The Birthday Gift, The Invisible Hand, And Molding Nature

“The prudent law of investment is you’re never supposed to make a complete decision, no or yes. It’s always a marginal one...” — James Grant

It has been over a month since our last hit. What happened to us you may be wondering.. We don't know where to start, dear reader. A lot has happened in the past month, it made us believe 24 hours isn't in enough in a day. First we received a package in the mail welcoming us to the university, we were stunned, then few days before our birthday our girlfriend whom we have spent half a decade with, gave us a gift. It wasn't in a gift wrapped paper as you may have expected, she told us, "we are done, i don't love you no more". We felt the electric shocks, then we checked the social networks, and saw her with what we suspect to be her new lover. As you can imagine dear reader, we still haven't relocated our heart, finally we figured we have emotions as well. Then after came a call that shocked us again. See dear reader for the past five years we have been working on project x, we gave up our life for it, we delayed pleasure, university, family, you name it, we lost weight, but finally we came to a conclusion. We have worked the in and the outs, then last week we received a call, suggesting us to change our theory into practice, and assured us no matter how complicated our formulas are, it will be quantified and coded as a software. At this time we were confused, we were sad, and so happy at the same time. Finally what was once a dream, is becoming our reality. As you can imagine we are heading to the university, come the new year. The software engineers from Dallas, Texas, tell us they are developing neural network for other clients, which is some sort of artificial intelligence that predicts the financial markets.We aren't declaring victory yet, but its a major milestone in our life. We don't know where this is taking us dear reader, but we know now not even the sky is the limit. So far we also learned our readers belong as far as in Australia, India, Brazil, basically each continent with the exception of the Arctic and Antarctica, we doubt they have a set of TV there. As always we are hoping this can pass as some sort of excuse, forgive us dear reader but we don't know what to feel. Happy or sad? Or a combination of both? So far we are down one point, and up three. Our birthday present wasn't what we expected it to be, but then nothing in life comes as you expect it to be. Maybe you the dear reader can help us, gives us some type of advice to understand our state of emotions. But our beat is politics or money, why bother with what happens in our backyard. We were asked our opinion on the following matter, few weeks ago.. and that's what we wanted to share today.

·         How efficient and effective is this system
·         To what extent is the system setup as a competition between the rich and poor
·         Should the winners be helping out the losers

Our earth compare to other planets seem to be a better place for humans and other creatures of nature. Despite being better, planet earth goes through turbulence's  such as hurricanes, earth quakes, tsunamis, climate change etc. It’s a self-correcting system; it creates, and destroys some. And yet, we claim earth to be our safe home. It took earth billions of years to figure out the troubles before becoming a much rather place to sustain life. Man might have 200k years’ worth of experience here on earth. Even so time to time earth destructs, and recreates, and there seems to be no regulator, that’s trying to stop nature’s course. How efficient is earth one may wonder?

We humans are as well nature’s gift, what separates us from other creatures, is the fact that we can say, “I think, therefore I am”.  If you think then you have a taught, and since every taught of every human being is different, is it safe to say that a single form of entity can control the needs and the wants of everyone?
Man for the most part of his history, didn't necessarily need an economic system. He hunted and gathered for his survival, used stone as a tool, then copper, and later iron. Each time he advanced technologically, he increased his odds of surviving, which also gave him the incentive to multiply his seeds. It wasn't until the industrial revolution man figured the use of energy, in which the history of the world changed radically. Living standards increased income of the masses shot up, and population growth exploded. At this point man understood his food can be grown by a farmer, his protein needs by the local butcher, and other goods and services by complete strangers trying to satisfy their greed.

Society became a more complex playground, and man began to ask, how do we provide the needs and the wants? How do we produce, to whom, what, and where? To answer these questions, two moral philosophers offered their opinion. Adam Smith and Karl Marx, both men wrote a book, the former suggesting, “The invisible hand”, while the latter argued, “by molding nature in desired ways”.

What is the invisible hand? According to Adam Smith, it is the unintended action of the self that brings the benefit to the mass.  In The Theory of Moral Sentiments (1759) in Part IV, Chapter 1, where he describes a selfish landlord as being led by an invisible hand to distribute his harvest to those who work for him: "The proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his brethren, in imagination consumes himself the whole harvest. Yet the capacity of his stomach bears no proportion to the immensity of his desires  the rest he will be obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, among those who provide and keep in order all the different baubles and trinkets which are employed in the economy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice. The rich are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society.” On the other hand Karl Marx wondered, if a single entity can control and mold nature so that we can achieve paradise on earth. In this case a government would act as a single entity, to decide what each member of society wants and needs are? Even if it is a rhetorical question, one can ask, how can a single entity read every single persons mind?

The Soviet Union is well known for embracing Marx’s ideas. The state acting as a single entity became the brain of society, by trying to mold nature, and suppressing the will of each individual thinking capability. In the Theory of Human Nature Marx assumes “that humans are capable of making or shaping their own nature to some extent”.  Therefore the state took over the means of production and began centralized planning to achieve the greater good. Comparatively the United States adopted the principles of Smiths invisible hand. In which self-thoughts generated from one being to satisfy his greed, leads to unintended benefits for society in general. So far ever since the industrial revolution, the world has tested both men’s theory in practice. A common principle in both theories is that not one is a perfect system to answer our wants and needs. While Smiths idea suggest capitalism to be a creative destruction process just like mother nature, Marx’s theory claim to bring equality by force against the will of nature. What we have today is a proof of Smiths free market principle to be much better off, than Marx’s control experiment. Earth for example destroys, and then creates, we are all grateful for the creative side of nature, but not the destruction. Same goes for the free market economy, whenever inefficiency or there is a waste in the system, it destroys the bad apples, in order to create fresh ones. Which means the invisible hand adjusts accordingly to the needs and wants of newly adjusted thoughts of society. History tells us any attempt to control this process will end badly, and it’s the reason the Soviet Union collapsed. Therefore it won’t be a sin to conclude capitalism to be more efficient and effective than any other economic system ever tried.

Since the Great depression, which was the destruction period for capitalism, the role of government in the economy has been increasing. English economist John Maynard Keynes sought to explain why depressions occurred and what could be done to prevent them.  Simply put, he thought government should use its massive financial power (taxing and spending) as a sort to stabilize the economy. Depressions, then, should be attacked with increased government spending at the bottom of the income pyramid.  Keynesian economists call this "counter-cyclical demand management," believing that the government's massive financial impact can be used as a counterweight to current market forces. In the Book of Genesis, Pharaoh had a dream. In it, he was standing by the river. Out came 7 fat cattle. Then, 7 lean cattle came up out of the river and ate the fat cattle. A similar dream involved ears of corn, with the good ones devoured by the thin ears. Pharaoh was troubled. His dream interpreters were stumped. So, they sent for the Hebrew man who was said to be good at this sort of thing — Joseph. Pharaoh described what had happened in his dreams. Without missing a beat, Joseph told him what they meant. The 7 fat cattle and 7 fat ears of corn represented years of plenty with bountiful harvests. The 7 lean cattle and thin ears of corn represented years of famine. Joseph wasn't asked his opinion, but he gave his advice anyway: Pharaoh should put into place an activist, counter-cyclical economic policy. He should tax 20% of the output during the fat years and then he would be ready with some grain to sell when the famine came. Genesis reports what happened next: the seven years of plenty ended and famine struck, and when Egypt was famished, Joseph opened the storehouses, and sold food to the Egyptians. People from all countries came to Egypt to buy grain, because the famine struck all the earth. There is no need to argue with the Biblical account. Besides, it sounds all too likely.

Franklin Roosevelt took Keynes advice and called it the new deal, initiating many programs to fight the depression. Unlike the pharaoh that saved in the good times, modern governments do not run surpluses. To comprehend what it means, when we say government role has increased, we have to understand, how economic activity is measured. Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period. GDP is calculated in the following format. GDP= Private consumption + Investments+ Government spending+ (exports-imports). As for example In the wake of the financial crisis of 2008, The GDP of United States fell dramatically, to counter this decline in private consumption, investments, export, and, import, the share of government spending rose substantially. Soon after the administration of Barack Obama claimed economic growth, but it was a fallacy. The United States government was spending more money in unproductive places like sending unemployment checks, feeding 47 million hungry souls that can’t feed themselves and a trillion dollar or so is allocated for empire building thru the military industrial complex. And also the government was bailing out companies the free market found to be weak and unnecessary. While everything was crumbling in the GDP formula, government spending went up, and according to the government that's growth. From the close of WWII until 2007 each downturn in the economy was met with more and easier credit, leading people and the government to borrow more and more money. 

The ‘neo-Keynesian’ economists argue government may be deeply in debt already, but it can go further into debt during the lean years, in order to offset the contraction in the private sector. An investment brings a revenue stream a result that justifies and pays for the investment. With a little luck, the investor recovers enough money to pay back the loan with interest and ends up with a little bit extra. That little bit extra is real ‘growth’ new wealth that didn't exist before. But there is no revenue stream coming from Social Security payments, fighter jets, the latest fashions, or other consumer items. The money is spent consumed keep up this borrowing and spending at some point it will be unable to continue. The suffering that comes to a market is known as a ‘correction.’ Sharp, dramatic corrections are called ‘crashes.’ In an economy, it is called a ‘‘recession.’ Severe cases are called ‘depressions.

The bigger the roles of government gets the wider the gap between the haves and have not’s get. In order for the government to do what it feels good or counter economic down turns, resources have to be extracted from the productive part of society. This usually happens in the form of taxing or borrowing, which means those funds that could be available for the private sector to generate wealth are confiscated and redistributed to the public by the government. What in reality is happening is a single entity trying to dictate the outcome of society. While the have not’s receive food stamps, and other similar transfers, the top class gets a subsidy or a bailout. This action by the government creates, “entitlement mentality”, in which societies morals for self-responsibility deteriorates.

As the above charts indicates citizen’s personal savings have been going down for the past 30 years, a contrarian indicator of entitlement mentality. So far the rich seems to be the beneficiary of the government’s untended action.  Widening the gap between the have and the have not’s.  To understand up to what extent the system is set up as a competition between the two classes, it’s important what the role of government should be in a society.

Imagine a world without traffic lights, would you feel safe or secure to drive in that environment? Or imagine a world where there is traffic lights, but you get rewarded for skipping red lights. Our modern government is setup where bad behavior is either encouraged or rewarded. If a corporation or a business makes bad decision, it shouldn't be rewarded by a subsidy or a bailout, if it is meant to die, let it be. The government’s role in society should be just like traffic lights, where everyone follows the rules, but if one violates the law, it should accept the consequences. If the owners of BMW’s, Mercedes Benz, Ferraris, and the like are being rewarded for skipping red lights, it automatically makes it unfair competition for the Honda owners. To date the United States government has borrowed $16 trillion, of which $5 trillion was borrowed in the past four years alone. Net result so far has been the growing gap between the rich and the poor. Instead what happened is the price of gold relative to the dollar went up in prices, as the state expanded its balance sheet to solve society’s ill.

 “Great empires, such as the Roman and British, were extractive,” economist Paul Craig Roberts observes. “The empires succeeded, because the value of the resources and wealth extracted from conquered lands exceeded the value of conquest and governance.”  But unlike empires of the past, the American Empire has a perverse logic all its own. The results from this turn of phrase are less than desirable. Again Roberts: “Washington’s empire extracts resources from the American people for the benefit of the few powerful interest groups that rule America. The military-security complex, Wall Street, agribusiness and the Israel lobby use the government to extract resources from Americans to serve their profits and power. The US Constitution has been extracted in the interests of the Security State, and Americans’ incomes have been redirected to the pockets of the 1%. “That is how the American Empire functions,” concludes Roberts. Instead of plundering foreign resources to finance it, the American Empire is always looking to inflate the next financial bubble. Each of these serial bubbles has the effect of “extracting” wealth from the citizens by drawing both savings and credit into overly inflated asset classes that then implode. As the bubbles inflate, robust tax revenues flow to the federal government. As the bubbles implode, tax-payer dollars flow to the connected Wall Street elite. Thus, over time, savings pass from the wallets of citizens to the pockets of scoundrels in Washington and on Wall Street. Thus as in the past, when the Roman Empire began its decline, the first symptom was its currency.  Each consecutive emperor devalued the content of the currency, until it became worthless. If history can be a guide, it now becomes the question of when will the American empire collapse and leave no resources to compete for.

We all agree that the winners in society should help the losers. Most often what we don’t agree is on how the winners should help. If history can be a lesson worthy of learning, then we should all agree to leave the government out of the equation. If we let nature take her course, the best alternative we might have is ourselves. In which we all accept personal responsibility for the good and bad. There will be a period of pain, as well pleasure. After accepting this fact, we then can acknowledge we can help ourselves.

Regards,
Eskinder Haile