Economics

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Speculation

Robert Locke’s excellent discussion of the different perspective presented by a tacit-knowledge rather than explicit-driven driven enquiry into economic matters prompts me to reprise my understanding of the purpose of a business firm.

Put briefly: a business firm exists to translate what is often called tacit knowledge in to what is called explicit knowledge. An alternative wording would be that firms take the ad hoc and various and make them into the codified and uniform. In my own thought I use the words “secondary knowledge” to refer to the kind of knowledge that tackles ad hoc or unexpected circumstances. I use the words “primary knowledge” to refer to the codified knowledge that allows us to tackle the usual and/or repetitive circumstances. It is phraseology I borrowed from evolutionary psychology.

Why do firms do this?

Because that’s how they extract value.

Firms succeed when they control a process in order to produce something. Such processes are constructed from a variety of roles and routines whereby knowledge is combined with energy and physical resources, with the outcome being something for sale. Since establishing a process is a risky proposition — it takes up both space and time and so is susceptible to uncertainty on two fronts — control becomes the key component. And, in order to make the process most profitable, firms want to establish maximum control over the outcome: products must be both qualitatively and quantitatively predictable. How best to do that? By eliminating the ad hoc and various and limiting production to the codified and uniform.

However, as all students of evolutionary theory will recognize, being too specific, too codified, and too uniform renders something highly risky in the face of uncertainty. An unpredicted event may make the output of even the most efficient process useless or obsolete. In biology such uncertainty might arrive in the form of environmental turmoil. In business it might arrive in the form of a new technology. Either way excessive specialization and excessive efficiency makes a process vulnerable to change.

So firms need to absorb novelty. They need to be able to adapt. This implies that there is survival value in the ad hoc and the various, since they are the source of the novelty and adaptation. But to wring out the efficiencies upon which profitability best thrives the new ideas and discoveries within the ad hoc and various must be reduced to code: reliable replication is the key to effective production.

The profit cycle then begins again: knowledge gleaned from confrontation with uncertainty is carefully reduced to code. The specific discovery is made general production. And along the way value is added because quality controlled production becomes possible in quantity.

Being able to deploy both primary and secondary knowledge is the only long term source of survival. In my view the goal of a firm is to survive, it is not to maximize profit since uncertainty rules out the ability to maximize. But to thrive a firm needs to generate sufficient profit to locate and benefit from novelty so it can then reduce that novelty to codified and thus controlled production.

And so on …

The advantages of primary knowledge are that it allows consistent and reliable replication; it is objective inasmuch as it exists outside of any one person [it is coded]; and it is cheap to maintain [it has low/no error rate]. It is thus the most efficient basis for process construction. As noted: these advantages come at the cost of potential failure in the face of change.

In contrast, secondary knowledge is highly variable; subjective inasmuch as it is unique to an individual; and it is expensive because it is both relatively scarce and inscrutable. It is also highly likely to involve redundancy since its components might have no application to any particular problem, but are, rather, available to be called upon to deal with change.

So the getting balance between highly efficient but vulnerable to change, and less efficient yet adaptable, processes is the goal of good management. Survival depends upon the latter. The former is the source of profit. Translation from one to the other is the purpose of the firm.

 

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Spite as Policy

There’s not much to say, but let me say it anyway:

Last week Trump simply stopped pretending he wants to make policy based on thought. He revealed, instead, that his primal driving force is to humiliate and stomp on anyone who stops him being in total control. Since Congress failed to deliver a “repeal and replace” just as he had advocated during the election campaign, Trump decided to let his inner spite flow. He decided to smash away at the Obamacare edifice regardless of the consequences in a child-like rage. He hadn’t got what he wanted. So people have to suffer. And suffer greatly.

So spiteful is his rage at being denied his original goal that Trump cares not one whit about the damage to ordinary citizen’s lives he is wreaking. That’s not the point: being concerned is for weak people. Domination and control is for strong people. And, boy, does Trump want us to cower in the shadow of his presence.

Apparently Trump’s calculation is that if he smashes away at the Affordable Care Act, if he undermines it sufficiently, if vents his anger and spews out his hatred of Obama enough, and if enough people feel the pain, then others — notably Congress — will be forced to come to heel. If not, then so be it, let people die, let people suffer, let people go without. In Trump’s contorted and vile mind, all that devastation is justified, it is part of his act.

Trump likes to imaging himself a deal maker. His method is based on a zero-sum approach. A deal is only good for him if someone else manifestly loses. He has no ability to give and take. He has no measure that allows nuanced or complex deal making. No, not at all: a deal is either a win or a loss. And the best way to arrive at a win is to demonstrate your willingness to tear down all and sundry until the opposition caves in. If the opposition doesn’t cave in, then all the destruction is their fault because they could have surrendered.

So when Trump stops the cash subsidies that have propped up the insurance markets he knows well what he is doing. He is driving up insurance premiums for everyone; he is undermining the entire healthcare system; he is adding substantially to the Federal deficit; he is hurting  insurance company profitability; and he is tossing people out of the system altogether. There is nothing good about any of it. He doesn’t care.

He lashes out by fiat.

He is driven by spite.

All because Congress didn’t deliver on his impossible promises.

His body language when he spoke about his actions tells us all we need to know. His actual language simply reinforced it.

He told us that Obamacare “no longer exists”; he has, he said ,”got rid of it”. More to the point he announced that the desperate  attempts going on in Congress to salvage something from his outburst, are only taking place because of his swathe of destruction. This latter assertion is, naturally, a total lie. Bipartisan efforts have been underway for over a month to come up with a fix to Obamacare. That they haven’t progressed far is due to his indifference: they don’t render unto Trump what he wanted. He wants to expunge the entire Obama legacy. He is entirely uninterested in fixing or improving anything. He, because of his insatiable ego, needs to be boss. And especially he needs to boss his predecessor, a black man far more popular, far more sensitive, for more intelligent, and far more aware of the needs of the country.

His attack on Obamacare last week wasn’t an act of policy. It was an act of spite.

In Trump’s case it is no longer possible to tell what else he might do in a fit of rage.

His policy is spite. It’s all he has.

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Health Care Front Lines

Health care is the muddy hellhole pocked wasteland of American politics. Forgive my World War One analogy, but its the best I can come up with. We are stuck in mindless trench warfare. The generals sit somewhere off to one side planning the next big futile initiative and the troops — in this case you and me, the consumers of healthcare — are once again thrown into the maelstrom.

This is stupid.

This is epically antisocial.

And this is the great defining point of American democracy.

If we cannot provide decent, patient oriented healthcare at a sensible price to our fellow citizens, then just who are we? Everyone else can. Why can’t we?

Last night Trump, the antisocial imbecile, gave orders to undermine the Affordable Care Act. He did this out of personal pique and narcissist-driven rage. He had promised his rabid supporters the impossible: cheaper and yet somehow more extensive healthcare. He had failed to deliver it because the Republican party is so splintered over healthcare policy. He failed to understand the basic economics and logic of insurance. And so, with his ego foremost, he has decided to undo the ACA without having in hand any replacement or fix. Healthcare is about to deteriorate for millions of Americans.

Trump imagines, I think, that this is some brilliant negotiating tactic. He imagines, I think, that his attack on the ACA will force Congress suddenly to defy its recent history and act on behalf of the people. He imagines, I think, that his unilateral action to raise insurance premiums — that is the logical result on his actions yesterday — will cause such a stir that the Democrats will have to reach out and work with him to repair the damage he has wrought.

He is an idiot.

He, apparently, has no idea of how Congress works. He has no idea of why he failed before. It wasn’t because the Democrats wouldn’t reach out, it was because the Republicans refused to cooperate.

He is an idiot.

The goal of legislation ought to have been to fix the more obvious glitches in the original ACA. But because it was associated with Obama whose name alone is sufficient to invoke loathing and hatred amongst Trump voters, fixing was never on the table. No. The GOP was committed to “repeal and replace”. The problem was that they never, ever, thought about having to fulfill the promise. They failed at their first attempt. They failed at their second attempt. They failed at their third attempt. And their fourth attempt was lost in the churned up mud of the battlefield before the troops even roused themselves out of the trenches.

The problem is simply this: there is no way to”fix” healthcare by going backwards. The only true fix is found by tossing aside all previous ideas and by combining up with a commitment to universal coverage with a very large government involvement in order to modulate and regulate costs — especially on prescriptions.

Yet the Republicans remain committed to exactly the opposite. They believe in reducing quality and coverage in the name of “individual choice” apparently ignorant that this will undermine the foundations of the insurance system. You can always offer cheap “skinny” coverage to healthy people. Their rates will go down. Which is the goal of one of Trump’s executive orders. But that exact action will shift the onus of costs onto the shoulders of the sick. It will make, inevitably, healthcare unaffordable for people who have long term illnesses. It will reduce coverage.

The entire premiss of insurance is that healthy people pay more than their health needs them to in order to subsidize the costs of care for the sick. Its called citizenry. As in we all help each other. As in you help me and I will help you.

This eludes the Republicans.

To them, in echoes of Reagan and Margaret Thatcher, since society doesn’t exist as a collective agent, and, thus, everything is reduced to individual agency, anything collective is beyond their intellectual framework. Insurance, however, is at its heart a collective activity. There is nothing individual about insurance.

This is why the Republicans are doomed to screw insurance up.

And it is why Trump is an idiot.

So much for his business acumen. He doesn’t comprehend insurance. His experience seems limited to bankruptcy law.

In any case:

The orders signed by Trump yesterday will cause insurance premiums to rise. In California they will rise by 12.5% next year alone. That seems to be the benchmark across the entire country. Not only that but policies will cover much less: maternity costs will probably be one of the first to be dropped.

So we plunge back into the mud.

The people suffer deprivation and possibly some will die. Whilst the generals in Washington prepare another stupid foray from the trenches.

Did I mention? Trump is an idiot.

Let’s stop talking about Obamacare: it’s “Trumpcare” now. Stick him with it.

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Geography as an Example

Let me be very quick:

Geography is not taught [if it is taught at all] as if there are no rivers, mountains, plains, valleys, coasts, seas, or oceans. Cities, towns, villages and the networks that connect them exist in even the most elementary geography lesson. Geographers don’t begin their lessons by ignoring reality. They dive right in and use the real world as the backdrop for teaching the processes and forces that result in what we actually see.

So why does economics not start this way?

Why does economics begin with the unreal and then make a sequence of adjustments to get closer to reality? Perhaps it’s because geographers cannot hide reality from their students: its all around us everyday. But economists are dealing with something more abstract, so they can get away with beginning with fantasy.

We can argue back and forth over how close economics ever gets to reality, but few would argue that economics 101 is far too simple a view and is far too riddled with unworldly assumptions to be of much value as a description of real economies.

The problem is that economics 101 is all that a very large number of people ever get to read or be taught. They are mostly oblivious to the adjustments that tend to be taught much later on and only to those who are determined to become economists.

So the simple world of uncluttered supply, demand, and competition, and the wonderland of prices is all most people understand. That’s like learning geography as if the world were flat and without a single blemish on its surface. Pristine utopias may or may not be useful teaching gambits. They are useless as descriptions of reality. That’s obvious. Except to the economists who doggedly deny that their teaching process is responsible for the remarkable ignorance most people have of the realities of actual economies.

Any economist who teaches the subject in this backwards fashion is contributing to the public’s ignorance. Worse: they are contributing to the dominance of the ideology embedded within the purity that does not and cannot exist in the reality.

That’s an ethical problem for economists to grapple with. Until they get it right we all ought to poke as much as we can at them.

Perhaps economics is just too important to leave to economists.

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More Fog

We still don’t have much clue what the Republicans want to do with their tax plan. It isn’t that we can’t understand the details, it is that there are no details to understand.

Take the corporate tax rate.

The big argument being put forward for a change in the corporate tax rate is that, at 35%, the US has one of the highest rates in the industrial world. But if you look at multinational corporations the facts tell a slightly different story. US multinationals pay about 28% of their worldwide profits in tax, whereas their competitors in the G-7 nations pay about 29%. In other words American businesses are not being hurt at all by the notionally higher rate.

Why not?

Because the US tax code is riddled with loopholes that any self-respecting tax lawyer or accountant can exploit. Many of those loopholes are highly specific to a particular industry. One or two are so specific that a single company benefits.

How did it get this way?

Money. Lots of it. Big corporations are the biggest source of corruption in the American political system. Only it’s not called corruption, its called lobbying. Lobbyists are very often the only people who really know what the tax code contains, especially for their clients. Politicians rarely, if ever, read the details of what they legislate, so there is plenty of opportunity for a well-connected lobbyist to sneak a paragraph or two in during the legislative process to pad the coffers of a client corporation.

As long as the American political system remains as corrupt as it is, the tax code will be a bear to reform. We are already witnessing how difficult: even though Congress has not released any detail about its big upcoming tax reform, the lobbyists along K Street in Washington are gearing up for a battle royal.

This implies, naturally, that getting anything meaningful done will be tough. Probably tougher than healthcare reform because in healthcare there are few lobbyists working on behalf of the public. So the business lobby gets to dominate it and the ideologues are more immune to money fueled attacks next election time.

This is not true of tax reform. The stakes are huge. And since the beneficiaries of the loopholes tend to be the wealthy and big corporations, these are same people who fund the corruption of our money sickened elections, the battle has big players on all sides. Someone is going to lose. That makes for a frenzied legislative process.

It is precisely because all this is known to Congress that we have no details. The minute, no, the second that any details emerge, the lobbyists will go to work. The more detail is available, the more intense the fighting becomes. Members of Congress who might want to produce a genuinely simpler tax code will be swamped by threats and/or inducements. It will take a level of political courage that hasn’t recently existed in Washington to get anything significant done.

So, much of our contorted tax code will likely survive.

Which gets us back to the easy stuff: tax cuts.

Despite all the smoke being blown by the lying cadre in charge of the White House, if the little we know is correct, then the rich will be getting a major tax cut whilst the rest of us will be getting what crumbs fall from the table.

And that, as we all know, is how America is run nowadays. That is the way a plutocracy is run: two Americas, one for the rich and one for the rest.

But plutocracies don’t last forever. They decay. Infighting enfeebles them. Contradictions emerge. And collapse ensues.

America is becoming weakened by its own system of government and the ease with which is can be controlled by a determined minority. This will worsen as the old system, designed to preserve the power of the rural heartland [and slavery along with it back in the day] is undermined by the great demographic shift into our cities. We already saw the future in the last election. Clinton won more votes than Trump by dint of her victory in the highly populous coastal states and biggest cities. She lost according to the ancient rules. How many more losses like that will it take to upend the bias in the system?

Meanwhile at the tax reform coal front a different schism also points to the future. The battle within the plutocracy to protect the rents, cheats, dodges, and sleights of hand that enable the spigot of cash to flow ever upwards will rend the wealthy into factions. How long can such greed driven and egregious plunder last? How many more Trumps do we have to endure before the system crashes to the ground?

Time will tell. But watch then tax reform fight, it will give us insight into how long the plutocracy has left.

Then again they couch it all in the name of markets and freedom. So the economists must be happy. That’s their gig.

Though quite what freedom they are talking about, I have no idea.

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