Money III: Liquidity Trap

If you have been following along with our Money and Money II posts, you know that we have been deconstructing the idea that money is a store of value, at least for any length of time. In fact, we would go so far as to say that if money itself becomes a long-term store of value, then the economy will be bad. One way this can happen is if the economy falls into the "liquidity trap."

The trap arises out of a widespread desire to hold onto one's money rather than spend it or even invest it. The value of money rises over time (that is, there is deflation) and the money in circulation goes down. The money supply may or may not dwindle, depending on whether the cash stuffed under mattresses is counted or not. Either way, however, economic activity goes down, aggregate pay goes down, and unemployment goes up.

The reasons for the desire to hold on to cash--what is, in effect, a decline in confidence--can be many things, but the reasons are related to expectations. If people expect that cash will be hard to get in the future, they will save it now.

Since people generally prefer cash to financial instruments in a liquidity trap, there is an effect on strategies with respect to debt. These strategies differ depending on one's economic strength relative to others. The rich will tend to pay off debts and lend less. (This is where the central bank role in the liquidity trap comes in. The central bank can add reserves to the banking system, but the rich are reluctant to lend and many are reluctant to borrow at all economic levels. The extra liquidity does not really help the economy.)

Some of the poor, being closer to the edge and needing to obtain a minimum amount of cash right now, might try to cut their own costs even more. Also they might try to work extra hours, take lower pay, work multiple jobs, and emulate the rich as well as they can by paying their debts. This is the so-called "race to the bottom," an attempt by workers to compete with one another, follow society's rules, and find out just how little a human being can live on. This is not a road to prosperity, though the rich will speak very well of such people. The rich will honor their determination, honesty, integrity, and dedication to hard work. The rich generally do not praise them for their intelligence, however.

On the other hand, other poor people might throw society's rules out and borrow as much as possible, figuring that it is better to have the money in hand now than to worry about how to pay off debts in the future. Naturally, lenders are not happy with this attitude and approach, so they fight them with as many social weapons as they can, including legal sanctions as far as possible. The rich punish them with poverty (that is, austerity), blame, and by socially marginalizing them. (In today's world, think of the Greeks, how they are treated and how they are spoken about.)

A liquidity trap therefore is generally an advantage for the rich. In particular because the government, which does want its people to be as successful and productive as they can be, cannot pull its people out of the trap using monetary policy and may not be able to use fiscal policy to do the job. (Because of politics and its own financial situation.) A stubborn ongoing liquidity trap is one reason why the Great Recession in the US has had such long-lasting effects.

Under the tosoc.org system, liquidity traps will not happen in the internal markets. That is, millions of people will not lose their jobs, their houses, and much of their savings simply because banks become reluctant to lend. Cash will not be allowed to become the preferred store of value in the internal markets. No one will have to be concerned where the money for their livelihoods--their basic needs--will come from.

Of course, if the rich want to create liquidity traps in their own markets, we would not want to stand in their way. Support tosoc.org.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (admin@tosoc.org)

Copyright © 2014 TheOtherSideOfCapitalism

Money II: Store of Value

Last week in our Money post we talked about the functional definitions for money. We made the argument that for our purposes, four of the five definitions are related to the value of money over time, barring some quibbling over the definition of money as a unit of account. Therefore it is reasonable to collapse all the definitions related to the future value of money into one: money as a store of value.

That naturally raises the question, is money a good store of value? Or, from a pragmatic viewpoint, does it make sense to save and store money as money for retirement? What are your chances of maintaining the purchasing power of your money that way for thirty or forty years? The answer is: almost zero.

Granted, as Robert Storm Peterson said (and apparently NOT initially Yogi Berra), "It's hard to make predictions--especially about the future." In any given period, money may actually gain purchasing power over time, more than maintaining its "value." However, given that the Fed tries to keep some inflation going all the time (about 2%), after a period of 30-something years, your first year of savings in money will only have half the purchasing power that it did in when it was earned.

Another danger to your pile of savings in the form of money is that there may be periods of enormous currency manipulation between now and the time you retire. In the US, for example, this was done during the Civil War. In the 1930's, the Roosevelt administration passed laws to keep gold out of the hands of US citizens. There is still debate whether the idea worked or not, but the idea was to encourage Americans to stop hoarding and start spending as a way to work their way out of the Great Depression.

Finally, something we mentioned in last week's post, saving money as money for retirement assumes that population demographics or other physical phenomena will not significantly change the prices in certain vital markets. For example, the price of food can become exorbitant if a true famine arises. We also pointed out that if the retiring Baby Boomer health care workers are not replaced, and the numbers of them not actually increased, then health care for retirees could also become exorbitantly expensive. Your cash savings may not be enough.

Therefore almost no one saves a significant amount of cash over long periods of time. Instead we invest. We buy things that we think have a better chance than cash does of maintaining value for our retirements. In a sense, therefore, the idea of money as a store of value is false. In many respects, money is just a medium of exchange that we use to purchase things that we prefer to cash over the long term. "Saving" is not about saving money for any length of time. "Saving" is about buying stores of value with our excess cash.

More next week.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (admin@tosoc.org)

Copyright © 2014 TheOtherSideOfCapitalism

Money

Thomas H. Greco Jr is another author who writes about multiple currencies, alternative currencies, and complementary currencies.  (We noted Bernard Lietaer's work last week.)  See Greco's 2009 book The End of Money and the Future of Civilization as well as his 2001 book Money: Understanding and Creating Alternatives to Legal Tender (with Karen Kerney and Vicki Robin). If you want a good explanation of "What is money?" read his Chapter 4 from the 2001 book Money for an explanation.  The title of Chapter 4 is in fact, What is Money?

Today we are particularly interested in the functions of money that Greco lists in his Chapter 4. As he says, these make up the functional definition of money. Here they are.  Money is:

1. a medium of exchange,
2. a standard of value,
3. a unit of account, 
4. a store of value, and
5. a standard of deferred payment.

Our readers could already guess that we think of currencies and the money representations of those currencies more in terms of the medium of exchange function than the other functions, especially if you have read our post Theory of Wealth.  However, let us think about some of the other functions here. Note that the wikipedia article on money lists "standard of value" and "standard of deferred payment" as being the same function.  "Standard of deferred payment" is further defined as the unit in which debts are denominated. This then bleeds over into the "unit of account" function.

We think the "standard of value/standard of deferred payment" function also bleeds over into the "store of value" function. Most money is designed to have value in the future as well as in the present. This property is inherent in a standard as well. The point of a standard is to maintain some characteristic or quality over time. It would be absurd to call something a standard if it changed frequently. Therefore if money is a "store of value" over time, then it can also serve as a "standard of value/standard of deferred payment" as well.

If money were not relatively good as a "standard of value", then the comparison of corporate performance from quarter to quarter would be quite difficult. What would the comparison of quarter to quarter results mean if the accounting unit for this quarter was significantly different from the one for last quarter?

The trouble with believing that money is a standard of value and store of value is that it has not really worked very well in times of technological advances, population changes, national emergencies, and etc. It may work pretty well from quarter to quarter, but what about longer periods of time?  For example and in particular, what does it mean to save money for retirement? If money were really a store of value over longer time periods, then it would be enough just to stuff cash in a mattress and keep it there until it was needed. That may have worked well in certain periods of history, but no one tries to do that today.

The problem with saving cash for retirement is inflation. Inflation means that it takes more cash in the future to pay for things than it does now. This happens even in ordinary conditions. Thus people today do not save for retirement by hoarding cash. Instead they buy investments that are expected to grow or otherwise mitigate the effects of inflation. That way, when they need cash to pay their bills, they can convert their investments to enough cash to accomplish that. So much for the idea of cash as a store of value for the long term.

Then there is inflation that occurs in extraordinary conditions, such as in time of war. We might have invested well enough to protect our retirements funds from ordinary inflation, but the requirements of war might make our calculations useless. Even investments might not be good enough.

Finally, there are population demographics. Health care costs are inflating at, say, 4 to 6 percent per year already, far faster than the 2 percent or so for the wider economy. That would be hard enough to save for, but consider also that the doctors in the Baby Boom generation are retiring in increasing numbers. If the supply of health care professionals is inevitably going to decline, then there will just not be enough of them. Even if we have invested well, we may be in an era of declining health care services that no reasonable amounts of retirement money can overcome.

We have run out of time today, so we must leave you with a teaser. Keep the weaknesses of money as a store of value in mind, and check back with us later.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (admin@tosoc.org)

Copyright © 2014 TheOtherSideOfCapitalism

Cooperative Currencies

Of course tosoc.org is not the only proponent of multiple currencies. Bernard Lietaer, Belgian civil engineer, economist, author, professor, and former hedge fund manager, has been writing about multiple cooperative currencies for over ten years. See his and Jacqui Dunne's 2013 book Rethinking Money: How New Currencies Turn Scarcity into Prosperity (BK Currents), for example. In it he lists many existing cooperative currencies and tells the stories of a select few. The major use of cooperative currencies seems to be to provide a medium of exchange when it is difficult to obtain ordinary currencies. That is, in economic downturns.

Lietaer's success stories do not surprise us. They are what we would expect since we would advise similar measures as those taken in the stories.

Similar measures, but not the same. In particular, we do not see in his analysis a need to firewall the rich away from the poor using exclusive currencies. The need appears to be present in several of his success stories, however, because several successful cooperative currencies were terminated by legal action to enforce the central bank's monopoly on currencies. There lies one weakness of cooperative currencies. It is relatively easy for the rich to outlaw them. Alternatively, the rich could simply buy them and manipulate them.

Thus for all the effort and thought that Mr Lietaer and his associates are putting into cooperative currencies, we doubt it will have any lasting effect. Exclusivity is also required in our currencies.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (admin@tosoc.org)

Copyright © 2014 TheOtherSideOfCapitalism

Monkey Trials

Science threatens religion not so much because it disproves religious belief, but because the output of the scientific method tends to bring scientists to consensus. For example, Satyendra Nath Bose and Albert Einstein collaborated on quantum statistics in the 1920's despite the fact that they were from very different cultures. They produced what is now called "Bose-Einstein statistics." The scientific method defines a way for thinkers to agree with one another no matter what their backgrounds. Scientific thinking converges. For example, despite a temporary defeat, the court of reality ultimately overturned the human court's decision in the original "Scopes Monkey Trial."

The output of religious thinking, on the other hand, seems to affect religious thinkers in the opposite way. Religious thinkers seem to look for ways to disagree with one another. As a result, the world is filled with different religions, denominations, sects, and splinter groups. One would think that if religious belief had any connection with an underlying reality, then the trend of religious thought would converge rather than diverge.

We bring this up in order to highlight the divergent nature of economic thinking. One result of the Great Recession was to paste a big "Epic Failure" sign on the backs of all our economists. After decades of study and effort, meetings and arguments, published reports and reviewed papers, none of them were able to predict a major, world-shaking economic event like the Great Recession in such a way as to convince most other economists of the danger.

Like religious thinkers, current economists cannot even agree on a way to agree with one another. The result is that we can find reputable economists who will take opposite sides on most any question. This allows politicians to pick the economic policies they want and then find economists to support them rather than use any rational basis for their decisions.

The point is not that we at tosoc.org think we have a truly scientific approach to economics that has the power to convince most other economists of the value of our proposals. The point is that after the Great Recession, current economics is no longer reputable. The Great Recession exposed the fact that devising economic policies today is, at best, a guessing game that anyone can play. Today's economics lost its trial in the court of reality. It is time to challenge conventional economic wisdom, and that is what we are doing at tosoc.org.

(Please note that once again, we are trying to shorten our posts so we can work on our book.)

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (admin@tosoc.org)

Copyright © 2014 TheOtherSideOfCapitalism

Demon Profit

We have all heard that money is the root of all evil, or perhaps that the love of money is the root of all evil. Some people equate profit with the love of money and therefore with evil. As a result, many of those who speak about "profit" and the "profit motive" load the word "profit" with negative connotations.

At tosoc.org we do not have feelings one way or the other about profit because one of our principles is that those who can produce more than they consume should do so. Or, if you prefer, we should all make more than we spend so that we can build up savings. Savings, which is profit in the accounting sense. See our post Theory of Wealth.

While we think that the word "profit" has an undeserved bad reputation, the rich do tend to increase their own profits at times when the poor are losing their savings. For example, hedge fund manager John Paulson is said to have earned, personally, almost $4 billion in 1987 by using credit default swaps to hedge against the US housing market. Mr Paulson and his investors were raking it in while the rest of us were suffering. Yet Mr Paulson and investors like him did nothing illegal or even overtly immoral as far as we know.

Even so, there is currently an economic ratchet effect in which the rich get richer in good times and bad times while the rest of us lose our savings in bad times. (See also our post Left for Dead.) Unstopped, the ultimate result of this trend will be that the rich will end up with almost everything and the rest of us will end up with almost nothing. Ever-greater income and wealth inequality is not sustainable. It is a harbinger of the breakdown of the social contract between the rich and poor in the US.

See also our posts The Capitalist Road To Serfdom, No Sauce for the Gander, The Guilty Innocents, and our very first post, The Other Side of Capitalism.

So what is the real problem here? Are profits good or evil? Should profit be our goal or not? The tosoc.org answer is that profit should be our goal, but only in the context of balanced competitive markets. Right now the markets are not as balanced or competitive as they should be. Mr Paulson and his investors made extraordinary profits only because he and other rich people were able to hedge against our home loans, while, in effect, the rest of us were not.

If we are to feel that our toil is really leading to a better society instead of being, as we wrote in another post, The Capitalist Road to Serfdom, then when we build up savings, they should not be so vulnerable and so easily destroyed by the worldwide financial shenanigans of the rich. But how can we do that when the rich make the markets and have direct access to our savings; our invested profits? We cannot.

Again, the only solution is to deny the rich direct access to our markets and thus to our invested profits. That is what tosoc.org's plan of multiple exclusive markets and currencies is all about. So yes, we want profits. We need to produce more than we consume so that we are not stuck in lives of mere subsistence, of bare survival. We need the extra resources so we can increase our capital and at the same time, build an ever-better, ever-wealthier society. But it is pointless to do that when the capital that we build up is so vulnerable to mistakes, thoughtlessness, or even ill-will on the part of the rich. Support tosoc.org.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (admin@tosoc.org)

Copyright © 2014 TheOtherSideOfCapitalism

Brutal on the Population

See the Wall Street Journal opinion piece Mi Amor, I Shrunk the Peso by Mary Anastasia O'Grady (February 2^nd, 2014). The article is about Argentina's devaluation and history of devaluations, but there are also notes from an interview with Irish Finance Minister Michael Noonan. Here is what caught our attention:

"Marking down the currency is the least-painful path for the state when it cannot meet its obligations. But as Mr. Noonan pointed out, it's brutal on the population. Devaluation reduces the purchasing power of the nation. Real wages and the real value of nest eggs belonging to ordinary people are cut from one day to the next. 

What is worse, Mr. Noonan observed, is that few countries go through a mega-devaluation only once. 'It becomes a habit.'"

We suspect that the rich in Argentina keep their wealth in commodities or in external financial instruments denominated in strong currencies. Or perhaps they own strong external currencies outright. Otherwise we do not see how they could remain rich in global terms. Owning the Argentine peso is clearly not the way to secure one's wealth.

To us this is yet another example of the rich using arbitrage to transfer our wealth to themselves. See for example our post Take from the Poor about how this is done. Based on what we see in Ms O'Grady's opinion piece, the rich in Argentina have been playing this game and "brutalizing" the Argentine population (to use Minister Noonan's word) for about two hundred years.

This means that the rich marginalize themselves. They "raise" themselves "above" local populations, becoming more citizens of the world than citizens of any particular nation. It is a side-effect of putting oneself in a position to take advantage of arbitrage.

Several points come out of this line of thought. First, if one is concerned about the stratification of society, it already exists. The rich think of themselves as being on a higher level. Therefore the issue is not so much how to prevent stratification but how to structure it in a reasonable way to prevent abuse.

Second, multiple worldwide currencies and markets already exist. The problem once again is how to structure them in reasonable ways to prevent abuses like the ongoing "brutalization" of the Argentine population.

Third, capitalism as it is now conceived will not fix itself. Capitalism is working as designed. We see in Ms O'Grady's article that the rich in Argentina have been taking advantage of that for a few hundred years.

One way to see the central problem is that the rich want to elevate themselves above the rest of us, but not so far that they cannot still control our economies for their own profit. Tosoc.org says that we should complete the separation by moving them into their own markets with their own currencies. Then we will be able to negotiate with the rich on a more equal basis and prevent abuses like the Great Recession and the devaluation in Argentina.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (admin@tosoc.org)

Copyright © 2014 TheOtherSideOfCapitalism

Truth and Reconciliation

Those of you who are managers may have been offended by our last two posts, Stupid Management Tricks and Ambition? Or All In?. If so, we want you to know that we wish you well. We just think that you wield too much power over your employees.

We know that some of you are wonderful managers who are beloved by your employees. Hey, can we come work for you? On the other hand, some of you are not wonderful managers.

If you are familiar with South Africa's Truth and Reconciliation Commission, you know that it was set up to deal with the effects of apartheid as part of the end of apartheid. We think it was a very wise approach because the purpose was not to identify and punish the guilty, but to bring the truth into the open. They recognized that trying to punish most everyone in an entire society guilty of discrimination, human rights violations, and violence was an impossible task, one in which the truth would get lost among all the lies. The attempt itself would become an open sore on the society, leading to many more years of violence, and give rise to witch hunts.

Instead, the Commission just asked for the truth. Those who testified could apply for amnesty and receive no punishment for their actions. Victims were identified and compensated. This approach rapidly led to peace and to the end of apartheid. Reconciliation was accomplished very quickly, in our view.

In the same spirit, it is not our purpose to criminalize managers or rich people. It is our purpose to get them to see what they do in a new light. Some of the things they must do, the things they would rather the public not know about, are no longer necessary.

For example, take the period of the Great Recession in the US. Some of you were managers in that period. Some of you knew about coming layoffs and concealed that information from your employees. In answer to their anxious questions, you outright lied to them. Perhaps you even painted a rosy picture of the future for them. After all, morale had to be maintained.

Then you laid off your employees. In tens, hundreds, even thousands. There you were, knowingly dumping them into a terrible job market, knowing that many of them would lose their homes and not be able to support their families. Perhaps their families would break up. No one we want to know would feel good about that.

You had to do it because you were ordered to do it. It was your job and your responsibility. They told you it had to be done. But if you are a decent human being, you did not like it and you wish it had not happened.

The trouble is that it was not necessary. These days most human suffering is caused by humans. For example, here is what John Maynard Keynes said at the beginning of the Great Depression:

"This is a nightmare, which will pass away with the morning. For the resources of nature and men's devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life ... and will soon learn to afford a standard higher still. We were not previously deceived. But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time — perhaps for a long time."

We generally agree with Keynes here, especially regarding our times and the Great Recession. We are now many generations off the farm and we are generally much better educated than people were in 1930. We all know the work that we have to do to keep everyone fed, clothed, sheltered, and in as good health as nature allows.

Despite that, we allowed our highest economic and political leaders to blunder (as Keynes said) in the control of the delicate machine. The competency and good will of our leadership was and is in question. How could the Great Recession happen? If it was not intentional, then why is the system so delicate? How is it that our highest leaders would allow digits on their balance sheets to lead to a huge economic mess and increased human suffering?

The tosoc.org explanation is that the natural result of capitalism is rich people, but rich people are not devoted to capitalism. They are devoted to keeping and increasing their riches. Once the rich become rich enough, Adam Smith's "invisible hand" suddenly becomes visible, and at that point, things are wide open. You can then pick your metaphor for how the rich destroy the system that made them. The heavy finger of the rich tilts the playing field in their favor—something that can only be expected. They just take advantage of their advantages, but they have a lot more advantages than we do. They change the game in their favor. They distort the markets in their favor. The rich cheat, if you will, although in general we do not think of it that way. See our post The Guilty Innocents.

It seems obvious to us, therefore, that the way to make the system more robust is to separate the rich markets from the poor markets. Make the competition balanced in every market. The rich can only destroy the markets in which they compete.

Naturally, splitting up markets and currencies is not a capitalist thing to do. It must be done by governments. Some might not like that, but we ask you. How much less capitalist would that be compared to what we do today? When governments borrow trillions (from the rich) to keep the private banks from collapsing?

Coming back to management and today's managers, we think it would be a lot less stressful for well-intentioned managers if laying people off meant just lost income, not also lost livelihoods, loss of homes, and possibly the breakup of families. The whole employer-employee relationship would be less tense than it is today. Especially during economic downturns, employees would never feel themselves under the almost life-or-death pressure to keep their jobs. Employers would not have to deal with those emotions.

For those of you managers who enjoy having an almost life-or-death whip hand over your employees, we do not have much use for you. We think you are bad managers. We are not out to punish you, but we want to take the whip out of your hand.

For those of you managers who are well-intentioned and sympathetic toward your employees, we want you to be able to exercise your leadership rather than a whip that you are uncomfortable using. We think that under our system, the employees of bad managers will migrate to you and your benign leadership. Ultimately bad managers will have no more employees and be driven out of the system, improving life for everyone.

Finally, managers would be able to both hire and fire faster and easier. We think that under the current system, the consequences (or costs) of firing someone is too severe for both the employee and the employer. This feeds back into the hiring process, where taking someone on must be weighed carefully against the possibility that you will have to let them go. If workers could change jobs faster without fear of personal financial destruction, they would find their best-fit employment more quickly. There should be major economic advantages to that for our entire system. Economists these days talk about the problem of "sticky wages" in economic downturns. Perhaps we have a solution to that for them here at tosoc.org.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (admin@tosoc.org)

Copyright © 2014 TheOtherSideOfCapitalism

Ambition? Or All In?

Last time we were pretty hard on managers (see Stupid Management Tricks). This time we will change our focus to the reasons why managers do what they do. We are not intentionally trying to be hard on managers again, though it may seem that way. We are saying that their behavior is understandable given the logic of their psychology and the imperative forces that drive them.

The primary characteristic of managers in general is personal ambition. The stronger your desire to get ahead, the better chance you have of getting ahead. Take for example Eike Batista, the Brazilian entrepreneur who built a multi-billion-dollar commodities empire over a few years starting in 2006. According to an article in the online Wall Street Journal (see Eike Batista's Empire), Mr Batista wants to be the world's richest man. Brian Gibson, "then a senior vice president with Ontario's Teacher Retirement Plan," is quoted as saying

"As an investor, you are looking for someone who is hungry. I didn't know if he was going to be the richest or not, and I didn't care."

We are speaking more of attitude than actual behavior here, but you have to be willing to give your "betters" the impression that you are "hungry" enough to do anything in order to get ahead. You must create the perception that on command, you would steal candy from babies. That you would steal candy from your own baby. If you are not willing to compromise your integrity in order to get ahead, then you will not likely rise very far in a management hierarchy.

Second, managers are joiners, joiners who plan to be invited into ever-more-exclusive socioeconomic strata, level by level. They are never fully in one stratum—never fully on one rung of the ladder—because no sooner do they reach a level than they begin reaching for the next one. The logic of "getting ahead in the world" requires it.

This means that they also have to leave any baggage behind that might tie them down to a lower level. Any inconvenient friendships, love relationships, or business relationships must be terminated quite deliberately. In part that is because they must be seen by the current occupants of the next-higher level as someone who can help them achieve their ambitions. You cannot do that if you have tied yourself down. This need to cut bonds and betray promises that are no longer useful is what we mean we say that managers are professionally faithless. There are those who are "in" and those who are "out," and managers must always work to be "in."

Finally, the more that managers invest in climbing the ladder, the longer they have been climbing, and the higher they climb, the more vulnerable they are to the threat of losing their places. Thus the process of climbing the ladder is generally also a process of increasing anxiety and fear. Not that managers can often display these things openly. Look for the anxiety and the fear in their underlings instead. They are very unusual managers who can control their own anger and keep from inflicting it on those who report to them. Think Donald Trump's famous line "You're fired!" from NBC's reality TV show, The Apprentice.

All this affects the rest of us because the workplace can be one long personality test to see if you have what it takes to become and succeed as a manager. How far will you go to be accepted? How glib are you and how well can you lie? How high a personal price are you willing to pay in your other commitments and your personal life to succeed at work? This gives rise to bragging and one-upmanship about how many hours one works every week. Another way to brag is to mope about how you had to miss your daughter's birthday party because of some urgent task at work. Of course, it is often hard to tell whether these claims are lies, especially in a wider culture that has the unspoken rule that if you accept my lies, I will accept yours.

The main point is this, however. If we train ourselves to accept lies unchallenged, how will we keep any hold on reality? If we train managers to be liars and betrayers, how will they manage us? If they are the ones who will lead our society, where will they lead us? Beyond Friedrich Hayek's chapter "Why the Worst Get on Top" in his book The Road to Serfdom, are we training those who are on their way to the top to do their worst?

The recent economic crisis tells us that indeed, they are doing their worst. The unwritten economic contract between workers and leaders in the US is broken, the one that says that economic security for the workers will improve as economic security for the rich and their minions improves. Instead we find that economic security for the workers is only a bit better than it was during the Great Depression. At the same time, the rich in comparison have almost perfect security, as do their favorite minions. The workers have less and less stake in the system. It will get harder and harder for them to support it if we let this trend go on.

However, no matter how badly we handle it, the management function is necessary and will not go away. Therefore we cannot solve the problems simply by getting rid of managers and expecting workers to self-organize. If not that, then what can we do?

First, we need to change our own attitudes. We are not "out" and the rich and their minions are not "in." We are all "in." We all deserve to be here and have jobs. Allowing ourselves to look down on those who cannot keep a job—feeling that we are "in" because we can keep a job—these are traps, lures by the rich to fool us into supporting their system against our own interests.

Another thing we can do is take the worst economic whips out of management hands. Yes, managers should have signficant control of worker incomes so they can use incentives, but they should not have any control of our livelihoods in the sense of necessities. Using the "carrot and stick" metaphor, managers should only be allowed to use carrots, not sticks. Then they would have to lead rather than rule. We need better leaders in this country.

Finally, we can put government back on the side of the people. US government income is controlled by the rich and their managers, not the workers. Therefore it is only natural that the US government favors the rich over the people. We can stop that by separating the rich out into their own markets and currencies. If the US government operates on an internal currency (or currencies) used only by the workers, then the interests of the government and the people will once again be aligned.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (admin@tosoc.org)

Copyright © 2014 TheOtherSideOfCapitalism

Stupid Management Tricks

We at tosoc.org have to work for a living, if that was not clear to you already. We are not rich and we get no income from the blog. (You may have noticed the complete lack of advertising on the blog so far.) We have very little time during the week to work on the blog because we have to keep our jobs. Therefore tosoc.org can only be a kind of weekend hobby at this point, but it is also much more than that to us. It is a life's work in progress.

We mention this because even though we are not managers and never have been, we have worked for many managers over the years. We have come to see management and its systems in a sense as the source of most of our economic problems. That is, our economic problems are the result of bad management and bad managers in systems that encourage these things. This applies to governments as well as to private businesses. After all, what is government if it is not a huge gang of managers, often bad ones?

The fact that our managers and management systems need an overhaul and upgrade is why we have criticized management before and will do so again today. It is also why a major part of the tosoc plan is to improve the relationship between management and the people. But that is not our focus today. Today we will just present some stupid management tricks.

In general we have found that managers are simply company or government hacks. Their reality is in the realm of perception, not physical reality, and they get their realities from their own managers. They just have to look good to their bosses; they do not have to be good. Since another part of their job is to manage people, they have a tendency to want to keep employees who know how to look good, too, but who are not necessarily good at what they do. The danger is that they and their fiefdoms of workers build a dream world that has no relation to physical reality. That works great until reality steps up and smacks the whole system in the face.

This happens in government more, and more seriously, than in private business because the government is rich enough to maintain its fantasies and delusions much longer than any private concern. The most famous recent example in the US is the implementation of the Affordable Care Act (the ACA, or "Obamacare"), which was a great fairy tale until it was shredded by contact with the real world. As another possible example, it seems likely that the implementation of Dodd-Frank will suffer a similar fate. We think that because the bill was created with all the serious consideration and forethought that went into the ACA. Dodd-Franks' likely failure will be quieter, however, because the public does not have much interest in that fairy tale.

Aside from departure from reality and surrendering one's critical faculties to one's boss, another important management skill is damage control and managing expectations. This is the process of turning lies and failure into a kind of truth and success. For example, we feel quite sure that despite the ACA disaster, bits of its intent will survive for a long time. Therefore, after a few years and after the hubbub dies down, suddenly we will see reports about the bits that survived, and we will be told what a great success the ACA was.

At a lower and more personal level, here are some examples of real-life stupid management tricks.

First up is "commitment." Managers always want workers to commit to deadlines, even when the deadlines do not make sense. As much as anything else, the purpose appears to be to give the manager the moral high ground when workers fail to meet the deadlines. In fact, sometimes it may be that managers intend for workers to fail. If they need to buff up the paperwork to justify getting rid of some personnel, "Failed to meet deadlines" makes good copy.

Another side of "commitment" is that people have lots of commitments—to their loved ones, friends, and communities. Managers therefore sometimes demand that workers commit to unreasonable deadlines as a sort of psychological test. Which workers are willing to break their personal commitments in order to meet their commitments to the company? Some managers feel that the best employees are the ones who will stiff their own children in order to climb the corporate ladder. It is not clear how widespread this kind of thing is, but it raises the questions whether this should be our vision of the future and whether we should make leaders out of those who will break promises to their loved ones, and encourage others to do the same, for the sake of an unfaithful corporation. This may be a major contributor to the number of bad managers that we have.

Second, there are kindergarten-style motivational tactics, like gold stars or candy. One of the most childish and offensive recognition programs in our experience had one of our managers dropping candy bars in selected workers' chairs early in the mornings. What did that really mean? If all the reward we got for above-average productivity and extra effort was a candy bar, then management must have thought we were overpaid anyway. It was the kind of "reward" prograrm that would increase resentment of workers toward management, not reduce it. Who can feel good about working extra hard only to get a candy bar in return?

Then there is polishing the management resume. One worker told us this story: A manager hired a worker for his group, but there was nothing for the worker to do. (Note that this was a high-tech position, not unionized.) When asked, the manager unexpectedly told the truth about his motivation. As the manager's twelfth employee, the manager had reached the "next level" so far as his resume was concerned. Having managed at least twelve workers, he could apply for the next higher-level management job somewhere else.

If some of you readers out there are saying to yourselves, "What's wrong with that? It was the smart thing to do," then perhaps you are part of the problem. The problem is that we may be selecting our leadership in this country from those who are faithless to their own managers and obligations. This may be another major contributor to the number of bad managers we have.

Finally, there is "ownership." Managers these days often exhort their employees to "own it" or "take ownership" or "act like you owned the company." For many workers this may just drive home the fact that we workers do not own anything of significance. Also, this could be interpreted as saying that the workers get to own all the problems but none of the wealth. We get nothing but our regular salaries in return for "owning" the problems of the company and resolving them. The real owners get a lot and they get to own everything, too.

And what are we supposed to say when we are asked to "take ownership" of some problem and resolve it? Because we need to keep our jobs, we cannot tell the truth and say "Look, I will help you and work hard to resolve this problem because that is my job, but please; I do not own anything here, especially not the problems." Instead we have to lie like a manager. We have to smile and say, "Sure! You can count on us to get it done!"

At the risk of being repetitious, when managers ask you to "take ownership" of a problem, they are really asking if you want to keep your job. If you say anything other than that you will be happy to take ownership, then you are on your way to unemployment. (Notice that they always want you to "own" some unpleasant problem. They never ask you to take joyful ownership of a pile of money.)

This has been just a smattering of stupid things that managers do, things that increase the unexpressed anger and resentment of the people. The danger is that this is a negative feedback loop, where the workers lose faith in management because of its lies and betrayals, and where, after having forced the workers to lie to them and fail them, after firing the workers who tell them truths they do not want to hear, management loses faith in the workers. At that point, in a poisoned atmosphere of mutual mistrust, there can be no real cooperation. Getting anything done will require the use of force in some form, if only to say "work or starve!" Our leaders may be taking us to just this kind of society.

One reason they might do that is that it is always easier to rule than to lead. It is easier to give orders than to negotiate and convince. It certainly makes life easier for the managers, especially for lazy and stupid ones. On the surface, ruling may also appear to be a more efficient and profitable way to run an economy. However, history shows that leaders are more effective in the long term than rulers, and that rulers tend to impoverish their economies ... if anyone cares about the truth and the long term anymore.

One very brief way to express tosoc.org's plans is to say that we want the people to take the actions necessary so that no manager can threaten anyone's livelihood. We should not allow our managers to control our basic livelihoods. That is too much power to put in professionally faithless hands.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (admin@tosoc.org)

Copyright © 2014 TheOtherSideOfCapitalism

Greed is

Greed is ...

• Universal?
• Evil?
• Natural?
• Good?
• Unnatural?
• Inevitable?
• Genetic?

Columnist Peggy Noonan has been on a bit of a tear recently about moral issues. See her Wall Street Journal column Our Selfish Public Servants from today. She is concerned about an apparently rising tide of selfishness on the part of our public servants that has ill effects on society. She closes by saying

"Someday history will write of our era, and to history the biggest scandal will be the thing we all accepted in our leaders, chronic and endemic selfishness. History will be hard on us for that."

OK, greed. Greed is bad. We know that. However, what is new here is that this is about government greed, not private greed. We think it is important for the people to realize that their government can be as greedy as any corporation, can cover up like any corporation, and can abuse the people like any corporation. See our previous post Relief for Manufacturers: Cambodia. Instead of working with the people and the manufacturers to raise garment workers' wages, the Cambodian government broke up the strike and restored the situation by ordering the workers to go back to work without any wage concessions.

There is a problem with the term "greed," however. It is just a pejorative label, not a measurable quantity. It is a "scarlet letter" that we pin on our enemies in the attempt to punish them socially. In truth, the difference between greed and need is not clear sometimes. Also, those with the ability to manage more resources should be allocated more resources. Are they greedy if they demand resources commensurate with their abilities?

This plays out differently in different systems. In socialist terms, just using the phrase "making a living" can evoke thoughts of "making money," "the profit motive," and "production for profit." Those are unacceptable ways of thinking and speaking in many socialist systems. Saying such things might even be against the law. Good socialists would not even think in terms of having to "make their livings." They are confident that heir needs will be taken care of by society. What good socialists should think about is how to contribute according to their abilities.

Even in egalitarian socialist societies, however, some have more ability to manage resources than others. Therefore persons with more ability will be given control of more resources. Also therefore they will live privileged lives compared to others, conditions commensurate with their contributions. This is necessary to keep morale high and support the continuation and quality of those contributions. Social stratification and hierarchy are natural and expected results even in supposedly egalitarian socialist societies.

The end result of stratification and hierarchy in socialist systems is of course the person who is supposedly the best resource manager of all. This person becomes the chief executive and chief administrative officer, and is of course the one who lives the most privileged life of all. This person directly and indirectly controls all of the society's resources. "The people" end up on the bottom again, and may live in conditions that are even worse than those that the worst capitalist system would impose on them.

Despite the fact that these individuals at the top of the socialist heaps control more of their societies' resources, with tighter control and less risk than any capitalist, it is difficult to apply the term "greedy" to them and make it stick. They do not own much as individuals, if anything, in a technical legal sense. They may not "make" any money at all in a technical legal sense. Thus they can argue that society has only temporarily assigned them so much power and privilege because they have shown that they are the best caretakers for their societies' resources and for their societies' visions of the future.

The sad fact is, however, that these persons live lives that are comparable not to any wealthy capitalists, but only to the kings and emperors that were supposedly relegated to the dustbin of history by social progress. They even find ways to pass their powers on to their sons and make their families hereditary rulers, as has been done already. For example, it has happened in what is called the Democratic People's Republic of Korea. Socialism in practice has come full circle and become what it claims that it hates.

The way tosoc.org sees it, these societies use "political currency" rather than money to carry out transactions at the higher levels. This has many advantages, the greatest of which perhaps is that the leaders are not accountable except to their own leaders, who will be reluctant to discipline lest they themselves be disciplined. Without ownership or money at the higher levels, the leaders cannot be punished for fraud, extortion, embezzlement, or other acts against individual ownership. They can just take what they want, something that leaders in capitalist societies must be wary of. How many politicians have been brought down in capitalist societies for example for misusing campaign funds? Many, but it will almost never happen in socialist societies. That is one reason why leaders tend to prefer socialism over capitalism. In a socialist sysem, one can rule. Under capitalism, one must lead, and leading is harder than ruling.

In any society, however, there are those who must be ruled and those who must be led. That is why there is inevitably a bit of socialism in capitalist systems and a bit of capitalism in socialist systems. Tosoc.org recognizes that reality and incorporates it in our suggestions. Instead of awkwardly bolting bits of socialism onto capitalism and creating a Frankenstein result that still has major problems, we want to avoid those problems by seamlessly integrating socialist elements into a capitalist superstructure.

Finally, about greed, our readers will find that we rarely use the term. We think we have shown that greed operates just as much in socialist systems as in capitalist systems, but also that the accusation only has real political impact in capitalist systems. To us that means that the term is politicized and biased by nature. That is, "greedy" is just an epithet without foundation in reality. Its use makes rational decisions more difficult, not easier. Generally we will not use the term because we find it a stumbling block to keeping things "real."

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (admin@tosoc.org)

Copyright © 2014 TheOtherSideOfCapitalism

Relief for Manufacturers: Cambodia

Headlines tell the tale. Here are three links to the latest updates of online Wall Street Journal articles by headline, from January 3^rd, 5^th, and 6^th:

Four Dead in Cambodia Garment Strike

Cambodia Reverts to Harsh Approach in Protest Crackdown

Cambodia's Garment Industry Resumes Production After Strike Ends

Strike, crackdown, and then everything returns to the way it was. Production resumes. Is this a happy or a sad tale? Here is a quote from the "Resumes Production" article:

"The fizzling of one of Cambodia's largest strikes in recent years brought relief for many garment manufacturers, who have complained of mounting financial losses because of missed shipments and lost orders."

Whew! All of us were concerned about the garment manufacturers and the stress they suffered from the strike. Now we can move on. The bodies have been buried.

Tosoc.org of course does not want to move on. This is another example how the poor are treated by the managers when the opportunity arises. Let us look at some of the economic details, also from the "Resumes Production" article:

"Garment manufacturing is Cambodia's biggest export business, supplying apparel to retailers mainly in the U.S. and European Union. The industry earned nearly $5.1 billion in the first 11 months of 2013, up 22% from the period in 2012, according to the Commerce Ministry. Cambodia has about 800 garment and footwear factories that employ about 600,000 workers, mostly women, labor officials say. 

"Manufacturers favor the country for its low-wage costs, but strikes are frequent because of what union leaders say is widespread discontent with meager salaries, poor working conditions and lax enforcement of labor laws."

This means that 600,000 workers generated about $5.6 billion in 2013 (estimated), or about $9,330 for each worker. Here is what they are paid (from the same article):

"The strike started as a protest against the government's offer last month to raise the industry minimum wage 19% to $95 a month, starting in April—well short of union demands for $160 a month. Workers then scorned a sweetened offer made by officials last week—a 25% increase to $100 a month, starting in February—and defied government orders to return to work by Jan 2."

Adjusting for the proposed increase, the workers are currently paid about $79.80 per month, or about $958 per year. On average, worker pay is about 10.3% of industry income in Cambodia.

Instead of complaining, the Cambodian government probably thinks that the workers should be grateful. Compare conditions in Cambodia to conditions in Bangladesh. In our tosoc update for 22 September, 2013, we noted a report about a Bangladesh garment workers strike (Tosoc Update 20130922). They were earning on average about $38 a month. That was less than 10% of industry earnings in Bangladesh.

Since then we see a report on libcom.org that the Bangladeshi workers have won a 77% increase in monthly pay, to about $68 a month (Striking Bangladeshi garment workers win a 77% pay rise). Good for them! That corresponds to about $816 per year. According to the report, the Bangladesh garment industry makes about $20 billion per year with 4 million workers, or about $5000 per worker. With the pay increase, Bangladesh workers will now take in about 16% of their industry income. Very good!

In comparison, Cambodian garment workers had been earning about twice the pay for about twice the production of the Bangladesh workers. The articles do not say so, but presumably the Cambodian workers or their representatives are fully aware of what has happened in Bangladesh. A comparable 77% pay increase for the Cambodian workers would raise their incomes from about $80 a month to about $142 a month. No wonder the Cambodians are striking.

Beyond Cambodia and Bangladesh, US workers also need to be paying attention. The international rich, meaning international corporations and their owners, are always looking for cheaper labor. In the apparel industry, US employment dropped more than 80% from 1990 to 2011 (BLS Spotlight on Statistics: Fashion). This kind of trend is not limited to the apparel industry. It could happen in any industry.

The issue is not so much that US workers will lose their jobs because corporations move their operations to other countries, though that happens. The issue is that our money managers (the rich) will invest our savings in other countries. Those investments will create jobs that will not be available to our children. This is a variation on the theme we explored in our post Take from the Poor. The difference is this: We will be investing in the growth of other countries and not in the growth of our own. We will be absentee worklords relative to the workers in other countries, getting income from the fruits of their labor. If that trend continues, the risk is that we will work less and less, becoming a rentier nation. One for which large parts of the rest of the world labors at relatively low wages to maintain our lifestyles. (This will be true also for all the "Western" countries," not just the US.)

There is already enough worldwide anger about American "Imperialism." At this point, that anger is still misplaced. If the trend continues, however, that anger will ultimately become justified. We and our children will cease to work to produce what we need. We will be in a strange and probably unsustainable position. Our incomes will be based on our investments in those who produce what we need. We will pay for their goods and services, but if their wages are only about 10% of industry earnings, then we might get back as much as 90% of what we pay through our investments. What a refund!

That all depends on their allowing it to happen, however, which seems unlikely. We need to be prepared for change.

Finally, for tosoc.org, there is the question how multiple exclusive currencies and markets would help this situation. The main problem appears to be government support for international manufacturing rather than their own people. The Cambodian government ordered the garment workers to go back to work by January 2^nd, according to the report. All we hear about is corporate greed. We do not hear enough about government greed. As we said before in Tosoc Update 20130922, government officials typically are not trying to keep up with their own people, they are trying to keep up with Western government officials. That means they have to squeeze their own people unmercifully.

That would change if Cambodian government officials were only allowed to earn and keep an internal currency, one that they cannot convert to a relatively hard external currency like the US dollar. Then Cambodian government officials would be in the same economic soup as their citizens. Their economic loyalties would no longer be to international corporations, but to their own people. Their wealth would be linked to their nations' wealth. Their focus would change from shooting their protestors to negotiating higher wages for their people. We cannot convert Cambodia from a poor nation to a wealthy nation overnight, but we may be able to turn it around and keep it from languishing in poverty. Who knows? We might even be able to help the US State of Mississippi. Support tosoc.org.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (admin@tosoc.org)

Copyright © 2014 TheOtherSideOfCapitalism

Left for Dead

See this quote from the Global View opinion piece Obama's Envy Problem by Bret Stephens in the 31 December 2013 edition of the Wall Street Journal:

"Besides which, so what [if the top fifth takes in over half the aggregate income]? In 1979 the mean household income of the bottom 20% was $4,006. By 2012, it was $11,490. That's an increase of 186%. For the middle class, the increase was 211%. For the top fifth it's 320%. The richer have outpaced the poorer in growing their incomes, just as runners will outpace joggers who will, in turn, outpace walkers. ... 

"As it is, to whom except the envious should it matter that the boss now makes a lot more, provided you, too, also make more? ..."

Sorry, Mr. Stephens. This is not Obama's envy problem, this is your math problem. You looked at a snapshot of relative incomes today and said they were fine, but you did not consider the trend. It is not so much where income inequality is now, it is where it is going. Even if relative incomes are acceptable now, they will become worse unless something stops the trend. Your "who cares?" attitude means that no one need come to you for a solution.

The top fifth already makes about seven times what the bottom fifth makes. If the trend continues, that will become ten times, then 100 times, then 1,000 times, and so on. Is that still OK? How about when the multiplier is a million or a billion? And what is there in capitalist theory to stop the trend? Nothing. That is why it is important. It may not matter very much if our bosses makes seven times what we do, Mr. Stephens, but it will if they make a million times what we do. The whole economic system will break down. We will stop being a capitalist democracy and become a plutocracy.

Tosoc.org has a solution for this problem. The underlying issue is that, using Mr. Stephens' metaphor, we compel the walkers and joggers to compete for their lives against the runners. Then capitalism encourages the runners to leave everyone else for dead. So much for the idea that letting everyone work for their own selfish ends is good for society. That principle works well in situations where it possibly can work, but at some level of income inequality, it does not work at all.

In fact it is exploitative, oppressive, and cruel to force people to compete for their lives when they cannot win. That has been tosoc.org's major point all along. Walkers should only have to compete against other walkers and joggers only against other joggers. Sure, let the runners take the biggest prizes, but do not let them take all the prizes.

As it stands now, the system does not even recognize that some people are life's walkers and others are life's joggers. The government tries to fix this perverse nature of the system by taxing away some of the runners' prizes and giving them to the others. However, we think it would be even better to have a system that is not perverse by nature, but is designed to work properly in the first place.

On the other side of capitalism, therefore, the government would set up different competitions and apportion the prizes between them. There would be a competition for walkers, a different one for joggers, and yet another one for runners. It would not be possible for runners to win all the races. All the competitions would be, for lack of a better word, competitive. That way all types of competitors could survive and no one would be left for dead. Support tosoc.org.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (admin@tosoc.org)

Copyright © 2014 TheOtherSideOfCapitalism