Reasons Unbeknownst

Grabbed some new books including Rothbard’s A History of Money and Banking and The Case Against the Fed.

The question I’ve been mulling over after macheteing my way through the first chapters is about the effect of change on the limits of freedom. Anarcho-capitalists see progressive taxation as inherently unfair. If you look at trends emerging due to the rise of automation it seems that the correlation between GDP and employment is starting to break down. With good enough robots having human help may actually hinder growth.

New jobs have always been created after brief turmoil following technological revolutions (industrial – farmers) but this time things are different. Automation is starting to kill jobs in the media business which was enabled by the printing press. This revolution is different because it doesn’t just allow new products. It makes their production nearly free. We basically had a form of socialism restricting free markets but it was caused by a lack and the expense of technology.

If you believe in free markets then this change would bring huge amounts of new wealth and progress, and I think it will. But I wonder how the distribution of that wealth will play out. Our low tech socialism created incredibly wealthy people (Hearst) but it also created thousands of jobs. One fat cat and thousands of people writing movie reviews. Everybody was happy. Now we’re looking at 50 fat cats with nobody else necessary. The 50 people will make more than the fatcat+1000s but is society better off? I think so. The opportunity cost of having smart people tied up in redundant jobs is usually overlooked in this analysis. I call it the Latent Potential of Middlemen (draft blog post in progress).

Hayek writes about that the mindset of an entire nation can be affected by socialism “The most important change which extensive government control produces is a psychological change, an alteration in the character of the people.” . It changes the way people think. There is an old quote that says we should work so that someday our children won’t have to. But are we just the kids that don’t want to stop working because our neighbors have a nicer car? Maybe our motives are flawed but the technological progress that results from our consumerism does benefit all people (MIT’s $100 laptop for instance). If the riots in Paris were occuring even in the face of France’s giant welfare state then should we be worried about the coming automation induced waves of unemployed? If you separate the concepts of employment and income which do people value more?

The title is a little misleading. Exponential growth is allowed by Austrian economics but the libertarian philosophy is incompatible with wealth redistribution that might become increasingly necessary as automation spreads.

I remember eagerly awaiting the local version of the free computer rag, sifting through the pages looking at the prices for the latest components. Finding out which component was better usually required a trip to a review website. Finding out what was good and what it cost was a multi step process for the dilligent shopper and for the uninformed shopper the steps involved included hoping for honest sales people and the decipher of fine print.

Things have changed dramatically in the last few years. Review sites often show price comparisons smack in the middle of the reviews including starred reviews of the sellers. The reviews often include discussions among current and potential owners which often shed more light on said item than the actual review.

Metacritic normalizes reviews of products on a ten point scale and gives the average score. You can rank movies, games, books, etc. by best of 2005 or best all time. It’s indespensible for times when you don’t have the time or energy to read a bunch of reviews and just want to make sure you’re not getting a lemon. Metacritic is one of the first incarnations of the potential of the semantic web. Everybody agrees on the ten point system syntax which allows comparison after aggregation.

Humans are relatively inefficient. Nobody would rely on the charm of a comissioned sales person if they could scan an item’s barcode with their cell phone and have a metacritic rating displayed along with the lowest online price on their phone. The hoardes or screaming brokers at the NYSE will soon be a relic of pre-electronic times.

Advertisments are famous for not showing information about products. The common quote being “our prices are so low, we’re not allowed to tell you the model number!” This is reminiscent of financial derivatives. Stop limit orders. Sell orders, etc. It’s all been done in the financial world but hasn’t been applied to products yet. Imagine telling an online store that as soon as the price drops below $50 for some blender that it is authorized to charge it to your account. You could manage all of your product limit orders the same way you manage stocks with E-Trade.

The only advertising required will be to implant lifestyle images in the heads of customers who consider price as an afterthought. Think beer ads that aren’t based on comedy. What the hell does “finishes smooth” mean anyway?

(image from the Eco-Almanac) Here is the condensed version of what I’ve been reading about for the last two weeks. The housing bubble is going to pop in the next couple of years creating huge problems for the economy because roughly 10% of employment in the US is due to housing and even a flatenning of the housing market will cause huge job losses. The real estate agent that isn’t making money can’t buy a house of their own.

When you invest in a house you are investing in something that does not grow or innovate. If there is a huge crash as more are predicting the long term effect might be good. People will invest in businesses instead of kitchens. Businesses will have more money to expand, hire and compete with foreign competition. Apple will have more money to create the next must-have gadget. Housing is a bad investment because it doesn’t do anything. If a house was a business it would be a dozen people sitting around reading newspapers all day and occasionally complaining of back pain. Home ownership would be much lower if you took away the government subsidies.

I saw an ad for a $100 computer this weekend. Ten years ago you couldn’t get one for less than $1000. That’s deflation. The fed thinks deflation is bad so they print more money to make sure deflation can’t happen on a large scale. The whole system is rigged to take advantage of the artificial inflation. Deflation is natural and inevitable because of growing productivity and technology which are beginning to affect industries outside of typical tech. Farmers are using satellite imagery to manage crops for example.

If the Fed is printing huge amounts of money to rid us of the scourge of deflation then where is it all going? Housing. Look at the graph above. It will take 20 years for the house price to income ratio to get back to its average of 8 if house prices were frozen at their current levels. That apparently isn’t realistic which means a big correction is in order.

The Mises Institute has a great article on the government’s fear of deflation. I’ve done a lot of thinking and writing about deflation and understood the mechanics if not the motives, until now.

“Why the hysteria against deflation? We are faced with a real puzzle here. In the whole of the private sector, the number one focus of retailers these days, particularly those dominant retailers such as Wal-Mart and Home Depot, is low prices. This they emphasize above all else because they know that this is what consumers want.

And yet in the public sector, we find exactly the opposite: an ironclad promise that prices will not be low but rather will be continually rising. So if Wal-Mart’s slogan is “Always Low Prices,” the slogan of the Fed and the government should be “Always Higher Prices.”"

The answer is (according to the libertarians) a damning condemnation of the motives behind inflation

“The reason the government ? and here I speak of Congress and the presidency ? favors a loose monetary policy, a discretionary rule at the Fed, and ongoing low-grade inflation is the most obvious one of all. It pays the bills. In other words, the reason is no different from that of private counterfeiting. They like to have money without having to work to get it. That is essentially what the Federal Reserve provides the government. It doesn’t have to worry about its bond rating collapsing or its credit standing falling. It doesn’t have to bother with taxing people. It can hide the costs of government in the complications associated with monetary affairs.”

Kurzweil’s latest book explains that deflation is inevitable due to the massive, accelerating productivity gains caused by technological progress. The Fed’s inflationary target then is rapidly diverging from the natural economic balance. They’re effectively sucking the productivity gains out of the economy and using it to expand the government. If you unwittingly receive a giant pay raise every year but your payroll taxes go up by exactly the same amount it’s possible you won’t even notice. And that’s exactly what our friendly government is banking on.

Big Media is fighting the rise of bloggers tooth and nail. It stands to reason that Big Government will fight the rise of peer to peer banking under the guise of stability in the not too distant future. This is the ultimate frustration. There are very smart people in charge that know 99% of the population will never question or bother to read about monetary policy or the Austrian School of economics and they rely on that ignorance. American politics today consists mainly of Socialists arguing with Intelligent Design proponents. Two theories debunked in 1871 and 1859 respectively.

The classical liberal in me wonders why a gold backed, open source currency combined with P2P Banking wouldn’t be possible. How do you use the market to beat the government monopoly on money?

Unemployment is listed as the root cause of the now waning rioting in France. News from financial gurus suggests we’re about to have a heck of a lot of unemployed people in America too. “The Center for Economic and Policy Research predicts worse, saying a bubble burst would mean the loss of 5 million to 6.3 million jobs. “ It looks like the predicted masses of unemployed that should have been made jobless by automation are simply finding work building and selling homes, in financing, speculation and supporting industries (Home Depot). Increasing home prices have masked the extent of the losses.

The question for America is what happens when automation finally leads to unemployment the likes of which are currently only known to France and Germany? Will bored teenagers riot? In the past we’ve been pretty good at creating new jobs surrounding the technology that killed the old jobs. Farmers were employed in the cities, calligraphers started building printing presses, etc. But we’re now at a point where the skills required for the new jobs require much higher skill levels than those emerging from previously disruptive changes. Technology is leading not only to the loss of jobs it’s changing the nature of industries that previously relied on middlemen.

The high school diplopma is becomming worthless while those with college degrees earn more. If our education system is designed to prepare our kids for blue collar jobs in factories should we expect disillusionment when they graduate only to find armies of tireless non-union robots? Should we prepare our youth for the inevitability of a lifetime of unemployment and dependence on the state? Is human nature compatible with life on the dole? Does status dictate that we’ll be ok with a lower standard of living as long as everybody else suffers the same fate?

My problem is that I never get bored. You could lock me in a room with an internet connection and a laptop and I could sit in the corner for years on end, reading and debating with the millions of diverse minds on the internet. It’s hard for me to understand the plight of the bored. But that quote “Idle hands do the devil’s work” makes me wonder if a nation of the bored would revolt, just to stir up some excitement.

The Parisian suburbs do have one growth area that employs many of the immigrant and second generation French youth. Drugs. There are no regulations or taxes holding the industry back, rendering the inaccessible, legitimate job market unappetizing by comparison.

Now Sarkozy is threatening to take away the only job generating industry they have left through enforcement of drug laws. Enforcement is the operative word.

In big cities one sees a growing tolerance from the side of the police, especially in the lower class areas like the banlieues. In the rural areas cannabis use is in many cases prosecuted.

The police apparently don’t often venture into the “sensitive neighborhoods” unless they’re accompanying a fire truck. The police keep the peace by turning a blind eye but they’re now forced to look.

More evidence from a study on drug laws in France lays out the economics…

“Cannabis trafficking in France is generally on a small scale and consist of small networks. In many cases cars are used for crossing the border. Many of these networks are centred in the “banlieues”, the working/lower class suburbs characterized by cheap high rise apartments, unemployment and a high proportion of immigrants, especially people from North Africa (Algeria, Morocco and Tunisia). Drug trafficking is sometimes seen in these areas as a alternative or a way out of the miserable living conditions without prospect and is sometimes even stimulated by parents. This makes some people speak of the existence of an underground drug economy in the French suburbs.”

If drugs were legalized or if the police actually enforced the existing drug laws in the French ghettos the riots would have happened long ago. Unfortunately for dealers the legitamate French economy has been suffering under the burden of excessive taxation and regulation. If you watch the TV show Cops here in America you know that the rich often drive to the slums to get thier drugs.

The only way to appease the French poor is by overlooking one very lucrative, very free market. The French do have free markets, drugs in this case through a lack of enforcement. But they only allow free markets to the extent that it prevents rioting. Sarkozy not only called the rioters scum but threatened to cut off their livelihood. He effectively said “If you think you’re poor now just wait to see what happens if the riots continue.” The disaffected youth are calling his bluff.

Most people assume this is about religion. If you follow the money and listen to the police the facts don’t align with the opinions of the left or the right. An interesting quote from the LA Times

“A regional police intelligence chief here said small-time gangsters who have long dominated the nation’s housing projects are instigating the troubles to assert control over drug dealing turf.

Police also have seen indications in recent days that Islamic militants, another major force in slums with big Muslim populations, have played a role in inciting vandals, he said, but to a lesser extent and, they said, “not on the front lines.”

At the same time, other groups of Islamic fundamentalists have been active on the streets trying to restore peace.”

180 Cars were burned in France last night in the seventh day of rioting. Though the catalyst was the death of two boys the duration can only be explained by deeper problems with French society.

Socialists won’t admit that high taxes and stifling business regulation do anything to damage their economy. The majority of French see capitalism as a system which enriches a few at the expense of the impoverished working class. They can’t understand how a lack of wealth could be a problem in a socialist utopia so they ignore the elephant in the room and point the blame at the only other possible explanation, immigrants.

The 10% unemployment in France isn’t going to lead to a revolution any time soon because of the massive welfare state. The problem is that immigrants are the red herring for economic woes and so aren’t being hired. The unemployment rate is 20% in neighborhoods just miles outside of Paris where the riots are occuring. Part of the appeal of socialism is that you don’t have to be entirely responsible for your actions. If you don’t want to work the worst that can happen is that you get extended unemployment benefits for years and then a generous welfare check. If you’ve never been held accountable then it stands to reason that when things go wrong you aren’t going to take responsibility. I predict this gets a lot worse before it gets better.

I haven’t heard much noise about this yet but Microsoft has a new Beta site (how very Googly) at favorites.live.com which replicates a lot of Del.icio.us’ features though they prefer the term keyword instead of tag.

Over the last few days I’ve been writing about how Google could face a threat from a search engine based on user contributed data. Well, now Microsoft has access to that juicy data stored in the IE favorites via an import tool that’s actually exporting your data to Microsoft.

If Microsoft makes Internet Explorer 7 or 8 work like Flock does with Del.icio.us then they’ll have access to billions of tags in the form of favorites. Imagine IE automatically using Hotmail username and passwords for this service when IE loads. My guess is that they will use this data for two things: Enhancing MSN search results and targeted advertising. Favorites are a billion tiny goldmines that they have finally figured out how to take advantage of.

I’ve said it before and I’ll say it again. We need an open source version of Del.icio.us, maybe a fork of De.lirio.us, which would be hosted by a non-profit organization supported by donations. Jimmy Wales’ Wikimedia foundation servers might be a good home. There was a backlash against ad cookies because we want control of our own metadata. As long as there is an open ended End User License Agreement between us and our data there will be demand for an open system.