Turning our Economic Backslide into Greater Steps Forward

(Rick, this article was from early last March, it may need updating.  I’ll try to take a whack at it while in Japan, but might not get a chance to until Sept. 1. When is the next issue of the STREAM planned for, and when is the economics special issue planned for if that is still in the works?  ….win) 

((Rick: here’s my input into the special issue you suggested.  Solicit other inputs as well, perhaps by provocatively circulating copies of this piece.  This will be a necessarily long newsletter.))

((If you don’t get other inputs, advise me and I’ll render several additional, shorter pieces.  Thanks.))

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           Turning the Current Economic Slide into Many Steps Forward!

Success and Failure, and avoiding needless Waste:

 Whether in science or in business, in order to succeed, one must have the chance to fail.  A theory in science has to predict specific outcomes that can be tested.  The astonishing progress of science the past several centuries is precisely because such tests have been made and some of the wrong theories weeded out.  Most of the self-made billionaires in Forbes failed miserably, several or more times, before hitting upon the winning strategy which lifted them above the pack. Where market economics was not allowed to be the determining factor as to where allocations should be made nor which enterprises should advance, the entire communist system collapsed miserably from an accumulation of inefficiencies and errors. 

 Which means: where success is allowed, there will be some failures. 

 Our overall success depends upon how well – and how rapidly – we recycle our failed people and resources into fresh opportunities for success.

 There is where we’ve been failing terribly, and there is where we have huge opportunity for a human and prosperous future….

Darwinism, Social and Otherwise:

 Many economists, social theorists, and eugenicists, took their respective models from a naive, Mendelevian theory of survival of the fittest, where genetic change could be attained only through rigorous costly process of elimination, the successful able to be so only by standing on a carpet of the bones of the fallen through glacially slow evolution through hundreds of generations.

 Meanwhile, civilized people recognized that imitation of success, learning from one-another, indeed “social evolution,” allowed personal and social change to happen within the current living generation.  That was somewhat less expensive in both human and material terms.

 Also meanwhile, genetics itself moved from mere selection of genes over hundreds of relentless generations, into the discovery that nature herself had, for obvious bioevolutionary reasons of survival, devised genetic mechanisms for change to happen within the living generation and the living individual.  Floating gene bundles, migration of genes across species, the body adapting to conditions by placing inhibitors or disinhibitors upon the protein sequencing expressed by one’s genes and chromosomes said inhibitors or disinhibitors continuing for some generations in one’s genetic makeup, and viruses routinely bringing in and installing new genes into our makeup – so much so that as a medical treatment infection by tailored viruses is now routinely used to correct genetic problems.

 What nature learned and started to use millions of years ago, our economists, social theorists, and eugenicists have not yet caught on to, and still believe not in adapting, but in pruning off, our unsuccessful people, firms, and resources.

Too Big to let Fall?

 Because the cumulative decisions made in the board rooms of GM and Chrysler were catastrophically wrong, we should let those companies crash?  Is that just, and is it necessary? [[[[[Rick - if we keep this section in we should note that this article was written last March before the successful bankruptcies happened.  The point being made here, however, obviously stands.]]]]]

 Who made those catastrophically wrong decisions?  Was it the three million workers who would be dispossessed of their livelihoods and their homes if those companies went under?  Was it even the designers and engineers who brilliantly carried out the directives of the company executives?  The golden-parachuted executives who made those decisions and directives can move on, or live well-padded for life from those parachutes.  Where is justice in all of this?

 From a practical and necessity standpoint, several trillion dollars in immediate value would be lost if the big auto makers were allowed to go under, and much more in the long run as cumulative effect of losing so much technology and productive capacity – plus we would face enormous expenses in dealing with the effects of three million more people unemployed and dispossessed.  It seems to this writer that to waste material and human resources on this scale, seems not only unjust but a bit impractical.

 We can install new management without destroying the entire company and its assemblage of productive people and resources.  We can even imitate successful models, we can learn, we can install new management systems whether or not we clear out all of the old management, the whole company doesn’t have to die, three million people don’t have to go down with it.  The larger the corporate entity, the more impelling it is to make this kind of change – instead of feeding the present problem with more bailouts to the people whose hideously wrong decisions got us into our present onslaught of troubles.  – And instead of letting these enterprises collapse and lose enormous amounts of both material resource and human productive capital.

 – And, I think, so we don’t face such catastrophic dilemmas in the future between huge bailouts and allowing the wrecking of lives of millions of people who had no say in the terrible mistakes and decisions made in the board room, as all this settles out we should break up these corporate giants into smaller, more numerous and more competitive units, as a matter of prudence and long-term economic health.

Solving Our Problems -

 One of the things we could learn, by self- and social evolution: there are now hundreds of different, ingeniously effective methods for creatively solving problems, successfully in professional use around the planet.  Why not use one or more of these on our real problems, yourself and ourselves?

 We now have up free on the web a Roadmap of easy, specific directions to many of these problem-solving techniques.  Each of the techniques and methods we have up, in turn consist of specific easy-to-follow step-by-step instructions how to solve a problem by that method, like a cookbook of recipes and specific step-by-step directions for preparing a dish or a meal.  The Roadmap to all of this is found at http://www.winwenger.com/solving.htm  

 You and we can use these specific methods to solve our own personal problems and our work-related problems.  We can use these methods to solve the problems and issues of common concern in our communities, or even on a wider scale.  We can even use these methods to solve the problems of the economy as a whole, or to solve the variegated problems of quickly recycling or transforming the productive human and material resources of the “Too-big-to-let-fall” corporate giants.  I commend this to your attention, which you can test right now or today, right where you are sitting, starting by clicking through to the above address.

The Free Market As A Directory: 

 The original Adam Smith became “father of the free market” with his world-changing publication, in 1776, of his great treatise on economics, The Wealth of Nations.  Prices in the free marketplace inform the process of allocating material and human resources more and more efficiently and productively – within a limited range of conditions.  Within that limited range of conditions, the free market performs a crucial function: it serves as a Directory, directing people and resources into more and more productive uses.  Within that limited range of conditions, the free marketplace operates infinitely more efficiently and effectively as such a directory than can any authoritarian command economy or government.  

 Trouble is, there are times and conditions where the free marketplace needs some help in its role as a directory, when conditions are no longer within the limited range as specified by Adam Smith.  For example, what is the value, to you compared to Joe Blow, of the eradication of smallpox or of polio?  How should we charge Cleveland for its share of the costs of protection from terrorism by safeguarding the southern border of New Mexico?  These are what economists call indivisibilities – benefits and costs brought to the whole of society.

 External economies (benefits) and diseconomies (costs), experienced by interests or persons other than the one causing them to happen, is another clear example of conditions cited by the father of the free market as derailing the market’s function as a Directory.  Pollution of air, land and water by an industry, is a cost not felt by the perpetrator but is felt externally, by other people and other interests whose costs don’t enter the bookkeeping of the perpetrator.  The perpetrator is answerable to its backers or stockholders and has fiduciary obligation to serve their interests, not the interests of the victims living downstream, so where such external diseconomies exist, society suffers net loss: more is done of this damaging activity than the total economics of society would warrant. 

 External economies, by contrast, tend to be underperformed – the shoveling of snow from neighborhood sidewalks, for example, or the very serious problem confronting us in allocation of resources for basic scientific research.   Basic research is many times more productive of value than is the narrowly pursued applied research which in fact depends upon that basic research in order to have something TO apply.  The results of basic research are unpredictable.  The firm doing the research may be positioned to get very little benefit from that research but is bearing its costs, while other firms get a free ride, across the economy positioned to take billions of dollars of advantage from the results of a given piece of basic research.  So much less basic research gets done than the overall costs and benefits to society as a whole would properly warrant – and that also describes many other types and examples of benefit externality in which the pricing Directory of a free market system misfires.

 In crises and emergencies and sudden developments, the Directory service of a free market economy is forcefully deranged.  A lot of opportunities are lost, wealth failed to be created and enjoyed, a lot of productive resources wasted and people suffering, because under those stresses the free market is no longer directing people and resources toward more productive uses but instead away from them.  People no longer find a stable reference point for value in their medium of exchange, and cascading stampedes carry entire national and international economies further and further away from rational allocations, exposing once-solid enterprises to destruction in their turn.  History is littered with the rubble of entire civilizations which entered such a tailspin and never emerged.  When so deranged, the free market desperately needs some help from outside to redirect at least some people and resources into production and into more productive uses, until conditions, expectations and reference points can be re-normalized. 

 A broader treatment of the circumstances for government intervention in market economies is found at http://www.winwenger.com/mixedecon.htm   Here let us note that while government or any command system can quickly adapt to emergencies, or break through general paralysis into useful specific actions when the whole community or civilization is acting like a deer at night on the road caught in car headlights, the involvement and intervention should be as brief as possible.  That improves the chances that the people acting on the situation are truly motivated to solve and correct it.  Setting up a long-term agency or staff to deal with it, silts up the situation with people whose motivation is either to build a personal career and empire regardless, or to laze through with as little actual work as possible. There, perpetuation of the problem instead of solving it becomes, for them, job protection.   More generally:

 As Lord Acton told us, “Power tends to corrupt, and absolute power tends to corrupt absolutely.”  We are just beginning to emerge from one of the very most corrupt periods in American history, and we may or may not ultimately emerge from it….

 In any arena of human affairs, advantage tends to drift to a small handful of the people there, who thereby increasingly constitute an “establishment” or an “elite.” 

 In any assymetric or unbalanced power relationship, convenience to some becomes a factor, then exploitation, then abuse.  The greater the imbalance in that power relationship, the stronger the impetus toward abuse.

 Practically every ill on the planet can be attributed to abuse of power.

 To accomplish some of our collective goals and policies – AND to correct some of the shortcomings caused by external economies, diseconomies, indivisibilities, monopolies, emergencies and other derangers of the free market’s Directory service, we have historically chosen to act on such situations directly through government and in doing so, have tended to amass concentrations of power and wealth to achieve these aims.  – Thereby creating even greater imbalances of power in relationships than before. 

 So government is a very imperfect instrument for correcting the misallocations caused by various conditions in a free market economy.  But the problems needing correction are often far worse, and to let the losses and human suffering run its full course is not only intolerable but unnecessary.  We need –

* A system for fast recycling of failure-involved material and human resources into fresh opportunities for success.

* Command and government bodies dealing with such problems to be as temporary as possible.

* Where and to the extent possible, pursuing policies and collective goals through setting or re-setting incentives, to people and interests in the free market, extending the range of conditions and economic activities for which the Directory can serve rationally.  People and interests go to enormous lengths to avoid taxes: a careful system of taxes and tax breaks would allow most of what government now tries to do to be economically and efficiently performed instead in the free market, at far less cost both materially, human, and to human freedom and initiative.  This obvious alternative approach is discussed at http://www.winwenger.com/ebooks/incentive.htm

* We need to move as quickly as possible from merely proposing particular incentives because they seem good, to developing an overall, objective frame of reference.  Because government is so imperfect an instrument even for determining what incentives are needed to offset distortions in the Directory, research should begin immediately to establish a standard and frame of reference, around the concept,

    Total Public Benefits = E + E(eE-eD) and

    Total Private Benefits = D + (D(eD-eG) (see definitions below).

Each commodity’s optimum allocation may be said to exist where, by this Underallocation Formula,

             E + E (eE – eD) – C
       U = —————————-  – C (eC – g) = 0
                D + D (eD – eE)
This value may be computed under these terms:

    +U = the rate of Underallocation;

    -U = the rate of Overallocation;

    D = the direct Divisible or private benefit of the commodity to be realized by the private supplier of that good or service;

    C = Compensatory incentive required to offset externality values;

    e = standard external benefits of income multiplier effect in that sector of the market and investment productivity multiplier effect therein, over some specified time interval;

    g = the standard external benefit of the highest sacrificed alternative, and where the value (eC-g) is maximized.

Please note the distinction between standard e of the most purely private commodities and E which applies to correspondingly less perfectly private commodities. The measure of this distinction evaluates the undesirable incentives which, when not compensated for, foul up the free market’s “guiding hand’s” accuracy in directing private interests toward the common good.

The ultimate measure of standard e tends to fall somewhere between the multipliers of the spending habits of those immediately involved, and those of the community or national average.

As a general yardstick: a commodity’s misallocation, stemming from the divergence of privately and general publicly experienced benefits, and/or from the divergence of privately and generally publicly experienced costs, is corrected by repaying/taxing private spenders according to the value determined by the ratio x over x+y where x/y is the ratio of public to private economies or diseconomies.

(Someone better versed at mathematics and/or at econometrics is welcome to create a simpler, cleaner formula which serves the same purpose of establishing an overall basis of reference for such policies.  Further discussion toward standards and points of reference for policies involving deliberate use of incentives, is found at  http://www.winwenger.com/ebooks/incentive.htm , op.cit.)

The Depth of the Problem is the Scope of our Opportunity. 

 When the problem is deep enough, almost anything will be a substantial improvement. Moreover:

 Nearly everything is locked into equilibrium of one sort or another.  When we try to make a change or improvement in that situation, often we find ourselves trying to overcome the natural resistance and defenses of the situation, when there could be much less wear and tear and expenditure if we found a way to map and work around those defenses – or: to seize the moment when equilibrium is already disturbed and those defenses partially used up.  Even if it were not true, that a major disequilibriation is a unique opportunity to come out way ahead of where you otherwise would have, if you proceed as if it were, you definitely increase your chances in fact of coming out ahead.  This can apply in your own personal life and career, this can apply in your community, this can apply in national policy.  How? – start finding out at the Roadmap at http://www.winwenger.com/solutions.htm, op.cit. 

Discovering Opportunities:  

 In my as-yet unpublished book, Creating Wealth, for Yourself and for Others, in Countries Without Capital, I proposed that almost any problem including societal problem can serve as the basis for a profitable and mutually beneficial enterprise, if we are smart enough to figure out how (again, you might consider the Roadmap).  Writing the original version of that during the fall of communism in Russia and eastern Europe, with reference to those long lines of people standing in the winter darkness in front of all those stores with their shelves empty, I suggested the example of creating, from such skimpy supplies as one might have, tureens of hot soup as the start of such an enterprise, offering bowls of that hot soup up and down the shivering line in return for cash or bartered goods or later favors.  Conditions may have changed since then but the principle not only remains, but weighs strongly in our own present situation.  “Windtunnel” or “Freenote” your way beyond all the stuff you know or think you know about this aspect of the situation and force yourself into a perceptive mode by continuing on through the all-essential, perception-provoking, Flounder-Around-And-Dig stage (http://www.winwenger.com/part72.htm and http://www.winwenger.com/freenote.htm, respectively.)  Or in ImageStreaming, or “Over-the-Wall, ” or “High Thinktank,” or whatever imagery-involved process, go in expecting to be surprised by what your greater brain and mind will show you….and you will be.

Which Experts are Expert?  

 104 mutually exclusive directions: the number of mutually exclusive predictions and recommendations made by – – – – 50 economists. 

 Check back through the news in the past year or so to examine the correlation, if any, between what the experts told us and what then happened.

 As to at least your own situation, YOU are the world expert, more than anyone else.  YOU have the information needed to surmount your own challenges, if you can just find the best way to focus on it.  Each of the hundreds of available problem-solving methods which are now successfully in professional use around the planet, is a way to bring your insights and information into useful focus.  YOU are more than a match for the challenges in YOUR situation.

Conclusion: 

 Don’t be that deer caught in headlights.  The start of effective problem-solving is your actually starting to do SOMEtbing in reference to the problem instead of letting yourself drift at its mercy.  There are a lot of good, useful things you can do beyond that initial SOMEthing.  There are some pretty clear directions to move in, once we do a little clear thinking about the situation. Hey you: take charge of your own situation!

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