Category Archives: Capitalism

Why Trump won’t be able to stop America’s decline

While Trump’s efforts to make America great again are admirable, and will probably lead to short-term results, the reasons for America’s decline are more systematic and cannot be affected by a single president.

America suffers from the problems that Michael Porter describes in his book The Competitive Advantage of Nations. In it, Porter characterizes the rise and fall of nations’s competitiveness in four stages.

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Humans are currently being disrupted by intelligent robotics

There is a fierce debate about what AI and improved robotics are going to do to humans’ productivity and the future of work.

Opponents are afraid that humans will be out of work. Proponents say that robots will allow humans to focus on what makes us unique.

Proponents are right.. For now.

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The path of least resistance

One of my friends have planted this idea in my head called “The path of least resistance”. It is the theory that you should basically go with the flow, take the least resistance to happiness. For example if it is easy for me to get a job in a certain career, then I should take that job instead of fighting to get another.

This has popped up in my head from time to time since he told me about it, so finally I decided to see if there could be any truth to the theory.

There is also another theory that has been bouncing around in my head that I haven’t really truly investigated, which is the idea of “personal strengths” and “comparative advantage”. They could be mistaken to be the same thing, but they are not. Personal strengths can be defined as the answer to “what can I do well without much effort?”.

Comparative advantage is a bit more difficult to explain, and I have to give an example to be able to explain it properly. Let’s say that we have two persons, person A and person B. We’ll look at their respective comparative advantages when it comes to producing apples and pears. Let’s say that both person A and person B are better at producing apples than pears, but person A is three times as good producing apples than pears, while person B is just twice as good at producing apples than pears. In this case, even though both persons’ strengts are to produce apples, person A has a comparative advantage in producing apples compared to person B, while person B has a comparative advantage in producing pears compared to person A.

Now the theory I said I have but haven’t really investigated thoroughly, is the theory that in order for a person to maximize his or her success, he should work with something where he has a comparative advantage compared to all other people in the world. This is certainly the theory we learn in school – where they say for example that if country A has a comparative advantage in producing X, and country B has a comparative advantage in producing Y, then country A should only produce X and country B should only produce Y, and then they should trade.

But this requires a certain assumption which, at least for me, was never mentioned. This assumes that there is infinite demand compared to the available supply of both X and Y. If there isn’t demand for something, it doesn’t matter if you are relatively better at it than everybody else in the world. You will still not earn your living.

Comparative advantage example

Let’s me make up an example using standard theory comparative advantage:

Person A can produce either 10 apples or 5 pears in one hour. Person B can produce either 4 apples or 1 pear in one hour.

Comparative costs for person A:

1 pear costs 2 apples to produce, and 1 apple costs 1/2 pears.

Comparative costs for person B:

1 pear costs 4 apples to produce, and  1 apple costs 1/4 pears.

Result 1:

Person A is comparatively better at producing pears than person B, and person B is comparatively better at producing apples than person A.

Result 2:

Person A will benefit from producing and selling pears instead of apples if he can get more than 2 apples for each pear that he trades away. Person B benefit from producing and selling apples instead of pears if he can get more than 1/4 pears for each apples he trades away.

Result 3:

1 pear > 2 apples

1 apple > 1/4 pears <=> 4 apples > 1 pear

Meaning: 2 apples < 1 pear < 4 apples.

This means that trade will arise and a pear will be traded for between 2-4 apples. For simplicity sake, let’s say that a pear will be traded for 3 apples.

Inserting demand into the model

Now we come to the interesting part. The above example, as I said previously, is not entirely realistic, because in the real world there may not be demand for apples or pears, or the relative demand for apples might be so much greater than the demand for pears, that both countries gain more by producing mostly apples. The overall goal of both persons, after all, isn’t to produce as much of everything as possible. It is to satisfy their needs to the greatest extent possible. Which is exactly the nature of a real free economy

Because of this, I want to see what will happen if we say that both A and B have limited needs for both apples and pears. After this example, I will explain how this is related to the theory of “The path of least resistance”.

Let us say that both A and B need 10 apples and 5 pears each.

Without trade:

If both A and B produced what they themselves needed without trading, it would take A 2 hours to produce 10 apples and 5 pears (1 hour to produce each). For B, it would take 7,5 hours (2,5h to produce 10 apples, and 5h to produce 5 pears).

With trade:

Now this will happen (assuming the previous price of 3 apples for 1 pear, according to both persons’ comparative advantages in order for trade to arise):

A will produce in total 9 pears in (1+4/5) hours (assuming we can’t produce fractions of pears). He will then trade 4 of his pears with B, against 12 apples. The result is that he will have got 12 apples and 5 pears (more than his need) in less than 2 hours.

B will produce in total 22 apples in 5,5 hours. Of these, he will trade 12 with A, and get 4 pears in return as we saw above. But it is now that the interesting bit occurs. Since there is no longer a need for A to produce any more pears, B will have to produce his last pear himself. This will take 1 hour. So finally, B will have got his 10 apples and 5 pears in 6,5 hours (again less than if he had produced everything himself).

So as we can see, both A and B still gain from trading, as they will satisfy their needs in less time than if they had not traded. But in order to fulfill his need, B had to do something where he did not have a comparative advantage – he had to produce pears as well as apples. This tells us that in real life, perhaps it is not enough to make your career choice based only on the comparative advantages you have. Perhaps you have to consider demand as well.

Real life is all about specialization and trade. We all benefit from specializing in something and then doing only that, and then trading what we have produced with things that other people have specialized in and produced. It is a little bit more complicated than apples and pears, as we specialize in thousands, dare I say even millions, tens of millions, or even hundreds of millions of different little tasks in total. Just to take one example of this complexity, there are in just “computer and IT related work” probably thousands or tens of thousands of different specializations to choose between to earn money. And the same is true for every other “general profession”. I work in IT and have done so for over 3 years, not to mention my interest in IT which covers even more years, and I don’t even know a fraction of the different programming languages, technical skills, and roles you can have. Hell, I barely have time to catch up on the latest cool gadgets that are released.

The key to success is to specialize in something where you have a comparative advantage and where there is high demand compared to supply, and to become really good at it.

The question that I want to answer though, and to tie this into the theory of “The path of least resistance”, is: “How will we choose what to specialize in?” In real terms, this means “What career should I choose?

Expanding the model to encompass multiple people

In real life, it is, as we saw in the example above, not enough to specialize in something just based on your comparative advantages. If B would only learn how to produce apples, even when there was no need for it, he would not be able to satisfy his needs.

In order to explore this further, we need to take into considerations that comparative advantage doesn’t just occur between 2 people – it occurs in yourself compared to all the other people that you can interact with indirectly or directly (which in today’s society means everyone except groups of people who are completely separated from everybody else in every conceivable way).

How can we possibly define this? This no longer becomes a simple question of listing possible specializations and measuring how good I am at producing them compared to someone else. Instead, we have to insert some kind of “base measuring unit” which will tell us how comparatively good we are at something on a neutral scale.

Furthermore, this measuring unit has to encompass not only how good we are at something, but also encompass how much need there is for this thing that we are good at. Simply put, this measuring unit has to be able to measure the total value that we with our specific strengths can produce, and compare that to the value that other people can produce with their specific strengths. We can then look at this value, and compare it across different specializations or professions that are available to us, and make the best choice (i.e. the choice that balances our strengths with other people’s strengths, and the need in society for each specific specialized skill).

We actually have this measuring unit in real life. It is called money.

The amount of money you can get by producing something is a direct measure of how much value you can give to others by producing it, while taking into account all mentioned above. All you have to do is to look inside yourself and ask yourself “how much money can I earn by producing X compared to the money I can earn by producing anything else?“.

This question encompasses both your comparative advantages (because you will not get much money for doing something compared to doing something else, if you are not comparatively speaking good at it), and the demand for it (because you will not get any money for doing something that is not valuable to someone else).

Inserting personal happiness into the model

They keyword in the above question is the “I” – because if you don’ t look at what you specifically can earn, and instead look at how much a profession in general pays, then you are not taking into consideration your comparative advantages.

However, we are not finished with this model just yet. In order to answer the question “what is the path of least resistance and is it the path I should take?”, we have to insert one more factor into the model. This factor is “happiness”.

This is an extension of “money”, because money is one part of your total happiness. The other parts of your happiness are for example how much you like doing what you chose to do. So we will rephrase the question above with the following:

“How much happiness can I get by producing X compared to the happiness I can get by producing anything else?”

In the word happiness, we will add everything that will make you happy (such as the ease of finding a job, how much pleasure you get from doing a job, and how much money you can earn by doing a job), and subtract everything that makes you unhappy (such as the painful period of low income and boring work you have to do to get to the position you want, and the pain of not finding a job when there isn’t enough demand for what you do).

Choosing the right career

Now let’s take it one abstraction-level down and look at real life again.

Let’s say that you feel that you are really good at producing music compared to other people. But as you look at the music-industry, you realize that the chances of you getting a lot of money by doing it are very small. However, you also see that there are lots of administration jobs, and although this is not your top strength, you think that you can make quite a nice progression here and easily get an OK job and feel save. Perhaps you decide that overall, specializing in accounting will make you happier than the stress you have to go through to become a successful musician.

This is exactly the path of least resistance, and this is the path you should take. This considers both your personal strengths and compares them to the personal strengths of others and the needs for this value in society. It is the optimal way that you can contribute to society, as well as your own happiness.

Another example – let’s say you have trouble choosing job – do you want to do sales or do you want to be a designer? You put your CV with your skills out there, and you see what kind of responses you get. And you notice that 90% of the offers you get are for sales jobs that pay quite well, while the rest of the offers are for design jobs that would pay not as well. The path of least resistance has then shown you that you can easily be happy going for the sales job and doing it OK, than going through the trouble of becoming a designer.

Of course, the opposite may also be true. You may be so good at and like being a musician or designer so much that you will nothing but enjoy all the overtime and extra work you put into it, even in the periods when it may be tough and not lead to where you want. Then this will give you the most happiness, and this will be the path of least resistance. And then this is the choice you should make in order to provide the maximum value to both others and yourself.

The path of least resistance

So which is the path of least resistance and what does  it lead to? Is the theory worth following?

Simply put, yes!

The path of least resistance is the path that will lead to most happiness for you in the easiest way, or with least trouble.. As we see above, it encompasses everything worth considering – both your personal strengths and comparing your personal strengths to other people’s personal strengths in order to find your comparative advantages, and then comparing this with the overall needs in society. Thus, this is the optimal way in which you can provide the maximum happiness for yourself by using your strengths compared to other people’s strengths (and incidentally, providing the maximum possible value to the society as a whole).

Sidenote: Why a free economy is the only way to maximize happiness

Everything I have written about above lies on the foundation of a free economy. If money is to be the “measuring unit” combining both your personal strengths with the strengths of others and the needs in society, and thus provide an accurate input to what will give you the most happiness, it has to flow freely and without artificial roadblocks and pressures. If I want something, I should be able to pay for it, whatever it may be (not considering the external costs of course). If somebody can provide something, he has to be able to offer it to me, in exchange for whatever  I am willing to pay for it.

Not only is this the only way to correctly choose the optimal specialization, but having a completely free economy is also the only moral choice we can make when designing society’s rules. The morality of it, I will write about in another post.

Note about external costs of production: We are talking about the needs of others, but have not mentioned costs for others. Of course, any cost that I infer to others or to the society as a whole, such as pollution, must also be inserted in to the model by being withdrawn from what I get payed and given to the ones who suffer. These costs must be the exact value at which the sufferer is willing to go through with what he or she is suffering, provided he or she gets paid said amount for going through with it.

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Best speech ever – why free trade and capitalism is in our blood

http://www.ted.com/talks/matt_ridley_when_ideas_have_sex.html

Matt Ridley explains how the human race is able to create things that a single human being could not possibly create, how we are all dependent on each other, and the reason we have tripled our average real wealth per person on earth even with the population growth that we have had.

This speech explains exactly why capitalism and free trade is in the blood of humans, and why people fighting against it or restraining it in any form are nothing but evil.

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10 happy friends go out for dinner

10 happy friends go out for a dinner together. The bill is $100. They split the bill based on the principles of how fairness is usually judged in a society, and how taxes are payed in most countries:

– The four first friends (the least wealthy) eat for free
– The 5th pays $1
– The 6th pays $3
– The 7th pays $7
– The 8th $12
– The 9th $18
– The 10th person (the wealthiest) pays $59

The 10 friends eat dinner in this restaurant every day and are happy with this arrangement. One day, the restaurant owner says:

– “You are such faithful customers that I will give you a $20 discount from now on”.

A dinner for 10 now costs only $80. The friends want to keep dividing the bill in a fair way. The first 4 aren’t affected. They get to keep eating for free. But how will the other 6 divide the $20 discount?

They realize that $20 divided by 6 is $3.3, and if they just split this evenly among themselves, the 5th and the 6th persons would actually get money to eat.

The restaurant owner comes up with another solution. He says that they can simply ignore the “discount” and pretend that the dinner costs $80. Then they can simply re-calculate what each person should pay from start, according to the principles of the taxation system.

The result is that now, the 5th person also gets to eat for free. The 6th gets to pay $2, the 7th $5, the 8th $9, the 9th $12, and the 10th person gets to pay $52 instead of $59. So the result is that everybody now has a lower price than before, plus an additional person gets to eat for free.

They are all happy, but when they get out of the restaurant, they start comparing what each person has saved…

– I only get to keep $1 of the $20 discount, says the 6th person. He points at the 10th person and says:
– But he gets to keep $7!

– Exactly, I also save just $1, and it is unfair that he gets to save 7 times as much as us! says the 5th person.

– Yeah! Why should he get to keep $7 of the $20 discount, when I just get $2? The rich always get the better deal! shouts the 7th person.

– Wait a minute! shout the 4 first persons, who get to eat for free every day.
– We don’t get anything from that discount. This system abuses the poor!

The 9 persons yell like dogs and moan like pigs at the 10th, call him all sorts of names, and accuse him of sucking the blood out of the poor.

Next night, the 10th person doesn’t show up for the dinner. Nice, think the others when they sit down to eat, finally they can eat in peace without a rich person sucking their blood out and using them. But when the bill lands on the table, they discover something very strange:

$52 is missing…..

(This story was originally written in Swedish and sent to me by a close friend. I translated it to English because it summarizes perfectly how second-handers misuse our empathy and kindness, to make us feel guilty and give away what is rightfully ours. But do not be tricked by their foul tactics. Second-handers are the ones who are selfish and greedy. Because they think they have the right to take what we rightfully own, without giving anything in return but guilt.

The original version of this story can be found on the internet if you search google for “10 glada personer går ut för att äta middag tillsammans”.)

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