Pro Commerce

IRS and Bill of Rights

I assume that most of my readers know the Bill of Rights. There are three of these rights that do not seem to have been previously arrogated by the IRS. Congress has created a unique category of laws for the IRS delegating to it astounding powers that violates seven out of ten of the Bill of Rights.

The first, second and 10th rights deal with issues previously unrelated to the IRS. To some extent the first amendment protection of religion partially relates to the IRS.  It prohibits the IRS from collecting taxes from religious organizations.

The most recent scandal in which the leaders of the IRS, Carter Hull, William Wilkens and Lois Lerner specifically singled out politically related organizations and pro-Israel organizations for malicious IRS treatment. This suggests that the IRS has decided on its own to violate the first amendment to the Constitution. The IRS has on
its own decided to violate the first of our Bill of Rights.

To me this is an outrage.

The IRS already has the most extraordinary powers of any American government agency. A brief review of the US code relating to the IRS will let you know that the IRS, on its own, using only internal decision-making and judicial processes can go into your home and take any documents, go into your business and take any documents including your computer. The IRS using only internal decision-making and internal judicial processes can close your business, can seize your bank accounts and can seize your other financial assets.

You are not enabled, despite the Bill of Rights, to have a jury trial when dealing with the IRS.  The IRS has by law been allowed to overstep most of our Bill of Rights protections. The IRS does not allow you to post bail. It can include in its web of prosecution relatives and spouses. That clearly violates rights protected in the Bill of Rights.

I am not making this up. The power of the IRS to violate seven out of ten of our Bill of Rights has already been inscribed in law.

Now the IRS has decided to arrogated to itself the eighth out of ten rights that were our protection from government.

Doesn't this convince you of the seriousness of the current scandal? Shouldn't Carter Hull, William Wilkens and Lois Lerner go to prison for their arrogation of our 1st Ammendment constitutional rights?

Big business and politics

The standard trope of Lefties and hippies is that big business controls politics and that they have a cozy relationship that is often described as plutocratic.

The only way such a preposterous and erroneous idea could become prevalent is that most people don't know a successful business person.

I do. I have known hundreds of business people who have gone from small business to large business.

In many cases small business people have to learn politics because local zoning requires such learning. In nearly all cases where businesses have grown to a substantial size, the businessperson must learn politics in order to survive.

The laws, regulations, taxes and the supervision by government of a business that is large enough to be effected requires the businessperson to learn politics.

If you have just lightly followed the previous two paragraphs it should be obvious that virtually nobody goes into business deliberately to learn about politics. Businesspeople are forced to learn about politics because the political world intrudes on them in a 100 different daily ways.

I watched Larry Ellison, founder of Oracle, learn politics. He decided to build his headquarters in San Carlos, California near a small airport that he could use for his regular travel. Ellison flies his own planes and helicopters including jets.

Ellison got permission to extend the runway on this small San Carlos airport in return for building his headquarters across the road.

When the headquarters was finished and the time came to ask the local city council to expand expand the runway, the council refused.  Ellison learned politics. You do not count on political promises. Honesty and trust are not part of the political moral value system. The runway should have been extended before the building was built.

The whole point of this is that businesspeople are forced to learn politics because the moral system in the political world is radically different. The political moral system is based on bribery and corruption. Businesspeople are forced to learn this.

I wish there were a way to put up big billboards that say ‘politics and government force businesses to be corrupt because that is the way of politics’. That is not the way of business in its dealings with employees and customers.

Commerce is a subtle world

There is a simple reason why the number of plays, movies, novels and short stories are 1000 to 1 about every subject except business.  Business is too subtle for minds of a literary bent.

Business is very hard to understand and even harder to comprehend. It is subtle. Business is about infinitely subtle communication between a business and its customers.

There is a reason, there are many reasons, customers prefer Starbucks or McDonald's to the local coffee shop with discarded living room furniture and the hamburger stand with windows too greasy to see through.

I have worked with nearly 2000 business and found that the slightest change can increase or decrease business. In a scent shop with body lotions the presence of a nearly invisible novel toilet seat on the wall (that was of interest to the shop owner) actually decreased sales. Removing the toilet seat increased sales. A subtle change in the store with more than 2000 objects and dozens of aesthetic issues.  The same reason rat poison and gerbil food are on separate isles in most stores.  Classification error.

The same is true of products where a minor change in wording on the bottle, a change in typeface on a brand and the change in color on a food wrapping package can make a big difference in sales both positive and negative.

All of these details are much too subtle to be determined simply by looking.

The subtlety of business is measured by a highly refined and highly evolved sense. That sense is called ‘mathematical skill’. Business uses numbers and financial statements to perceive the world. It is accounting and bookkeeping that provide business people with their highly evolved sense of the subtleties of customer choices.

The way any detail about a business operation is determined is by testing the detail being considered and looking at the financial results. Looking at numbers.

I understand why literary people cannot comprehend the subtleties of business. Business subtlety is understood through the sense of numbers.

Open letter to Obama

You said the following without a shred of understanding or insight:

“There are very few African-American men in this country who haven't had the experience of being followed when they were shopping in a department store. That includes me.

There are probably very few African-American men who haven't had the experience of walking across the street and hearing the locks click on the doors of cars. That happens to me -- at least before I was a senator.

There are very few African-Americans who haven't had the experience of getting on an elevator and a woman clutching her purse nervously and holding her breath until she had a chance to get off.

That happens often.”

That statement is true only for casually dressed black males between the ages of 13 and 35. It can also be true of two or more black females in the same age if they are wearing informal clothes.

*It is not true for black women over 35.

*It is not true for black men over 45 if they are well dressed.

*It is not true for any black male or female wearing a uniform of the US military of a police department of a fire department or any other responsible agency. It is not true for anyone wearing a suit.

*It is not true for anyone who is wearing a security badge or identification.

*It is not true for a wide range of black people who are clearly involved in productive work such as a person carrying a musical instrument, a person involved in maintenance or repair.

Your failure to understand the reasons for this issue are disturbing in themselves. A black male or female in casual clothing between the ages of 13 and 35 presents a risk of crime that is not trivial. And everybody knows it. Everybody. Every American.

Most people spend their lives ignoring trivial danger. We face trivial dangers when we drive a car, when we ride on public transportation when we climb a ladder and when we use shop equipment. So long as the danger is trivial we try to be a little more careful.

Being in an elevator, being in a car or being responsible for products in the retail store presents most of us with a non-trivial danger if the person with us is a black in casual clothes between age 13 and 35. With a hoodie, even more so.

You don't seem to know this. You have been a cloistered affirmative action male.  You speak English well, you are half white and you chose to go into a field that doesn't require intelligence: politics. Your arrogance, which is partly the result of 20 years of affirmative action, has made you insensitive to your own ignorance.

What I wrote above is simple, clear and easy to understand. I hope it gets through to you and you apologize to the American people for your racial incitement.

Muni and Bart 3rd World

Please indulge me. I often use examples from the politics of the San Francisco Bay Area.

More than 99% of my readers do not live here. However, urban government is the same all over America. It is just that my local government is the example of the worst one can expect. That is because this area is heavily dominated by unions, the Democratic Party, academia and wealthy trust fund zombies.

If you have spent time in the Third World, Yemen, India, Africa and much of Latin America you know what the term Third World means. It means nothing works the way you expect it to. Airplanes leave Lagos Nigeria when they are full and not before. Often the pilot needs to borrow a passenger’s credit card to pay for the fuel for the airplane.

In urban areas of the United States, with very rare exceptions, the public transportation is rather pathetic and not particularly reliable. My standard for buses is Tokyo, a very dense and complex city where bus schedules can be posted to the minute and are accurate. Do you know any American city where that could be true?

One of the reasons is evident in the union conditions for the operation of the Bay Area high-speed transport BART. Another is the San Francisco transit system both buses and underground light rail, MUNI.

In both instances the unions have written contracts that allow employees to not show up and not phone in to let management know that a position needs to be filled. In both systems, employees are allowed 40 days of absence without reason and without notification.

This is Third World living and working. A worker can stay in bed and go back to sleep most of the time just because they feel like it. Being at their job or being on time is irrelevant.

Now imagine you are management.  You don't know until each shift begins, how many workers you have available on any day or any shift. Now try to manage a very complex highly technical and dangerous system under those conditions. You can't.

Unions have created Third World conditions that we live in because Lefties don't understand the environment around us and the institutions that make life good or bad.

We are climbing

It is widely taken as fact that the middle class has been losing membership for 20 years because of a decrease in middle-class jobs in manufacturing and import competition.

This loss of the middle class is universally promoted by the New York Times and the Lefty mainstream media.

I know my readers will be glad to know that this middle-class disappearance is a distortion of reality.

What this article and the chart shown here, have to teach us is that the middle class in the United States for many decades has been migrating into the upper class.

That is wonderful news. Bad is what the Left is trying to distort and disparage. The Left is a world of misery and zero-sum thinking. (Not ‘thinking’ but ideology.)

Spread the good news. Commerce is always the vehicle for progress, good health and better lives. The Left and the political moral system are the opposite of commerce and positive sum.

Detroit

To me the word Detroit has become synonymous with the phrase 'anti-business'.  Attitudes that destroy a city.

There are three forces that have destroyed Detroit, a city with abandoned houses, rampant crime and empty lots with weeds everywhere.

The first was a large black population that burned many parts of their neighborhood in anger in the 1960s. Black populations have done similar things to other cities ranging from DC to Watts and New Orleans.

Second there were strong unions that strangled the businesses that kept the city alive and provided employment. Unions, in nearly every situation, will prefer that a business die rather than reduce wages or layoffs workers. (Call it the ‘twinkie syndrome’)  Businesses in and around Detroit died as the automobile related industries faced international competition.

Lastly, there is the Democratic Party, which is inherently union controlled and opposed to commerce. It put traditional incompetent politicians in charge of the local government and made sure any new businesses had every incentive to locate someplace other than Detroit. It also made sure that the school system would never attract middle-class hard-working people.

Nearly every urban city faces these same forces. In my humble opinion Detroit is the model for most urban governments today. The vitality that counteracts this oppressive political moral system is commerce that is inherently attracted in its retail form to dense urban populations.

City maintenance

Do you want to know why urban areas in the U.S. look like a Third world?

Because political moral systems do not accept responsibility for the general welfare.  The general welfare does not have a vote.

If you saw an ugly sidewalk, dirty windows in front of a Starbucks or Nordstrom's you would be shocked.

On the other hand, most cities do not accept the responsibility for street maintenance, sidewalk maintenance, street trees or graffiti removal. Because the political moral system is interested only in using its revenue for its own internal purposes such as wages, luxury benefits and retirement pensions.

I know that is true for San Francisco. I realize this city hates commerce and loves politics. It is a more extreme example than other cities like Houston or San Diego. On the right is a photograph that lets you know the extremes to which a city can go in abdicating responsibility for the general welfare.

If the sidewalk is cracked in San Francisco,  cracked locations are spray-painted and a notice is sent to the homeowner nearest to the cracked sidewalk to immediately repair the sidewalk (expensive) or face a penalty. At the very same location the street can be filled with holes and cracks. The city no longer has a maintenance budget for fixing streets, sidewalks or street trees. Every few years the city floats a bond to pay for street repairs. That is the same as getting a new mortgage every four years to fix leaks in your home.

Graffiti removal is the responsibility of building owners or the owners of buildings nearby. I have seen abandoned buildings with penalty notices about graffiti that the owners are supposed to remove. Of course the city is the only entity with power to punish graffiti creators. We property owners can't shoot them.

If a business did this most people, because they have a partial industrial-commercial moral sense, would be outraged.  Many would tell the business owners that they will avoid shopping there.

There is no way to boycott paying the wide variety of taxes that an incompetent city imposes on its residents and visitors.

Newspaper racks

The photo on the right of an empty newspaper rack tells an interesting story.

Roughly a decade ago the city of San Francisco was faced with a rapidly growing cluster of newspaper racks that were crowding most business sections of the city on the corners.

The First Amendment to the Constitution made sure that the racks could not be removed.

The City’s solution was to design and install these large arrays of racks for all of the formerly separate newspaper stands.

Typical of San Francisco corruption at the time the dominant Lefty newspaper was put in all racks and the conservative newspaper (since gone) was put in only a few racks. The rest of the racks were for real estate ads, free universities and job finding indexes.

People often talk about the decline of newspapers.  As this photo shows, that is not the story.

All paper distribution of information is disappearing rapidly. Newspapers are just one of many forms of paper information distribution that has migrated to the Internet. The Internet seems to be much more competitive than the newspaper racks were. I find at least 10 local real estate listings sites online. More than double the old paper handouts about real estate.

The decline of newspapers is really a decline for the ‘paper’ part of the word ‘newspaper’.

Productivity gains

The productivity gains in American society have been high for the last 15 years. Often at the level of 5% per year. ‘Productivity’ means growth of GDP over and above capital and labor inputs.

So why hasn't that productivity gain been beneficial to employment?

First and most importantly I think that a major part of the productivity gains have come from intangibles such as Starbucks espresso and similar stimulants, people working harder and the incredible connectivity in every square foot of one's daily life with smart phones.  So people work more efficiently, and most importantly we have the power of the Google search engine for getting information.

These types of productivity gain result in significant increases in output without creating a significant number of new businesses or new jobs. Workers work harder and more efficiently in existing jobs.

Second I think that the barriers that have been growing in our society for decades are having an increased effect in the past half decade.

*The financial crisis wiped out a great deal of assets for ordinary people and ordinary investors. This reduced initiative in business expansion.

*We had a minimum wage that acted as a barrier for entry level jobs that had not been a problem when the economic growth was rampant.

*We have high college debt and the associated milieu of anger amoung the new job entrants.

*We have an age distribution that leaves older workers in charge of management and baby boomers dropping out of the workforce early.

*We have a large uneducated unmotivated black population and no relevant jobs for them.

*Lastly we have a hostile government attitude toward commerce with government employees who are highly paid and very intrusive on the economy.

That is enough to make sure that productivity gains do not get translated into expansion of employment.

Are 'women peaceful'?

There seems to be a universal belief that women are more peaceful than men. I am regularly told that we would have no wars or fewer wars if there were more women in elected offices.

Fortunately I learned how false this narrative is in my early 20s.  Fifty years free of this ignorant proposition.

I was on the committee to integrate the San Francisco public schools by busing in the early 1960’s. I now regret that role and wish that we had only encouraged the most competent black students to go to white schools.  Busing ended up driving whites with kids to the suburbs.

I had the unfortunate job of going to PTA meetings and helping explain the new busing plans for San Francisco. The largest meeting I went to was at Hoover junior high school in the auditorium. I would estimate 1200 parents, predominantly women.

After we explained the busing system which would have taken their children to many black parts of the city and brought many black students to Hoover and its feeder schools, we opened the microphone to people in the audience.

Women were disproportionately the speakers from the audience.

I had never, before nor since, in my life, been exposed to such a group expression of venom and hatred. The room was at jet engine decibel levels with everyone, especially women, screaming at the tops of their lungs. We had no choice but to run out the back exit. The level of anger and hatred was life-threatening.

Since that night, I have never accepted the thesis that women are somehow more peaceful than men.

Commerce rewards, politics punishes

This is a continuation of the theme from the last blog. The difference between the industrial-commercial moral system and the political moral system.

In San Francisco we have two $.10 rules. Thanks to the city political moral system.

The lunatics in the environmental movement are determined to make life difficult for shoppers. So the city now requires that only paperbags can be used in retail stores for customers to carry out their purchases and that every store charge $.10 for each bag.  This is intended to force shoppers to bring their own reusable bags. Even for Xmas presents at Macy’s.

It is intended to save paper and eliminate plastic bags.

A rudimentary calculation would suggest that this pathetic legislation has no effect on either. Paperbags have many uses after they carry consumer goods home. They are recyclable, used to dispose of many other forms of waste and they have some health benefits over reusable bags (cleaner). Plastic bags also have many benefits and household uses and can only be considered a scarce resource if one is completely ignorant that they are made of our abundant natural gas.

The second $.10 charge is used at McDonald's.

The political moral system which gave us 50,000 years of early death and daily life with pain, is certain that the toys that McDonald's gives to children encourages the children to eat unhealthy McDonald's food. So these prissy moralists banned McDonald's in San Francisco from offering free toys.

McDonald's responded by charging $.10 for the formerly free toys.  Parents do not treat the $.10 as any different than free.

Of course McDonald's charges the $.10 to snub its nose at the politicians of San Francisco.  A dime for a toy that kids want, may make it more desirable.

Contrast these two moral systems. The political moral system has only one mechanism at its disposal: punish by either taxing, charging or banning.

The industrial-commercial moral system on the other hand has a variety of mechanisms at its disposal. But it always relies on rewards. The reward of choice for children, a toy, faced a trivial ban on offering them for free  It had no effect on the business.

Business is constantly finding ways to reward customers because commerce lives in a voluntary world and its morals are oriented toward rewards, generosity and appeal to customers.

Retail stores that now have to charge for a paper bag (government punishment) are slowly finding ways around it by offering new inventive rewards including coupons, discounts on specific items and other plastic ways to wrap merchandise that doesn't use bags.

Commerce is imaginative, dynamic and vital. Political moral systems are punitive and striving to maintain the status quo. Sometimes the intended status quo was a century earlier when stores didn’t give away paper bags.

SF prefers pensions to computer upgrades

As you read this blog you will notice I have added two points this year. They are consistent with what the blog has been about for its 13 years of existence. The new two points are being repeated because I am constantly looking for ways to explain the complexities of a pro-commerce worldview.

The world changed radically 200 years ago. Before that there was a homogeneous 50,000 year period of human history with very little change and very little improvement over subsistence. The Industrial Revolution dramatically raised parts of the world to luxury and good health. There have been plenty of experiments during this 200 years to confirm that a new system of morals associated with commerce is the source of our modern vitality. The old system of political morals has been constantly tried since the commercial world blossomed by communism, socialism and its many variants. The political world and its moral system has failed miserably.

It is my job to constantly point out the two different moral systems, the industrial-commercial moral system and the political moral system.

In today's case, I use my local city of San Francisco. A recent budget surplus due to rapidly rising prices of homes over $1 million generated sufficient millions of revenue for the Board of Supervisors to argue about how to spend the money. The decision was finally to put more money into the pensions of the 26,000 city's employees, rather than upgrade a very antiquated computer system that constantly fails to deliver reliable information.  It fails for the city employees and for citizens.

A political moral system is designed to maintain status quo by balancing power centers. An industrial -commercial moral system is designed to reduce costs.

In the city of San Francisco the most powerful power center is the city employees unions which includes fire and police. Their personal interest in their retirement far outweighs their interest in making their job productive. That is how the status quo is maintained. Productivity is what disrupts the status quo.

In an industrial-commercial decision, the productivity of the business has top priority, unless it has been rigidified by unions or old bureaucracies.  The decision to use extra revenue in a business will always give priority to improving productivity, upgrading computers before increasing funding for pensions.

We have a mixed moral system today. Hopefully in time the two will become more distinct and the industrial-commercial moral system that has brought us longer lives and greater health will triumph.

The IRS is different

In the discussions that I am part of and in the materials that I read, I don't find an adequate expression of outrage about the current  IRS scandal.

We have an instance in which a large number of IRS employees, at the direction of management, apply political criteria to the operation of the IRS.

Individuals and groups were (1) selectively chosen for harassment, (2) their private data was released to political opponents and (3) the entire process was the subject of partisan activity.

This would bother me if it were the actions of the local park and recreation agency  or the state licensing agency.

But it rises the level of outrage when the IRS is the agency being directed by partisan interests.

The IRS has the power to totally destroy an individual. It can jail them for a minor infraction as was the case with Al Capone. It can close a business and put a lock on the door with no warning. It can completely freeze bank accounts and investments. An individuals lifeline to survival.  It can demand private records and can seize them even it they are vital to daily livelihood.

This is the power to totally disrupt the life of an individual or a family or a business. And the IRS does it 100 times a day. This is not a trivial use of government power.

Moreover, for the people who can read American history, it is possible to read eight out of the first 10 amendments to the Constitution as a specific protection against that type of behavior exhibited by the IRS.  The right to free association, to keep the government out of our homes, to a trial by jury.

If you read the Declaration of Independence you will find that the complaints against King George and the British government in the colonies were specifically complaints that match the horrible misuse of power that we find in the IRS.

With any common sense about power, with a rudimentary sense of justice, it should be clear that the IRS scandal is one of the greatest outrages in American history since ratification on June 21st 1788.

Harem benefits

I am pro-commerce for many reasons one of which is listed in the title of this blog. Commerce supports "meritocracy".

In commerce meritocracy means hiring the most competent person for the job or using the most competent supplier.

The antithesis of meritocracy is usually nepotism. Nepotism is the hiring practice used in most pre-commercial societies and is still used in many areas such as small retail business.  It is still used in giant companies in China.

A friend of mine, one of the few people I actually can talk with about abstract matters, Stephen Besselman, and I were talking about the backwardness of the Arab society. Nepotism is rampant in the Arab world. You will always find one of the sons as the successor to a leader in any era and in every Arab country.

The problem with this is that offspring seldom inherit the skills or talents of the powerful parent. The same is true for the education of the offspring. It is seldom effective in transmitting skills or talents.

Stephen pointed out that one of the benefits of having a harem and a very large number of offspring in an  Arab or similar society that uses harems is that so many offspring increases the chance of finding a competent son

We now have a conceptual alternative to the horrors of nepotism. It is to support large harems as a way of finding skilled successor children.

This is the second alternative to meritocracy that I have found. The first of course was the Japanese model in which a highly competent stranger is adopted into powerful families to take on responsibilities as the official child.

Thank you Stephen

Definition of capital

In reading a recent book on economics I was struck by the author’s constant complaint that the standard definition of capital in economics was completely inadequate because capital that refers to new machinery and equipment cannot explain the dramatic returns to capital that are seen in the real world.

This does not come as much of a surprise to me. I was a graduate student in economics in the early 1960s at UC Berkeley. I wrote my doctoral thesis on capital.

My thesis ended up being 80 pages long. I argued that the predominant form of capital in any modern society was information and innovation embedded in institutions.  For example: early drop line soundings of a bay became numerical measurements on maps.  Those numerical measurements became embedded as isobars in newer maps. Finally the map details disappeared as sonar measurements became common on large ships. This was information embedded in institutions which is ‘capital’. I gave other examples and explained why bombed-out cities in post war Germany were able to recover so quickly.  Capital is embedded in the layout of cities and in the design of buildings.

Since this definition of capital was in direct contradiction to the arcane Marxist definition used exclusively in economics at UC Berkeley, I realized I had no future in economics. I left Berkeley.

I submitted my paper to the AER, American Economic Review. It was returned, after peer review,  with the requirement that it be less than 20 pages, per the journals publishing requirements.

I was young and too arrogant to tolerate such editing. A decade later I learned the value of editing on my first book The Seven Laws of Money published by Random House.

If you still think of capital as being machines and equipment it is time to rethink. Capital is embedded technology and improvements in every business form and structure including personnel and training.

The new Bay bridge

The San Francisco Bay will be getting a new bridge from Treasure Island to the East Bay at the end of this year. The new bridge is beautiful. It was designed by an architect, Donald McDonald.

I leave it to you to judge whether I should get any credit for this beautiful new structure.

Donald was a client of mine in the late 80’s. He was a prominent local architect. When he called me for advice there was not much architectural work available. His usually booming shop was down to very few architects.

Donald had done many public and newsworthy architectural projects but was getting very little appreciation for his skill and talent.

I looked at his financial statements and I already knew many of his architectural achievements. One of his constructions was the spaghetti freeway structure that connects Highway 101 to the San Francisco airport. To me this was a masterpiece of freeway design. I learned from Donald that he had approached the state highway building agency on his own to suggest design improvements. He was listened to.  And hired.

I asked Donald about his other highway design creations. One was a pedestrian overpass in Berkeley California that I knew.

I realized at that point that Donald had the most unique of all architectural skills: the ability to work with political entities. I strongly encouraged Donald, as my business advice, to work on bridges and overpasses. I suggested that he would be pretty much the only good architect in the field.

Donald pointed out that one famous person was already prominent in bridges in the United States: Calatrava. I replied that there was room for another architect and that Donald’s unique talents would bring him sufficient business to run a large operation.  I was right and Donald followed my advice.

I also suggested to Donald that in future bridge constructions that he operate an online site to keep the public posted on construction and the daily change orders that such construction entails. This was very early in the life of the Internet.  Donald rejected that idea.

I still believe that anyone who creates such a site on the Internet for a major project will have millions of schoolchildren worldwide follow it.

Business cycles

There are two problems with the idea of business cycles.

I went to graduate school in economics to study business cycles in the early 1960s. The only work of significance that had been done was by the founder of the field Wesley Mitchell.

First, there is nothing cyclical about business cycles. They come in relatively short intervals but they are highly erratic in their timing.

Second there is nothing repetitive about them as the word ‘cyclic’ implies. Each one seems to be individual and distinct from every one else. No one has been able to identify any factors that are common to many.

In fact there is no such thing as business cycle ‘theory’ after 80 years of effort. There is one institution, the National Bureau of Economic Research, NBER, in New York that we accept as the arbiter of business cycle dates. After the fact, the NBER identifies the point at which the cycle turned down and the month at which it turned up. This is done by looking at the various indicators of commercial activity and looking for coincident movements that indicate the peak or trough. These coincident movements are never the same and highly eclectic.

There was one long-term business cycle theory, called the Kondratieff cycle. It was supposedly a period of 25 years of growth and 25 years of no growth or decline. While such fifty-year cycles can be read into history, it has not been visible in the past seventy years in the United States or the world.

Business cycle theory is not a viable theory and does not help us understand anything in economics. Unfortunately.

When commerce confuses modes

In many places in this blog I explained the three modes of commerce: trade, industry and clientry.

I often give examples that (1) trade is the coffee shop with couches from The Salvation Army and the owner's family behind counter,  that (2) Starbucks is the industrial model where marketing of every detail lowers costs and has a highly refined effect on customers response and that (3) the French Hotel where the staff brings you cafe au lait while you lay in bed is the clientric model.

The big problem that many people have seeing these three modes of commerce is that some businesses confuse these separate types of commerce.

For example, many simple retail trade operations use the industrial model of the airlines by giving cumulative points for repeat usage (preferred customer cards). At the local retail trade level, this does not work. Regular customers should be known to the owners and staff and genuine recognition of these people should come in the form of spontaneous gifts of a free brioche or fancy cup.  Not a punch card with an ‘11th punch is free’.

There are two businesses that try to behave like industrial businesses. One is the utility company and the other is the bank.  

The utility company is a monopoly that has your business whether you want it or not. Behaving like an industrial business is a waste of time and money. Monopolies are not part of  commerce they are part of the political world. They can do everything wrong with the customers as long as they do everything right with the lobbyists and politicians.

Banks on the other hand are clientric. When they are well run they are likely to have a lifetime relationship with the client, like a lawyer or dentist. But they are never well run, unless they are ‘merchant banks’. Ordinary banks constantly act like industrial businesses.

What you want from a bank is timeliness, reliability of the highest order, and someone to talk to who can help you deal with any particular finance problem. Such a clientric bank would have a complete personal file on you like a doctor with medical records, and would charge for that function.  They would give you steadily improved service the longer you were a customer.

Does any of that sound like a bank to you? That is precisely what a bank was like more than a century ago.

There are many businesses that do not understand what they are doing. The businesses confusion tends to confuse us in our ability to distinguish trade from industry from clientry.

Time value of money

Gregory Clark in the book described in yesterday's blog finds the locus of the industrial revolution in the time value of money. The time value of money is a personal attribute in a national population.

I have two observations on this point and one painful experience.

First this point was brilliantly made by Max Weber in his book the The Protestant Ethic and the Spirit of Capitalism a century ago.

The difference between Clark and Weber is important to me. Clark fills his book with very reliable and testable economic equations. He also cites the research and authorities for each equation and study.

Weber argues entirely from his own observations over many years and many trips overseas. He uses logic and appeals to a rational-mind-construct for his argument. He assumes that if his argument is sufficiently clear, logical and based on standard rational observations, that the reader will be convinced.

Since I lead my life making my 'original' arguments of the Weber type, I am strongly in favor of people who learn from this combination of habits of the mind.  I am personally much more convinced by a powerful argument that is clear and incisive than I am by an excursion through reams of data. Though I obviously use the latter when appropriate.

Second, I have spent a great deal of time in Third World countries as well as late developing countries like Japan and Singapore and China. It was in the Third World countries that I came to understand why the work ethic was perhaps absent.  Tribal people are not ‘lazy’.

I found that tribal peoples in many places from Puebla Mexico to Mali to Vientiane Laos had entirely fulfilling lives, when food was abundant, as it has been for nearly a century. These lives are satisfying in every human dimension from smell, to physical warmth with other people to sexual satisfaction to answering the ultimate questions of mortality.

Because I found and understood why tribal people have rejected the industrial revolution I have spent decades trying to create an organization that will protect these people from our ethic of work that they reject.

Lastly on a more personal note, I built a park for winos and street people at the end of the 1970s. The park was a place where they could sit all day as long as they wanted and not be bothered and not be harassed. Most of the habitués were black. Not a day went by that the world of the Protestant ethic did not try to get, me the creator of the park, to get  these people sober, and to get them jobs and housing. Things that the park inhabitants had no interest in.

I deeply understand why the Protestant work ethic is not a universal human value. Few others in my world do.

Book on economic history

Gregory Clark has written the finest work on economic history that I know. The entire book A Farewell to Alms is focused on this single chart on the right.

Clark uses measurements from every period back to the Neolithic.  His data is impeccable. What he demonstrates is that all humans for the previous 50,000 years lived under the same conditions. Just a small amount above functional survival with occasional dips into starvation and death.  Clark shows, with a simple equation and solid data, that Malthusian economics accurately describes the conditions for this 50,000 year period.

For much of northern Europe, starting in England, this changed. We call the change the ‘industrial revolution’. Clark doesn't like the terminology but doesn't offer an alternative. The reason he doesn't like it is because he shows that moving the industrial equipment to Third world countries had no impact.

In the mid-19th century entire cotton processing and fabric producing factories were moved to Egypt and India. While these factories employed 3 to 4 times the number of workers used in England, in the same factories in Egypt and India the factories produced half as much output. This is why the industrial revolution did not spread outside of northern Europe and a few other locations. A century later we know that it did spread to Taiwan, South Korea, Japan, Singapore, China and a few other places.

Clark concludes that the industrial revolution occurred because of productivity. Productivity consists of two elements. One is a willingness of workers to work hard and consistently in return for delayed gratification. The other is a willingness to accept innovation and build that into the institutions of commerce.  Both of these elements are related to the time value of money. Time value of money is simply the willingness to forgo a gift of $10 today for $20 in five days. Such time value of money is what allows people to work hard consistently. It also allows them to introduce innovations that will increase output.

Different types of coffee tree take two to five years to reach coffee bean productivity. A person must have a high monetary value for waiting in order to plant a coffee tree.  Grape vines are similar.

I offer my personal comments on Clark's book in the next blog.

Max Boot

If you liked the books on the military and warfare by John Keegan you are a fortunate reader. This book review is intended to tell you that an even better writer on the subject is Max Boot. His book is  Invisible Armies: An Epic History of Guerrilla Warfare from Ancient Times to the Present.

Boot reviews the entire history of warfare with separate attention to terrorism, guerrilla warfare and main battle warfare. He looks at every part of history and every part of the world..

It is not apparent to most people that each of the types of warfare, terrorism and guerrilla action both have long histories. Both forms of warfare were used in biblical times.

Both forms of warfare have been used successfully and both have been complete failures throughout history.  The KKK was a successful terrorist organization.

Terrorism is defined as attacks on civilians for military or political or revolutionary purposes.

The most interesting category of terrorism was the wave of anarchist terrorism that began in the late 1800s and ran for half a century. It got nowhere because it had no cohesive goal in political, or military outcomes. Getting people to reject their government was a negative that was impossible to successfully promote. Anarchism remains a failure even as anarchists show up at Left wing demonstrations to regularly destroy property to this day.

Over the past several centuries, the combination of terrorism leading to guerrilla action has been increasingly deployed. We can see it in John Brown's movement from terrorism to guerrilla actions before the Civil War in his efforts to provoke what became the Civil War. We can see it in the fight of the Jew's to create the state of Israel. At the same time we can see it in the successful campaign of Mao who moved from terrorism to guerrilla action to main battle warfare. We can see it in the complete failure of Che Guevara to provoke a guerrilla movement in Central America.

Surprisingly we can see the complete success of suppressing guerrilla warfare in the 1950s in the Philippines and in the Surge in Iraq in 2007.

The most important lesson I took away from the book was that in the modern world, the New York Times, the Washington Post and the Lefty media establishment in the US and Europe can turn a terrorist movement or a guerrilla movement into a successful revolution.

That is precisely what happened when the Lefty media became the champions of North Vietnamese guerrilla groups. It was evident in the Lefty support of the Black Panthers that lead to Black Studies in every school of higher education. It continues to be evident in the Lefty support of the Palestinian terrorists.

Great book.  Get a hardcover copy.  You’ll want to lend it to friends and refer back to it in the future.

Measuring racial guilt

I have long had a background in survey research. When I can figure out a metric for measuring human attitudes, I am willing to make dramatic statements. Such dramatic statements can be tested with my metric if anyone wants to prove me wrong. (Otherwise I treat all other statements as 'Atlantis'... imaginary statements.)

When I figured out that intelligence in adulthood is correlated with political positions I stated that Republicans are smarter than Democrats. Such a metric could be determined by following a generation of schoolchildren whose IQs were tested in elementary school, into adulthood.

I now wish to make a statement that Pres. Barack H Obama was elected president because a significant part of the voting American population is filled with racial guilt.

I now believe such a measurement is possible in survey research.

In 1964, when Willie Brown, a black man was first running for the California Assembly in San Francisco, I conducted a survey to determine how much anti-black sentiment existed in the voting population. I was determined to estimate the amount of money it would take to defeat Willie.

I did this by measuring anti-black racism. Such anti-black racism turned out to be trivial in Browns’ Assembly district. No amount of mney could have defeated him.  He won easily.

The same could be done to measure racial guilt. Many white people believe that they personally did not do enough to ameliorate the consequences of slavery in the United States. This is racial guilt. It may be justified in many cases. It may not be.

The metric consists of asking people a series of questions about their friends and associates. The questions would measure the level of guilt that these friends and associates feel about their own contributions to ameliorating the effects of slavery. A very simple set of questions about  blacks, crime, black education and black work ethic would give a reliable answer.

I am now willing to make a statement about our first affirmative action president because my thesis can be tested. 'He won two elections because a significant part of the American voting public feels serious racial guilt.'

Golden Gate Park Bridal Falls and changing views

The photo on the right is of Bridal Falls in Golden Gate Park in San Francisco.

There are no cars parked in front of this scenic location these days. A century ago, shortly after the park was built, these falls were the most popular site in the park. People were picnicking in front of them, getting married in front of them and frequently just sitting there contemplating their beauty.

All of which is to say that what is beautiful and what is valuable and what is important aesthetically is always in flux.

These falls were popular during a hyper romantic era in our society. I consider America itself to be a romantic society from its founding. I use the term ‘romantic’ in the sense that it is used to describe ‘Romantic’ in art, literature and music. It refers to a worldview in which we can see the surface but there is emerging through the fog and clouds a beautiful underlying real world. ( A delicate world most readily seen by ethereal women.)

I suspect that the horrors of poison gas in WWI were what brought this domestic romantic sense to an end.

I also suspect that the high level of American optimism that was growing after the Civil War brought with it an excitement about sexuality, food, the future and prosperity that was compatible with a romantic view.

This sense of American optimism did not return to the general population until the 1950s.

We are currently in a very socially conservative mood. 

Change my mind towards commerce

In yesterday's blog I promised to discuss the second reason that I was forced to adapt my worldview to the reality around me.

The first change in my worldview occurred at age 19 based on my dramatic experiences in a kibbutz. The second change came in my early 50’s when I was digesting my 30 years of experience in business. My business experience began as a marketing researcher then as a banker, as a corporate treasurer, as a foundation president and as a business consultant to more than 1000 businesses of all sizes. Finally as founder of a business school and author of several books on commerce.

My epiphany came as I was trying to explain to myself the nature of commerce. It was at that moment (while on a business trip to Washington D.C.) that I realized that commerce had three separate and distinct components.  At that point I began to see the world differently.

In my first book, The Seven Laws of Money, I used the terminology of “tradeskills”. As I faced my new understanding that commerce is made up of three components, I realized that ‘trade’ was only one of these.

The three components of commerce are: trade, industry, and clientry. Each of these modes of commerce has a different goal and a different structure. Trade is directed at making certain that each sale covers the costs of replacing the sold item and providing sufficient revenue to continue in business. Retail stand-alone coffee shops, flower shops and Chinese restaurants are good examples of trade. Traders notoriously are travelers and sell their goods as they travel. Each sale is final.

Industry is directed at reducing costs. Cost reduction can occur through innovation at the supply, manufacturing, distribution and marketing points. Industrial commerce usually takes advantage of economies of scale. We all know industrial commerce because it is what created our modern world.

Clientry is the third form of commerce. Its goal is to maintain the customer relationship for a lifetime. Examples include dentists, designers, lawyers and bankers. (In the last case, bankers, they seldom understand the nature of their business.)

The world around us is made up of a mixture of all three forms of commerce.

Once I understood that the world around me was not a homogeneous world of commerce with singular business goals, I was much better able to realize the importance of commerce. I was also better able to synthesize my experiences in business and realized that commerce embodies both an amoral system of decision-making and a deeply moral system of values that lead to a modern society. Values such as anti-nepotism, diversity, openness, and the development of each individual's unique personal attributes.

Understanding this nature of commerce was my second epiphany on the road to my current pro-commerce worldview.

Changed my mind on a kibbutz

I have many blogs on my experience after college on a kibbutz. You can Google my earlier blogs simply using the word “kibbutz” on the left side of this blog.

The issue came up when a close friend asked me what were the turning points that have led me to my current pro-commerce position. There are two. I will deal with the second one in tomorrow's blog.

My friend knows that I grew up in a red diaper family with several communist relatives and two parents who were extreme FDR Lefties.

My mind was changed by a short three-month stay at a kibbutz in Northern Israel. I had read George Orwell's Animal Farm so I knew the propensity of human beings to turn any egalitarian situation into an hierarchical one. Each human has a different array of skills and competences which will automatically generate an hierarchical outcome if productivity plays a role in the social structure.

In this perfectly communist kibbutz, I saw every conceivable effort on the part of the top members of the hierarchy to appear as supporters of equality while effectively giving themselves covert hierarchical advantages. The senior members of the kibbutz smoked better cigarettes, had better toothbrushes, underwear, bed linen and they always got jobs in the dining room or laundry  which were the choice jobs.

I was on a kibbutz at the same time as Noam Chomsky, the contemporary global leader of Marxist intellectual thought. We came to different conclusions. He decided communism was too good for humans and I decided communism was not good for humans.

It was at this point that I began to see the world with greater clarity and recognized the idealistic world of communism was a fantasy. Later that same year, I became a production planner in an Israeli aircraft factory. I was in the same office as the Soviet style union boss. The ideologically preposterous demands of the union for low productivity and support for the status quo were shocking and dismaying.

I very soon found myself going to the American Embassy library to get books on finance and economics. I returned to the United States to do graduate work at UC Berkeley in business cycle theory. I also became president of the local Young Republicans and the campaign manager for a Republican candidate for the California Assembly.

Turkey is a real test for democracy

I am commenting on the popular uprising in Turkey because Turkey has two attributes that are of importance to me. First, Turkey has been a secular democracy for nearly 80 years, an island like Israel, in the middle of a desolate religious Arab sea.  Second, Turkey has been a growing force in commerce as one would expect from a people who have the same cultural origins as the Japanese.

There is no inherent connection between democracy and commerce as China and Singapore demonstrate. The connection between democracy and commerce is that a truly innovative commercial nation must be democratic. Other nations are then free to copy the innovations, prices and market institutions of the nation that combines democracy and commerce. In this sense, the United States, is the engine of the train of global commerce so long as United States has a political system that does not effectively interfere with the commercial system.

Turkey is an instance where the moral values of commerce have had 80 years to develop in the population. This is a wonderful test to see if those commercial values, as as opposed to the values of a political-moral system, that supports tyranny, can triumph.

It is my contention, that a society with industrial-commercial moral values (diversity, openness, meritocracy) will be less willing, over time, to accept the moral values of politics: (secrecy, autocracy, and hereditary class structures) that PM Erdogan has introduced in Turkey. Values that favor a zero sum society.

We should be watching this closely.

Why tribal groups can’t cooperate

Most of history is the story of well-organized fighters conquering disorganized tribes.

* Rome conquered all of its tribal neighbors. Even though all of France and the Celtic nation was far more numerous than Caesar's legions, Celtic tribes couldn't cooperate.

* The same was true as the British settlers moved into and then across the American continent.

*The tiny population of Jews in Palestine have been continually able to defeat the massive populations of Arabs surrounding them because the Arabs are tribal and unable to cooperate.

So why are tribal people so unable to cooperate with each other?

The answer is that tribal people live in a virtually zero sum world. The amount of land that is available to them, the amount of food and other resources is limited. If someone else gets more, they get less.

With this perspective in mind, one tribe has to give serious thought to cooperating with another tribe. In return for cooperating, in a military defense with another tribe, the other tribe will want something in return in the future. The more tribes that are needed for cooperation, the more the future is being put in jeopardy.

Such reasonable strategic thinking about the self interest of the tribe makes it very hard for any one tribe to cooperate with another tribe. The Celts may ultimately lose their war to Caesar but it is harder for them to see that outcome then to see another Celtic tribe demanding their women, their salt, their water and their land.

It is the world of zero sum thinking that makes cooperation so difficult. As tribal groups get more resources they are more able to cooperate with other tribes and even form governmental structures over themselves. Such was the case with some of the Indian Nations in the Appalachians.

In the zero sum world of tribes, cooperation is difficult.

Why do banks have so much real estate?

Do you ever wonder why there are so many bank branches and buildings owned by banks?

The answer turns out to be very simple. It has to do with the particularly strange way that banks do their accounting.

If you are a depositor at a bank, the amount of your deposit, the balance in your checking account at any moment, is counted as a liability on the bank’s financial statement. The reason it is treated as a liability is that you have the power to remove it at any time for any whim. That is the definition of a liability. The bank owes you your money and you can collect it when you want.

On the other hand if you borrow money from the bank, let's say a mortgage, the bank is counting on you for 30 years to make payments on that mortgage. From the bank’s point of view your mortgage with its associated payments is an asset of the bank.

In reality the bank makes most of its loans to corporations that get reviewed and renewed every year. These corporate loans can be paid back at any point but the bank doesn't see it this way. The bank sees the loan as a medium-term asset that it uses to generate income.

Among the many assets of the bank, in addition to cash on reserve with the Federal Reserve Bank, is its real estate. Since real estate can be sold quite readily as opposed to corporate loans in the bank's portfolio, the bank sees its real estate assets as more liquid and more desirable than anything other than cash.

For the bank's asset package to look more appealing, the bank buys more property, it opens more branches and it therefore creates a larger part of its asset portfolio that is nearly liquid.

I have long argued, in these blogs, that Federal insurance should be applied to bank loans, not deposits. If businesses were certain that their loans would not be sold-off or called-in unless their actual asset value declined, businesses would be much more able to run and expand in difficult economic periods.

I hope that explains why banks are so aggressive in adding real estate in the form of branches to their portfolio.

On income inequality

One of the reasons that some of my friends find they are uncomfortable with income inequality is they have a sense that very rich people have a great deal more power than everyone else.

If this were true, I would be in favor of a income redistribution. It is simply not true.

The area in which the rich are presumed to have more power is politics and government.

If my readers are not familiar with the statement by the most brilliant of all politicians, Jesse Unruh, I'll remind you: ‘if you can't take their booze, their money and their women and vote against them, you don't belong in politics’.

That is an accurate statement. Politicians have reasons to vote to mitigate conflicting power centers. Interests that override money. They invariably take money from all sides and make their decision independent of that money unless there is only one side with money.

I have spent several decades in the political world. Rich people are no more influential than leaders of political action groups. Rich people are seldom as skilled as political workers, union bosses and local government officials.

Bill Gates, Steve Jobs' wife and Warren Buffet may be able to arrange dinners with political leaders but their influence is genuinely insignificant.

Political people are taught to respond to real power, exercised by politically skilled people. Money does not often deliver either of those attributes.

Therefore I am never concerned about income inequality being associated with differential power in our society.