Gyroscopic Investing

Stone:

Let me add a bit more to the comments on wealth redistribution.  

There have been instances of redistribution in America, though not always by Americans.  In Mexican California, envy over the land holdings of the non-profit missions led the government to expropriate the land in favor of private interests who ignored the original principle that mission land was to be held in trust for the resident Indians.  The tenuous claim of these Californio ranchers invited later American settlers to squat and otherwise poach land from them.  Thus, a lack of respect for property rights begat a further lack of respect for property rights.

Similarly, the opening of the west involved the transfer of land, mineral and fishing rights on a massive scale from Native Americans to American citizens.  Even land that had been purposely set aside by the government as Indian territory (e.g. Oklahoma) was subsequently redistributed to others.  We should factor all this in when considering the merits of allowing government to pick winners and losers.

TBV, I can see from what you describe that land distribution was often a murky affair in US history. We had a TV program in the UK that made the claim that the large number of small plots of land deeded out very early in American history created a lasting legacy that seeded subsequent prosperity. Even if those land deeds were for land stolen from Native Americans, that doesn't in itself refute that idea. People who you describe, such as Andrew Carnegie  were not recipients of such land wealth, but nevertheless the distributed wealth might have created a population of potential customers able to afford the products people like the Carnegie's sold?
I'm not saying that perfect equity is required for an economy to function. I'm just wondering whether, if ownership concentration is extreme, then the economy will stop functioning. Basically I can see that a poor person surrounded by rich people could also become rich. What I doubt is that the same is as true for a poor person surrounded by poor people all of whom pay out rent to some very remote rich person. I have the worry that things could be moving towards the second scenario.

TBV,

I think your posts highlighting the PAST crimes of ignoring indigenous property rights lends more to the argument that today's wealth distribution is flawed, not simply that we need to watch out for government confiscation.

Are these the increasing concentrations of wealth you are referring to?

http://autos.yahoo.com/news/-8-1-millio ... xcess.html

stone wrote: TBV, I can see from what you describe that land distribution was often a murky affair in US history. We had a TV program in the UK that made the claim that the large number of small plots of land deeded out very early in American history created a lasting legacy that seeded subsequent prosperity. Even if those land deeds were for land stolen from Native Americans, that doesn't in itself refute that idea. People who you describe, such as Andrew Carnegie  were not recipients of such land wealth, but nevertheless the distributed wealth might have created a population of potential customers able to afford the products people like the Carnegie's sold?
I'm not saying that perfect equity is required for an economy to function. I'm just wondering whether, if ownership concentration is extreme, then the economy will stop functioning. Basically I can see that a poor person surrounded by rich people could also become rich. What I doubt is that the same is as true for a poor person surrounded by poor people all of whom pay out rent to some very remote rich person. I have the worry that things could be moving towards the second scenario.

As to the very big picture that we're trying to wrap our heads around, my befuddled answer is "Until we see an economy stop functioning for the reason stated, we'll never really know, will we?"  But I have another response for you.  I recall a story from China in the 1980's of a guy who was the first person to buy a privately owned car in Shanghai, maybe even in all of China.  It was a Toyota Corolla and he got lots of press coverage.  He did it by raising chickens in his small cramped city apartment and selling them to his neighbors.  For the time, he was regarded as "wealthy."  He paid all cash for the car since credit was unheard of.  So, I guess you can become a prosperous businessman even when surrounded by no one but poor people and living under the suspicious gaze of anti-capitalist authorities.  And by the way, there's another guy like this, one who came from a dirt-poor peasant family.  His name is Wang Chuanfu, chairman of electric carmaker BYD, and this year's richest man in China.

TBV, the Chinese examples you give are fascinating. Chinese economic growth has been astonishing. The media here portrays much of it being down to state run lending at a loss etc rather than purely down to free enterprise. From what you say that is not at all the whole story. But perhaps the pioneer chicken farmer you described was the type of person who, if born in New York, would have been a multi-billionaire. He might have prevailled against all the odds but on a macro scale things also have to work OK enough with every Joe Average.

Do you have ideas as to why China is developing now but Africa didn't during the 1980s and 1990s? I saw a TV program about Chinese chicken farmers in Zambia. The Chinese couple featured were given a $20000USD interest free loan by the Chinese state to set them up when they moved to Zambia and started Chicken farming. The Zambian chicken farmers by contrast were doing things on a micro scale and barely making ends meet.

Also what causes places such as inner city Detroit (a US example but we have many here in the UK) to be mired as they are?

Stone:

Don't be so sure about the fellow doing better had he been located in NYC.  New York has a high cost of entry for just about everything, whereas China in the 80's was very much the other way around.  Zoning regulations alone would have prevented him from replicating his specific success story in NYC.

As for Africa, the first thing to say is that there is no "Africa" per se.  Morocco, Libya, South Africa and Tunisia are not much like Chad, Sierra Leone or Zimbabwe. If we choose the worst examples, the list of negative factors include: the level of educational attainment and public health, kleptocracy among elites, scapegoating of the rich, scapegoating of racial, religious, and ethnic minorities (whites, Asians of all stripes, various tribal rivals, etc.), the lack of physical security, disrespect of private property rights, and diversion of resources away from productive endeavors to the state and its political clients.  P.J. O"Rourke touched on this in his book "Eat the Rich" in which he described stagnation in Tanzania.  None of this is hard-wired, however. For example, prior to 1999, Ivory Coast was a prosperous country with a stable economy and political system.  Foreign technocrats were welcome and made a positive contribution.  But not any more. Pushing against this tide are local entrepreneurs in agriculture, trade and retail enterprises.  We all know about white farmers in Zimbabwe, but less so about grain farmers in Ethiopia, or the growing number of Africans who reside semi-permanently in China as buyers for retail shops back home. Micro-credit and wireless commerce/finance also stand out against the backdrop of negative stereotypes.

As for Detroit, many of the regressive factors listed above can be found there.  Bottom line: at present prices (and that includes the overall cost of government), prospective returns are lower than in competing locales.  So, rational actors invest elsewhere, regardless of their politics.  When those costs are lowered, or projected revenues somehow spike, the investors will come back.

TBV,  I totally agree with you that obstructive government is a disaster for everyone but the fact that "Africa" is so diverse (as you point out) and yet seemed to do so badly almost across the entire continent during the late 20th century made me wonder whether there was some other unifying factor that applied across many countries? I wondered whether it was rich Africans investing the money they earned not back into Africa but into Europe, USA etc. I feared that the reason they did that was because their fellow countrymen were too poor to provide a customer base capable of making investment in Africa worthwhile. That set up a viscous circle of capital flight. My fear is that in the developed world we might forget Henry Ford's notion that it was important to pay his workers enough so that they could buy the cars they made. Basically, that we could turn Europe and USA into being like much of Africa was in the late 20thCentury. Do you think Chinese money flooding into Africa is what has turned the corner there over the last few years?

Stone:

I don't pretend to be an expert on this stuff, but I find the customer base explanation unpersuasive.  First of all, revenue diverted to regime cronies usually ends up overseas primarily to avoid political risks at home.  Second, in nations where the rule of law is compromised, merely attempting to do business puts you in a tangled web of government red-tape and back-door deal making.  If you succeed in such an environment, you run the risk of becoming a crony yourself (see what happened in Egypt.)  Third, currency manipulation (as in Zimbabwe) can make it virtually impossible to re-supply one's business, let alone make a profit.  If you demand hard currency or exceed the laughably low fixed price guidelines, you risk being labeled a hoarder or profiteer.  Who needs that?  Finally, many countries in Africa are blessed/cursed with rich natural resources, which inevitably end up being controlled by a state monopoly, a private cartel (like de Beers), or a rebel army.  Such arrangements don't encourage risk-taking, political pluralism or a vibrant private sector.  What you get instead are economies shrouded in secrecy, patronage and corruption.

Unlike their first attempt at African dollar diplomacy in the 1960's, the Chinese now are aggressively pursuing natural resources as well as preemptive market advantages over potential low-cost competitors like India and Vietnam. By offering see-no-evil financial arrangements, the Chinese can make commitments to regimes that other countries shun (like Sudan, Congo DR, etc.)  This comes with risks of its own, one of which is becoming the latest foreigner that everyone loves to hate.  Check out the links below.

http://www.spiegel.de/international/wor ... 70,00.html

http://www.assatashakur.org/forum/afrik ... ities.html

http://www.msnbc.msn.com/id/18287943/ns ... ld-attack/

TBV, am I right in understanding that your impression is that if only governments stood back and didn't make mischief but did enforce property rights in a law abiding way- then prosperity can blossom pretty much from any starting point? I find Latvia a troubling case to fit into that framework. They seem to have followed your prescription for prosperity (am I very wrong about that?) but the result has been an ever worsening spiral of impoverishment. I'm also still struggling to get my head around the Chinese in Africa situation. The Chinese seem to be showing in Africa that even with wretchedly corrupt states, if money is thrown into the economy as the Chinese are doing, real economic growth happens???

Stone:

Latvia today suffers from the highest unemployment in the EU, but just a few years ago, it had the highest inflation in the EU.  That is not a coincidence.  The wage and credit bubble which together with the international financial crisis caused the economy to implode raised asset prices to levels which were unrealistic.  How do you fix that except by lowering those prices?  The government's approach is a reaction to a pre-existing problem, not its cause.  And that approach has succeeded in growing exports, which is an important achievement.

As you've noted, unemployment is nevertheless still high and I gather you feel there's a cause and effect relationship between the government's policies and that lingering condition.  Well, here in America, despite several rounds of government stimulus, unemployment is pretty much where it was when the Obama administration took office.  Like Latvia, we also have an aging population and doubts about our potential for future growth.  Nevertheless, folks like Paul Krugman argue that we should not only stay the course when it comes to deficit spending, but double down.  My question is, if we can give the benefit of the doubt to American policies which have had little effect on unemployment rates to date, why not do the same for the Latvians?

As for Africa, it should surprise no one that foreign investment can spark economic growth.  Even King Leopold of Belgium knew that.  Why should it be any different for the Chinese?   However, as King Leopold's Congolese subjects learned, some people are more equal than others.  It's the dis-empowerment and strong-arming of certain groups that makes "growth" a very ambiguous term.  A good example of this is the case of Ken Saro-wiwa.

http://www.ask.com/wiki/Ken_Saro-Wiwa

TBV, my impression about Latvia is that they did everything by the book in terms of following the IMF prescription. They created conditions such that investors gained all the profits from their investments and the state was paid for by taxes designed to avoid penalizing wealth. The consequence was a property bubble that popped, mass unemployment and now mass emigration with just the old people remaining. I just can't help thinking that if taxes had instead targetted assets, then the property bubble would not have happened and because taxes would have been moved off incomes, the domestic purchasing power would have sustained jobs and so the whole sorry mess could have been avoided.
Paul Krugman seems to think inflation is somehow the cure we need. Personally I couldn't disagree more. I get the impression that it is a disaster to try and use monetary policy to create stimulus. From what I can see, that "jobless recovery" path just blows transitory bubbles that cause more damage. I do wonder though whether transfers of wealth (NOT conjuring up of fresh financial assets) by fiscal policy can redress the  imbalances that are causing the problems. An asset tax and citizen's dividend system to transfer wealth would not be a monetary stimulus. It would be neutral in monetary terms. It would also not involve the state running things. It would just spread out purchasing power.

Stone:

The kernel of truth in all this may be the migration issue.  Over the centuries, millions of Europeans have voted with their feet in pursuit of greater economic and political freedom....of the sort to be found in America, Canada, Australia, etc.  The desire to acquire and keep earned wealth is a strong one, and not just for unemployed youth.  I suspect that participants in the system you describe would likely flee, leaving behind little worth redistributing.

Aside: The US has various laws which make it easier for people to get cheap apartments, supplemental income, or assisted living arrangements if they appear to have meager assets.  Some conceal or transfer their assets to others in order to qualify.  Even outside the realm of public assistance rules, prosperous individuals often give assets away to loved ones, who may or may not have substantial assets of their own.  Does the transfer of wealth in ways such as these create difficulties for the scenario you are developing?  If so, what would you do to keep it from short-circuiting the system?

TBV, I don't think people giving stuff away would be a problem because the recipients would be less likely to use the money for inflating asset bubbles and more likely to use it for buying goods and services. I have to stress I'm trying to clarify the utilatarian side of things rather than the justice side. I can totally understand the view that wealth redistribution is injust. I'm just questioning the idea that it is ALSO bad from an economic perspective.
Lativa did preserve people's right to keep the wealth they gained. BUT people are voting with their feet and leaving because although the government policies do everything to avoid confiscating their wealth, those same policies mean that they have diminishing opertunities to get any wealth. Ireland also did everything by the book to favor wealth and they also now have mass emigration for much the same reason. The USA in its early years had an expanding frontier and I think that creates a different scenario to dealing with a closed system. New land for the taking might make the rules different???