The Millionaires of Maralal

In 2002, a group of Samburu herdsmen in Africa received $7 million (US) as compensation for injuries caused by ammunition left by the British. Headlines proclaimed "From Herdsmen to Instant Millionares."

What did these tribesmen do with the money? As reported by James Shikwati in the magazine African Executive, they went on a spending spree. All that remains today of the money are cell phones and televisions that don't work.

Shikwati cites this story as an example of why "big money" foreign aid does nothing to eliminate poverty. Until individuals have the human capital to handle financial capital, they will squander whatever financial capital comes their way.

Unfortunately, this is not an isolated African problem. In the West, stories of superstar athletes who make millions of dollars and wind up bankrupt are all too common. And sadly, many lottery winners end up spending their way back to whatever standard of living they had before their good fortune. For people like this, wealth is a vacation, not a lifestyle.

An individual and cultural expectation to save and invest for the future, rather than live entirely in the moment, is more valuable than all the "big money" in the world. Somebody tell Bono.

$425,000 Per Person

Larry Kudlow, cable TV's unapologetic champion of free-market capitalism, points out that the Federal government has spent $127,000,000,000 over the last two years to rebuild New Orleans.

That works out to $425,000 per person for the 300,000 people living in the city.

That works out to almost as much as the economic output for the entire state of Louisiana for one year.

After two years with Uncle Sam's open checkbook and all the government brain power it could use on call, New Orleans is the murder capital of the world, with a murder rate 40 percent higher than before Katrina.

Kudlow says this is a shinning (or sinking?) example of what happens when bureaucrats and planners ignore markets and the individual preferences revealed thereby. The result is spotty and slow progress, massive waste, and the creation of a whole new universe of problems that must be met with even more spending and bureaucracy, if those who believe in big government aren't going to abandon their faith in social planning.

Why Women Shop

The human mind evolved to solve an entirely different set of problems than those it faces in the modern world.

This simple but startling truth affects everything around us, from the colors we prefer to the ways we like to spend our leisure time. Take shopping, for example.

As reported in the Economist, researchers have come up with a possible evolutionary explanation of why women like to shop more than men, why women like the color pink more than men, and why men are better at spacial orientation via landmarks than women (somebody tell my wife, please). It all has to do with the ancestral division of labor: men hunted things that moved around a lot, women gathered food from stationary locations.

As a result, the male brain evolved orienting skill, and the female brain evolved the skill to recall the precise location of a food source, probably some kind of fruit. Since a lot of fruit is colored on the red end of the spectrum, the female brain evolved a preference for those colors.

Frauds and Nuts

Forbes magazine reports on a new Reason Foundation study that concludes, "The real motivation behind most occupational licensing regulations is one of special interest, not the public interest," the report says. "By banding together and convincing governments to impose new or stricter licensing laws, existing practitioners (who typically are exempted from the new laws through grandfather clauses) can raise the cost of doing business for potential competitors."

Capitalism gets a bad name -- justifiably -- when capitalists use the threat of violence via the political system to limit competition and set prices. Unfortunately, all too many business people think it's a great business plan to do just that. That's why so many businesses spend so much time lobbying government at all levels, local, state and federal. There's gold in those licenses!

That would explain why you need a government license to tell fortunes in Maryland, or a government license to be a tribal rainmaker in Arizona. It's not because customers are clamoring for certifiable skill in these dubious occupations. It's because one group of greedy business people wants to protect cosa nostra, "our thing," by getting the police to do their dirty work.

Of course, such schemes are usually promoted as a civic virtue, as a way of assuring the customer he will get a more reliable product or service. But we're talking about fortune tellers and rainmakers here, not brain surgeons. Do we really need a government license to tell the difference between a fraud and a nut?

Gipsies Fortune-telling.--Fac-simile of a Woodcut in the "Cosmographie Universelle" of Munster: in folio, Basle, 1552.

Damned If You Do...

Some cogent analysis in Reason from Steve Chapman on the political grandstanding going on around the problems in the sub-prime mortgage market. An excerpt:

"In the old days, financial institutions that refused to lend to people with low incomes or imperfect credit were accused of victimizing the needy. Today, financial institutions that make many loans to those same people are found guilty of the same crime."

Lofty Intentions Result in Horror

The following is my response to a letter from a sincerely Red writer on the web site for the magazine The Nation. A part of the original is quoted verbatim in italics. Any spelling or grammar mistakes are his, not mine.

"I wish people would realize that a true communist government has ever been established. Pointing at Russia and China is pointing to authoritarian governments, which is diametrically opposed to communist theory. People need to forget 1950s US propoganda."

Jonathan,
I'm glad you cleared up my confusion. I thought the 20 million people who were murdered in the USSR died at the hand of a communist government. Now I learn that they died at the hand of an authoritarian government.

Too bad we couldn't have made that distinction clear to them before they were snuffed. I’m sure it would have made death a little easier to understand.

But I guess I'm still afflicted with 1950s US propaganda. What's the difference between communism and authoritarianism? As F. A. Hayek made incontestably clear in "The Road to Serfdom", the lofty intentions of one system inevitably lead to the horrors of the other.

The Bastiat Collection

From the Ludwig von Mises Institute, a wonderful introduction to the first edition of the collected works of Claude Frédéric Bastiat, the namesake of the Bastiat Society.

"In this thirty-minute interview, Dr. Mark Thornton, the compiler and general editor of The Bastiat Collection, explains Bastiat's significance, and tells the fascinating story of how this definitive collection came to be. He further explains its significance for the future of liberty."

Order your own copy here.

Commercial Judgement Day

On PRI's "Marketplace," Daniel Mitchell of the Cato Institute makes a good point with style, while commenting on the economic turmoil of the last few weeks:

"A capitalist system without losses or bankruptcy is like religion without hell."

Image attributed to Hans Memling (c.1440-1494) "Last Judgement Triptych" (open) in Muzeum Narodowe, Gdansk, Poland.

Smashing Capitalism

Barbara Ehrenreich celebrates an unusual working class revolution in The Nation, one where the masses advance social justice by making a mess of their credit report, then cry about it. An excerpt:

Somewhere in the Hamptons a high-roller is cursing his cleaning lady and shaking his fists at the lawn guys. The American poor, who are usually tactful enough to remain invisible to the multi-millionaire class, suddenly leaped onto the scene and started smashing the global financial system. Incredibly enough, this may be the first case in history in which the downtrodden manage to bring down an unfair economic system without going to the trouble of a revolution.

First they stopped paying their mortgages, a move in which they were joined by many financially stretched middle class folks, though the poor definitely led the way...

Then, in a diabolically clever move, the poor--a category which now roughly coincides with the working class--stopped shopping.

A few more smashing victories like this one, and the "low, strangled, cry of pain" of the poor will rise to howls of indignation at a system that makes them wait in line for basic necessities, offers loans only to those who don't need them or those who are politically well-connected, and gives consumers their choice of shoddy products or nothing at all.

At least it does all this with a nice color scheme, most likely red.

Poverty at the Gold Mine

Last night (Tuesday, August 21), PBS aired a documentary entitled "Gold Futures" about the environmental controversy surrounding a proposed gold mine in the small village of Rosia Montana, Romania. The program apparently leaves the impression that, although there are a few villagers who are in favor of the mine, most residents of Rosia Montana don't want it.

This is the same controversy examined by another documentary "Mine Your Own Business," whose South Carolina premier will occur September 5th in Charleston. "Mine Your Own Business" is an unapologetic look at "the dark side of environmentalism." It comes to a very different conclusion.

Writing in the Wall Street Journal, John Fund noted that, unlike "Gold Futures," "Mine Your Own Business" is a film that "will never be shown on PBS, but is nonetheless rattling the environmental community...[it] is a documentary by Irish filmmakers Phelim McAleer and Ann McElhinney. They conclude that the biggest threat to the people of Rosia Montana "'comes from upper-class Western environmentalism that seeks to keep them poor and unable to clean up the horrific pollution caused by Ceausescu's mining.'"

Ultimately, the debate about the future of Rosia Montana is a debate between those who believe human freedom and prosperity are more desirable than external control and poverty, and those who believe with religious fervor that poverty is a price worth paying to preserve the environmental status quo. So long as someone else pays it.

The Rhymes of History

Criticizing a war is much easier than winning one. Consider the following bit of history.

In the space of six weeks during the Civil War, the Union army under the command of General U.S. Grant lost over 61,000 men, more than the US lost in all the years in Vietnam. Many powerful and vocal critics in the Union denounced President Lincoln as a bumbling incompetent and General Grant as a butcher. Many in the press called for an immediate end to the war, even if it meant dividing the country and the continuation of slavery. Lincoln did not waver. It cost him his life.

How would the US look today if those who opposed Lincoln and Grant had won the day? Would black Americans be free or would they still be another man's legal property?

Would the divided states have grown to be the world's economic and business leader with the highest standard of living in the world, or would a divided country have been gobbled up by some more powerful and ruthless nation?

Impossible questions to answer, but frightening possibilities. No doubt the Civil War was a terrible thing. But who can seriously argue that nothing good came from it?

Now consider this question: how will the world look one hundred years from now if we listen to those who denounce President Bush as an idiot and the war on terror as a failure? As the saying goes, "History does not repeat itself, but it rhymes."

Contrary to the opinion of too many people, business does not find prosperity in war. War, as an activity that uses up lives, property and wealth, is good only insofar as it is protects far greater numbers of lives, far more property and far greater wealth.

Business Is Not a Poker Game

A Harvard Law school professor thinks the world would be a better place if more people played poker. Among the many benefits he envisions from playing poker are business acumen, negotiation skills, and improved risk management.

I'm sure this all sounds very sensible in the halls of Harvard Law, but out here in the world away from Cambridge, the professor's great idea looks silly, and maybe even dangerous. Business isn't about taking someone else's chips and leaving them worse off. It's about trading for mutual benefit. Poker has more to do with swindling than trade.

Consider what happens when you buy something. If poker were the appropriate model for a business transaction, your goal would be to get something for nothing, and the seller's goal would be the same. The counter help at McDonald's would sell you fries, then triumphantly proclaim "I was bluffing. We didn't make any," and you, fool that you are for not detecting the bluff would have no recourse.

Only a person who sees business as a win-lose proposition could believe poker is a way to develop business acumen. Bluffing is a great poker strategy. It's a lousy model for customer service.

Talkin Bout My Generation

Roger Daltry, best known as the lead singer of the English rock band The Who (founded in 1964), has achieved the apotheosis that appears to be the destiny of aging rock stars. He has become a global policy aging rock star.

Daltry offered this bit of advice about climate change: "burn all the f***ing oil as quick as possible and then the politicians will have to find a solution.”

At first glance, this might just be another splendid illustration of the risks associated with asking rock stars for advice on global policy.

How odd that the young person who once scolded the establishment is now an old man who turns to politicians for solutions.

On second thought, he almost got it right. When the oil is gone, it won't be the politicians that find the solution. It will be business.

Why the Fed Cut Rates

Today, the Federal Reserve made an interesting call. After weeks of financial turmoil caused by too many borrowers who can't make payments, and too many lenders who can't make loans, the Fed cut one of its key short term interest rates. The securities markets responded with predictable enthusiasm.

Apparently, the Fed sees prolonging malinvestment caused by unusually low interest rates as the lesser of two evils, especially when the other evil is an angry political attack on the remaining institutions of free enterprise.

When Credit Collapses

Much of the economic turmoil of the last few weeks is explained by the monetary policy of the last few years.

As the Federal Reserve lowered interest rates, the lower cost of borrowing encouraged many business projects and investment decisions that would not normally make sense. The result was what some economists call malinvestment.

Malinvestment looks very much like growth, at least for a while, just like a gambler on a winning streak looks prosperous. Then something happens. Luck runs out. Business hits an unexpected problem. First someone, then many someones can't make the payments on their loans. The problems expand, credit contracts, and growth stops.

The Fed knows this. That's why its been trying to raise interest rates after pushing them to historic lows after 9/11. It's trying to reload the monetary gun after using nearly all its bullets.

The most important question of the next few weeks is, how will the Fed respond? Will it cut interest rates to keep growth going a little longer, or will it sit back and let businesses and individuals suffer the consequences of decisions made under conditions of the Fed's own making?

Either decision leads to problems. If the Fed lowers rates, then it merely postpones the reckoning. If the Fed holds rates fast or raises rates, it creates an angry mass of voters susceptible to ambitious political rhetoric affixing blame and promising solutions.

Unfortunately, angry voters and ambitious politicians rarely blame the right people or deliver the right solutions. That might be the biggest risk of all.

Michael Graham Rounds Up the Usual Suspects

Press release from SC Hotline...

15 Years Of Political Humor and Commentary Comes To An End with

One-Night-Only Live Performance in Downtown Charleston

CHARLESTON, SC— A column that began with his banishment from South Carolina Public Radio fifteen years ago will come to an end when author, comedian and former GOP political consultant Michael Graham “Rounds Up the Usual Suspects” at Theatre 99 on Thursday, August 23^rd.

The “Usual Suspects” column first appeared regularly in the Columbia, SC Free Times in 1992. It has since run in newspapers across the Southeast, including the Charleston City Paper, where it (and the paper) will celebrate 10 years together later this month.

Graham is currently morning drive talk host for Boston’s WTKK-FM, where he writes a twice-weekly column for the award-winning Boston Herald. “I love column writing, and I’m particularly proud of the success of the Usual Suspects. But between talk radio, the Herald column and my other projects, I can’t give the column—or the readers—the attention they deserve,” Graham said. “So I’m getting out while the nouns and verbs still occasionally agree.”

Graham spent six years as a national, touring comedian, working with performers like Robin Williams and Jerry Seinfeld. In 1992, he returned to South Carolina to begin a career as a GOP political consultant. This special one-time-only performance will be Graham’s first stage appearance since his successful 1997 one man show “Strom Thurmond’s Love Child Tells All.”

“It’s a part of my past that many of my readers aren’t familiar with, but the truth is, I spent years staying up late, doing blow and partying with my friends,” Graham confesses. “That’s right—I was once state treasurer of South Carolina.”

“Michael Graham Rounds Up The Usual Suspects” will feature highlights of Graham’s political commentary, from 1992 through today. “Hillary, McCain, Lindsay Graham, Joe Riley, David Beasley, Robert Ford, Cousin Arthur and—of course—my old friend John Graham Apartheid III,” Graham said. “I’m going to do the one thing guaranteed to inspire howls of side-splitting laughter: Quote them all accurately.”

Graham is the former afternoon drive talk host from WSC-AM in Charleston and the author of REDNECK NATION: How The South Really Won The War.

DETAILS: “Michael Graham Rounds Up The Usual Suspects.” Theatre 99, 280 Meeting Street, Charleston, SC. 8pm, Thursday, August 23^rd. Tickets are $12.50 and may be purchased by calling 843-853-6687.

The World Goes by Itself

Sometimes, the link between the airy world of intellectual ideas and the practical job of building a business is hard to find. Sometimes, the link is as obvious as the history of a father and a son. For example, consider the idea of "laissez faire."

The term "laissez faire" has been around since the 18th century. Today, it is synonymous with "free market."

"Laissez faire" is just part of a longer phrase adopted by a group of 18th century free-market French intellectuals called the Physiocrats. The complete phrase is “laissez faire, laissez passez, le monde va de lui-même.” That translates into English as "let do, let it pass, the world goes by itself."

Doesn't sound like much of business plan, does it? But wait. There's more.

The Physiocrats produced many famous names, one of which is pictured here. His name was Pierre Samuel du Pont de Nemours. In his book La Physiocratie, du Pont advocated low tariffs and free trade. Pierre believed that if the government would just get out the way, individuals could peacefully and spontaneously coordinate a world that "goes by itself."

After the French revolution, the DuPont family got into trouble because their political views weren't radical enough. Their printing business was ransacked and, for brief time, they were imprisoned.

In 1799, the family fled to the United States where their political views were mainstream. There, in 1802, Pierre's son E. I DuPont founded the E. I du Pont de Demours & Company, now one of the largest and most successful science and technology companies in the world.

What is the connection between the airy ideas of intellectuals and the practical world of business? Just this: ideas embedded in the cultural and political life of a country can either drive business talent away or allow it to flourish. The result is the difference between poverty and wealth, misery and the opportunity for happiness.

Catch Ball, Pay Tax

Many years ago, when soccer-style place kickers with unspellable foreign names first began kicking field goals in the NFL, a friend of mine used to imitate their broken English, post-game interviews by saying "Kick ball, cash check."

That phrase came to mind amid the news frenzy after Barry Bonds hit his record-breaking home run. A college student named Matt Murphy caught the ball, and managed to hang onto it during a scrum. The good news for Murphy is that experts estimate the ball is worth around $600,000. The bad news is the ball represents taxable income. That means Murphy could end up owing the IRS more than $200,000.

If this is truly a case of "Catch ball, pay tax," wouldn't all those other guys who tried to take the ball from Murphy be guilty of attempted grand theft? If he had handed the ball to a friend, would Murphy have to file a gift tax return? Could Murphy put the ball in a trust? What happens to the tax bill if Barry leaves the game in disgrace and its value drops?"

Strange things come from a strange tax code. Too bad we have to pay bright minds to dig up the answers to such questions.

Uncommon Public Service

Politicians love to claim the title of "public servant," but all too often they end up being more "public" than "servant."

What's the best way for them to be better servants? The answer to that question lies in a little history lesson. Before there were politicians, there were kings. Kings made the same claim about public service, and faced many of the same problem politicians face today. Faces, names and costumes change in history, but human nature endures.

According to Robert Wright, author of Nonzero: The Logic of Human Destiny, kings figured out they "could win gratitude by performing the public service of harmonizing law and settling disputes. Indeed, by bringing trust and predictability to the system, he could unlock enough economic non-zero-sumness to pay his salary in the form of taxes."

In effect, government earns its keep by creating the conditions under which people can reliably own property, trade with one another, and peacefully settle disputes. The king that created those conditions was a king worth keeping. The government that creates those conditions is a government worth voting for.

Statue of Israel King David in Copenhagen, Denmark. Sculptor: F. A. Jerichau (1860)

"He Lives Well Who Lives Lightly"

Success does not come from hoarding things. Rather, it comes from the pleasure of using familiar things to make something new and unexpected. In that respect, business is every bit as much a creative act as painting or poetry.

The fact that business must produce something that is not only beautiful, but useful as well does not take anything away from the creative nature of the act. Varying standards of beauty often pose a challenge to the appreciation of individuals who do not possess the knowledge of the specialist, but it is beauty, nonetheless. Just because we don't all recognize something as beautiful doesn't mean that it is not.

Finally, like art, business is restless. It constantly seeks new inspiration and new ideas, and stands ready to jettison the old ones. Someone once described capitalism as "institutionalized restlessness."

The words of the contemporary English poet Peter Abbs also describe the genius of the entrepreneur:

He lives well who lives lightly,
hoards nothing,

lets go the air he breathes—

to draw in more.

For more on Peter Abbs, check out this review of his work in "The Economist."

Free Riders of the World, Unite!

A couple in Sweden collected ten years of welfare payments because they claim to be conscientious objectors to work.

The husband justified the payments by writing, "Conventional work is out of the question for me - both in terms of my conscience and on an intellectual level - as it seems objectionable with regard to both my personal well-being and the well-being of society as a whole. Emotionally too it creates unbearable pain and dejection."

Unfortunately for people with such refined sensibilities, a local court decided that aversion to work isn't a good enough reason to continue collecting welfare payments. The couple is appealing.

Meanwhile, teenagers and worthless uncles across the world have enthusiastically praised the husband's articulate summary of their common cause. Free riders of the world, unite!

Cut Taxes on Business

Why should the US cut taxes on business? Because other countries are, and that leaves businesses in the US at a competitive disadvantage. Like it or not, the best economies in the world are playing a game called "tax competition," and the US is losing.

Here's an excerpt of the story from the The Economist:

"IT IS more than two decades since America led the world in tax reform, and what Ronald Reagan called “that old jalopy of our tax system” is looking in need of a lot more than a new spray of paint. Last week Hank Paulson, the treasury secretary, held a summit in Washington, DC, to address the part of the system that is most visibly lagging behind best practice in the rest of the world—the taxation of firms."

Sub-Prime Politics

Thomas Sowell says the sub-prime problem is the direct result of two popular political decisions : restrictions on building that resulted in rapidly rising home prices, and pressure to loan money to people who otherwise would not qualify. He writes:

"Attractive and heady phrases like “open space,” “smart growth,” and the like have accompanied land use restrictions that made the cost of land rise in many places to the point where it greatly exceeded the cost of the homes built on the land...

Politicians have also been a key factor behind pushing lenders to lend to borrowers with lower prospects of being able to repay their loans.

The Community Reinvestment Act lets politicians pressure lenders to lend to people they might not lend to otherwise — and the same politicians are quick to cry “exploitation” when the interest charged to high-risk borrowers reflects that risk."

The usual result of a political attempt to engineer a specific economic result is a new economic problem. The bigger the attempt, the bigger the problem.

How Business Builds Civilization

1. It promotes a universal language and international community
2. It promotes the tolerance of other races, religions and customs
3. It creates the wealth that funds culture, worship, education and public policy
4. It satisfies the demands of all the population, not just the wealthiest and most powerful

Other ideas?

A Poor Man's Capital

Running a successful business is the best way to escape poverty. Unfortunately, government is often the primary obstacle to starting and running a business.

Parth Shah, from the Centre for Civil Society in India, gives a stunning example of how law and regulation makes the poor even poorer.

The Delhi Municipal Corporation has a law regulating rickshaws. The law requires every rickshaw operator to own the rickshaw. He cannot lease or loan it to another. Any owner found leasing or loaning his rickshaw will have his property confiscated and destroyed.

The result of this law is the destruction of the poor man's capital. The rich man's capital in India can operate 24 hours a day, seven days a week. But a poor rickshaw operator can only use his capital, i.e., his rickshaw, while he has the strength to drive it.

Shah says that laws like this are prime examples of the law of unintended consequences. The original intent may have been to help rickshaw owners. The result is great harm.

Finally, Shah says there are some laws in India that were never intended to be enforced. Rather, they were designed to enrich public officials. Shah estimates that government officials collect 10 million rupees per month from the poorest of the poor as bribes to avoid prosecution for "violating" these laws.

Cherchez la femme

Scientists have found a new explanation for conspicuous acts of charity. Or perhaps it's the same old explanation with scientific validation.

After "priming" male subjects with romantic notions (you'll have to read the article to get the details on just how they did this), researchers "found that when requests for benevolence were financial, rather than time-consuming, romantically primed men were happy to chip in extravagantly. Giving money to charity is thus more akin to conspicuous consumption than it is to blatant benevolence. The primed men were also willing (or at least said they were willing) to act heroically as well as spend—but only if the action suggested was life-threatening."

Is it possible that men seek a reputation for benevolence and heroism for the same reason they seek success in business? As Alexandre Dumas wrote in 1854, Il y a une femme dans toute les affaires; aussitôt qu'on me fait un rapport, je dis: 'Cherchez la femme'. Translated into English this reads: "There is a woman in every case; as soon as they bring me a report, I say, 'Look for the woman'."

Chad Waldorff at August Meeting

This familiar sign on King Street in Charleston welcomed members to the August meeting of the Bastiat Society...

Chad Waldorff, Chairman of the South Carolina Club for Growth, gave a presentation on his organization's efforts to put sound economic thinking into state politics...

The crowd was nearly standing-room-only...

Trust, Trade and Fairness

In the magazine Scientific American Mind , an article asks the question "Is Greed Good?" It concludes "economists are finding that social concerns often trump selfishness in financial decision making, a view that helps to explain why tens of millions of people send money to strangers they find on the Internet."

Rather than reduce each and every transaction to a rational calculation of self-interest, humans appear culturally and genetically disposed to trust and trade, under some standard of fairness. You can sum up the results by saying human nature uses the rule "Trust someone until they give you a good reason not to. Then punish them accordingly."

Equilibrium, RIP

The idea of a system in equilibrium has been central to the economic thought of the last hundred years. From economics, it has spilled over into many business plans. Today, it's quite popular to talk about "balance" in product lines, personnel, or budgets.

Economists borrowed the idea of equilibrium from the physical sciences, where it had been quite useful. Unfortunately, economic systems are not equilibrium systems.

New research reveals economic systems are open-ended systems. They never achieve equilibrium. In the words of one researcher, if an economic system ever did achieve equilibrium, it would mean the death of everything in it.

Living things change, and then they change the world around them. Like it or not, the mere fact of our presence will change the world. Our actions will change it even more. The world is forever out of balance.

Rather than spend precious time and money attempting the impossible task of holding any system together in a stable equilibrium, we should recognize the challenges and opportunities of change. This includes not just economic systems, but all human social institutions, from culture to commerce.