed by them) and very few liberals. I pay no attention to these two bloggers due to their obvious bias.

If you can not see the bias of Posner and Becker then you need to ask yourself, what psychological mistakes am I making

Xavier L. Simon aka Xavier

Observer, Okay we are making progress. I think I am beginning to get the idea of your model of the world. Nothing wrong and may actually be quite interesting and even useful, but I need to understand the whole if I am ever to understand the parts. Have you presented it at any time in these pages? I gave you mine in the very first entry to the democracy blog at 05/04/2011 at 12:29 PM although of course in highly condensed form. So let me keep probing.

1. Am I to understand that the only activities that add value are those that increase the supply of food and shelter, and I suppose health, all others just being means towards those ends?

2. How do you square your various comments about the source of our freedoms with “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness;” and the fact that the government that we eventually did get is one of very limited powers, with bunches of checks-and-balances including to the possible infringement of our Creator-given rights, and that it was created by “We the People.”

3. What is your view of Fukuyama’s assertion, at least according to his reviewer, “that it matters more to the destiny of a society which conqueror takes power—and when and how—than what its people's supposedly innate qualities might be or what perfect model of rational self-interest its scholars may endorse?” And would you agree with me that that conqueror can come from outside or slowly take over from within? For the record, you will note that I have been arguing that as we drift towards despotism the conqueror could come from within; or we could self-destruct if we don’t control better our economic machine; or that our scholars may actually be more dangerous than Fukuyama believes, not out of malice but as a result of their being misunderstood or misused by our leaders.

4. Finally, am I correct in assuming that if you had it your way you would discard all other sources of values and morality, including from religions, and stick only to Charlie Munger’s checklist?

I am not being facetious, I just want to understand. With respect to the first point, I have actually toyed with formulations that are as simple although I eventually discarded them (maybe I should revisit them some of and I will certainly think about the implications of yours). And the next three are really tough stuff that I have been struggling with for a long time, particularly what is and where and how we get a good government, how do we keep it, and from where should we get our values.

bestmishu

I just want to say Taiwan is not a country, it is part of china.

an observer

Xavier

I disregard everyone who throws out values, etc., as they all are just promoting their own self-interest. It is hard enough for Observer to manage his own affairs, let alone to provide morals and values for others.

What we were talking about was how to set policy for economic growth. There are two conditions that have to be promoted: (1) an environment that fosters creation of ideas; and (2) an environment that fosters application, testing, and adoption of the ideas generated.

Just stating the rule shows that no conservative gov't, anywhere, is ever going to foster and growth. I defy anyone to show where it has.

Beyond that, the question is how to sort through the good and bad ideas offered. I offer the Munger/Buffett model---creating a checklist and using it for avoiding all the bad mistakes that arise out of the psychology of human misjudgment. Read Munger's speech on the Internet. The idea is his, not mine. He and Buffett have a track record showing that it is a pretty good approach.

Hows does such work in action. Take our current lack of jobs

1) I throw out all solutions from the right

2) I throw out all the self interested bs from economists, who don't know much (read Drucker, Krugman, DeLong, and others) and are writing and talking in shameless self promotion. (I also throw out all the soft sciences which are shameless in their self promotion. Instead of social workers, required people to work, and give them a rake and three square meals and a safe place to sleep. We have millions of square feet of empty space where we could cheaply house the homeless, if we had any public will.

3) One uses a little common sense: what Bush did on 9/11, taking the planes out of the sky and stopping the economy, dead, then fighting three wars on borrowed money (war on Terror, Iraq, and Afghanistan) and I ask myself, would I invest?) No.

4) I add a little more common sense: we have spent trillions over 35 years, since Carter formed the Dept of Energy and are no closer to energy independence

5) I add a little more common sense---the financial crisis did far greater damage than we can image. By all rights, with interest rates where they are, housing prices should be through the roof. That they are not shows that we have gutted the country of its wealth and that massive action is required.

I come up with the conclusion that our problems are more fundamental, deeper, and broader than you have considered and that we need deed, fundamental changes in our gov't to make it effective and to solve our problems. Instead, we have idiots going in the opposite direction, who take the status quo of the shape of gov't as a given.

Michael

Re: point 8 of Xavier. It's interesting where the point of exploration is that leads to useful or explorable frontiers. I wish I knew the economics associated with it but for some reason Portugal was the tip of the spear if you will with Prince Henry the Navigator responsible for exploration down the coast of Africa and into the Atlantic. Navigation instruments were refined and methodologies. I wonder if ship-making didn't also advance.

The Breaking News

Great article with excellent idea! I appreciate your post. Thanks so much and let keep on sharing your stuffs.
The Breaking News

Jack

Geez Observer! I even explained Ricardo's relative advantage theory which underlies all trade. And btw, on the most humble of interpersonal trades it's HARDLY zero sum! Consider: I'd NOT trade my salmon unless I received more than the fish is worth to me. Think! For ONE pound of an easily caught fish (for me) I can buy a year's worth of pencils and pens I couldn't make in a week's time....... or longer.

Mebbe one more try on Ricardo? I pointed out that though the Brits do worse at both tomatoes and wheat than does the US but if they're only half as bad on tomatoes and five times worse on wheat......... they can take a few of their scarce tomatoes and buy MORE units of wheat than they could grow for the same effort. They ARE richer for having made the trade than if they ate only their own tomatoes and wheat.

Sometimes takes a while to get it.

Hmmmm:

"4) I add a little more common sense: we have spent trillions over 35 years, since Carter formed the Dept of Energy and are no closer to energy independence"

This one is plain silly! But for Clinton's brief exploration of a BTU tax (when we needed more revenue to patch up the ongoing deficits) we've had oilhors in the WH and most everywhere else, since Reagan symbolically tore Carter's solar installation off the WH. Can't think of a single exception.

As for:

"5) I add a little more common sense---the financial crisis did far greater damage than we can image. By all rights, with interest rates where they are, housing prices should be through the roof. That they are not shows that we have gutted the country of its wealth and that massive action is required."

........ It's wise, in terms of econometrics not to place TOO much value on one dab of info. Remember your basic supply and demand equations?? We've OVER built homes in many areas, and as you can see if you LOOK at the following graph, there ARE too many homes that even at steep discounts are too expensive for the "entry level" that is about the only housing sector still having a heartbeat.

NOTE..... that under the NEW deal it's back to buying homes at no more than three times HH incomes. 50k median income points to $150, maybe $180,000 median home price.

The 300,000 starts per year? Down from 2.5 million? A few in growth areas, with most filling in where the "right house" doesn't exist. Mansions or bungalows. That's it.

But yes......... much of the wealth and income of America was stolen.... gone. Long road back.

http://webcache.googleusercontent.com/search?q=cache:51_W7BsWWGsJ:mysite.verizon.net/vzeqrguz/housingbubble/+housing+bubble+graph&cd=1&hl=en&ct=clnk&gl=us&source=www.google.com

Jack


Observer? or should I say Duuuuuuuude!!??

"When one starts thinking of trade in terms of knowledge, one can see why real estate brokers try to keep information about houses for sale away from the buying public. Such permits opportunistic behavior."


...........Ha! and Coke really ought publish their secret and Intel provide blueprints to AMD????? Try going out and getting new listings...... it's work! They EARNED their MLS entries.

And! there is not the slightest thing stopping a seller from selling his own house. Pay the ad costs? try to learn how to stage and show the home? Have an open house? Find the buyer moving back to the midwest from the coast?

And finally the conclusion: Most sellers and buyers USE a realtor as their services add value to both sides of the deal. No advantage? NO pay, No deal.

Jack

Xavier

trade adds no value

what is the point of arguing that it does?


........... just to set you straight?

Xavier L. Simon aka Xavier

Observer,

I think I get it now, and if I do then I also have tried the approach you follow, i.e. to start with a blank sheet and attempt to outline an ideal outcome. In fact, I have a whole bunch of sketches in what seem like endless notes. It is almost impossible and perhaps even foolhardy not to start that way. In the end, however, in part because of my original objective starting some 60 years ago, and then because my work required practical solutions to actual problems, I did have to take the world as it is and figure out how to make small improvements. In time I have expanded this into the theory that I presented on 05/04/2011 at 12:29 PM in this posts above.

In that theory, for instance, values are something that is, not something I preach or judge one way or another. To me values are just a part of the social glue that holds people together and determines their behaviors. That glue is fairly complex and includes all kinds of stuff from personal instincts and beliefs, through traditions and cultural traits, to the more fluid secular rules or laws that we keep devising every day to cope with the developmental and growth changes we continually make.

Somewhere in there are values which to me are the set of beliefs that guide our actions and which can, underscore can, serve as checks to our more undesirable instincts, and thus help, or not, advance the objectives of the shorter-term secular rules and regulations, or the so-called institution of the law. Of course that law also includes many of our traditional values. It gets quite hairy and complex but it is the stuff of the actual or real life with which I had to work if I was to solve the problems that faced me during my 20 plus years of work in the development field, and before that as a hands-on manager in a different society.

Take what I call the corruption of petty bureaucrats and police in Mexico of which I wrote in these posts. Since I believe that this is something that keeps that society from coalescing into one workable whole, I had to figure out how it may be solved and to do that I had to understand its source. As Fukuyama writes, with respect to Melanesian politicians, “from the standpoint of many foreigners, [the behavior of those politicians] looks like corruption, But from the standpoint of the islands’ traditional tribal social system, the Big Men are simply doing what Big Men have always done, which is to redistribute resources to their kinsmen.” (xii) Now, it is not directly the same in Mexico but there is a lot of tradition that helps justify both the corruption and how it is done. I am not a psychologist but I suspect that the how somehow justifies the what. Here is why.

In Mexico corruption happens at all levels of the bureaucracy but is always part of a flow wherein those that receive it always pass part, sometimes even most, of the bribes up the chain of command. The system is highly reminiscent of how the Spanish monarchy used to collect taxes and how the Church collected tithe. I suspect that the people receiving the bribes feel justified in what they do because they pass a part up to their superiors. The practice thus is deeply embedded into what has always been sanctioned by higher authority, and passing money up to that authority makes it okay. Obviously I don’t approve but that is what we have to deal with if we are to solve that problem. In a way taking bribes has become part of the accepted value system.

That is the lower level corruption. Now let me give you an example of higher level corruption. The practice of having the CEO of a large public sector company owning one or more suppliers to that company is perfectly acceptable even in law. As plant manager I once complained that the railroad company was giving priority to a plant manufacturing railroad ties next door. I asked our traffic manager to deal with it in Mexico City with the railroad company. A few days later he came back to me saying there was little he could do because the owner of the plant making ties was the CEO of the government owned and run railroad company. By the way, this happened 40 years ago so maybe there has been some progress.

I think you can see why it is difficult to change. To do so you have to change the law, and to change that you have to deal with culture and at least some parts of the value system. Professionals in the development community in this country don’t seem to understand this. I used to bang my head against brick walls trying to get my colleagues to understand and change the way they were going about fighting corruption. To them it was only a matter of telling the locals loud enough that it was wrong, but the locals couldn’t understand what was wrong since that is the way it has always been done. No surprise then that the locals told the outsiders what they wanted to hear and then when the foreigners left the locals went on the way they had always done.

Yet if the fragmented Mexican society is going to coalesce into a single whole, there will need to be a lot of reconciliation of the cultural values of those running the show in Mexico City with not only the far flung indigenous communities but also the more proximate poor living in the lower class suburbs of Mexico City itself. Mexico has its own version of a Hugo Chavez and he came within a fraction of one percent of becoming president in 2006. I did a district by district analysis to understand the dynamics of the voting. In the middle class suburbs the candidate that won got an overwhelming majority of the vote. In the poor districts where millions live and which used to be slums, the more demagogic candidate won by an overwhelming margin. Those are districts where the poor don’t participate in the formal society in large part because they are held back, put in their current place by corrupt petty bureaucrats and the police itself. I know, I’ve been there.

James

Given your mutual support of a carbon tax system, I was wondering what your positions are on a carbon tax-income tax trade-off system such as that proposed by Art Laffer: http://www.youtube.com/watch?v=Ryc3bE7b6k4

It seems, to me, to be the most politically viable way of implementing one.

an observer

Jack

What is your point in mentioning Ricardo?

Xavier

What is the point of your last post?

Extortion and bribery are two of the worst forms of opportunistic behavior that inhibit economic growth. We all know such and we should oppose such at every turn. Mexico is a failed country because it is so corrupt, yet Mexico is the model for Republican politics in the USA

Republicans and conservatives in this country celebrate and rejoice in extortion, bribery, and corruption on scales that the Mexicans can only dream about.

Such takes many forms. For example, the Republican party now openly advocates such by: (a) supporting unlimited corporate campaign contributions: and (b) fighting disclosure of campaign contributions by government contractors. The sole purpose both activities is so that big corporations can use the gov't to favor their interests at the expense of prosperity for all.

The worst offender, as far as the number of people affected, is the Muslim religion that prohibits lending money at interest. Talk about a 1400 year choke hold on economic development. If you are a Muslim with a new business idea, you cannot borrow money, pay market interest, and reap profits for yourself.

No, instead, you have to take in partners, from the existing elite and share your profits, which means that the rule is just and means or method for those in power to perpetuate their rule.

Xavier L. Simon aka Xavier

Wow, I am sorry I even tried!

Jack

Observer? "Jack, What is your point in mentioning Ricardo?"

Well, as attempt numero dos, at least, in concert with Xavier to pass on Ricardo's wisdom in seeing the benefits of RELATIVE advantage in trade.

I'm not sure what makes you so stubbornly resistant to the obvious wealth enhancing truth of all forms of trade from local barter, to nationwide markets, to world wide trade, but perhaps for now you're stuck with it? But for one last? Try to consider how trading cotton and other new world resources for Sheffield steel, Swiss watch making and old world craftsmanship enabled the growth of the industrial revolution in the America's?

Mexico "failed?" I wonder, if you read others here? I pointed out here, replete with growth rates that Mexico's GDP growth is quite respectable, but in terms of conveying wealth and a higher std of living it's been swamped by very high population growth until about the 80's where the rate tapered off. Still, they'll have significant population increase due to the lower rate being atop a much larger base.

Thus! if they (and the US??) are interested in solving their 25% unemployment rate that will, obviously, continue to fuel immigration to the US.......and foment crime and drug smuggling, once we again have work for them to do, on the cheap, we should implement cooperative policies that benefit the goals of each nation.

I'd enthusiastically agree that Mexico suffers from the tremendous inequality of wages and wealth that we used to snicker about until we caught up to them on that score. Such inequality does not bode well for either nation.

In a closer look at the Muslim prohibition of paying interest, you'll note they've a system of fees that often provides the same. The "partnering" is due to their not adopting the corporate format that we're experiencing so much trouble with today.

I'd not argue that we've not benefited from the corporate format, but it is worthy of reflection that before Paulson and others (benefited mightily!!!) from taking Goldman public they HAD been a partnership with hefty "skin in the game". I would argue that we'd be FAR better off were our corporate managers to have more (or at least some) skin in the game, while the Islamics would benefit from moving more toward a corporate structure.

WE would do WELL, after the dust from this crash settles, to decide whether our corporate model is serving our citizenry and stockholders, or largely those using it to glean incomes that have soared from 30 times working folk's pay to over 400 times since 1980.

There should be some means of empowering our citizenry and stockholders (though most of the shares are in mutual funds, pensions and the like) to slow the consolidation of wealth and incomes in the hands of the few that both of us abhor and see as the demise of a once fair nation.

Problem! To solve the mystery of how Republicans get so many of modest or less, economic circumstance to vote for their ALL FOR THE RICH agenda which these days they don't even try to camouflage!

Jack

Whoops -- Left out my hopes of a spiritual revival among Christians that would, again? make the usurious rates of interest often extorted in "Christian" nations something of the sin it surely is.

an observer

Jack:

Let me answer your question: You ask, "how Republicans get so many of modest or less, economic circumstance to vote for their ALL FOR THE RICH agenda"

It is because your have no idea what you are talking about.

Take trade. Trade creates no value. You and I can trade rocks, all day. At the end of the day, we have nothing.

Trade only facilitates the exchange of value created by others. If I life in country Y and can build a factory that makes 1000 widgets, and I can only sell 900 in my home country, I need to trade the extra 100 widgets to be full value out of the knowledge embedded in the factory. If I can trade those to Joe in country B to iphones, and if Joe can increase efficiency in Country B to make the iphones I can take in trade, then trade facilitates, but trade, alone, creates no value.

The problem with trade is that is is principally a justification for opportunistic behavior. For example, if in country A I hire people and use their knowledge to learn how to manufacture 1000 widgets and I then close the factory and move the knowledge to country b, hire lower paid workers, and make 1000 widgets, all that I have done is engage in opportunistic behavior. I have merely taken advantage of the weaknesses in the legal system in Country A to steal the intellectual property of the workers who created the first plant.

This is why I say that distribution of income is entirely political. In may view, knowledge out to be better protected. Manufacturers should not be allowed to move knowledge to lower wage environments.

I call this my what's good for the DVD rule. If it is illegal to reproduce a DVD, the same rule ought to apply to all other knowledge.

Because knowledge wants to be free, the need for legal protection is greater than under current law

peng

As for knowledge, perhaps Xavier makes an example of the export of modern ship building. I'd use the needed kick our automakers got from the Japanese. Out in a rural area I've a 79 Chev wagon that runs and all but the engineering looks "third world" compared to that of a decade later.

tammy

wow wonderful.
-Guccioli Charm

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