Compound Your Worth

Would you prefer to have one million dollars in one month, or have a penny, doubled every day for that same month?

It’s a popular question that illustrates the power of compounding.  The penny, doubled every day, equals more than five million dollars in a thirty day month, and nearly eleven million in a thirty-one day month.

Compounding is powerful even if you’re not doubling every day.  And it works with more than money.  If you assign a numeric value to something, even arbitrarily, it can illustrate the transformational ability of this effect.  Let’s say the value of you as a person – your abilities, output, and offerings to yourself and the world – is 100.  If you resolve to improve your self by one percent every day, in just a month, your value will be 135.  In a year, it will be more than 3,700.  However imperfect this quantification is, there is no denying that a small, daily improvement has immense power to enhance your worth.

How do you improve, even by just a little each day?  By doing.  What things matter to you?  What do you want to produce, or be skilled at?  Once you pick something, just do it.  Do a little every day.  Sure, you can read about cooking, counseling, playing the oboe, writing, tennis, or investing.  That’s fine, but it won’t be of much use unless you’re also doing those things.  It’s not that intimidating when you realize the power of compounding.

Improve yourself every day, even a tiny bit.

A World of Kramers

Nobody knew what Kramer actually did.  He was always doing something, but it remained a mystery how he obtained the resources to pull of his schemes, let alone pay for rent and food.

Kramer had a brand.  He was the crazy, out of the box guy who’d help you overcome a problem in an unconventional way.  He was a fringe entrepreneur and occasional activist.  He was relentless in pursuing whatever was his latest fancy.  He somehow made a living just being himself.  This is increasingly possibly, even for less quirky types.

I can think of at least a dozen people I know personally who somehow live a good life, despite the fact that I’m not really sure where their income originates.  It’s so easy now to sell a product, start a business, market and distribute ideas, and connect with partners, customers and investors.  It’s entirely possible to draw a circle around the stuff you care about, become the guy or gal who’s known for doing and talking about that stuff, and with enough hard work, get a living out of it.  It starts by giving your audience things they like.

If you’re known for providing something others value – even if it’s just good jokes on Facebook – you can generate a following.  You can offer to write a book, if your fans will pledge the money via Kickstarter.  You can ask for donations to keep producing whatever it is you produce.  You can sell your services to people all over the world with very low transaction cost.

Before long, apartment buildings could be full of people who don’t commute to an office every day, but instead spend their hours doing an assortment of bizarre and interesting projects.

Regulation Schmegulation

The number of hurdles to jump before you can legally create value is astounding.  There’s a law at every corner, working to impede the peaceful pursuit of profit.

Highly resourceful or talented people simply find ways around it.  They pivot, contort, or even work to alter the law to achieve their goal.  They devote entire divisions of their companies to overcoming these arbitrary obstacles.  But eventually, they can overcome them.  Some entrepreneurs have an amazingly high risk tolerance, and choose to ignore the laws entirely and provide their products illegally.  Others aren’t willing to risk prison but have the smarts, connections, or wealth to navigate and comply with the labyrinthine legal system.

So what’s the problem with state intervention in the market?  Visionaries can find a way to achieve their vision, laws or not.  The problem isn’t for them.  It’s for everyone else.

People with limited means and average ability suffer.  The barriers are often too much for them to overcome and too risky to ignore.  Their ideas languish.  Each new obstacle sucks away too many resources and leaves them unable to move forward.

Even those who with no particular entrepreneurial vision suffer.  The immense dead-weight loss of all the creators devoting resources to fighting, influencing, or complying with the regulatory state destroys value for all.  I’ve met business owners who devote ten or twenty percent of company resources to state created problems, meaning ten or twenty percent fewer resources are available to solve customer problems and make everyone better off.

People think economic regulations hamper big businesses and rich people.  The opposite is true.  If an idea is big enough and an entrepreneur driven and resourceful enough, it can come to fruition, despite the state.  But there’s no way to comprehend just how many smaller ventures never got started, or how much more wealth would be created for all if the ham-fist of regulation were entirely replaced by the invisible hand of the market.

A Law Colleges Love

I’ve often wondered why so many people go to college instead of learning on the job by offering to work for free for a company they like.  Turns out, it’s not that easy to work for free.  In most cases, it’s illegal.

Consider the absurdity of this setup.  Young people are supposed to do something to enhance their earning potential.  Without any knowledge or experience, they do not produce enough value to be worth hiring in most promising career areas.  So they’ve got to do something to gain skills.  Since they’re not worth paying, and it’s illegal to have unpaid workers, they can’t get on the job experience.

It’s supposed to be illegal to have unpaid workers because we wouldn’t want poor, unskilled people being taken advantage of.  Instead, they’re directed to college, where not only do they not earn money, they must borrow tens of thousands just for the privilege of not being paid.  They have limited choice as to what skills they learn, as a huge number of courses and credits are required in areas of little interest to them.  It takes at least three or four years to finish.

When they do finish, it’s often the case that they are only a little more valuable to employers than they were before – and much of that is a product of them being four years older and more mature, not any particular knowledge gained.  Most of the needed skills still must be learned on the job.  Most graduates have no idea what kind of job appeals to them or what they excel at, because they spent time in classrooms, not at workplaces trying different things out.

There are, of course, complicated work-arounds.  Non-profits and degree granting institutions can setup legal unpaid internships in some cases, and some businesses can do certain types of apprenticeships, on the condition that they create no value.

Let me repeat that: as long as unpaid apprentices do not help the business in any way – better yet if they destroy value – it’s possible to have one.  You think I’m joking, but read this language, pasted directly from the SBA website where they list the guidelines for a legal, unpaid apprenticeship.  This is number four in a list of six criteria:

“The employer that provides the training derives no immediate advantage from the activities of the trainees, and on occasion the employer’s operations may actually be impeded”

We want young people to learn how to create value, but certainly not by actually creating it!  We want businesses to create wealth, but not if trainees do it!

You reap what you sow.

Where Are All the Factories?

My wife and I recently watched a few seasons of Stargate Atlantis on Netflix. (Go ahead, say it.) Something that always bugs me about the show and many like it is the incredibly unrealistic way in which alien societies are portrayed.

There are countless episodes where the team finds a new planet with a thriving civilization. No matter what period of development the people are in, they always have a vast array of highly produced goods. Villages have houses with uniform, manufactured bricks, panes of glass, ornate wood and metal work, produce and meat, cooking utensils, tools, textiles, weapons, and on and on. These items require an expansive division of labor, a high degree of specialization, and a very deep or “round about” capital structure. Yet there is rarely any indication of these things. Most societies only have raw materials, like land and some farms or pastures, and consumer goods. It’s seems these societies magically convert raw materials into serviceable items with none of the complex, multi-layered in-between processes required in the real world.

It’s possible the writers cannot portray these features due to constrained budgets. After all, we see the same set re-purposed with a few small tweaks to represent several different villages. When the plot-line isn’t about the structure of society, it doesn’t make sense to spend a lot to show the way it works. But often the plot is built around the way the society works.

One episode had cities that followed orders from a computer screen, and structured their way of life to fit exactly what they were told, a la Sim City. They’d switch from making furniture to steam engines overnight. Somehow the invisible capital, labor and knowledge markets seamlessly switch course, and no major shortages or surpluses result. The childish absurdity of this is hard to fathom.

If it’s not because of budget, perhaps the simplistic portrayals are a reflection of the economic ignorance of the writers. It’s sad that so many intelligent people are utterly unaware of how the market works. It’s sad that so few have tried to contemplate the incredible complex dance of unplanned coordination required to produce a single, simple consumer item. Yet the fact that so many can be so ignorant of the workings of the market is also one of the things that makes true capitalism so great.

These writers are showing the world as they experience it. A huge marketplace of end-products, available everywhere you look in dizzying array. Their experience is one in which they have access to the products of the free market, without having to understand or even be aware of the incredible process that took raw materials, capital, ideas, and labor, and transformed them. No one has to be an economist or an expert in any field or industry to participate in a capitalist system; indeed to meaningfully contribute to that system through their actions.

As much as I’d love Hollywood writers and everyone else to understand the full-fledged spontaneous beauty of the market, I’m even more excited that they don’t have to in order for the market to serve them.

The Question Henry Ford Just Can’t Answer

It seems a safe, affordable vehicle, powered by an internal combustion engine, accessible to all would be wonderful. Except we’ve never seen it.

Horse and human powered transportation have their drawbacks, but they’ve been used the world over, and sometimes pretty effectively. We know it’s possible, even if occasionally slow, smelly, and costly. Automobiles, on the other hand, have never existed as more than dreams, fleeting playthings, useless hunks of metal, or dangerous death traps. The idea of a practical, functioning horseless carriage has been around for a while, and it’s appealing. But is this pipe-dream worth taking seriously or pursuing?

The Henry Ford’s of the world need to answer this one, glaring question: If the automobile is such a great idea, why hasn’t anyone tried it?

Why I Love the “Like” Button

Facebook’s “Like” button is genius.  It’s positive, affirmative, and gives an incredibly simple way to express support for content we enjoy.  It requires no deep thought or time, yet sends a reinforcing signal to the poster.  It also provides immediate feedback on what your group of friends in the aggregate enjoy.

Those are nice perks, but the real value is that the button acts as a check on the overall quality and tone of Facebook content.  Everyone wants to earn likes.  But since there is (mercifully) no dislike button, you have to frame negative content up the right way to get liked.  No one wants to click like on a story about a house burning down.  But the same story, with a line or two about wishing the victims well, is easy to like. The inability to quickly display negative emotion towards a post forces the poster to position and comment on items in a way that makes light of frustrating events, or shows sympathy in tragedy.

Deep, meaningful, terrible, sad and heavy content can and do still get posted.  But there is an incentive to put these into some kind of context or perspective with a softer, human touch, or a fun-loving sarcasm that makes a like sensible.  This structure is a valuable contribution that alters the ways in which humans talk about the events around us.

Crowd Funding vs.Taxation

The main justification given for taxation is that it solves a collective action problem.  Everyone would be better off, we are told, with the construction of a road or a park, but no individual has the incentive to pay for it, and if a collection were taken up, everyone would shirk and expect the next guy to pay.  If you know your few bucks won’t make or break the project and you’ll get the benefit either way, why pay?

There are many flaws in this analysis, but even if we accept it, consider the emergence of crowdfunding as an alternative.  You can share the details of a project and the cost, and offer specific access or benefits to those who contribute a certain levels.  The project does not move forward until full funding is committed.  This is an amazingly powerful tool that is just starting to reach its potential.

If what is funded benefits the whole world, great!  They needn’t be labelled free-riders, because everyone who pledged to support it knew ahead of time this would be the result, and indeed welcomed it.  If it’s a project that can’t sustainably benefit everyone, crowdfunding allows the ability to restrict access to those who pay.  It also utilizes the power of transparency and shame.  If you claim to really want a project to succeed, yet you pledge no money yourself, you’ll incur the wrath of your peers.  Crowdfunding harnesses people’s public spiritedness.  It lets you openly demonstrate what you’ve pledged.  It creates competition to cooperate.

I’m not just talking about bake sales for summer camp.  There have been startups that raised ten million dollars on sites like Kickstarter.  There have been massive research projects and prescription drug advances utilizing crowdsourcing (harnessing dispersed knowledge) as well as crowdfunding; not just the supply of capital, but the supply of human and intellectual capital can be done without central control.

The very projects that people worry wouldn’t happen without government funding are those most suited for crowdfunding.  Works of art that won’t generate tons of popular sales through traditional channels.  Highly speculative research.  Space travel.  Charity and welfare enhancing programs.  Helping a single person pay for a costly medical procedure.  Why couldn’t bridges or buildings be financed in the same way?

We live in an amazing world.  Every day, more people voluntarily coordinate and co-create and make the functions the state tries to monopolize less and less relevant.  Humans have always created free institutions that, under no compulsion and with no clear designer, enhance our individual and collective well-being.  Technology just puts it in high relief and speeds the process.

Expect Benevolence; Don’t Need It

Wake up every day expecting great things to happen to you.  Look forward to some unforeseen goodness to fall from the sky.  But make plans and take action as if you’ll never get a thing you don’t scrap for and earn with hard work.

People who live on the hope of unexpected good news end up sitting around waiting to win the lottery.  It’s a corrosive, stultifying mindset.  People who embrace the opposite, and assume nothing good ever happens and every inch must be taken through sacrifice and grit, are often cynical, overly skeptical, and can miss opportunity because they don’t think it ever knocks.

If you can expect the universe to shower goodness on you every day, yet work like the only rain is the rain you make, you’ll be hopeful and cheerful, yet motivated and persistent.  You won’t be bitter when good things don’t fall on your lap, and you won’t miss it when they do.

Five Great Economics Books

Originally posted here.

1. That Which Is Seen and That Which Is Not Seen, Frederic Bastiat

This essay is almost single-handedly responsible for sparking my interest in economics. If you don’t have any economic understanding, this is sure to give you several “lightbulb” moments. Though two centuries old, it is still the best introduction to the economic way of thinking I know of. The book addresses common economic myths—like the idea that government programs can boost the economy—with clarity and wit. Henry Hazlitt’s Economics in One Lesson is essentially a modern revision of Bastiat, and it is also excellent, but I still find Bastiat’s style and frequent sarcasm unbeatable. Start with this book, and if you’re not intrigued by what you learn, you can have your money back.

2. Beyond Politics, Randy T. Simmons

This is a fine introduction to the field of Public Choice Economics. Just when you thought you had come to the end of epiphanies after reading Bastiat, you discover Public Choice and the lightbulb goes on hyperdrive as you see economic thinking applied to the political process. This book is a must for anyone who thinks democracy is the cure for the world’s ills, or that electing better politicians is the key to securing liberty. In fact, I would be so bold to say that if you engage in any type of efforts to reform policy without a knowledge of Public Choice, you are acting irresponsibly and doing more harm than good. Beyond Politics will open your eyes and clear your head.

3. Economics for Real People, Gene Callahan

This is an incredible book. It’s not only fun to read and at times humorous, but it’s immense scope is dumbfounding given its reasonable length. If you want to understand economics from the very first principles and see how things like the law of demand are derived, this is your book. It is an introduction to the Austrian School of economics, so you will not have math and charts and graphs, but logic as your guide. If you have no mainstream economic knowledge, start with this book before you take a class and become polluted by make-believe models and regressions. If you already have mainstream economic knowledge, read Economics for Real People and be refreshed!

4. The Fatal Conceit, F.A. Hayek

Hayek is not always easy to read, but this is his best book in terms of readability, and I think his most profound in terms of possible applications. Hayek’s most interesting work focuses on the role of information in the economy, and how amazing markets are at giving us information to act on. The Fatal Conceit is the opposite side of that coin; how deluded central planners are to presume to have enough information to make good decisions absent the market process. This book is short, but after you read it you will want to apply these Hayekian insights elsewhere. I suggest reading some Thomas Sowell to follow the rabbit trail.

5. Human Action, Ludwig von Mises

I know, I know, this book is really big. Some people complain Mises is hard to read. I could not disagree more. His writing is very structured, his arguments very logical and clear, and his conclusions groundbreaking. Human Action is one of those very few books that every thinking person should read. This is the more sophisticated version of Economics For Real People (but don’t worry, real people can read this too!). Mises takes aim first at the methodology of economics as a discipline, then builds a comprehensive theory of economics from the ground up, and uses it to expose all manner of fallacies in socialist and mainstream economic thought. Before you either embrace or dismiss the Austrian School of economics, you have to read Human Action. After you read it, you will start to see everything else through a Misesian lens, and you will be the better for it. This book changed my life!

I decided to stop at five books, but I am going to add a little caveat to sneak in a few more.  The granddaddy of the discipline, and still probably the single most insightful book that launched political economy as we know it is Adam Smith’s The Wealth of Nations.  When paired with his Theory of Moral Sentiments, you get the moral backdrop.  Everyone talks about Smith, but really reading and rereading him firsthand is unbeatable, even if challenging at times.

For a more modern intro to basic economic thinking than Bastiat or Hazlitt, Stephen Landsburg’s Armchair Economist is a great book.  It’s got a lot of non-intuitive insight, but on a more solid foundation than some of the Freakonomics style stuff.  If you have an interest in economic history or you are grappling with questions about economic booms and busts and the growth of government, Crisis and Leviathan by Robert Higgs is your book.

Finally, some readers may have noticed that my economic reading list includes nothing of what people call economics today. Between the five books above I don’t believe there is a single chart or graph. There is no talk of determining someone’s utility function, no calculus, and none of the stuff that most people associate with the discipline. That is because I think most of that stuff is bogus and has nothing to do with understanding how the economy works. If you are unsatisfied with my dismissal of what most economics courses teach, and in particular if you are curious to learn about macro economics, I highly recommend Micro Foundations and Macro Economics by Steven Horwitz. Read it after you have read Economics for Real People and preferably also Human Action, and it will help you relate those principles to the things your professors talk about.

On Not Having a Goal

I’m a very goal oriented person.  Everything I do is towards this or that short or long term goal, and anything else seems like wasteful fluff.  I’m pretty efficient at only doing things that advance toward my goals.  I used to feel bad for people who didn’t seem to have many goals, and would kind of float by, just taking in the scenery, with no real purpose to many of their actions.  Now I see something valuable in it.

How many of my goals arose just because I had nothing to focus on, craved it, and picked the first thing that seemed right?  I’ve put tons of energy into things that were goals almost for their own sake, not because I took the time to find it really resonated with me.  Certainly some things were gained and learned, but often in a haphazard, accidental way.  Contrast that with people I know who are slow to adopt a goal.  Sure, they have some long periods of aimlessness, but they are often taking the time to discover what they want and what goals are truly worthwhile.  When they find one, they are not as burnt out, and they’re ready to dive in.

That will never be me on an instinctual level, but I have definitely learned from observing such people to resist the urge to pick goals just to have them, and even be comfortable for periods without really clear goals.  This has helped the truly important things come into clearer focus, and let me hone in on a smaller number of more valuable goals.

Evil Doesn’t Mean Irrational

I was singing the praises of rational choice theory to a friend – telling him it can help people understand cause-effect relationships in the world and navigate better towards their goals, rather than just getting bitter – when he posed an objection.  Sure, he granted, most people are acting to get what they want and not just to torment you for its own sake, but what about those few people who may be genuinely evil, and truly revel in your misery?  How can rational choice account for this?  Don’t they destroy this worldview?  Isn’t it impossible to understand what they’re aiming at and negotiate to avoid pain?

I asked for a specific example.  He mentioned a friend of his who gets angry at people and immediately assumes evil motives.  When someone says they’ll show up at 10 and comes at 10:30, she thinks it’s because they’re simply a terrible person, and there’s no rationality behind their selfish tardiness, therefore there’s nothing she can do to cope with or avoid being the victim of it.  It’s a very helpless, disempowering way to look at things.  It’s also patently false.

Even if we grant that the person is pure evil, hell bent on her discomfort, this theory has provided no explanatory power for the particular actions taken.  Why didn’t the person just key her car or slash her tires if inconveniencing her was the goal?  Why did they show up 30 minutes late, instead of 60, or not at all?  What accounts for the particular choices made?  Clearly, some kind of calculation was involved.  If being a jerk was the goal, the person must have reasoned that showing up 30 minutes late was the least costly way to exact the most jerkiness.  In other words, they looked at costs and benefits, and made a rational choice given their preferences.

Once you strip away the emotion and realize that, evil or not, people still make rational choices about what means to employ in seeking their ends, it tends to melt away the anger and helplessness a bit.  If the person was rational enough to choose whether to be late and by how much, does it seem probable they did it just to tick you off?  Not in most cases.  Far more likely, they had a phone call, or forgot to get gas ahead of time, failed to account for traffic, or any number of other things, and they determined sacrificing 30 minutes was the least bad solution.  But even if they wanted to cause trouble, knowing they have a cost/benefit calculation just like you do can help you see possible work-arounds.  How might you change their incentives to improve the chances of punctuality?  The onus is on you to accept their preferences, whether you like them or not, and learn to get what you want anyway.

It’s much easier emotionally to just call them evil and irrational and propagate the myth of your own helplessness.  It might feel good in the moment, but it’s a terrible way to reach your goals, and it fails to explain the real world.  In fact, the vindictiveness that can result is likely to make them truly angry with you, whether they were at first or not, and want to exact revenge, perpetuating the conflict.

Worry less about the morality of others or their motives, and put more focus on what caused them to choose what they did and how you might alter what they view as in their best interest.  You’ll enjoy life more, and you might find people around you aren’t as bad as you think.

Term Limits as Humanitarianism

I don’t think term limits reduce government corruption or largesse. I don’t think they stop bad legislation or promote good. I’ve seen them in action, and they do alter the interests, but things quickly adjust and the average Joe and his freedom are no safer. Ultimately, no rule changes or tweaks can stop government oppression. The only real solution is for markets, not states, to provide social solutions.

Yet I’m a big fan of term limits nonetheless.

As much as I hate to admit it, politicians are people too. As a fellow human, I do not wish ill upon them. Probably the worst thing that can happen to a person is the loss of their soul; their dignity; there very humanity. This is worse than death or injury, and it is precisely what the political system does to politicians.

No matter how well intentioned, they face rigged choices every day that force them to be a backstabbing jerk to all their peers, or fudge a little on their principles. No one can resist this forever. To cope, they create elaborate justificatory narratives, and separate their political actions from their sense of morality or self. Even when you’ve seen the evil of Mordor, it’s hard to throw the ring in the fire.

The first few years in office, newly minted politicians are mostly being used, or patted on the head like kids at their first ball game. After three or four, they start to learn how to get stuff. Five or six and they’re almost gone for good – barely recognizable as the people they once were. Always “on”, and not even knowing what real people behave like. At this stage, a few years out of the system and they may still regain most of their former humanity. The detox is tough, but possible. Six or more years and all hope is lost.

Term limits save souls.

We Already Have the Solution: It’s Called Freedom

Milton Friedman once said of the political system,

“I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing.”

There already exists an institution that ensures people, be they right or wrong, do the right thing.  It’s called the market.

Any wish to constrain government, or keep political interests behaving in the interest of the general public, is a wish that government behave more like a market; and that the political class behave more like individuals must behave to succeed in a market.  All reform efforts aimed at making the state smaller, less oppressive, more accountable, more efficient in it’s various activities, and less arbitrary are efforts to make it completely unlike itself, and completely like the market.

What I mean by the market is the entire realm of voluntary exchange and coordination.  Politics, like all institutions, is a type of market, but not the type I mean.  It has two unique feature that no other institution has, it produces a host of things unthinkable under other institutions.

The first unique feature is coercion.  The transactions in the political system are not voluntary.  This dramatically alters the incentives and signals in all the exchanges.  “Customers” tolerate what they hate, because it’s not worth being jailed for.  The second unique feature is near universal moral approval.  Though the coercion is real and known by all, it is not only accepted, but praised and condoned.  No other institution enjoys this kind of unskeptical reception and sanction.  Without these two features, there is no state.

It is easy to see why governments produce so much of what we hate, and destroy so much value.  Any market entity that attempted to engage in a single activity the way government does would cease to become profitable and receive universal scorn.  On the market, people think it immoral and tasteless to say you’ll provide a free soft drink with a sandwich and not make good.  That kind of behavior from a corner deli wouldn’t last a week.  On the political market, people think little of a politician who promises to stop sending young people to kill others across the globe, but then sends more instead.  That kind of behavior might get you another four years.

If we wish for the wrong people to do the right things, we can engage in the monumental task of altering public belief and preferences enough that they are willing to pay the price for resisting the state.  We can work to continually alter the incentives faced by politicians on every single issue, fighting back against every incentive built into government.  Of course, the state itself resists this by its very nature, and always will.

The real solution is not the state at all, but the market.  It’s not changing the state, it’s letting it fade into irrelevancy as markets grow up around it, carrying out all the activities states try so jealously to monopolize.  Markets don’t require perfect consumers or producers.  They put bad people in the position where they must do good to succeed.

Friedman was right.  The easiest way to do it is to force political entrepreneurs out of government, and into the realm where they’ll have to be market entrepreneurs.