Employment, Wages, Opportunity -- And How to Raise Wages

It seems not uncommon that the mindset about employers is that they have a moral duty to provide some level of "reasonable" wages for their employees (and, as we can see in aspects like healthcare, we also think of employers as these very paternal organizations that are responsible for providing for our entire well-being, which terrifies me in its own right). I also understand that many very smart people I know hold an implicit belief that there are various forces of this reasonableness that are at work when workers are indeed paid these "fair" wages and benefits. Such forces include good will, societal pressure, union pressure, and when necessary, law.

This is, of course, particularly true in the case of minimum wage.

To begin our discussion, let's look at the opposite end of the spectrum, as I'd like to lay a foundation here. We won't look at CEOs, as we generally get the impression that their wages follow a different set of rules. Instead, let's look at Google employees, shall we? (Before you roll their eyes, I know there are differences between them and minimum wage workers, and I'll try to be clear about those.)

According to GlassDoor, Google engineers make an average of $128,000/yr. Benefits are also like something out of a dream--read for yourself.

So in this case, would we expect any of these forces of "being reasonable" to drive up prices? Maybe one could argue that Google are just "good guys," but the market average in the US has software developers getting paid an average of well over $90k, and this includes all the more "low-skill" software developers (Google needs the cream of the crop so it pays for them). There are no laws or social pressure demanding that Google or other software employees get paid more--in fact, they're making so much money that they've achieved the threshold of having rocks thrown at them for making too much, so if anything, there's a lot of social pressure to pay them less. Something's driving these wages up, and what is it?

If you've studied economics, you probably know where I'm going with this. The key here is, of course, supply and demand. Let's look at both:

Supply: Software developers have a frighteningly low unemployment rate of 2.8%. As someone trying to recruit a software developer on a startup budget, believe you me, this is so low it is almost choking the industry. (An interesting digression would be discussing why unemployment that's too low is terrible for economic growth, but we'll save that for another time and leave it as the dreaded "exercise for the reader" for the moment.)

Demand: This already-strong demand is predicted to grow at a mind-boggling 22% per year, according to the BLS. 

So you've got tons of companies scrambling to find an itty-bitty pool of software engineers. The key point here is that what drives wages up is high demand and low supply. 

What's This Mean for The Rest of Us?

In the US (as of July 2014), unemployment is at 6.1%. That sounds alright (we had 6% unemployment back in 2004), but it's highly misleading. Getting the "real" %'s is hard, but Forbes suggests over 14% of Americans that want full-time jobs are either totally unemployed, or have marginal/part-time jobs. If you're into this stuff, you've probably been reading about the problem that most new jobs are part-time, and you've probably also heard speculation that the full-timer mandate of Obamacare might be causing a shift to part-time jobs, as it makes full-timers comparatively more expensive. It's hard to know for sure (it's only been 7 months of implementation) and there are lots and lots of confounding factors going on--if you're right-leaning, you're probably jumping on this data; if you're left-leaning, you're probably rejecting it. 

But either way, we've got lots of unemployed and lots of under-employed. Those under-employed are part of the pool of "supply;" they're hungry for full-time work.

So what this means--as is the opposite of the software developer sub-economy--is that we have very high supply. 

And what about demand? Well, the US economy is--at best--crawling out of the recession, rather than rocketing. We've been looking at some 2% growth since the recession (we're accustomed to 4%-6% growth rates in recoveries), and Q1 2014 actually saw a 3% contraction. Bad news. It means low demand. Keen readers will say, "this is over-simplistic!" and it is, when one is trying to calculate demand (there's a lot of other stuff going on), but higher GDP growth trends with hiring, even when much of that GDP growth has been driven by stuff like automation. 

So: high supply, low demand. 

Quick Economics of Supply & Demand:

If it's not obvious that supply and demand drive price in general, I will refer the reader to Wikipedia for a quick catchup. It's most obvious in commodities (like metal, pigs, oil, whatever), where if there is a glut of supply, price goes down, and if supply crashes (like there's a famine, or a mine shuts down, or a war interrupts trade), price goes through the roof. In commodity trading, the future predicted supply and demand is really important, which is why the price of oil has gone up way more than one might expect, because the future supply of oil doesn't look like it's going to grow, where growing countries like China and India are going to be consuming a whole lot more oil. (Another digression: this is actually a good thing from a sustainability perspective, because that high price is making alternative sources of energy economically viable long before the "oil crisis" occurs.)

Labor Recoveries Mean Low Wages:

So low wages are going to be a hallmark of labor recoveries--that is, periods when there is a large excess of labor are going to have low wages, because--essentially--companies don't have to pay to compete for a limited supply, the way that they currently have to for software engineers. (If one software engineer is getting 8 offers, they can pick-and-choose whoever is willing to offer the best package, where if one retail job has 40 applicants, the employer gets to choose whoever is willing to do the best work for the lowest price.)

It's not a happy picture, but at the moment, it's reality. 

Let's talk about what well-intentioned stuff we do that is counter-productive, and then what we have to do to make the situation better.

What Not to Do: Artificially Raise Wages

It's so very tempting to raise wages artificially by increasing minimum wage, or adding mandated benefits (like healthcare). So. Tempting. It's so tempting that sometimes I find myself wanting to do it. It takes a mind-boggling amount of cold discipline to avoid the temptation, but politics doesn't work like that.

But "why's it a bad idea, Erik?" 

In the case that a potash company (I use this example because it's a quick case study of Potash Corp in the past few years due to--of all things--weird politics in Poland and Russia) has a huge glut of mined potash and there's not much demand for it, it could do one of two things:

1) Drop the price, and other businesses would buy more, either because they want to hold onto it at a lower price for when they'll need it, or because the lower price allows them to profitably use that potash in a way that the higher price didn't let them (there are certain farming applications where this is the case). 

2) Keep the price steady, and hold onto the spare supply for later. Potash actually chose to do this, predicting that the market would pick back up.

This case follows those basic laws of supply and demand, and shows us what happens when we raise the price of labor: the supply is consumed more slowly than it would otherwise be, if "the market" let the prices drop even lower. 

Some smart people will, at this point, start pulling out all sorts of studies that show that increasing the minimum wage doesn't cause job cuts, or even doesn't stop unemployment from decreasing. 

No reason to say that this isn't true. Businesses already invested in a certain model aren't going to just give up because margins are thinning ("I'm not making as much  money from this employee so I'm just going to fire him and give up on the endeavor"). There's also no reason to think that businesses would just up and stop hiring--most employees don't work minimum wage jobs, and in those that do, there are still going to be applications where those higher-priced minimum wage jobs are still profitable.

This is a good counter to a fundamentally faulty (and frankly, lazy) argument that "lots of minimum wage employment is barely-profitable, so raising the minimum wage is going to make them necessarily unprofitable." Poppycock. Corporate profits are at a record high. Corporations aren't going to suddenly become unprofitable. This sortof "traditional" argument that raising unemployment will lead to mass layoffs is just silly.

(There is a key exception to this, which I'll explain in the next section.)

So you might be saying, "Erik, there's tons of room to increase wages!" It might be tempting to think that these high profits mean that, by jove, we should absolutely be artificially increasing wages, and that the economy won't even see a hiccup. 

But--hate to say it--high corporate profits actually mean an even bigger problem for raising minimum wage, and I'll explain why below.

Limited Capital and ROI:

Businesses are constantly looking for new ways to make more money--this is self-evident.

High profits mean that there are a lot of high-profit ways to invest fundamentally limited capital out there already. In short, what I mean is that companies have a limited amount of money to invest in new profitable ventures (which drive growth), made up of cash sitting around from profits and investment, and that they can take in from loans (their debt can only be so high). This applies to the mega-corps and the corner stores alike. The measurements they use are Return on Investment (ROI), Internal Rate of Return (IRR), and Net Present Value (NPV) of different investments, which are all essentially ways of measuring how much money you're likely to make on what you invest. 

With that money, they are going to seek out the most profitable ways of spending that limited amount of money. In a sense, they're going to look at a bunch of options, rank them in terms of likely profitability, and then pursue items from the top until they run out of money. What we want is for labor-heavy investment opportunities to be at the top of this list so companies pursue them. As wages go up, the labor-heavy opportunities start to slide down that list and are less likely to get more investment--which means less hiring, not none (or negative). 

There are some businesses that are exclusively labor-driven and have very high margins on that labor--software happens to be one of them. So software development companies don't have a choice if they want to grow--they have to hire people. Even here, very high wages are going to mean that the lowest-profit or highest-risk software ventures just won't be able to move forward, because they're not able to handle the high price of these software developers. If there were more software developers, the high potential demand for them would just slurp up the labor pretty much immediately. 

In businesses with lots of options--especially if one of those is low-skill labor--they are going to seek other options in a rate commiserate with the price of labor. These include outsourcing (in the case of manufacturing), automation (in the case of low-service retail, seeing more self-checkouts), or pursuing other lower-labor ventures entirely. Some of these, by the way, are a few of the cases where you'd actually see layoffs, but these layoffs have been comparatively small potatoes in the past. I've been a consultant that helps find opportunities to reduce headcount by improving manufacturing efficiency--this should be something companies do all the time (if they're purely rational) but it tends to happen when they get worried that their profit margins are shrinking too much, which happens in a recession more than it does a recovery with high profit margins (unless, of course, wages go through the roof very suddenly).

In short, raising minimum wage will slow job growth, not reverse it. 

The most obvious illustrative example is looking to Europe. Again, there are lots of confounding factors here, but "peer" countries with low (or no) minimum wage have lower unemployment, and those with very high minimum wage, mandatory benefits, and other "pro-labor" regulations that make it hard to hire people (like making it basically impossible to fire people, or tons of mandatory vacation, or high payroll taxes, etc etc) have persistently high and growing unemployment.

(Reader Katy points out, brilliantly, that we saw these very same troubled countries--particularly Spain and Ireland--see huuuuge drops in unemployment in the 90's, and I don't know for sure why).

"What about Germany?" Until about a month ago, Germany had no minimum wage at all (I, too, was surprised when I learned this), and it's one of the most economically free states in Europe (it's famous for its "Social Market" economy, or Soziale Marktwirtschaft, which has a very free market and lots of social services/welfare).

There's a looooot more going on than just unemployment, and my argument here isn't just "don't raise minimum wage." I'm going to discuss below how to drive down unemployment beyond having free-adjusting wages, but let's just say that "France, Italy, and Spain aren't suffering from too much capitalism." They're going to have persistent unemployment for a very long time unless they make dramatic adjustments to a freer market. 

And Persistent Unemployment Means...

Right, persistent low wages. And, in the case of the unemployed, no wages. Think back to that 14.3%--it might be great that they're getting $10/hr rather than $8/hr, but if they're only working 20 hours/week, they're still quite poor. 

The enemy is unemployment. Persistent unemployment is terrible for both the unemployed and also low-skill labor, and that's the thing we have to fix. Bring that employment rate up, and companies have to start competing, so they have to start raising their wages. Main Street wins.

The Terrible Irony:

The worst part about this is that what we want to do--with the best of intentions--to help the under-paid worker is hurting them (and particularly hurting the unemployed worker). By introducing "forced" higher wages, benefits, and other protective controls to "help labor," we make it harder to hire labor, and when it's harder to hire labor, unemployment is higher, and average labor wages go down (not to mention those off work for years). It is painful, it is very hard to accept, and we rage so much against the idea that even I am sometimes tempted to support raising the minimum wage because I hate so much seeing people suffer in these labor recovery periods.

Temporary Relief:

The best forms of temporary relief are those that don't interfere with the labor market--generally, forms of welfare or some sort of "universal basic income." People don't like this because it means that the taxpayer is subsidizing companies "under-paying" employees, and this seems unfair. Generally, in a progressive system, corporate taxes (I know, in the US corporations are able to frequently dodge these, but that's a separate problem) and taxes on the wealthy (the top 10% earners cover 68% of federal income taxes in the US) cover these payments.

(Another reader points out a "tax on automation" may help out to cover UBI/welfare, as well, but maybe there are some incentive problems here.)

So coincidentally, it comes out of the pockets of those profiting most from these low wages, so it seems like an interesting avenue to explore. More on this another time, but those looking to provide relief should be looking here, and we'll have to discuss the issue of managing incentives (that is, "if I'm getting all this free money, why get a job?") another time--suffice for now to agree that in our current state, unemployed people have no opportunity to get a job, and the "laziness" myth just doesn't apply at all. Milton Freedman has a great model where your government-supplied income could drop by $0.5 for every $1 you make, so you have the incentive to make more.

The Only Way to Real Wage Growth is to Reduce Unemployment:

Let's rally around raising wages and getting people back to work. We want to relieve the pain now, but let's do it in ways other than implementing changes that slow hiring.

We must reduce unemployment. Look back again to the case of the software developer: when (and only when) unemployment in a certain sector is low, businesses will have to start hiking wages to compete for the shrinking pool of employment. That's it, it's simple. More people will be at work, and they'll get paid more.

So, going back to supply and demand, we need to get this in line. Because we can't just get rid of people in the labor pool, the thing we need to do is increase demand. So let's talk about how to do that. 

Increasing Demand for Labor:

Eliminating unemployment is one way to increase demand for labor, as low wages will make certain labor-heavy ventures really profitable (compared to others), and so capital will flow to those. This is politically impossible and emotionally distasteful, so let's ignore it because it's just not going to happen. Even Germany abandoned its brilliant no-minimum-wage policy (will be a great case study), and it's just never going to happen in an economy where people are working full-time and not making enough to feed their families. 

So what can we do?

• Take the risk away from hiring. Barriers to firing people mean it's really bloody risky to hire them, and impossible to motivate them (particularly if they're part of the unskilled group). Ask frustrated businessmen in Spain and France (which I have), and they'll tell you they're pulling their hair out with current employees, and just plain refusing to hire more... and, by the way, they're outsourcing their work to Eastern Europe, not only for lower wages, but because it's easier to motivate and fire a contractor than it is an employee who is impossible to fire. In my personal experience with heavy industry, I've seen literally dozens of cases in which union employees were operating heavy machinery under the influence of drugs, or literally sleeping on the job, or showing up chronically late, and just couldn't be fired. 
• Make it easier to hire people. As a guy trying to run my own small business, I can attest that it's a major headache to bring people on board. The paperwork almost requires a new position
• Invest in infrastructure--intelligently. My Austrian friends will kill me for this, but there are smart ways to use very certain forms of deficit spending to grow employment in the right way. There is stuff that has to get built (the US has a rather terrifyingly decaying infrastructure) and we're not building it. As a free-marketeer, I will claim that the best way to do this is release the infrastructure development to the free market (Google Fiber installations are great example of it being done intelligently and profitably, and those market incentives are, as always, good guides to what's intelligent investment), but in places where it's politically unfeasible (like roads), there is work to be done. We must be careful not to have the "bridge to nowhere" or "digging holes and filling them" fallacy capture us ("just building things" for the sake of building them is wasteful, not helpful). But when we create infrastructure (that in current political conditions only the government can build) that creates further economic growth, it's a perfect time to invest that will create jobs and pay off. The best-ever example in my book was the Eisenhower Interstate Highway System, which employed just-returned war veterans, and stimulated huge economic growth by providing trade infrastructure (it has its own major problems that make the free-marketeer cringe). 
• Tear down the barriers to competition. This is worthy of its own volume of books, but "regulatory capture" creates crippling monopolies that stifle growth and job creation, and our economy is rife with these industries (Europe is much worse). The worst of these are the industries we feel most need to be regulated--utilities, telecom, medical drugs and devices, etc. 
• Make it crazy-easy to start businesses. Similar to my experience hiring--but way, way worse--the amount of paperwork and money involved in starting a business is dizzying. I am constantly blown away that corner stores and pizza parlors even manage to get off the ground without huge capital investment. We don't do a great job of making young businesses exempt from the (already overbearing) rules of mega-businesses, the latter of which hire batteries of people just to deal with the paperwork and other activities of legal compliance. 
• Bring on the immigrants! The knee-jerk reaction is, "we need to limit the supply of labor for it to be consumed," but all evidence points against this--particularly if the immigrants are highly educated. Highly-educated immigrants create way more jobs than they "consume," particularly through innovation (new products need new labor). Immigrants probably also tend to be more entrepreneurial / daring than native-borns (by selection bias--those willing to uproot and move to a new country tend to be of that nature). Our brutal limits on immigration (we only give out 50,000 employment-based green cards per year and 140,000 employment-based visas) mean we're turning away hundreds of thousands of job-creating machines every year. It's just absolutely bonkers, and another example of how well-intentioned moves to "protect American labor" are creating unemployment and poverty.

I could go on. The short version is we need to drive growth, and we have tons of artificial barriers to it. Taking those barriers down will mean new ventures, expansions of current ventures, and more hiring. More hiring means lower unemployment, lower unemployment means more competition for the pool of labor, and that means higher wages.

Minimum wage may not hurt the picture as much as its knee-jerk opponents think (and in different ways than they think), but when we have 30 million people unemployed or under-employed, focusing on artificially raising wages instead of letting the economy grow to consume this pool of surplus labor is bonkers. No matter what we do to minimum wage, we won't see wage growth in the US return until that labor supply is consumed, and we're doing nothing clever to make that happen. 

How Currency and Market Manipulation Destroyed the Roman Empire

We Austrian / free-marketing types usually rave pretty aggressively about the economic (and thus entirely human) ills caused by excessive market manipulation (usually through direct command, subsidy, government spending, etc) and currency manipulation (usually through printing and credit expansion).

(Hey by the way: if you don't know much about topics like credit expansion and what it does, I'm going to be working longer-term on some "Explain Like I'm Five" pictograms or videos to try to simplify how it all works for everyone.)

While more sophisticated forms of these tend to cause problems that are Depression-sized rather than collapse-of-civilization-sized, these kinds of manipulations have negative consequences and fundamentally must have negative consequences. I'll talk about this somewhat staggering claim of inevitability in another post.

But for now, I want to talk about the really heartbreaking case of the collapse of the Roman Empire. It's a case of these manipulative activities being undertaken before anyone understood enough economics to really have a good coherent policy, much less understand the consequences. The point of this is to show a decisive example of this manipulation totally annihilating the greatest empire that ever lived, and hopefully teach us a few lessons that we'll see come back when we discuss the Great Depression and Great Recession of the late 2000's, as well as the Staglfation of the 70's.

I know most of my Roman history by listening to the venerable Mike Duncan of the History of Rome podcast. I highly recommend it, by the way--Duncan is sharp, engaging, accurate, and has a wonderfully dry sense of humor. Also you learn a lot. I'll note here that Duncan is not a free-marketeer like myself (in fact I believe he sortof betrays his more left-y ideologies in some of his social commentary), as to assert the more-or-less neutrality of my source. But note he is basically my one major source, and the rest of it is poking around on Wikipedia, so I'm sure you Roman history PhDs will find a few inaccuracies. Let me know and then go argue with Duncan.

Anyway.

Rome printed coins, which was awesome. Bartering is terribly inefficient and essentially prevents any sort of growth of prosperity (and really limits what you have access to). Currency is one of the best things that ever happened to mankind. Rome also had private property rights and a pretty darn free market. It's just really hard to have lots of economic regulation on a giant empire, especially when you have boats criss-crossing the Mediterranean. There were taxes and tariffs, but people were generally free to buy/make/sell what they wanted and pay people what was negotiated between them. This, of course, made the Romans fairly rich. (I'll admit, before anyone calls me on it, that the Romans had pretty high inequality in their Golden Age, too. But their poorest were a lot richer than most everyone of the rest of the world, and the inequality was way less bad than many of the more royally-commanded economies of the time.)

The tough part about printed money is that you can just keep making more of it (keep this in mind as we start talking about the Federal Reserve), without actually expanding the amount of resources available. When we print a lot of money, we start to get inflation--if you suddenly double the amount of money everyone has (without changing the amount of stuff/labor available), things will just cost twice as much. 

Sounds like it's not a big deal, but when inflation is fast, lots of bad things happen. Germany (in WWII), Venezuela (recently), and Zimbabwe (90's) have seen hyper-inflation from printing money too quickly. When that happens, you can't hold on to any money / save any of it, because it will be worth much less very soon. This generally means people also don't want to sell their stuff for cash, because the cash they get for their stuff will soon be worthless, where the stuff doesn't really lose value. Of course nobody will give loans at all, because when they get paid back, the money's now totally worthless. So you really can't start any new ventures. The economy grinds to a halt and, like we see in all these historical cases, people literally start starving to death. All because we printed too much money.

So this rapid inflation is really, really bad. Just freakin' terrible. And remember it comes from printing way too much money. This is even worse in older economies, by the way, because it takes a lot of time for that new money to show up, so prices go up before people even get that new currency to spend on it.

So that's what the Roman government just did, of course. They started doing it to pay the army, which was growing and extorting the later Republic for continually-increasing wages. So they started printing more coinage, and then realized that they could just reduce the amount of gold and silver in the coinage (most of this happened under Nero; later emperors extended it but not by much), and simply declare the new money is worth as much as the older, gold-rich money.

That is, of course, just silly to believe will work.

The problem of inflation started gradually, but when it got bad, it got really bad really quickly. Part of the problem was that nobody knew for sure why it was happening. When prices went up (which was a mystery), the Roman government started printing even more money with in order to try to alleviate the problem and get more money into people's hands, but this of course made things worse.

So you had crazy-rapid inflation. People started starving. The poor started having to give up their plots of land because they were broke, and land started to consolidate into the hands of the wealthiest. 

Finally a few smarties in Rome (around the time of Aurelian, like 270AD or so) got the message--partway. They restored the level of gold/silver in the coinage and tried to scoop up old coins to get them the heck out of circulation. But they kept printing. The Roman economy was collapsing, and oh-by-the-way the gigantic army they had (to deal with all those Goths being displaced by the advancing Huns) were demanding more money all the time, because their wages kept buying less and less stuff. Because the economy was crap, they couldn't use taxes to pay the army, and so they kept printing to do it.

Just a super-vicious cycle here (getting to its worst in the 3rd century). This economic collapse was part of why we had Brittania and Gaul (France) and Spain declaring independence and trying to set up their own economies. It came at a particularly bad time, as those aforementioned Goths were starting to really beat the snot out of the Romans and ran around plundering what was left of the economy.

Anyway.

284 AD, enter Diocletian, the guy whose well-intentioned attempts to take over the economy put the final nail in the coffin and set the stage for feudalism and the dark ages. The guy ruled for 21 years, which was a pretty bloody long time for the age, and in that time screwed up a lot of stuff. 

Diocletian, who is responsible for such insane amounts of bureaucracy that he brought about the adjective "Byzantine" to refer to something overly-complicated.

So what'd Diocletian do?

First, he started imposing price controls. This is a common tactic in high-inflation situations and, of course, always backfires in a lot of ways. Diocletian created a massive bureaucracy to determine empire-wide prices of everything, from pigs to grain to boats to shoes to forks. I mean, freakin' everything.

He made it law for this to be imposed everywhere, but of course it was really not being enforced in private trade. But since provincial governments were the biggest customers of just-about-everything, it meant that a lot of stuff was sold to the government at way-below-market-value, and those people had to turn around with paltry money and try to buy other stuff at market rates. This caused even more starvation and whatnot.

A well-known (and terrible) secondary effect of price controls is shortages of everything being price-controlled: if it's not profitable to make it, people stop making it. So economic activity ground down even further.

Yet another impact of this policy was that money became even more worthless. It was so bad and so rapid that the government started taxing people "in kind"--that is, taking chickens and nails and cut rocks and even services like distance of transport of goods rather than cash, in order to hopefully get the right proportion of goods they needed for the year, but that of course failed miserably. The government got way too much of some stuff (which now sat totally idle as waste) and not nearly enough of other stuff, which meant Roman troops were running around without stuff like shirts and shoes.

Another truly fascinating effect of this extensive price-control was that people started ditching industries wholesale. If we imagine there's a "correct" market price for something, everyone's goods were under-priced. But some of them were more underpriced, and some of them were less underpriced--a central authority just can't set perfectly-proportional prices, especially over an empire.

So let's imagine that in the free market, a pig is worth 100 denarii and a chicken is worth 25 denarii. A pig is worth 4x a chicken.

Knowing that Diocletian's policy had to be at least a little inaccurate, we can imagine that pigs maybe dropped to 10 denarii and chickens to 4 denarii. This means that pigs are now only 2.5x the value of a chicken. Chickens have become comparatively more valuable. So pig farmers started ditching pigs and moving to chickens, which meant you had pig shortages.

So you can imagine all sorts of goods or services (particularly transport of goods, as it turned out, which as you can imagine is particularly bad) just drying up completely, and others becoming excessively common.

So Diocletian had a great plan for this. In order to keep these industries from collapsing, he made pretty much every single industry into a "Guild," like a shipbuilder's guild or a grain-growers guild or a baker's guild. I mean, everything. And by "Guild," I literally mean that if your dad was a grain farmer, you were bound by law to be a grain farmer. Period, end of story, unless you want to go to jail.

So lots of folks in these massively under-valued industries were forced to keep working in them, and went broke and starved. I mean, Ayn Rand's dystopian fantasy in Atlas Shrugged really pales in comparison to just how awful this is.

Most people that didn't starve had to sell off their assets to a rich person and then go work for that rich person to survive, as that rich person could at least feed and shelter them. So these rich folks collected even more property and also, critically, collected lots of incredibly cheap labor that had absolutely no ability to ever leave, as they never got cash and legally were not allowed to get into a new industry.

Sound familiar? It should: it's serfdom. Under Diocletian--in 21 short years--the Roman economy went from its phase of a totally-messed-up-hyper-inflating market economy to a feudal economy in which the majority of the population was locked in legal serf bondage to either the government or to very wealthy land-owners.

Eventually, these land-owners had so many people under their rule that for purely practical purposes (after the Roman empire totally blew apart in the 400's), the local kings of the new mini-kingdoms just gave these guys legal powers, turning their lands into feifdoms and them into barons/lords/whatever.

After that, it was only further downhill. Food shortages and starvation became the norm, in a time when the army needed to be bigger than ever. Wealthy land-owners started hiding their cheap labor so it wouldn't be recruited away, so now the army was not only short on material, but it was even shorter on manpower beyond the effect of the starving/dwindling population.

And that's essentially how the Roman empire ended--the army couldn't get what it needed (men or materials) to defend against the encroaching Goths, and by the 400's they were doing whatever they wanted. Rome ended pathetically poor after this process of rapid inflation, price control, command economy, and then serfdom killed its productive capacity. Obviously a lot was involved in the collapse of the Roman (Western Roman, really) Empire. I feel passionately that the Romans would have weathered many of these storms (as they had so often before--Rome's many burnings, wars that almost depleted the empire, plagues and famines, etc) had their economy and population not been a gutted husk of its former self.

When it was gone, the money was abandoned entirely for a while, and the economy shrunk further as people reverted to bartering.

It makes the latter episodes of Duncan's "History of Rome" really, really depressing. Just to show how Duncan and I don't quite see eye-to-eye on this, he rates Diocletian as one of his top 5 emperors. I think Diocletian is in my bottom 5 for total impact--Nero may have played the fiddle as the city of Rome burned, but Diocletian played the puppeteer as he turned the entire empire to ashes. All from the well-intentioned notion that the government can take over failing parts of the economy and save them, rather than make them worse.

Dear reader, think about how this example applies to the examples of Germany in WWII, Zimbabwe in the 1990's, Venezuela in the 2000's.

Remember this story well. We'll talk about it when we get to the Great Depression, where I'll thankfully have loads more data about how money-printing and credit expansion caused the stock market collapse, and then how FDR's well-intentioned command of the economy prevented the market from getting back on track until well after WWII was over.

Why Can't a Gecko Sell Me Health Insurance?

We have a terribly broken health insurance system that needs fixing. We knew that.

The US is split on whether Obamacare is a good idea. (Personally I'd think a Canadian-style single-payer system would actually be more cost-effective, but that's not what I'm going to advocate here.) The Republicans get a lot of flak about being the "party of no," but had a few good ideas in their own proposals that got drowned out because Obamacare had the initiative and the Republicans didn't act when they had control of both houses.

I am of course not particularly an Obamacare fan. As an alternative, I ask: "Why can't a Gecko sell me health insurance?"

15 minutes can save you 15% or more on Health Insurance!

What I mean is this: why can't health insurance be just like car insurance? 

It was, once... but when WWII came around, the US put wage controls on most jobs to control spiraling costs. In order to compensate for this, health insurance became a special, non-taxed benefit, which meant employers would save money by simply providing health insurance themselves rather than paying individuals to buy their own. This was sortof the beginning of the end for any seriously free competition in the system.

Lots of other things happened--hundreds of laws across the states increased the barrier to entry for any small guy or any cross-state competition, and added cost in the form of paperwork and required coverage. Non-insurance related costs from hospitals (whose staff counts exploded by 7x per bed between the inception of Medicare and the 1990's) and pharmaceuticals (who have just silly-long monopolies on their drugs due to ridiculous patent law) add to this, but let's focus on insurance for now.

Right now, it's noncompetitive, period. Insurance is expensive. Interestingly, it's not because of profits--health insurance profits (at 4% of revenue or so) are lower than most big industries:

The real problem is everything but the profits. The health insurance industry rakes in about $885 Billion each year, and somehow only 4% of that is profits! Where the heck are the other $850 Billion going?! The entire health care industry is $2.8 trillion, which means that the costs chewed through by health insurance companies are 30% of what you spend. 

Remember, this money isn't the money that they pay for your stuff--this is money they're chewing through in their own internal machines. It's essentially waste--all health insurance companies do is move money and paper around. The total Americans pay for car insurance (which includes the payouts for service you get) is $105 Billion.

With 86% of drivers having auto insurance and maybe half of everyone (this is a guess) driving, then the people served by auto insurance are about half the number served by health insurance. Yet we're paying well over 8x as much (and auto insurance agencies make twice the profit margin, at 9%).

So there's clearly far, far less waste in this auto insurance market, and it's very clear why: it's a relatively competitive, free market, and health insurance isn't.

Imagine! Silly ads in the Super Bowl advertising how much money you can save on health insurance by switching to their company!

Imagine a wild scrap for your money by insurance companies, in a market where it's easy to switch, and your costs plummet!

But are Americans willing to move to a free market healthcare system? Absolutely not.

I want to cover the most-heard objections:

1) Insurance companies increase profits only two ways: increasing premiums and lowering coverage. Because they must grow their profits, they will always squeeze the consumer. Sounds good, except it doesn't hold up. Auto insurance companies will universally automatically provide discounts to users without them even asking as they age to maturity or go for a few years without an accident or even just stick around.  And no, they're not also reducing your coverage.

So what gives? Well, notion #1 here forgets that auto insurance companies are competing for market share, and that it's very easy to switch. This gives the consumer very powerful leverage, without even having to lift a finger. The mere threat of losing a customer to someone else quoting them lower compels auto insurance companies to give you free, un-asked for rate drops. Pretty cool, huh?

Auto insurance companies also compete on service, introducing new features and giving you dedicated representatives to make sure you're happy (rather than chopping away at those services like airlines--another story of regulation gone awry, for another day). When I told my auto insurance company I'd go get my windshield fixed and ask for reimbursement, they offered to send someone to my house to do it for me, and that I could pick any time window convenient for me. I didn't have to do anything. When my motorcycle got hit, an agent came to my house without  me having to be there and assessed--without a fight of any sort--that the cosmetic damage on my motorcycle made it "totaled" and that I'd be recompensed the full value of the bike at purchase. Since I'd forgotten to leave my beat-up jacket/helmet, she accepted photos and declared them similarly totaled. I could have replaced everything, without my premiums going up.

Imagine if health insurance worked like that?

Auto insurance companies do find ways to cut costs, but from other angles. They get much lower prices than individuals from mechanics due to bargaining power and negotiating savvy--they have the data and expertise to call "bullshit." They move between suppliers of different goods to find lower prices. We can see from the lower-cost higher-profit auto insurance company that they simply have less waste within their system. But what they can't do is stiff the consumer, because the consumer will leave to a better company. The free market gives the consumer the win.

2) Health insurance is too complicated for Americans to choose individually, and they'll be taken advantage of by insurers. I agree it's complicated, but we ask Americans to choose between plans in Obamacare or the Massachusetts Health Connector, and there doesn't seem to be an uproar. A little regulation on contract clarity can go a long way to not getting hosed by fine print... but so can competition.

Your auto insurance is fairly complicated, too, but it's presented simply. When consumers are comparing plans, they'll quickly reject the plan that is complicated or has lots of fine print--specifically because when it's too complicated, they don't feel comfortable making the choice. In the free market, health insurance companies would compete on clarity of contract as well, lest they lose potential customers to clearer, more straightforward plans.

3) The poor can't afford it. In the free market, healthcare prices would plummet, meaning many many more people would be able to afford it. Like all things (including housing, clothing, and even food), there are those who are so unfortunate and destitute that they cannot afford health insurance, even in a cheap system. But this doesn't mean the state has, or should, take over the housing, clothing, and food markets!

We can solve this problem in the same way: with welfare. It gives the poor consumer much greater choice, and is ultimately much more cost-effective, as a consumer with money chooses a plan on price, where a consumer with a blank check puts no price pressure on an insurance company.

Closing Thoughts: How Would We Get There?
A free market health insurance system would require a major overhaul, similar to the scope of Obamacare. State regulations would have to be gutted and made much more consistent for companies to be able to compete across state lines and open up the market.

Similarly, paperwork and reporting obligations would have to be slashed--this will not only reduce much of the overhead that insurance companies are legally stuck with, but it will make it at all possible for startup insurance companies to break into the market (today it's impossible because the amount of startup capital and manpower you need to just fulfill those reporting requirements is just ridiculous).

We would absolutely have to abolish most mandatory coverage. Currently most folks pay for coverage they don't need because it's included in their plan (under Obamacare for example, you're obligated to pay coverage for a sex change operation).

Finally (at least on my list, but I'm sure there's much more), we'd need to let the free market set co-pay rates. Everyone hates co-pays and thinks abolishing them is a good idea, but it leads to massive over-consumption. Americans get far more MRIs and all sorts of other expensive procedures and medications than their brethren across the pond, and yet remain quite unhealthy. If we had higher co-pays, we'd think twice about just getting an MRI for our shoulder pain, going to the doctor when we had a cold, or going to the ER (where fewer than 15% of visits even get to admittance).

It would take some time, but you'd see some companies clever enough to "see the light" and compete more rigorously. You'd see more T-Mobile and Southwest Airlines and AirBnB types start to emerge from the soil, disrupting the system in ways we couldn't have previously imagined (Pay your contract break fee? $40 per flight? Private hotel rooms? Madness, in the old world!).

So imagine with me: in a free market health insurance system, who will be trying to help you save money on health insurance? And what would that mean for those 30MM uninsured?

Telling Capitalism's Story to the Non-Economist

Economics is pretty boring.

In particular when we read many economists, they're so deeply entrenched in academic theory that we can't understand them, can't relate to them, and don't really know why it's all that important.

As more of an obsessive layman--rather than academic lifer--I believe I can write about capitalism in a way that you, the reader, will really understand. Whenever you walk away from a post, I want you to understand why it's important to think about, and what the capitalist perspective (or at least my perspective) looks like. I want everything to matter, and to make sense.

I'll be telling capitalism's story through both "case studies" -- or just historical events like the great depression explained through the capitalist lens -- or by introducing really important concepts that should help the reader see events, policies, and behavior around him in a new light.

I intend to be rigorous about backing up my claims with data, but I will simplify concepts enough to not make them totally maddening. I will use examples an anecdotes to demonstrate a larger point, knowing that such an anecdote does not irrefutably prove it.

In fact, I won't try to irrefutably prove anything--the academic economists aren't able to do it to each other and I don't intend to write the thousand-page treatises (especially for you, dear reader) that attempt to "settle" the debate.

I want simply for you to understand capitalism: what it is, what it's not, and I'll leave it to you, dear reader, to decide if it truly resonates deep down. 

My Disclaimer

I am young, I am biased, and I am often wrong.

I promise my readers that I shall do my damnedest to research thoroughly my claims—including the evidence that points to the opposite conclusions of my own. I shall do my damnedest to use this blog as an exercise to seek truth as much as it is an exercise to change the minds of others.

But I am fallible, and am prone to logical fallacies and biases in evidence gathering. We humans are particularly prone to these in matters about which we are morally passionate about the outcome (like politics) rather than passionate about simply knowing whatever the truth may be (like physics).

Recognizing this, I must give myself the leeway to change my mind, to amend what I’ve said, to admit I was wrong in an earlier post and press forward. I am proud of my capacity to recognize that I am wrong, admit it, change my views to new evidence, and press forward that way. But my writing about capitalism will be a constant morphing and discovering, and will never be perfect. I hope that I can achieve something close enough to the truth to inspire others to believe in the vision I have, even if in the future they will go on to do great things that I even advocated against.

I must also reserve the right to not be pinned down by the connotations of the word “capitalism.” Like “socialism,” one can assume a series of policies under its umbrella that could be mutually contradictory or unthinkingly dogmatic. It is very loaded. Don’t assume too much about exactly what I think until you’ve read me say it. I believe passionately in environmental regulation, support publicly-funded (though not state-operated) education, and have mixed feelings about welfare and wealth redistribution. You might say “but that’s not capitalism!” and I say, “fine, I shall come up with a better name for it in due time.” Be patient with me.

If you’re willing to do all of that and be open-minded to hear me out beyond the tagline of the blog post, then come with me. Leave comments and feedback. Tell me I’m wrong. Help me refine my message. I want to learn from you as much as I hope you’ll learn from me.

Why I Write

Capitalism has lost its way, and I have made it the purpose of my life to restore it.

Since the 2008 Great Recession, capitalism has become something of a 4-letter word. It has developed many enemies of various ideological persuasions. Where it once had triumphant champions, it now has feeble apologists and compromisers.

This is best explained by chronic mis-labeling of what is and is not capitalist, and mis-attribution of economic woes to capitalist causes rather than other causes (like well-intentioned government intervention). We have a notion that “capitalism” is the state-corporate industrial complex of the modern American age, rather than a vibrantly competitive free market free of lobbying and special favors. What we call “capitalism” today favors the entrenched rich and entrenched businesses at the expense of the shrinking middle class, the poor, the unemployed, the entrepreneur, the small business—all through well-intentioned government interference in the free market. We knee-jerk blame capitalism for our current economic woes, because we chronically do not seek the root causes behind the problems that we see.

It is my belief that capitalism in the free-market sense has had incredible and unmitigated success in bringing prosperity to all of mankind that it has touched. It has exclusively been responsible for bringing billions out of poverty, where every other attempted economic system has failed miserably to do so. It is my belief that well-intentioned interference by our governments in an attempt to make the economy better have broken our economic systems and brought about an age of high unemployment, low growth, inequality, and spiraling private and public debt—an age that is stifling innovation, trapping the poor, and careening towards incredible disaster if we do not change our ways from even the most seemingly-obvious practices, like stimulus spending and lowering interest rates.

But there is more at stake than our mere prosperity—something much more important.

In the 20^th century, the world reacted to the Great Depression—and the mis-attribution of blame to “capitalist” causes—by bringing about the most horrifying decades of tyranny and mass insanity the world has ever known. In Western Europe, citizens desperate for their governments to cure their woes gave infinite power and total loyalty to the state, leading to the rise of Fascism. In Eastern Europe, Russia, and China, the masses were convinced by Marxist ideologues that their poverty was due to the hoarding of wealth by a few wealthy property owners, and that violent Communist revolution would bring about a new age of prosperity.

Both of these movements caused unimaginable human suffering, cruelty, murder. Europe had never been darker. Even among the non-Communist world in the cold war, socialism (in the state-planned economy sense, not the welfare state sense) nearly took hold, and communist sympathy was the style du jour of the intellectual elite.

As man turns its back on capitalism, he turns his back on freedom of choice in his economic life. Hayek writes brilliantly about this in Road to Serfdom, so I will not belabor the point here.

But I believe that as man has turned towards accepting communalist ideologies as increasingly obvious, his soul has suffered deeply.

When we cast our eyes on our fellow first-world citizens, we find something missing. A certain light in their eyes, an industriousness, a self-reliance, a sense of pride. We see a mass that cry, “someone should do something!” and precious few who do anything. We see a mass of people that expect to be taken care of by a paternal figure: if employed, their employer, and if not, their government. We see a mass that no longer believes that businesses have the right to exist for profit—they must exist as a public service, to create jobs. We see jobs as an entitlement; we do not see ourselves obligated to earn our keep by offering value to the world.

We see a mankind whose brightness of spirit has faded a bit, who no longer aspires to great things. We see a generation growing whose great motto is no longer “I will,” but “I want;” a generation whose swan song will be “YOLO!” as we fetter away our lives in petty hedonism.

Without the pressure to find a way to truly contribute to society in return for one’s livelihood, we do not learn self-reliance, nor the ability to struggle nobly, nor to overcome adversity, nor to be truly proud. No longer do we shout, “I will find a way!"

The American Dream is dead, and with it go our hope, our work ethic, our passion for bettering ourselves, our pride.

I believe, truly, that it can come back. It will require throwing off the supple yoke of a paternalist economy in which our governments and corporations are meant to take care of us, all the while stifling our ability to push ourselves beyond our current lot.

We must return to capitalism to end poverty and give the opportunity for prosperity to all of mankind. We must return to capitalism to bring back growth and innovation in industries that have been crippled. We must return to capitalism to ensure our individual liberties. We must return to capitalism to restore our self-reliance, our work ethic, our independence, our pride. We must return to capitalism to save the spirit of man.