Uh Oh ... Boring 8

Layers

Economic activity is like an onion field. It starts with a single onion, which grows either from a seed or a bud. In a few plant generations, the entire field is covered with plants, some the result of sexual reproduction, others vegetative clones.
 

Digging Down

I must believe the archaeologists' story, that the origins of Western agriculture were in the Middle East 7,000 - 10,000 years ago. Before that, our ancestors were everywhere hunter-gatherers, probably nomadic and probably not highly organized beyond the immediate kinship level. If there were settlements, they were probably composed of related individuals - extended families. Each family or village was self-sufficient. Perhaps, as in Amazonia today, there was some sort of on-again, off-again trade (and war) between the villages, particularly in females ready for mating. (Sorry, it seems daughters have been bartered commodities since earliest times.)

In those ancient times, most economic activity, such as it was, had to do with basic survival. I assume there was division of labor, just as may be observed today among the "uncivilized," isolated tribes of Brazil and Africa. Men went out and hunted; women and children gathered. Men were primarily responsible for creating tools and weapons, doing heavy work (house building) and warfare. Women made the clothes, cooked the meals, bore and attended the children, and did everything else required to support the village. For a long time, women have been far more socialized in villages than men. For this reason, from the beginning, there have two different sorts of human economies; male and female.

The traditional male economy is based on hunting prey species and other men (i.e., fighting). The good hunter is an athlete, savvy in the ways of the chase. These virtues are still exemplified and extolled daily in hundreds of cops and robbers movies and TV shows. Courage in the face of the enemy is required; especially the bravado that risks death. In the male economy, the rewards go to the conqueror and death or enslavement to the conquered. The alpha male enslaves others of his own kind, or those defeated in battle, and thus acquires a following and a luxurious life. It should be easy to see, the core of "capitalism" is the male economy.

The traditional female economy is based on the village, the kitchen plot and raising children. These are fundamentally social projects, which assume security and continuity over a long period of time. There are hundreds of movies and TV shows about women, which typically emphasize feelings of love and connection to children, spouse, parents, etc. A woman's life is about relationships and the quintessential mother. There is an alpha female, too, but this woman is more identified by having been chosen by the alpha male, not by her own social skills. Sometimes women "make it" on their own, but very often this is by emulating and beating men at their game. It is a rare woman who rises to the top, and even more unusual to have got there by supremacy in the domestic arts. (I believe that is why people have treated Martha Stewart savagely compared to men who committed far greater crimes.) It should be easy to see the core of "socialism" is in the female economy.

It should also be patently clear to everyone that we are here because of co-operation between the sexes. Despite stories of virgin births, and Athena springing full grown from the head of Zeus, everyone I've ever known was born of a mother inseminated by a father. I am quite sure that is true. If our society was made up entirely of males, it wouldn't last long; certainly no longer than it takes for men to die. The same is true of females, although females have a better shot at cloning themselves (virgin birth) and, thus, doing without males. (Some Arizonan desert snails have devolved into hermaphrodites.)

So, the society - and economy - that works and survives involves a combination of the male and female; some socialism and some capitalism. Following my analogy, socialism might survive a lot longer than capitalism, but neither is likely to endure forever alone.

So, if economic explanations of basic human behavior start with the family and the village, they are neither "capitalist" nor "socialist." (Sorry, Adam Smith and Karl Marx.) Instead, the basic explanations are biological and sociological: "making a living" starts with "built in" human needs and desires.

Growing Up

Human children are taken care of by parents or elders; if not, they do not survive. Families, societies and species do not survive if they do not successfully reproduce. Either upon personal initiative or by formal training, children learn the skills of their elders. We are very good at copycatting, especially if personal survival or tribal praise depends on it. By the time children reach sexual maturity (puberty), they have learned most of the skills required for basic, personal survival. That is not enough, however, to acquire social standing or even, sometimes, tolerance in most societies. It is almost certainly not enough to support a family.

Nature has cleverly (through evolution) arranged ourselves to become sexually active just about the time we are physically able to survive on our own and reproduce. With puberty, males and females are afflicted with strong sexual desires. [I believe sexuality is mostly a result of hormone production, as, from personal experience, removal of sex hormones removes most sexual desire.] Please recall that females were commonly given as brides at ages 10-12 in most ancient societies. Even until the mid-20th century, it was common for females to be mated by age 14-16. First births used to be common among women under 18 when I was a young man. Similarly, males were sent to apprenticeship at ages 10-14. Just a generation or two ago, most men had started full-time, career work about the ages of 14-16. [We must constantly remind ourselves that things have changed radically in the First World during the last century or more.]

Our biological makeup starts an irreversible sequence of events once we pass childhood. The sexes are attracted and mate. In time, this brings about live birth and, with that, everything changes. Females who may have been able to survive on their own can no longer do so once they are mothers. Pregnant women and nursing mothers require secure sources of nutritious food, safety and, sometimes, specialized care. By its nature, pregnancy, child birth and nursing require social interaction and support. So, from the start of her adult career as a mother, a woman is essentially forced to socialize or die.

It is clearly different for males, who can walk away from the consequences of mating. Of course, if genes are "selfish," then males won't walk away, because fathers have an interest in the survival of their offspring. That interest is never expressed as, "the genes in my sperm having been lecturing me lately ..." Rather, it comes out in other peculiar male behaviors, common in mammals and our close relatives, chimpanzees and other primates. Most mammalian males try very hard to dominate females, and prevent all other males from mating with "their" female. Possessiveness and exclusive ownership ensure all the offspring belong to the dominating male, not the other guy. [Among chimpanzees, monkeys and other mammals, it is common for a new alpha male to kill all surviving offspring of the previous chief stud.]

It should be obvious that rape and philandering are supplemental male methods of promoting one's genes. After all, the costs of reproduction will be borne later by the female and whichever male is her guardian. The logic of promiscuous sex proves the value of possessive behavior. It also implies it is best to have out-of-wedlock sex with females possessed by another male, as that has the double advantage of giving the best chance of survival to any illicit offspring while denying offspring to the other male. Further, there is the psychological advantage that the cuckolded spouse may be regarded as inferior to the interloper: the cheated spouse is made a loser. All of this is implicit in the very old-fashioned "double standard."

A woman, once pregnant, has no choice but to claim that her offspring are the result of copulation with her official mate. This deceit is a time-honored strategy to avoid punishment for infidelity, and to gain support for her children. From the female point of view, all of her children represent her genes, regardless of paternity. (Note again that male chimps, great cats and some humans kill any remaining, unprotected offspring of the harems they take over.) The selfish gene expresses itself differently in female and male behavior.

So, right there, upon being confirmed or passing Bar Mitzvah, the die is cast for the future lives of boys and girls. Hormones, genes and the will to survive guide behavior. In the very beginning, we have the forces which make man a social animal, as Aristotle said. Females must be socialized to survive, and they socialize men enslaved by lust. This is why many have said that women are the civilizing force of our species. [It may also be why Adam Smith's idea of yoking greed is often more "obvious" to men than women.]

The basic human economy is thus laid down for all who live in society. It is a direct result of our biology. It divides work between most men and women in a certain way. It requires their co-operation for survival of themselves and their offspring. None of this motivated by greed or any "higher" impulse; it is entirely due to our genetic construction.

Like the core of an onion, this is the most fundamental layer of economy - the starting point. Everything else is built on this, either by vegetative reproduction (more of the same) or productive seed (new ideas).

Back to the Farm

In the modern world, the farms not far from my writing chair can be "taken apart" this way: as layers of innovation and growth.

What's obvious today is agricultural machinery. There's the tractor, the (dangerous) disc plows, the devil-may-care crop duster, the harvester, the braceros and the trucks. There's the chemicals: pesticides, fertilizers, pollination inducers, and everything else it takes to fool the plants into blooming, fruiting and ripening on our time. This sort of farm cannot exist in undeveloped societies.

The modern farm is efficient in the sense that very little labor produces enough crop to feed everyone. We're down to less than 2% of the population producing everything we eat, as well as much of our fiber, and whatever else agriculture supplies. Hidden in that number, because of the word "efficient," is another 20% or so of the working population (or, the economy) that produces the farm machinery, chemicals and services used by agriculture. For example, modern agriculture cannot exist without a commodity (futures) market, grain elevator, complex banking arrangements, railroad and/or trucking, etc, etc.

Add it all up, and we find that about 20% of the US economy is an input to agriculture, not just the 2% of the population living on the farm. It is the combination of all those things that makes agriculture "efficient." It also means, at the macro level, it is justified to charge about 20% of our national income for the food and other agricultural products we use.

Our history books tell us about the struggle of the early American pioneers, who tamed the West; no chemicals, machines or bank loans for them. They had to make it from scratch, every day and every year; but many did not. The poverty and indebtedness of rural America runs through our history from the earliest days. The original Jamestown colony died of exposure and starvation. The Pilgrims only made it on the charity of the local Indians, a favor not returned by White Men. Rural America has been the source of radical politics and rebellion for centuries, until this very day. Take away the recently applied blanket of efficiency, and you have 19th century Iowa, Kansas and Nebraska.

Of course, modern methods are more efficient in the sense that only 20% of the economy is required to support agriculture. A century ago, it was 85%. Before that it was 90% or 95% or more. Jefferson's concept of democracy was founded on the independent farmers, the American yeomen, who were more than 95% of the voters of that day.

American agriculture developed from well recorded roots. We know how it got where it is. It started with simple survival, as discussed above, and then got more elaborate. The growth of agriculture was synchronized with the growth of the United States. Americans were both fortunate and cursed in being able to produce record farm surpluses year after year. This allowed entrepreneurs to invent and try different lines of work, and shifted labor from the farm to the factory. Part of the new factories' product ended up back on the farm - for instance, the combine - which improved productivity. So, a virtuous circle was formed in which industrialization improved agriculture, and the improved agriculture spurred more industrialization.

Consider the growth of an onion. Sometimes conditions allow growing another layer. Other times the core divides into several eyes, each of which becomes an independent onion. Then, the onion sometimes blooms, and sexually mates with who knows what other onions; it's all a matter of what pollen is blowing in the wind. The seed pods develop, and scatter new challenges to evolution. Some survive, some don't. After a while, there are a lot of different onions out there, but they have a synergy that makes the species viable.

What has happened on American farms since 1776 is not explained by communism or capitalism. It is explained by sociological and environmental factors. The economics of agriculture don't fit into some neat theory like those taught at the University of Chicago's Business School. Maybe that's why very few MBAs are to be found on family farms, in addition to the fact that there's damn little money to steal there.

Neo-classical economics is, ultimately, more a theory about wealth and position in a certain kind of (urban) society than an explanation of how most people making a living. It is my view that the persistent "farm problem" in our society is a direct result of applying wrong economic ideas to farming. Agricultural is a resource-based industry critical to our well-being, not just one of Smith's pin factories. It is one of our oldest industries, and is at the core of almost all other development.

I believe we need to reckon the costs and benefits of agriculture in a different manner than we do now. I think it is best analyzed from an input-output point of view, taking into account that there are certain minimum social needs. For this reason, I believe modern agriculture is permanently dependent on large and invasive governmental structures to regulate its performance. Some entrepreneurial risk is also required in the system, but too much can be destabilizing.

I believe the best structure for agriculture is intelligent co-operation between the private and public sectors. From time to time, maybe the balance between private and public changes, but that should be recognized as normal. Where that balance is should depend on an scientific analysis of social needs and agricultural factors. If we are in a time of innovation, more private initiative should be encouraged. If we are having environmental problems, more public oversight may be required. And so on. It is entirely a pragmatic matter, a question of what is going to produce the desired result, given generally agreed constraints on the problem.

The sort of thinking I am suggesting can be applied to other industries. It should be clear I believe money is not the only factor in deciding what a business should do, or how it should be run. It's the money fixation that's got us into a lot of trouble for millennia, and in our time as well. We should be old enough and smart enough to get over that addiction. Just say "NO!"

Inelastic

Classical economics has an incredible grip on political conservatives, and many other people as well, who try to cast everything as a market, thus subject to market analysis. But, there are many enterprises which cannot be properly evaluated using (neo-)classical economic models. Among these are agriculture (food), health care (medicine) and education. There are several reasons those enterprises need a different sort of analysis.

It is an often undeclared premise of classical analysis that economic transactions must be analyzed as market behavior; i.e., the analysis starts with the assumption that there is a market somewhere. Of course, if a market is assumed, then market rules will presumably apply. I ask, where's the market?

Most of us are familiar with the "farmer's market," and the historical existence of markets since ancient times. It is true that farmers have brought their surplus stuffs to markets for thousands of years. It is also true that other producers have piggy-backed on farmers markets to sell their wares. It is also true that things were sold at auction in those markets. Are not these examples of markets? Of course they are, and were. That such things occurred is a matter of observation, not dependent on economic theories. Once we have established that a certain behavior or event exists, then we can develop and apply the appropriate theoretical tools.

We just cannot assume there is a market whenever we want to apply those classical economic methods. My claim is that modern agriculture, medicine and education cannot be analyzed as markets for several reasons; i.e., they are not markets. This is not to deny, in each case, there may be local markets within these industries. There is an on-going and lucrative "health food" business, which is related to the "alternative medicine" business. Large companies apply the usual market manipulation techniques to sell products into this market. Within broad limits, we might call "health foods" and "alternative medicine" a "market" (although I question that claim); but, those businesses are only a small fraction of the agriculture and medical industries.

Agriculture, medicine and education are not, in my opinion, markets, when viewed "in the large". There are NO willing buyers and sellers who can avoid these supposed markets. Every citizen of a modern State requires the products of these industries; there are no alternatives. The fact that there are competing farmer's markets, grocery stores and HMOs does not support the conclusion that agriculture or medicine are market economies. What the existence of local markets does show, is that people will prefer cucumbers to cantaloupe depending on price, availability and season. It also shows that there is a surplus, because only the surplus is sold at market. Patients may prefer Doctor A to Doctor B, or feel better taking BRAND X instead of GENERIC Y. So, there are choices; but all of these choices are substitutions, not sale or no sale.

The basic need of all living things for food, or of patients for medical care, is not fungible. What is fungible is the luxury of choosing Doctor A or Doctor B, not the cure for disease; choosing wheat or rice, but not starving. It's the same in education, because there is no inducible market in 5th Grade, even if tutoring in spelling is saleable. The distinction is between macro and micro economies. On the "micro" scale, the classical theories may apply in designated cases. People at farmer's markets often do behave as expected by classical theories. Nonetheless, that performance does not generalize to the "macro" scale. Commodities markets are zero-sum games because there will be only so many pork bellies, or bushels of corn or wheat harvested. The large commodities markets exist to finance an inherently unpredictable and only partially controllable industry, agriculture; they do not reflect consumer choices. In fact, the system that works best with respect to agriculture, medicine and education is government oversight and control, not futures markets.

Classical economics assumes elastic markets. "Elasticity" means several things, including "easy entry," "easy exit," and "market clearing." The Smith/Ricardo market is easy to enter: anyone with a few bucks can create a product for sale. It is easy to exit: people can close their present business and move on to something else, without ill effect. All of the product brought to market can be sold; i.e., there is a price at which sufficient buyers will be found for everything to be sold.

The assumption of elasticity actually defines the markets that can be analyzed by classical methods. It is not the result of some inherent fact about markets. There are markets in which the product cannot be sold; e.g., what is your price (positive or negative) to take care of just 1 gram of high level radioactive waste? Or, a pint of deadly nerve gas? I am sure, if you reflect on this, you will realize there are lots of products for which there is no clearance price. If you still do not agree, how about your life; what's that worth?

There are many markets which do not allow easy entry or exit. What do you do with a redundant doctor, nurse or nuclear physicist? Russia has the nuclear physicist problem, with enormously bad consequences for the rest of the world: nuclear proliferation. If it takes 10-15 years of training beyond high school to qualify an entry-level doctor, or 5-10 years after high school to qualify teachers and professors, is that "easy" entry? I have railed about this before, so I will consider the point made: generally, in agriculture, medicine and education, there is NO easy entry or exit to markets. In all of these industries, there are many products or services for which there is NO market clearing price. Even if agriculture, medicine and education are considered "markets," they do not meet the criteria of classical analysis: they are inelastic markets.

Regulated Industries

Most industrialized countries, including the United States, have tacitly accepted the foregoing analysis. That is why we have regulated public and private agencies which provide electricity, highways, water and all the other "public utilities." Most people agree the big choice concerning these industries is whether they are operated by public agencies, private businesses or both. Almost everyone except rabid conservatives agrees these industries should be subject to government regulation and oversight.

Conservatives and their allied neo-classical economists believe all those industries should be "de-regulated;" privatized. The biggest examples of that philosophy in the last 20 years are the airlines, long distance telephones and electric power. In the conservative view, deregulation of those industries has been a great success. What I note is almost all of the major players in deregulated industries have been in bankruptcy at least once. There have been major disruptions of the economy resulting from market "fluctuations" in deregulated industries. Some companies (such as ENRON) have taken criminal advantage of de-regulation.

Airlines no longer serve many areas of the United States, and they cannot afford the security services now mandated by the government. The recent rise in oil prices is already resulting in another round of service cutbacks and bankruptcies. While privately operated air services may be appropriate, it seems to me Federal supervision and subsidy is required to keep the industry alive. This is not optional, as modern "just in time" inventorying and other fast transport needs require airlines maintain excess (on demand) capacity. The full effects of airline service disruption became apparent during the days after 9-11-2001, when the entire fleet was grounded: the US economy was threatened with mass chaos and breakdown for lack of materials. The airline industry was only kept operating by government intervention, when travelers abandoned airplanes. As this was being written, United Airlines was again in bankruptcy. This is a repetitive story for all the major carriers.

Artificially disrupted electric services and "gaming the system" cost Californians over $40 billion in 2001. The State had to step in, and buy $9 billion or more in electricity to prevent economic chaos. We Californians are still paying for that gigantic fiasco, both in our taxes and our electric bills. A few weeks ago, PG&E got out of bankruptcy caused by the 2001 manipulations, which allowed top managers and shareholders of PG&E's holding company to reap a $4+ billion windfall. The major effect of electric deregulation in California has been to gouge working people, and transfer billions to an already wealthy elite.

Telephone deregulation is another flop, despite the best efforts of Sen. McCain. When AT&T was split up, Regional Bell Operating Companies (RBOCs) were created by the Court. It was assumed the local companies would compete and eventually enter each others' markets. It was assumed long distance services would become more competitive. What actually happened was that telephone companies immediately began consolidating. Long distance carriers did lower rates, but could only survive by constantly merging with, or taking over, other long distance companies. The consolidation process went on and on until it reached its zenith in WORLDCOM, which then went bankrupt. The RBOCs have mostly merged back into a few giants, VERIZON and SBC. It turns out that the telephone business isn't naturally competitive, and requires a large scale to operate and make a profit.

Despite all these well known problems, dislocations and scandals, which even conservatives agree resulted from deregulation, conservatives still defend deregulation. I don't. I think substantially the same results could have been obtained with a lot less pain and suffering under direct, public supervision. What all of this shows to me, is there is a big role for enlightened government supervision of the economy. I emphasize "enlightened."

It is frequently argued the Internet became popular as a result of telecommunications deregulation. I disagree: the Internet was becoming widely used prior to the 1996 deregulation. The spread of the Internet was more due to the rapid improvement of computing equipment, and the development of inexpensive user friendly interfaces, than anything else. What deregulation did accomplish was allowing, even promoting, the investment of hundreds of billions into cable and fiber networks without regard to use or need. The internet and telecom stock bubbles were energized by hopes of merger, takeover and buyout which were allowed under deregulation. The actual result was, of course, disastrous, when the bubble burst after March, 2000. More than 90% of the value of most internet and telecom companies was lost. Around $7 trillion was eventually lost in the crash, and the country was put into recession as a result.

So, I think airlines, telephones and electricity should be re-regulated. How much is a matter of debate, but we shouldn't be surprised that private enterprise is not always, and often cannot be, the final answer.

We already regulate agriculture extensively. We have done so since the New Deal, although the Gingrich Republicans tried to reverse that in the 1990s. Deregulation didn't work for agriculture, and now things - even under George W Bush - are going back to where they were. The fact is, the New Dealers solved the agonizing farm problems which had been going on since the first settlers arrived in this country. There really is no reason to undo what has been done. It is interesting, despite WTO rules to the contrary, that all major WTO States regulate and subsidize agriculture in their countries. In disguise, those regulations and subsidies continue, even if WTO denounces them to the international public. It does seem similar solutions to the farm problem have been found almost everywhere; at least, almost everywhere among rich countries.

People are learning in the school of hard knocks that electric deregulation wasn't such a good idea. Of course, sometimes it takes a lot of knocks to get an obsession out of some people's minds. For example, small cities that no longer have airline service, or have only "feeder" service, are experiencing the cost of being "out of the loop," literally. Deregulation is great until you lose your job, your city raises taxes, and your electric bill and local airfares go up and up.

In the end, we went too far with telephone deregulation. The result is countries like Korea are wired for broadband, but the United States lags far behind. The fact is for-profit companies are not motivated to improve service unless they absolutely have to. That's what the ultra-capitalists were saying about the government a few years ago, but it turns out it applies to private businesses as well. The real problem is not public/private; it is how the ordinary citizen can influence the managers of those huge enterprises to provide the desired services.

Education is already a public business. I think it should stay that way.

It remains to nationalize the health care industry. Medicine is like education in requiring highly skilled workers. In addition, health care workers must perform with military precision under persistent, stressful conditions. Like agricultural crops, disease is unpredictable. We never know who will get sick or when, even if know about how many cases of the flu there will be this year (a prediction that failed in 2003). What we know about medical care is probable aggregate demand, not the specifics. Unlike perfume, very few people can be induced to buy this or that disease right now. When was the last time appendectomies, or health insurance rates, were "on special?"

So, medicine should be nationalized. It requires public oversight and scrutiny. If doctors and the public took the Hippocratic Oath seriously, all health care in the US would be nationalized by 5 PM today. We will never solve the medical care problem until we take this step.

Executive Material

Who is qualified to run a business? Become CEO? Be the President?

Is it just a few select people? Anyone who passes a training course? Or, anyone at all?

If you listen to CEOs and MBAs, you would think these princes and pashas of commerce are a special breed; like the thoroughbreds they put in the Kentucky derby. But, they are not; they are, for the most part, no more or less able than most people.

Suppose I am right, that almost anyone has the ability to run a business, even be CEO of GE or IBM. We certainly "believe" the all-American myth that anyone can be President. What does that imply about our wage and management structure?

We now pay the President about $400,000 annually plus perquisites to run a country of 280 million people. Bill Clinton was paid $250,000 annually. There are always lots of people who want to be President. Probably many of them would be better Presidents than some we've had. Is there some reason corporate CEOs should be paid millions?

A few years ago, U.S. CEOs were averaging 400 times average workers' pay; now the factor is 600. In Japan, CEO's usually make less than 50 times workers' pay. In many quarters, rating CEOs at 10-20 times the average worker is sufficient. Despite American criticism of the Japanese way of doing things, Japan has not gone broke. In fact, lately, the Japanese are making things better for themselves, and savvy American investors have been pouring money into Tokyo.

The myths of the charismatic CEO and magical entrepreneur are promoted by the very ultra-conservatives and market fundamentalists who are the primary beneficiaries of corporate largesse. I don't believe those self-serving stories. It doesn't require a demi-god to make a buck. Lots of people can do it. What it does require is willingness to work, to learn, to persist.