Posts tagged with: economics

Temples and Rats

Was thinking this morning about inflation and deflation and the incentives they create. People using inflationary money are incentivized to adopt a high time preference, preferring immediate gratification to a monetarily induced guarantee of less gratification in the future. People using deflationary money are incentivized to adopt a low time preference meaning all purchases made towards immediate gratification must pass a much higher bar in regards to the satisfaction they produce.

That is to say, Keynesian writ large produces a desperate death spiral of consumption as present generations consume the well-being of future generations knowing if they don’t consume their current purchasing power then time itself will. In contrast, a society operating on deflationary money would seem boring and spendthrift, loosening its purse only to consume that which builds and maintains the road by which the future carries its goods to the present.

That is to say Austrian Economic and free-market monetary systems are the decentralized, inter-generational construction project of a temple to the future of our species, and Keynsianism is the screeching howl of a thousand desperate rats trapped in a burning house.

So, to speak.


How “Moonshots” Destroy Wealth

In a previous post, we discussed the “false promise of the moonshot”, a technological project undertaken with with little regard to success or profitability. In short, the allure of the moonshot is the notion that one can make great technological leaps into the future by simply applying unique thought processes with new technology. The Moonshot places a lot of emphasis on ideas. It suggests that there is a hidden path to the future that can be uncovered if we’re clever enough. Proponents of this kind of thinking often point to innovators of the past as examples of how moonshots work, however in these revisionist histories the grinding labor and years of capital accumulation that precede the supposed “moonshot” are rarely mentioned. Also rarely mentioned, a realistic portrayal of the fate of projects that are developed without a capital structure based on commercial viability. Once these factors are taken into consideration, it becomes pretty apparent moonshots are vehicles for destroying wealth and, as such, do more to push the future away than bring it closer.

To demonstrate this, I’ll begin by taking a knife to the sacred cow that is NASA’s Apollo project, the etymological mother of the term “moonshot”. I have nothing against the exploration of space, per se; my favorite book growing up was Ender’s Game, I’ve watched every episode of Star Trek, and I the only fiction I bother reading is science fiction. The fact of the matter is, though, that $110 billion dollars (in today’s value) was spent on the Apollo project. This is a massive investment in what was essentially an enormous geopolitical pissing match between the United States and the USSR, however, as soon at the USA no longer needed the marketing campaign of moon travel, the entire lunar project withered and died. Many at this point will claim that the lunar project inspired millions and created vital, valuable new technologies. To be sure, those are some of the effects that can be seen. What’s not seen, however, are the original holders of those dollars (taxpayers) and the businesses and markets they would have invested that $110 billion dollars in. While less inspiring than a rocket to the moon, a new shoe factory or delivery service expands the productive capacity of the economy as a whole. This small growth in wealth is then reinvested and growth begins to compound, over time building the levels of capital wealth that may be necessary to support commercial space travel. French economist Frederic Bastiat called this the “seen and the unseen”.

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen… Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, — at the risk of a small present evil. -Frédéric Bastiat

Evil may seem a strong word, but consider the legal environment that was left behind in the wreckage of the Apollo project. Prior to Ronald Reagan, private companies interested in space exploration had to obtain 17 permits to send a vehicle into space, my friend Mark Frazier’s project to build a commercial spaceflight special economic zone in Liberia was quashed by the Carter Administration, and SpaceX has had to jump through dozens of hoops to compete with the industrial space complex which has metastasized out of our initial foray into space.

This means that not only did we lose out on hundreds of billions of potential economic growth, in our attempts to yank the future into the preset we created legislative artifacts which began to actively work against the commercialization of space.

Imagine another scenario. Imagine private companies, perhaps with public partnership, working to build profit producing commercial projects instead of a moon mission. How much wealth would have been created if we had received GPS 5 years sooner? If all our investment had gone towards simple means of getting technology into orbit that had an ongoing commercial benefit to those of us here on earth? Imagine a sky full of satellites and the sudden realization that there’s a massive commercial opportunity to keep this airspace clean. More complex space projects emerge. Soon, perhaps, even a need for people in space to manage these systems. Throughout this process, the investments made compound into new wealth for new investments and commercial spaceflight becomes actually commercial; no longer vulnerable to the short attention spans of political institutions.

Perhaps we “reached” the moon in 1961, but at what cost? Isn’t it possible that in our rush to manifest space travel we ended up delaying its meaningful execution? Over 50 years after our space travel “moonshot”, human civilization, much to my personal dismay, still isn’t wealthy enough to consume space travel commercially. In fact, XPrize, the company whose sole, stated purpose is to create “exponential change” through innovation challenges began with a $1 million prize to make space flight commercial, the result was a high altitude shuttle that has limped along on a $600 million investment from Abu Dhabi and commercial support from Richard Branson’s Virgin Galactic. Hardly “commercial”. Most of their other challenges have produced similar results.

Google and their moonshot factory “X” should take note of this. Even though the search and advertising section of their business produce virtually all of their revenue their company still spends about $1 billion a year on “moonshot” projects, virtually none of which have achieved commercial success. That’s a billion dollars a year that isn’t being rolled into the small “boring” problems which provide the seed of scalable future capital systems.

These failures highlight, in my opinion, the power of resources-based incrementalism and the importance of robust commercial and capital structures. We’re told by the moonshot club to think about the “big idea”, to search for big problems, but in my opinion, this leads to anemic capital structures that turn to dust the moment the public loses interest. New frontiers of economic and social possibility are fashioned out of an impossibly complex weave of commercially valuable solutions to real, small problems. If we wish to reach these frontiers as quickly as possible, we need to move more slowly and more deliberately, building strong, vital capital structures that can grow and compound with time.


John Mackey’s Great Point about Min Wage

I finally watched the Reason interview with John Mackey, and he brought up a great point about the minimum wage.

If businesses are really so greedy that they want to pay absolute bottom dollar for people to work for them, barring already existing laws, why wouldn’t the company just pay people in the US 10 cents/hour? Why is it that wages at the bottom end all look pretty similar? Why is it that, even if you removed existing wage controls, they couldn’t get people to work for them at 10 cents/hour?

It’s because they don’t control those prices. Wages are controlled by a dynamic market process that depends on individual productivity. You can’t imagine a price floor for human labor any more than you can imagine up a price ceiling. You can’t demand they pay $15 an hour any more than they can demand you pay $10/pint of Ben and Jerry’s ice cream.

While it may seem counter-intuitive, businesses aren’t the central arbiter in wage pricing. If they want to continue as a business, they have to set prices according to labor markets. Pay people more than they produce and the business dies. Pay people less and the business dies.
You can’t ascribe absolute agency to the business, and you can’t pretend businesses are operating under different economic laws than you are.