SECOND CHANCES

Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.com

Economics: Making Sense of the Modern EconomyECONOMICS The Third Edition, Edited by Sauguao Datta for “The Economist”

Narrated by David Thorpe

Economics is a primer on second chances for capitalist economies. This may not be a spellbinding subject but it offers insight to the “dismal science” based on improved big data collection and better data analysis. This book of essays contains information that may be used to argue for or against Keynesian’ or Hayekian’ economic theory.

Keynes’ minions argue for government intervention in economic crises (e.g. national depression or deep recession)–a willingness to create jobs with taxing power, government loans, and newly minted money for public works and/or public/private investment to create jobs. Hayek’ s followers argue for market-force correction–the idea of the invisible hand that will eliminate jobs in the short-term through reorganization, and/or bankruptcy but will eventually create new jobs as market driven correction reverses economic crises.

FRIEDRICH AUGUST von HAYEK (1899-1992)
FRIEDRICH AUGUST von HAYEK (1899-1992)
JOHN MAYNARD KEYNES (1883-1946)
JOHN MAYNARD KEYNES (1883-1946)

Both Keynes and Hayek believed in a safety net for modern industrialized nations (a minimum of food, shelter, and clothing for the unemployed and unemployable) but each  suggests different government action for recovery. Keynes argues for government intervention. Hayek argues for free market determination.

big dataThe differences in approach by Keynes and Hayek were formulated before Big Data became a factor in the analysis of economics.  Big Data is a sword with two edges. One edge of big data analysis obscures financial consequence and may lead to disaster. The other edge offers potential for stabilization and improved prediction for job markets and general economic recovery.

QUANTS (Private investment firms hire young computer whizzes to mine big data for an edge on market trends)

On one keenly sharpened edge, there is the example of Quants in private investment firms that use big data to create financial derivatives; i.e. primarily real estate mortgages, many of which were guaranteed by the federal government.   As the classification “Quant” implies, they have little concern about economics.  Their knowledge is in how to aggregate statistics. A Quant’s focus ignores the real-world consequence of financial instruments known as derivatives.  These derivatives nearly collapse the world economy in 2007/2008 because they were obscure Big Data calculations that discounted risk to the economy if they became devalued.

MISTAKES AND CONSEQUENCES

Hayek’s followers would suggest that private investment firms made a market mistake. They created derivatives from Big Data that were not clearly understood or misrepresented by unscrupulous bundlers and sellers. A theoretical Hayek’ economist let’s the market punish companies that make mistakes.  In other words, let those who make a private business mistake suffer the consequence.

ANGELO MOZILLO (FORMER CHAIRMAN & CEO OF COUNTRYWIDE FINANCIAL)

Loss of jobs is considered regrettable but jobs will return with stronger companies that will have learned from past mistakes. Not following this criteria allows many to escape the consequence of their bad judgement, borderline illegality, and incompetence.

The other edge is Big Data use by government. American’ government regulation of central bank’ actions is “beefed up” after 2007/2008. Big Data analysis is used  to reassert financial stability by propping up banks, investment houses, public mortgage lenders, and deposit insurance companies. This is the government “bail out” after 2008. It is a response more in tune with Keynes’ followers.

BANKING INDUSTRY
BANKING INDUSTRY

The issue of intervention and regulation is parsed from different perspectives. One is the perspective of private enterprise; the other is from the perspective of government. On the one hand, private enterprise needs government backing to promote trust in financial markets.

WALL STREET
WALL STREET

Without trust, loans are not made, businesses do not expand, and employment stagnates.

The obverse of government’ backing to create trust is over regulation that creates distrust. Over regulation discourages entrepreneurial risk, idles capital, stultifies economic growth, and sews mistrust.

Critics of  government’  intervention suggest that “bail outs” reward miscreants of the capitalist system, and interfere with free enterprise. Critics argue, government intervention may subsidize the wrong industry (choosing winners and losers) or an industry declining rather than growing. Government intervention in finance may discourage investment by manipulating interest rates that are more attractive to idle investors that would rather save than take risks in new ventures. Government may bet on the wrong horse–an energy company that fails, and wastes public money.

CHECKS AND BALANCES

Government’ taxes are mandated while private investment’ is a choice. With Hyek’s economic theory, when banks or private investment houses make a mistake, they suffer the consequence; i.e. via reorganization (layoffs, mergers; etc.) or bankruptcy. With Keynes’ economic theory, when the government makes a mistake, every tax payer suffers the consequence.

Still, economic stability comes from jobs. The question becomes–is the safety net strong enough to sustain the unemployed or unemployable until the economy recovers? Is  safety net expenditure a more prudent use of tax dollars than waiting for market force stabilization of the economy?

Turning's Cathedral-The Origins of the Digital Universe(A perspective not fairly addressed in The Economist  essays is the value of early generation government research of computer technology and space engineering.  Without government R&D in computer technology and rocket science, one wonders if Watson, Jobs, Wozniak, Goddard, von Braun, and Gates would have become icons. Government expenditure for R&D created the impetus for new industries and more jobs.)

FREE TRADEAnother insight, somewhat counter-intuitive, is that higher imports than exports are a good sign for a nation’s economy. As free trade improves, importing countries benefit from lower price commodities and exporting countries benefit from improved gross domestic product. An exporting country becomes a buyer of more imported goods because of higher GDP (Gross Domestic Product) which increases individual and national domestic wealth. Developing countries become bigger importers of foreign goods that were previously un-affordable.

MONOPOLYAnother chapter addresses monopoly and the danger of jumping to conclusions about predatory pricing.

Comprehensive and accurate measurement of purported monopolies is critical. Monopolies do have the potential to destroy competitors and inhibit start-up businesses. Monopolies can bundle consumer goods and offer “loss leader” pricing for market capture that bankrupts competition. However, an argument is made to suggest consumers benefit from monopolies with lower prices. Monopolies acquire small inefficient start-ups that become better capitalized and more productive through acquisition. The Economist‘ inference is that proven predatory pricing can be mitigated by government investigation, and regulation.

BRIDGE TROLL
BRIDGE TROLL (Government manipulation through currency manipulation and tariffs.)

National debt, deficit spending, and free trade obstruction are trolls on a bridge to economic health for both developed and developing countries. The Economist’ essays suggest that America has, in the short-term, been able to dodge these trolls by having a currency that is internationally recognized and supported. However, America’s trolls are becoming more dangerous as foreign nations, like China and Japan, choose to invest in American’ bonds and not American’ assets. China and Japan are looking for consumers of their exports. China and Japan are not investing in America’s industrial or economic growth; they are subsidizing American’ consumers by buying bonds (a loan, more than an investment).

PICKING WINNERS AND LOSERS (The risk of subsidizing dying industries.)

The Economist’ essays also make the point that wealthy nations like America, Germany, Japan, England, and France, often subsidize dying industries rather than invest in new ideas. Private industries and governments fear short-term unemployment. They are unwilling to take expense risks of long-term opportunity because jobs and income “known” are safer than jobs and income “unknown”.

WORLD TRADE IMPORTANCE

The Economist’ articles emphasize the importance of free trade despite job displacement. Private enterprise is always looking for the best business deal; i.e. the argument is that all nations need to adjust employment in accordance with free trade to benefit national’ as well as world’ prosperity. The Economist’ argues that short-term loss in jobs from free trade policy is hugely offset by improved nation-state’ GDP. With improved national wealth, safety nets can be expanded while new jobs are created.

The articles in this book argue that restraint of world trade through tariffs, licensing fees, national government subsidy, and false safety claims inhibit capitalism. The authors’ arguments for enhancing free trade are not anti-regulation but anti-protectionism. There are justifications for regulation of world trade but not for the false purpose of protecting domestic’ product pricing or less productive jobs.

Many things have happened since the 2010 economic information offered in this book. One comes away from listening to Economics with previously held biases mostly intact. A nagging feeling remains that rational economic theory makes sense on paper but skitters out of control when acted upon in real life.

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