Two Dimensional Politics

All for freedom and for pleasure
Nothing ever lasts forever
Everybody wants to rule the world
--Tears for Fears

As election banter heats up between 'liberals' and 'conservatives,' I am reminded of the imprecision in viewing the political spectrum in one dimension--i.e., liberals on the 'left' and conservatives on the 'right.'

If all political systems were grounded in big government, then a uni-dimensional scale might be appropriate. After all, ideologues on both left and right desire large powerful governments although perhaps for different reasons (although I am not convinced that their motives essentially differ).

As we've proposed before, the universe of possible political stances seems more appropriately sketched in two dimensions. One dimension is scope of government. By nearly all empirical measures (e.g., federal government spending), today's liberals and conservatives prefer a large government scope with little observable difference between the two political stances.

The other dimension is sovereignty of the individual. Here, conservatives may believe a bit more in individual sovereignty (although much of this belief seems confined to talk rather than action). But because both groups believe in big government solutions, even if the two ideologies  differ slightly on the individual sovereignty scale, today's liberals and conservatives are relatively close in two dimensional political space.

The two dimensional model of the political landscape also helps us locate the political philosphy now doing battle with today's liberal and conservative mainstream. This philosophy resides at the nexus of belief in small government scope and high individual sovereignty. This political philosophy is today referred to as 'libertarianism.' In the days of the country's founding, someone sympathetic to this philosophy was called a 'liberal' (this is before the term was hijacked by the modern left).

The libertarian ideology of small government scope and high individuals sovereignty is grounded in natural law. It is the philosophy elaborated by Aquinas, Locke, Sidney, Trenchard, Gordon, et al, adopted by Jefferson and the framers, and captured today by the Tea Party movement.

On a two dimensional scale, libertarianism is appropriately portrayed as distant from today's liberal and conservative philosophies. A nice example is how a libertarian like Ron Paul is treated in mainstream political circles--i.e., like an alien or quack.

As in the days of the country's founding, libertarianism constitutes the radical political position.

Administering a Hand

"They want what every first-term administration wants: a second term."
--Robert Ritter (Clear and Present Danger)

Some believe that stock markets are betting on a Romney victory and that an Obama victory would spell trouble for the markets. This seems unlikely.

During its first four years, the Obama administration has been busy pumping cheap credit, bailing out poor economic decisions, and raising entry barriers to new competitiors--all things favorable for encumbent profits. Whenever it appears that the nascent recovery (now four years 'nascent') and markets are rolling over, policymakers add even more stimulus.

The above picture shows that markets understand a Helping Hand when they see one.

Moreover, there is little evidence to suggest that the Romney/Ryan ticket is more credible/motivated than the current administration in reversing economic deline and fiscal collapse.

As we have noted before, this administration knows that it needs markets higher. And markets know that the administration knows it.

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Vol Fall

Am I right side up or upside down?
Is this real, or am I dreaming?
--Dave Matthews Band

After Monday 7% crush lower, US equity volatility indexes are touching lows last seen in 2007.

While not timing devices, low implied vols reflect complacency among market participants. Investors are seeing less need to pay up for downside protection.

Expectations of another fix of stimulus seem quite high. Moral hazard...

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Polarization

There's a world where the light won't find you
Holding hands while
The walls come tumbling down
When they do, I'll be right behind you
--Tears for Fears

Comments are getting louder that things are becoming more 'polarized.' Many such comments are aimed at Washington, where it seems increasingly difficult for politicians from across the aisle to work together, to reach agreement, to compromise.

I'm pretty sure that Mises would say that this is to be expected. He would say that the polarization of society could have been forecast one hundred years ago, when the world seriously began marching down the path to socialism.

Socialism puts control of economic resources in government hands. Governments around the world have been busy redistributing economic resources from present production as well as borrowing resources from future production to deliver even more political favor to special interest groups.

The resulting debt is becoming insurmountable, meaning that it is becoming increasingly difficult to preserve standard of living while paying off lenders of real economic resources. Governments have therefore resorted to printing money and buying their own debt. Like all Ponzi schemes, 'monetizing debt' creates no new economic resources. Instead, it literally papers over the problem, creating temporary illusion that things are better than they are.

The bottom line is that present-day economic resources available for socialistic redistribution are running thin. Standard of living is rolling over.

Unfortunately, billions of people have become dependent on the government handouts that are drying up. These dependents are willing to vote for government officials willing to forcefully take ever more wealth from others in order to deliver resources that the dependents think they are entitled to.

Those still in possession of economic wealth therefore face more frequent shakedowns from strong armed government agents. Consistent with Rand's Atlas Shrugged phrophesy, this is driving many producers to leave the system. Continuation of this phenomenon assures that productivity will decline.

The polarization that we are witnessing reflects an escalating battle over economic resources--resoures that are becoming increasingly scarce. Socialism has been destroying the voluntary cooperation between individuals upon which free societies and productivity depend. That cooperation is being replaced by unproductive opposition that is becoming increasingly forceful.

Polarization of society is wholly consistent with the endpoint of socialism proposed by Mises: chaos.  

Specialization and Free Markets

I break tradition
Sometimes my tries
Are outside the lines
--Natasha Bedingfield

Specialization, or focusing production on a narrow set of outputs, is often proposed to flourish in free market environments. Specialization involves repetitive work; this repetition enables learning-by-doing improves productivity over time. The result is typically the high volume/low variety model of mass production. And there are few symbols more associated with free markets than the mass producing operation.

High levels of commitment to particular technologies are required to enact specialized production strategies. Because repetitive work can often be automated, specialized production processes usually carry high amounts of capital equipment designed for narrow use. Moreover, repetition is habit forming, and habits are hard to break. As such, significant capital commitments tend to lock producers into their strategies, and inertia makes their repetitive habits difficult to revise if environments change.

Problematically, environments are constantly changing in free markets. Competition drives innovation that, as Schumpeter famously observed, destroys existing production structure as it creates new production structure. This dynamic is likely to wreak havoc on specialized producers locked into narrow production technologies and rigid in their ways. High degrees of specialization in free market environments seem a risky proposition.

Perhaps high degrees of specialization are a better fit with environments that are stable and predictable. Stability and predictability are common objectives of interventions that characterize hampered markets. The Federal Reserve, for instance, intervenes in markets in the name of 'price stability.'

One would think that specialized producers would in fact encourage interventions that institutionalize stability. Indeed, we see 'big business' (i.e., specialized high volume producers) partnering with government to 'stabilize' markets. (too big to fail, anyone?)

One would also think that markets perceived as stable would attract specialized operators in droves. Indeed, we see 'big businesses' engaging in epic levels of outsourcing peripheral operations in order to focus more on their 'core' specialties.

The 'common wisdom' proposition is this: The less hampered the market environment, the higher the degree of specialization.

Here, we're exploring the plausibility of a rival proposition: The more hampered the market environment, the higher the degree of specialization.

More exploring to follow...

Generalization vs Specialization

"What I do have are a very particular set of skills, skill acquired over a very long career."
--Bryan Mills (Taken)

From an economic standpoint, the natural state of the world is scarcity. This scarce state is reduced through production. Production combines labor, materials, and technology into outputs that can be consumed.

Two general strategies are available to producers. One strategy is to generalize. People who are 'jacks of all trades' are generalists, meaning that they produce many different things. If someone is isolated from others (e.g., the Robinson Crusoe scenario), then that person has no choice but to diversify production. If the isolationist does not produce a variety of outputs such as shelter, food, drink, and clothing, then this individual is unlikely to survive much less thrive.

Achieving a state of self-sufficiency could be desirable when markets are uncertain or underdeveloped. But self-sufficiency has its costs as well. Because they frequently shift between products, generalist producers lack the learning-by-doing repetition that permits mastery. Standard of living may therefore suffer.

The second general strategy available to producers is specialization. Specialists focus their productive efforts on limited types of output. Focusing production enables the learning-by-doing that improves productivity (i.e., more output per unit of input) over time.

Specialization is of little use in isolationist situations since, by definition, the specialist cannot produce the variety of output necessary to satisfy even basic existence.

However, when it is possible to trade with others, the specialization strategy becomes particularly interesting. Multitudes of people can focus their efforts on narrow product lines and achieve high levels of productivity through specialization. If these individuals can subsequently exchange their specialized output with the specialized output of others, then standard of living is likely to rise for all.

This, of course, is the essence of trade theory. People are better off when they employ specialization production strategies, and then trade their output on the market.

But trade theory has its problems. One common assumption is that markets are unhampered. Producers are free to choose their production strategies, and buyers and sellers are free to engage in totally voluntary exchange. But we know that modern markets are not free; they are hampered to some degree. They are subject to government interventions that restrict volunatary production and exchange. These interventions distort decision-making among both producers and consumers.

Even if markets were in fact unhampered, then trade theory seemingly still has problems. Free markets are processes of creative destruction, where competition among producers drives innovation that renders current methods and outputs obsolete. The more dynamic the market, the less likely a specialization seems likely persist.

Here is what I'm wondering. Does trade theory have it backwards? Is it truly a good idea to pursue specialization production strategies in free, unhampered market contexts? Don't free market dynamics penalize specialization in the long run and reward at least some degree of generalization that permits adaptability?

In fact, is there not an argument to be made that hampered environments are actually better fits with specialization--at least in the short run? After all, hampered environment reduce competition and impair innovation, thus slowing down the 'creative destruction' engine that puts specialization at risk. Managers may be more likely to want to specialize when there is less perceived risks to specially configured operations. When market rules are being 'fixed' by government, then specialization may abound.

Many other important issues seem to trail this line of thought. For example, in addition to gains in standard of living from specialization, there are likely some losses due to 'creative destruction.' How the gains and losses net out over time seems an interesting issue. Moreover, in hampered market environments, producers might over-specialize if they are lulled into a false sense of security by regulatory regimes. The spectacular rise in outsourcing, an expression of specialization, in the midst of ever-increasing government intervention of the past few decades, might be indicative of this. The false sense of security comes from incorrectly relating near term stability that might accompany a set of government intervention with long term instability that comes from pent of market forces 'letting go.'

The other implication of this thoughtstream is that there may be more merit to generalization than meets the eye...

More in future posts.

Brain Dead

"All right. If you're not here, speak up."
--Alex Jurel (Teachers)

There are few better examples of the waste inherent in socialism than federal government involvement in education. Since the Department of Education was 'upgraded' to cabinet-level status in the 1950s, public school costs have gone up and quality has gone down.

Not sure there many things more predictable than dismal performance of State run schools.

Moreover, and just as predictably, US public schools have become a cesspool for special interests and government sponsored jobs. Since 1970, US public school employment has risen nearly 100% while enrollment has increased less than 10%.

Constitutionally, of course, there is no enumerated power over education granted to the federal government...

If/when we get serious about de-socializing government and eliminating bloat, federal government involvement in education is low hanging fruit.

Capitalism is Not Pro-Business

Always searching for the real thing
Living like it's far away
Just leave all the madness in yesterday
You're holding the key when you believe it
--Michael McDonald

Nice video on whether capitalism is 'pro-business.' In unhampered markets void of force and fraud, producers are free to produce what they want and charge what they want. However, they must please consumers. Producers that do so are likely to make a profit.

Not only do they provide incentive, but profits also signal value, and encourage producers to improve quality and reduce prices to the market.

Producers unable to turn a profit are by definition destroying value (output value < input value), an undesirable thing in a world of scarcity. Unprofitable firms cannot persist in unhampered markets. Instead, unprofitable firms must cede productive resources to operators who may do better.

This is all good for society. Consumers get more of what they want and producers are rewarded for doing so. Those rewards motivate productivity improvements so that more abundance is produced in the future. Moreover, incompetent producers cannot waste scarce resources for prolonged periods, which further improves standard of living prospects.

But today's markets are far from the unhampered ideal. Whether they are labeled hampered, mixed, managed, controlled, etc, today's markets are subject to forceful interference by government. Bailouts, subsidies, and regulations are some of the forms that such government interference take.

Ironcially, while they are often done in the name of the consumer, government interventions are prone to do just the opposite. Competition goes down and inefficiency is institutionalized among producers. Special interests, such as certain big businesses or union groups, benefit from government intervention at the expense of others.

The presenter in the video offers the example of Wal-Mart (WMT), a company that came out in favor of higher minimum wages a few years ago. While nicking WMT, higher minimum wages hammer cost structure of small competitors in a disproportionate fashion. Minimum wage laws put mom-and-pop shops at a competitive disadvantage. Moreover, wage laws raise entry barriers to entrepreneurs thinking about getting into the sector. Consumer welfare suffers.

Big business backing of Social Security in the 1930s provides another example of the phenomenon.

Supporters of capitalism are not pro-business, particularly big business. Supporters of capitalism are are pro-people--i.e., people voluntarily engaging in production and trade without force or fraud.

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Who is the Thief?

"These people are contractors."
--Alourdes Galindo (Shooter)

One person hires a second person to rob a third. Who is the thief?

A person votes for a government official to forcefully take property from another person.

Who is the thief?

Lagging Trannies

George Bailey: You know what the three most exciting sounds in the world are?
Uncle Billy: Breakfast is served, lunch is served, dinner is-
George Bailey: No, no, no. Anchor chains, plane motors, and train whistles.
--It's a Wonderful Life

Have been eyeing the lagging performance of the trannies versus the Dow. What we have here is a classic technical 'nonconfirmation.'

In classic Dow Theory, you want the industrials and the transports to move in synch. Currently, the industrials are marking highs for the move while the transports remain mid-range. The industrials are well above their 50 and 200 day moving averages while the transports are struggling to remain above theirs.

Maybe the trannies will soon play ketchup. Or maybe the lagging trannies are a BRF (Big Red Flag).

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