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Sunday, December 30, 2012 - 9:19pmSanction this postReply
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Let's say one company produces widgets and the other produces wonkits -- a widget knock-off product.

So-called Exploitation of Labor
The widget business owner (hereafter: widget boss) tries to short-cut economic realities and gives his employee a pay-cut that is 20% less than he'd earn if he worked at the wonkit factory. This information eventually reaches the "exploited" employee and he promptly quits the widget factory and leaves for employment at the wonkit factory. With no employees, the widget boss is left with approximately half the productivity as before (working the factory by himself). His profits are cut in half and he becomes worse off than before. He resolves to never again attempt to short-cut economic realities via employee-exploitation.

Minimum Wage Law
Let's say that the 5 interacting individuals -- actually, the 2 bosses -- are forced to follow miminum wage law. The minimum wage is set above the added value of the products produced when the products are produced with the help of the employees. This means that, as long as the boss has employees, the added value stemming from employee labor is less than the rise in wage rates forcibly paid out. The boss faces a choice: keep employees and operate at a loss, or cut your losses and fire employees. What happens is that all 3 employees are fired, and begin self-employment -- which is less productive than if they were working together via free association. Life goes on, but without any employment (without anyone working together on projects), so prosperity suffers.

Union Shakedowns
Let's say that 2 of the 3 employees got together and threatened a strike if they weren't given "Cadillac" benefits plans. If the cost of the "Cadillac" plans outstripped the added value of having them in the labor force, then their boss would face a choice: keep the employees, give in to their excessive demands, and operate at a loss -- or cut your losses and fire the employees.

More can be said about these and many more issues. Today, I just wanted to make a beginning.

Ed




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Post 1

Monday, December 31, 2012 - 9:19amSanction this postReply
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Ed:

I tried this once with an even simpler model;

1] Desert island.

2] 3 people. Fisherman, coconut gatherer, central banker who engraved seashells as currency.

3] Both fish and coconuts had a finite shelf life, though it was possible to dry fish and store coconuts for some period of time.

4] An exchange rate between fish and coconuts was established every day, based on supply and demand.

5] Based on simple barter, suppliers had to store their own inventory.

6] Economic life was much easier with the introduction of the central banker, who was paid a fee for his service.

7] The exchange rate for fish/coconuts was reflected as their relative price in units of specially engraved seashells.

8] It was possible to borrow engraved seashells for some limited time in exchange for a promise of future fish/coconuts, backed up by a claim on existing fish/coconuts.

9] The central banker was not permitted to simply carve seashells and spend them on fish or coconuts; he was paid fee for services, period.

10] The action of the central bank absorbed both excesses and deficits of fish/coconuts ... as long as they were out of phase. If they were in phase, the actions of the central bank were powerless.

In more diverse economies, there is an assumption that all commodities are substantially out of phase and cyclic, with cycles that are never in phase. (So...what happens, when by ever more heavy handed centralization and concentration of 'the economy' running, we constructivistly force more and more commodities to be in phase? For example by setting 'the' interest rate? We move resilient pluralistic economies back to the fragility of 'the' economy, and its exposure to phase issues...)

But... it is easier to understand 3 person economies first.

And then, two guys wash up on shore and we have your 5 person economies...

regards,
Fred



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Post 2

Monday, December 31, 2012 - 9:20amSanction this postReply
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Ed:

So how did the central banker end up living in the nicest hut?

regards,
Fred



Post 3

Monday, December 31, 2012 - 10:23amSanction this postReply
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Great analogy, Fred!

You are right that your analogy is easier than mine, and every bit as true (corresponds to reality as perfectly as mine does). It's also crafted by intellectual excellence. It's beautiful. You know, Fred, I'm pretty sure it would actually be possible for a human being to exist on just fish and coconuts just like you say! What a perfectly feasible analogy! But I'm still going to be a hold-out when it comes to usefulness. Many, many, many things are true -- but only a few of them are useful. For instance, the five-person economy -- or the FPE, for short -- can model employment. But the 3-person economy, as true and as clear as it is as a model for understanding human economics, cannot.

9] The central banker was not permitted to simply carve seashells and spend them on fish or coconuts ...
What kind of a central bank is that? Yeah, sure, it may be the proper way to have a central bank -- but I'm not sure that it has ever actually existed before (calling into question its existential feasibility). Instead, it seems that every central bank -- every historical entity capable of minting money -- printed at least a 'little extra' on the side, every now and again, at least for those in the "in-group." Imagine if you could make an influential person's debt go away, simply by printing some money. Would you do it? What if that influential person convinced you that it would be in the best interest of yourself and your innocent family if you went ahead and printed money whenever he called the favor in.

Would you do it then?

There seems to be an inescapable incentive for corruption intertwined with the concept of a central bank.

Ed




Post 4

Monday, December 31, 2012 - 10:46amSanction this postReply
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There is anecdotal evidence that price controls for milk are coming to a country near you (in 2013). I thought we learned about the effects of that kind of thing all the way back in the 1970's? Maybe some of us didn't learn it all that well. Anyway, let's model price controls, heavily-adapting reasoning from Mises' book: Planning for Freedom (p54-55):

Price Controls
The government of Quintopolis -- a remote place where 5 people interact economically -- decided that widgets (and widget knock-offs, such as the wonkit) should have a price ceiling, above which there shalt not be any sale of widgets or widget-like products. Folks in Quintopolis had been getting a good supply of widgets and wonkits, until the price controls set in. You see, the widget factory had a high cost of production, and was staying in business and making a profit because of being a high-quality brand name -- and therefore selling at a higher price. Once the price controls set in, however, the cost of production could no longer be offset by a higher selling price of the product, and the company started losing money and eventually shut itself down. This left only the wonkit factory in production. With roughly half the former production of widget/wonkit type products, the price controls were found to be "contrary to purpose".

Instead of increasing the public availability of the products in question, it decreased the public availability of the products in question -- because of running up against the economic realities in the world.

Ed




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Post 5

Monday, December 31, 2012 - 11:18amSanction this postReply
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Ed;

That's true, the economies changed as soon as the two new guys washed up onshore, and we could support the concept of employment.

But that wasn't the only choice; the two new guys could have become competing fishermen or coconut gatherers and created a free market from those monopolies. Or even, opened up a nice fresh water business, though, franchises would yet be out of the question.

So what's the deal with becoming a fisherman? Well, there is risk involved. Actual risk. Not just in not finding fish that day, but getting lost at sea, or washed overboard, or eaten by a shark. Still, the upside is ... fish.

So maybe the new guy who washed up onshore is presented with a choice that didn't exist in the three person model. He can, if the fishermen agrees, offer to work for the fishermen. He can offer himself as an at risk partner, take on his share of the risk/reward. They can sink or swim together. Or, he can make a different deal, and accept a smaller ROI in return for a guaranteed ROI as wages, not subject to the same level of risk. Because at the end of the same day risking life and limb to go fishing, it is possible to end up at the docks at the end of the day with no fish at all, when ROI is totally at risk.

And so, a plurality of options appears; 1] ROI totally at risk, as a competitor 2] ROI totally at risk, as sweat equity partner 3] ROI guaranteed as wages at a discount, reflecting the -value- of the guarantee.

Totally anathema to anything the slight bit Marxist in its analysis; Marxist analysis only begins after a boat filled with fish ties up at the dock, and it is time to redistribute the fish...

Another thing that occurs when the two new guys wash up on shore; that central banker is now only 20%, not 33% of the population, and whatever he is doing with those carved seashells is less front and center to those scrambling to survive...

regards,
Fred






Post 6

Monday, December 31, 2012 - 11:27amSanction this postReply
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Ed:

Who is the government in Quintopolis? There are five of them. Is he the guy who found the Conch shell, blew it, and declared "This is the symbol of authority in Quintopolis?"

(I just rewatched "Lord of the Flies" recently, can you tell?)

Or, do they draw straws, or form a true democracy, or whatnot?

Hold on there, compadre, you have to form a government before you can have price controls...what does it look like?

The central banker in my model isn't any government. We haven't found the need for one yet. He is some guy sitting under a shady tree(already harvested of coconuts)who offers to carve seashells, track accounts and so on. He is told by the other two/four that if he gets jiggy with carving seashells and spending them in their little economy, the fisherman will carve him up and use him for bait. There is no way for him to spend more seashells in a given month than they pay him for him services.

The actual coin of his realm is 'trust' and as soon as he blows it, he's toast, and has to go find some other means of offering value for value in their tiny little 'eyes up' economies.

It's only when the economies grow and get more complex that he's able to do what humans will do, given carte blanche over the local carved seashell franchise...

regards,
Fred



Post 7

Monday, December 31, 2012 - 11:41amSanction this postReply
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Ed:

I know this; one sure sign that the central bank has blown its trust is when it is no longer effective at being a central bank...

This whole central bank business was far more understandable when it was a guy carving seashells and tracking accounts for the fisherman/coconut gatherers, managing credit based on conservative banking principles in the best interest of -everybody- in those economies, etc.

If we polled 10,000 Americans at random, what % would be able to give a coherent explanation of how the Fed works, what it does, what QE is, what it means when the FED declares as its policy to accept an in-determinant amount of government issued treasury bonds, and so on?

Over/under 1%? 100 people out of 10,000?

I'd say under.

But with five people in our economies, and only one of them a central banker, far more eyes are up. In our simple model, I'd say at least 60%(got to include the banker!) of the participants in the economies understand the functioning of the central bank; the two guys who just washed up on shore are just glad to be alive and have a job.

regards,
Fred




(Edited by Fred Bartlett on 12/31, 11:49am)




Post 8

Monday, December 31, 2012 - 12:56pmSanction this postReply
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Fred,

Regarding post 5, I really like your '3-options-for-economically-interacting-agents-in-the-world' analysis (i.e., compete with others, join with others, work for others).

Regarding employment, I should have been more precise when I said, in too many sloppy words, that it is better modelled with 5 people. The advantage of the 5-person model is that you can always have 2 business owners, each with at least one employee. This let's you witness the loss of employees from either business, which is an economic reality in the world. As the game theorist Herbert Gintis taught me**, it's not as important to be perfectly clear as it is to be able to more-perfectly correspond to reality. That is what makes the 5-person model better. It is not always as clear as a 3-person model is, but it almost always corresponds to reality better than a 3-person model does.

And great point about Marx presuming that wealth falls from trees and is thus merely unjustified accumulation in the hands of a few exploiters. And also, great point about how the number of degrees-of-separation from any kind of a regulator affects whether his actions are at the forefront of your mind or not -- i.e., all regulation should be either local or heavily publicized and brief, in order to keep the potentially-nasty regulators regulated (e.g., an annual Federal Register containing anything more than 1000 pages is preposterous, let alone one containing more than 80,000 pages).

More than 80,000 pages! You can't make this stuff up! ...

Anchorman: "Well, it's 2016 and the Federal Register last year was 3 million pages long. It's getting somewhat harder for producers of value to be able to be in compliance with all of the federal law nowadays, and this has investors worried. Let's go over to Bob for the weather. Bob?"

Ed

**Book: Game Theory Evolving, 2nd Ed., Princeton, p. xv:
I take my inspiration from physics, where sophisticated mathematics is common, but mathematical rigor is considered an impediment to creative theorizing. ... Indeed, the stress placed on game-theoretic rigor in recent years is misplaced. Theorists could worry more about the empirical relevance of their models and take less solace in mathematical elegance.
More on this point: Ron Merrill, in his book The Ideas of Ayn Rand, gave an intelligent exercise for the reader: He asked the reader to work to get themselves into the epistemological position to be able to choose between competing theories, one excelling in internal consistency or validity and the other in external consistency or validity. Hint: There is only one right answer in that mental exercise.

(Edited by Ed Thompson on 12/31, 1:34pm)




Post 9

Monday, December 31, 2012 - 1:19pmSanction this postReply
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Fred,

Lord of the Flies? I never read it, and only watched the first half-hour or so of the film. I lost attention when it looked to me like just a bunch of youthful savages in a power struggle involving pressure groups and involving rule by force or the threat of force and ... hey ... wait a minute ...

:-)

Hold on there, compadre, you have to form a government before you can have price controls...what does it look like?
Dobt! You caught me off guard. You know, that's one of the qualities I like about you, Fred. You are both willing and able to catch me off guard. I really appreciate that. Anyway, to respond to your criticism -- thereby making my analogy more rock-solid and impervious to further criticisms! -- I would ... [thinking] ... I would like to utilize a modified version of Athenian democracy. One man governs, 4 men "obey" ... and the governorship rotates among them at regular intervals, but with one caveat: You can take a "pass" on being governor and ... somehow ... you get to do that ... without compromising your ability to be represented.

There. Is that good enough?

:-)

The central banker in my model isn't any government.
Well, he's still a regulator-of-activity of sorts. Government is about the regulation of activity. You create one when you have determined that you need that kind of a thing. If for instance, one of the people in Quintopolis was a hot-head who over-reacted to perceived injustices and then physically threatened others, then you might need a government. Alternatively, if Quadropolis wanted to invade Quintopolis, then you might need a government.

Let me be clear and possibly ideologically confrontational for a moment (though still friendly!), there is a greater human need for a government than there is for a central bank.

Ed

(Edited by Ed Thompson on 12/31, 1:25pm)




Post 10

Monday, December 31, 2012 - 1:52pmSanction this postReply
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Ed:

There. Is that good enough?


Perfect; a kind of draft. "Hey, it's your turn to be the state plumber. Here's the plunger, get to work..."

I wish!

When our tribes grow more complex, we seem to inevitably evolve to some kind of Maximum Leader model;

Of course, it might just be the Emperor Wannabees among us self-elevating those state plumber positions, while the rest of us aren't paying close enough attention to the state plumbers.

You know, the fishing gets more complex, the struggle to run up hills gets more intense, and before you know it, you aren't paying close enough attention to what the state plumbers are doing.

Christ, we hand them a plunger, and the next thing you know it turns into an f'n scepter in their hands.

And if you just laugh at that, then the scepter soon enough becomes a whip.

Can't you hear them on Capitol Hill, as we speak: "Harder! Try harder! We need you to run up those hills! WHat's wrong with you! Aren't we printing enough money..and painlessly spending it on the results of all that uphill running???"


Meanwhile... townhouse gets listed for $380,000 in DC, sells for $780,000 because there are 156 anxious Emperor Wannabees crashing the OPM party at "The Capitol" ...

This is while the balance of the nation is on it's a$$.

Speaking of which, I just rewatched "The Hunger Games" again this weekend. No inference implied; it's explicit.


regards,
Fred




Post 11

Monday, December 31, 2012 - 2:30pmSanction this postReply
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Fred,
Meanwhile... townhouse gets listed for $380,000 in DC, sells for $780,000 because there are 156 anxious Emperor Wannabees ...
Now, c'monnn, man. Are you making this stuff up? Did that really happen, or did you just make it up to be "cute"? Because, if it is true, it really hammers your point home. But if you just made it up, then it's merely a rhetorical trick and can be intellectually dismissed during further value-driven discussion of this important matter. You don't have to find/provide a link, as I have come to trust you like a brother (I never actually had a brother, but if I had one, I'd probably trust him like I trust you). So I'm just asking for a verbal verification of the truth-status of the evidence presented.

In other words, are our guys currently acting that much like those society-pillaging/society-plundering Chinese 'politician-billionaires' on the other side of the world?

Ed




Post 12

Monday, December 31, 2012 - 2:34pmSanction this postReply
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Ed:

Hey 'bro. Read this.

Is the WSJ yet a reliable source?

regards,
Fred



Post 13

Monday, December 31, 2012 - 2:37pmSanction this postReply
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Ed:

Mea culpa in the retelling, I did screw up the exact numbers.

But not in any significant way...


No matter how the economy sputters in flyover country next year, President Obama has made clear that the spending party will continue in Washington. And that's the main reason Beltway homeowners can party like it's 2005. The Post says that amid a "red-hot real estate market," one D.C. townhouse recently listed for $337,000 sold for more than $760,000, after attracting an astounding 168 offers.

regards,
Fred



Post 14

Monday, December 31, 2012 - 2:41pmSanction this postReply
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Ed:

For an eye opening bit of research, spend a few minutes perusing the data at Zillow for Northern VA during this shared national economic crisis...


regards,
Fred






Post 15

Monday, December 31, 2012 - 4:01pmSanction this postReply
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Alright, alright, alright, I've seen enough. We are all but at the point where Palpatine addresses the Senate, declaring the reluctantly-observed new need to be granted emergency powers which he solemnly swears to willfully relinquish at some undeclared future date -- after the newly-created ... er ... I mean the wholly-uncreated crisis abates.

:-)

Ed




Post 16

Tuesday, January 1 - 3:21amSanction this postReply
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Meanwhile I am re-reading Ominous Parallels and am even more "concerned" than ever. The emergency powers starwars scene...completely plausable, I believe I mentioned something to that effect over a year ago, hope I am wrong.
(Edited by Jules Troy on 1/01, 3:22am)




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Post 17

Tuesday, January 1 - 7:03amSanction this postReply
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Jules,

When you've got a guy or small group of guys whose interests are contrary to our "general Welfare"*, which means contrary to justice (because justice is what it is that is in our "general Welfare"), but are aligned with "progressive" values instead -- such as social justice (which is, at root, injustice) -- then he or they will resort to all manner of deceit in order to advance their plans. This is why early Hitler burned down his own political party office building, in order to scapegoat the act onto the opposition and get ahead politically via corrupt means. He then went on to scapegoat Gypsies, Jews, etc.

When you are not interested in "general Welfare", but only in special welfare (interest-group politics), then you have to utilize evil propaganda to achieve what you want. There is no alternative to that. Limbaugh was right to proclaim that progressives cannot be both honest and powerful at the same time.

Ed

*Capitalized in order to copy, and therefore indicate, the precise meaning meant by those who penned the Preamble to the US Constitution.

(Edited by Ed Thompson on 1/01, 7:12am)




Post 18

Tuesday, January 1 - 1:26pmSanction this postReply
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Tangent
Here is an attempt to summarize Austrian Economics. After outlining key aspects, I plan to create a 5-person scenario -- introducing Jackie, Jermaine, Tito, Marlin, and Michael -- illustrating how it is that human living standards could ever rise -- both relatively and absolutely.

Human life is precarious and conditional on value production and it is also not static, so its optimization requires periodic variation of activities in order to adjust the factors of production to best meet our needs. Let's say you needed coconut milk and had drilled a hole in a coconut and drank almost all of the milk. You could keep doing the same thing with the same coconut -- which becomes progressively empty of all of its milk -- trying harder and harder and harder to suck out the last drop of coconut milk, or, after realizing there's hardly any coconut milk left in that coconut, you could alter your activity by climbing the tree and grabbing another coconut.

The decision to alter your activity at this critical time (when the coconut is almost empty) is entrepreneurial. The function of an entrepreneur is to consciously mitigate maladjustments utilizing rational choice and the adjusted application of the factors of production which rational choice gives rise to. The alternative to making this decision is to go on as before, trying harder and harder and harder (until death) to get more milk from the same coconut. In retrospect, it is possible to compare the relative value of employed efforts at getting the last drop of milk out of a coconut, with the combination of rational choice and those altered methods which rational choice gives rise to. There is a greater "marginal productivity of labor" when you employ rationality and obtain another coconut -- instead of continuing on with progressively ratcheted-up efforts to obtain more milk from the same, dried-up coconut.

Key point: Because you chose to switch to that new method where there was a greater "marginal productivity of labor" -- you, in effect, gave yourself "a raise" (you improved your living standards without employing any extra labor overandabove the previous amount of labor you had been performing).

Now that you have benefited from entrepreneurial activity (your belly is now full of coconut milk), you have new-found energy. One of the things that you could do with that new energy is plan for the future. For instance, even though you don't need them right now, you could cultivate coconut trees, for an expected future need or desire. In doing so, you are accumulating capital goods -- goods not immediately consumed, but which increase the amount of consumable goods obtainable in the future. If you go so far as to utilize some of your new energy to build a ladder (to climb coconut trees), you have combined the activity of an entrepreneur with a capitalist -- and have developed an upgrade in the quality of capital via the judicious employment of science and technology.

Key point: Because you chose to switch to that new method involving funneling savings or accumulated capital into a new use of technology, there was a greater "marginal productivity of labor" -- and you, in effect, gave yourself another "raise" (you improved your living standards without employing any extra labor overandabove the previous amount of labor you had been performing).

When you accumulate capital -- or even simply the initial savings required in order to begin accumulating capital -- then you are acting like a capitalist, i.e., someone who acts for a future. If another person is around, then you have 3 choices: you can each either work together on projects (form a "corporation"), specialize efforts and trade with one another (engage in a market), or enter into an agreement where one of you works for the other but always for a set wage (utilize the activity known as: employment). A fourth option is to attempt to live like animals do, and to view the other guy as your "prey" -- taking his produced values and possibly his life in the process. A caution is that this is risky and it can only be performed once, after which -- assuming you survive the ordeal -- you may not only be lonely, but terribly destitute.

Key point: Because you chose to work together with others via at least specialization, there was a greater "marginal productivity of labor" -- and you, in effect, gave yourself yet another "raise" (you improved your living standards without employing any extra labor overandabove the previous amount of labor you had been performing).

If a third person shows up on the scene and it is discovered that they have previously engaged in both entrepreneurial and capitalistic activity -- i.e. they have tons of value to trade -- and that they plan to keep on doing this kind of rewarding activity, then a market is created by mankind ex nihilo and competition between producers may develop. If competition between producers develops, then extra attention is paid to the optimization of employed factors of production in order to best meet human needs -- and everybody wins.

Key point: Because you chose to enter a market with others by engaging in trade, there was a greater "marginal productivity of labor" -- and you, in effect, gave yourself yet another "raise" (you improved your living standards without employing any extra labor overandabove the previous amount of labor you had been performing).

It appears like there are 4 ways to improve your living standards without employing any extra effort than you had been employing before, the first 3 happening even before the origin of a marketplace. In other words, in the absence of destructive ideologies, it's really easy to raise the living standards of human beings.

Ed
(Edited by Ed Thompson on 1/01, 4:19pm)




Post 19

Tuesday, January 1 - 4:12pmSanction this postReply
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Ed:

I've pulled my chair up.

I'm going to have my personal filter out(free vs. forced association)and see how that reflects the relationships outlined-- as well as how it illuminates the nature of the objections to the relationships outlined...

regards,
Fred



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