True Wealth (h/t to Willis)

True Wealth by Willis Eschenbach

Here’s the Amazon review of “How Rich Countries Got Rich … And Why Poor Countries Stay Poor” by Erik Reinert to which Willis refers:

To Become a Rich Country: Industrialization Policy First, Free Trade Second, November 12, 2007

By

Serge J. Van Steenkiste

This review is from: How Rich Countries Got Rich … and Why Poor Countries Stay Poor (Hardcover)

Erik Reinert masterfully uses experienced-based economics to demonstrate how rich countries got rich. Economic growth and welfare in rich countries originated not in unrestrained international free trade, but in conscious and deliberate industrialization policy that progressively shaped a particular form of economic structure (pp. xx, xxiv, 9-10, 47-48, 65, 79-83, 88, 98-100, 115-20, 177, 198, 246-49, 288-89).

Reinert’s greatest merit is to clearly show how economic development really works (pp. 39, 52, 305-08):

1) A country first industrializes behind a wall of tariffs, direct subsidies, and/or patents and is then slowly and systematically integrated economically with nations at the same level of development (pp. 17, 22-24, 56, 84, 88, 134, 171, 210, 235, 268-69, 273). The United States followed the example of England to industrialize behind a protectionist wall for about 150 years based on Adam Smith’s Wealth of Nations (pp. 23-25, 31, 58, 212). The Marshall Plan to reindustrialize Europe after WWII was built on the same logic (pp. 63, 89-90, 179-81, 241, 265-66).

Countries already wealthy need very different economic policies from those of countries still poor (p. 81). An aspiring poor country needs to tax “bad” trade, i.e., exports of raw materials (read agricultural or mining products) and imports of industrial products (pp. 17, 21, 62, 78). Perfect or commodity competition is for the poor, resulting in price-driven diminishing returns, no industrialization, and immigration to the rich world (pp. 8, 18, 62, 71, 133, 149-201, 245, 280-81). Unlike development economics, palliative economics do not radically change the productive structures of poor countries but instead focus on easing the pains of economic misery (pp. 63, 179, 211, 239-70, 282, 296-97).

Paradoxically, being poor in natural resources is one of the keys to becoming rich (pp. 7, 77). A poor country has to encourage “good” trade, i.e., imports of raw products and exports of industrial products. The existence of an (inefficient) manufacturing sector establishes a national wage level which prevents countries from moving too far into diminishing returns (pp. 109, 124, 183, 251, 265, 295). Reinert observes that “good” trade also results from the export of industrial goods in exchange for other industrial goods (p. 89).

That initial protection is essential to achieve increasing returns and to access new technologies (p. 67). Once these goals are achieved, further protectionism is counterproductive. Reinert contrasts the “good” protectionism of East Asia with the “bad” protectionism of Latin America (pp. 224, 285, 311-12). Solidly industrialized countries require bigger and more international markets to further develop and prosper (p. 81).

The timing of the opening up of an economy to international competition is therefore critical. Opening up too late undermines growth (p. 205). In contrast, opening up prematurely will result in deindustrialization, falling wages, and increasing social problems (p. 252). Mongolia and Peru are two examples that come to mind (pp. 110, 164, 173-79, 251-52). That insight about the timing of free trade is absent in the Washington Consensus as applied to most of the developing world (pp. 19, 55, 68-69, 81, 84, 107, 204, 216-37, 244, 278, 295).

2) The preconditions for wealth, democracy, and political freedom are diversified manufacturing and knowledge-intensive services subject to increasing returns (pp. 268-69). In some economic activities (read manufacturing and advanced services), costs fall as the volume of production increases (pp. 36, 38, 108-09).

David Ricardo’s theory of comparative advantage in international trade relies on a number of simplistic, abstract assumptions that too often lock poor countries into specializing in being poor (pp. 15, 23, 42, 59, 75, 106, 277, 301-04, 309-10). One of the key assumptions is that there are no qualitative differences between economic activities. If left alone, the market will even out the differences between say, Microsoft in the U.S. and goat-herders in Mongolia (p. 177). Ricardo’s theory is also built on the rigid assumption that there can be no change in specialization, which unsurprisingly results in factor-price polarization (pp. 19, 117, 213-14).

3) Economic wealth results from synergies, i.e., people of many different trades and professions sharing a community (pp. 73, 93-95, 102, 136, 268-69, 275). The diversity of economic activities based on the extent of division of labor makes it possible for new knowledge to be transferred from one sector to the other (pp. 94-95, 256-63, 276). Ricardo’s theory completely ignores synergies (p. 214).

Reinert clearly explains to his audience that this path for a country to join the club of rich countries is much more difficult today than in the past for the following reasons (pp. 290, 292-93):

1) Information Technology: Unlike process innovations, product innovation tends to create imperfect competition and higher wages. For example, at Google, search technology as a product innovation results in high wages and high profits. When the same technology is employed in say, the hotel and airline industries, the results are falling margins for the travel industry and lower wages for many persons employed in that sector of activity (pp. 188, 229).

2) Intellectual Property: The increasing percentage of copyrighted, trademarked, and patented products widens the gap between rich and poor countries (pp. 111-14). For example, the pharmaceutical industry based in rich countries works hard to legally protect the output of its substantial investment in research and development.

3) Workers Distribution: There is a transition from single-plant economies of scale towards multi-location economies of scope. For example, the integrated American automakers are evolving toward modular architectures for their mainstream models to compete on speed and flexibility.

4) Workforce Mix: Manufacturing increasingly gets automated while services occupy an increasing percentage of the total workforce.

5) Workers Substitution: Service workers are often more easily substituted than specialized industrial workers, resulting in diminished workers’ bargaining power.

6) Employers Fragmentation: Decentralized franchising instead of centralized ownership also reduces workers’ power at the negotiation table.

To summarize, Reinert recommends that poor countries study the policies of those who created American and European prosperity, and ignore the advice of their forgetful successors (pp. xxix, 13). “Do not do as the Americans tell you to do, do as the Americans did,” concludes Reinert (pp. 23, 168).

Our Ignorance is Breathtaking – We Should be Humble

Big Picture News, Informed Analysis

We humans consistently miss the big picture. The world is improving dramatically, but our brains are addicted to worry and fear.

Last week’s edition of Nature includes a highly readable article about Swedish global health professor, Hans Rosling. He makes fantastic videos that help us see the world more clearly. (I’ve written about some of them here and here.)

Embedded in that Nature article is a remarkable TED talk, filmed in Berlin two years ago. The first 10 minutes are eye-popping.

Using multiple choice questions, Rosling demonstrates that most of us are wildly misinformed about big picture trends. Since each multiple choice question has three possible answers, a chimp choosing at random would get the correct answer 33% of the time. But humans routinely score worse than the chimp.

Rosling begins by talking about those who perish due to natural disasters. Over the past century, he asks, has the…

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The President of What?

Skating Under The Ice

The newly-elected Negotiator-In-Chief, Donald Trump, is likely to name Rex Tillerson, the CEO of Exxon, as the Secretary of State. True to long-standing tradition, his own tradition that is, Trump tweeted this evening that he’ll release the name of the nominee … tomorrow morning. Man knows how to use Twitter to build suspense … plus he loves using Twitter to beat the media to the news. Given how they’ve treated him, I can understand that.

Apparently, the choice of Tillerson  is making some people’s heads explode. They complain that Tllerson has no government or diplomatic experience of any kind. They say that we need a diplomat or a politician for Secretary of State, someone with some experience in the field.

Me, I think it is a brilliant choice. I see it differently because I’m a businessman, and because I’ve worked in the oil industry, in distribution. The thing people don’t understand about…

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Rolling Back Environmental Progress?

PA Pundits International

Having achieved major goals, US should refocus EPA and other environmental agencies

By Paul Driessen ~

Donald Trump plans to “roll back progress” on climate change, energy and the environment, activists, regulators and their media allies assert. The claim depends on one’s definition of “progress.”

These interest groups define “progress” as ever-expanding laws, regulations, bureaucracies and power, to bring air and water emissions of every description down to zero, to prevent diseases that they attribute to manmade pollutants and forestall “dangerous manmade climate change.” Achieving those goals requires controlling nearly every facet of our economy, industries, lives, livelihoods and living standards.

If we are talking about halting and reversing this unbridled federal control, President-Elect Trump has promised to roll “progress” back – and not a moment too soon, if we are to rejuvenate our economy.

Federal land, resource and environmental agencies have unleashed tsunamis of regulations in recent years, and…

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Pipeline Facts vs. Fears

Science Matters

This week Canadian PM Justin Trudeau announced federal approval for 2 pipeline projects:  Trans Mountain and Line 3 expansions.  From a press report (here):

Kinder Morgan’s Trans Mountain expansion has become a lightning rod for climate protests from coast to coast, with opponents from among Trudeau’s own caucus of Liberal MPs and his political ally, Vancouver Mayor Gregor Robertson.

Climate campaigners and indigenous groups immediately attacked the government decision as a betrayal, while B.C. Environment Minister Mary Polak issued an anodyne statement noting the province’s own environmental assessment of Trans Mountain continues.

The fight overshadowed quieter deliberations about Enbridge’s proposed replacement of Line 3, a half-century-old pipeline from Alberta to the United States that Trudeau approved Tuesday, effectively doubling its current working capacity.

Between the Trans Mountain and Line 3 expansions, the Liberals have approved the export of almost a million additional barrels of oil per day —…

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The Great Thanksgiving Hoax

The Great Thanksgiving Hoax

11/27/2014Richard J. Maybury

Each year at this time, schoolchildren all over America are taught the official Thanksgiving story, and newspapers, radio, TV, and magazines devote vast amounts of time and space to it. It is all very colorful and fascinating.

It is also very deceiving. This official story is nothing like what really happened. It is a fairy tale, a whitewashed and sanitized collection of half-truths which divert attention away from Thanksgiving’s real meaning.

The official story has the Pilgrims boarding the Mayflower, coming to America, and establishing the Plymouth colony in the winter of 1620–21. This first winter is hard, and half the colonists die. But the survivors are hard working and tenacious, and they learn new farming techniques from the Indians. The harvest of 1621 is bountiful. The pilgrims hold a celebration, and give thanks to God. They are grateful for the wonderful new abundant land He has given them.

The official story then has the Pilgrims living more or less happily ever after, each year repeating the first Thanksgiving. Other early colonies also have hard times at first, but they soon prosper and adopt the annual tradition of giving thanks for this prosperous new land called America.

The problem with this official story is that the harvest of 1621 was not bountiful, nor were the colonists hard-working or tenacious. 1621 was a famine year and many of the colonists were lazy thieves.

In his History of Plymouth Plantation, the governor of the colony, William Bradford, reported that the colonists went hungry for years because they refused to work in the field. They preferred instead to steal food. He says the colony was riddled with “corruption,” and with “confusion and discontent.” The crops were small because “much was stolen both by night and day, before it became scarce eatable.”

In the harvest feasts of 1621 and 1622, “all had their hungry bellies filled,” but only briefly. The prevailing condition during those years was not the abundance the official story claims, it was famine and death. The first “Thanksgiving” was not so much a celebration as it was the last meal of condemned men.

But in subsequent years something changes. The harvest of 1623 was different. Suddenly, “instead of famine now God gave them plenty,” Bradford wrote, “and the face of things was changed, to the rejoicing of the hearts of many, for which they blessed God.” Thereafter, he wrote, “any general want or famine hath not been amongst them since to this day.” In fact, in 1624, so much food was produced that the colonists were able to begin exporting corn.

What happened? After the poor harvest of 1622, writes Bradford, “they began to think how they might raise as much corn as they could, and obtain a better crop.” They began to question their form of economic organization.

This had required that “all profits & benefits that are got by trade, traffic, trucking, working, fishing, or any other means” were to be placed in the common stock of the colony, and that, “all such persons as are of this colony, are to have their meat, drink, apparel, and all provisions out of the common stock.” A person was to put into the common stock all he could, and take only what he needed.

This “from each according to his ability, to each according to his need” was an early form of socialism, and it is why the Pilgrims were starving. Bradford writes that “young men that were most able and fit for labor and service” complained about being forced to “spend their time and strength to work for other men’s wives and children.” Also, “the strong, or man of parts, had no more in division of victuals and clothes, than he that was weak.” So the young and strong refused to work and the total amount of food produced was never adequate.

To rectify this situation, in 1623 Bradford abolished socialism. He gave each household a parcel of land and told them they could keep what they produced, or trade it away as they saw fit. In other words, he replaced socialism with a free market, and that was the end of the famines.

Many early groups of colonists set up socialist states, all with the same terrible results. At Jamestown, established in 1607, out of every shipload of settlers that arrived, less than half would survive their first twelve months in America. Most of the work was being done by only one-fifth of the men, the other four-fifths choosing to be parasites. In the winter of 1609–10, called “The Starving Time,” the population fell from five-hundred to sixty. Then the Jamestown colony was converted to a free market, and the results were every bit as dramatic as those at Plymouth. In 1614 Colony Secretary Ralph Hamor wrote that after the switch there was “plenty of food, which every man by his own industry may easily and doth procure.” He said that when the socialist system had prevailed, “we reaped not so much corn from the labors of thirty men as three men have done for themselves now.”

Before these free markets were established, the colonists had nothing for which to be thankful. They were in the same situation as Ethiopians are today, and for the same reasons. But after free markets were established, the resulting abundance was so dramatic that annual Thanksgiving celebrations became common throughout the colonies, and in 1863 Thanksgiving became a national holiday.

Thus, the real meaning of Thanksgiving, deleted from the official story, is: Socialism does not work; the one and only source of abundance is free markets, and we thank God we live in a country where we can have them.

Half Of The United States Lives In These Counties

http://www.businessinsider.com/half-of-the-united-states-lives-in-these-counties-2013-9

Why The 2016 Election Proves America Needs The Electoral College

PA Pundits International

By Jarrett Stepman ~

Background from Australia:

There’s a 15 hour time difference between the U.S. and where I live here in Australia, so the actual counting for the results started here in Australia at around 9AM on the Wednesday morning, and I watched it all day at the Politico site, where it had the State by State results. I watched as States were moved into that Electoral College count for either Donald Trump or for Hillary Clinton. The last States to enter the count were the West Coast States, Washington (State)  Oregon, Nevada and California, and then the last two States, Alaska and Hawaii. At the same time as I was watching that Electoral College count, I was also watching the overall Popular Vote count. Prior to the California count coming into play, Donald Trump was well ahead in that Popular Vote by more than two million votes. California…

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The Electoral College Still Makes Sense Because We’re Not A Democracy

What appears to deprive the populace of its power to decide a president is the very mechanism that preserves its power. The Electoral College works that way because the United States isn’t a pure democracy.

By Donna Carol Voss    September 16, 2016

The Electoral College has been on life support since a chad—specifically a “hanging” chad—tipped the White House to George W. Bush in 2000. The painful reality of how our Constitution works was never more apparent. The Gore/Lieberman ticket won the popular vote 50,994,086 to 50,461,092 but lost the electoral vote 266 to 271.

There was a lot more to it, but the punchline is that the U.S. Supreme Court ruled Bush the winner because he won the electoral vote. It’s a tribute to the American national character that we weathered that cataclysm without civil war, but it left a bad taste in the electorate’s mouth.

During the 2016 Republican primary, when it looked as if Donald Trump would win the popular vote but still not reach the delegate threshold for nomination, that bad taste turned sour. Riding high on populism and “throw the bums out,” Trump complained that the election was rigged because the people wanted him, and whomever the people wanted, they should get. Fortunately for the country, Trump reached the delegate threshold, and we were spared a debacle that would have made 2000’s cataclysm look like a lemonade stand.

Cue the national election. No controversy, scandal, “info dump,” lie, corruption, defection, or dirty trick has been left unturned. Why would election night go smoothly? Frankly, the plane is going down no matter who wins; it’s only a question of water or land and how many survivors there will be. Chances aren’t looking good for the Electoral College.

“This is a democracy,” the people cry. “It should be one person-one vote, and that stupid Electoral College needs to go!” Poor Electoral College. So misunderstood. If the Electoral College has to go, it has to go, but we should at least buy it dinner first. While we’re at it, we might as well get to know it better.

Trust History: You Don’t Want Mob Rule

The sad lot of the Electoral College is that what you see isn’t what you get. Like the counter-intuitive fact that a tire blowout on the right requires a steering wheel correction to the left, the EC works backwards. What appears to deprive the populace of its power to decide a president is the very mechanism that preserves its power. It works that way because this isn’t a democracy; not a pure one.

“Pure democracy” is just another phrase for “mob rule.” Dictatorship of the majority means 51 percent of the citizenry rule the other 49 percent. That minority has no rights except those the condescending majority grants. It works well for those in the 51 percent, not so much for those in the 49. Plato knew it, and James Madison, who knew his Plato, did too. Plato and Madison both recognized that justice and liberty for the minority is possible only when power is shared between groups in society.

Plato’s “Republic” heavily influenced Madison and the other framers to devise a Constitution that protected the minority. Plato held that the ideal, i.e., just, form of government was one in which power was shared correctly between workers, warriors, and rulers. Madison held that the ideal, i.e., American, form of government was one in which power was shared correctly between judges, lawmakers, and rulers.

Inspired as it is, our Constitution protects the minority while preserving the best of democracy: we the people elect representatives to run the government (republic) and we do so by majority vote (democracy). Ergo, this is a democratic republic. Ergo, an Electoral College.

The Electoral College Balances Voting Power

The purpose of the Electoral College is to balance voting power across states so no one region of the country can gain too much control. If a president is elected by a simple majority of votes, a candidate who is wildly popular in one region (e.g., Ted Cruz in Texas, Mitt Romney in Utah) can ignore smaller regions and campaign only where large majorities are possible. Or a candidate who kills in California and New York can write off “flyover country” completely.

If, however, the Electoral College elects a president, a candidate who is wildly popular in one region must also prevail in a number of sub-elections to win. The Electoral College ensures a better result for the country as a whole than the democratic power play wherein 51 percent of us matter and 49 percent of us don’t.

Think of the Electoral College like the World Series. One person-one vote equates to the World Series Champions being determined by total number of runs scored. If the Dodgers win the first game 10-0, and the Yankees win the next four games 1-0, the Dodgers win the series. Even though the Yankees bested the Dodgers in four games, it doesn’t matter because the Dodgers scored 10 runs to their 4. One anomalous game decides the whole series. Without the Electoral College, a few heavily populated states decide the whole election.

So, the poor Electoral College sits condemned before its last meal because its power is misunderstood. How ironic—and tragic if no stay-of-execution arrives—that those who clamor for “one person-one vote” are seeking more power at the expense of power they already have.

Far from “uneducated”

life on this side of the fence

If you watched any of the recent presidential election results, you may have noticed a recurring theme.  As traditionally blue states turned red, a common phrase heard among reporters was that the “uneducated rural community” had made a larger turnout than what was expected.  As a member of the rural community, which is quite educated might I add, I saw a few things wrong with this statement.

First, the political affiliations of a certain group of people should in no way merit the assumption of education, or lack thereof.  In a society that claims to be open to all walks of life and discourages the labeling of cultural groups, I felt that the way rural voters were viewed was quite misguided.

Secondly, the definition of “uneducated” is the lack of education.  Nowhere in that definition do I see that the lack of an Ivy League education or a formal college…

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