Foreword: This post was originally posted in December 2010 titled "Reflecting on the Character of Business and the Economy". I have updated this post to reflect the current circumstances as of April 2012, April 2013, June 2014, then again December 2014. The last update increased support for the view expressed. This post is lengthy but necessary to communicate the view with robust support.
This an open discussion that looks at interesting and traditional thinking given the change imposed on the world. This is intended to be thought provoking by presenting views that often are overlooked or missed in the demagoguery. Whether there is merit and if what has been presented is good or not is for you to determine.
The Economics
During November 2014, economist Steb Hipple, Ph.D. of the Bureau of Business and Economic Research made a presentation regarding the U.S. economy at a professional dinner. Two of the key slides from the presentation are provided. Figure 1 is the Real GDP Growth between 2007 to 2014. The 3% dotted line is normal and stable economic growth. If the area above this 3% line is computed as a positive and the area below the 3% line is computed as a negative then added together the result is a significant net loss during this time period. In short, there has been no economic recovery since 2007.
Figure 2 is the Long Run U.S. Employment graphic between 2002 and 2014. The Full Employment Level curve illustrates normal employment had the economic recovery occurred. The Official Employment Level curve is the U.S. Government's report regarding employment levels between 2002 and 2014. In short, there has been a net loss of jobs beginning in 2008 which is the space between Full Employment and Official Employment. In an eyeball of Figure 2, at 2010 the gap is roughly 10,000,000 jobs lost that persists in the US without any substantial closure between the two curves.
| Figure 1: Real GDP Growth |
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| Figure 2: Long Run U.S. Employment |
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Overall, there is a net loss of GDP and a net loss of employment without a net reduction in the employable population. Where did the GDP and jobs go? Some of the GDP was lost due to reduced demand and a greater portion was transitioned offshored. Likewise, most of the jobs were offshored, some jobs were eliminated due to increases in efficiencies, and some were lost due to lower demand.
| Figure 3: Economic Super Cycle or Kondratiev Wave |
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Figure 3, there is an economic cycle characteristic of capital economies that has a period of about 80 years having transition points that are characterized by a brief time during which there is a short economic boom then a bust followed by a war and finally a new way of living. The concept is called a super cycle also known as the Kondratiev Wave. The durations in Figure 3 are approximations as the cycle has some variance. During the sustainment period technologies and concepts emerge and in their infancy gain support and enthusiasm leading into the boom period. The short boom period begins a regeneration of the economy. Following a short boom is a bust period during which unemployment is high and inflation sets in causing a depression era or a severe recession. A war follows the bust resulting in rationing, a reduction in populations, and a loss of economic capacity and/or capabilities. All of the losses must be restored to the new sustainment levels in a new economy centered on the technologies and concepts that emerged prior to the brief boom period.
The Super Cycle seems to coincide with significant U.S. history. Specifically, the Revolutionary period, Civil War period, World War II period, and the current economic period. All of these periods were characterized by a boom, bust, war, then a new way of living. For example, The Roaring 20's led into the Great Depression and World War II having the new way of living centering on personal appliances and transportation which was the age of luxury living. Today, the housing and Dotcom boom has led into the current down economy which has now persisted for over 7 years. If on point, then the cycle should have a war in the next 2 to 5 years. Most futurist speculated during the 1990's that the new economy would be based on social, communications, informational, and logistical networks.
Overall, the evidence is pointing in a direction that the world in amidst a major transition and the future is not entirely a gamble. There are patterns and trends that can be leveraged smartly and are more apparent than not. The question is will the economy be a capital economy or a command economy?
The Transitioning World
The world has made transitions from a theological pride to a secular nationalistic pride for over the course of 2000 years. History records the transition for Israel to secular governance during the time of David. Other transitions are occurring right up to modern times. For example, a 1950's mass movement demanded national self-determination for the Bengali people. The politician-preacher Maulana Abdul Hamid Khan Bhashani championed the demand for national self-determination and the demand that the state distance itself from Islam. Bhashani led the transition to secular politics in the decades that preceded the emergence of Bangladesh.
Today, the world is in transitioning once more. This time towards an economic pride as evidenced by regionalization efforts ongoing throughout the world such as the European Union, EU, and others in Africa (ECOWAS), South America (UNASUR), and the Western Pacific (APEC). Keeping in step, the region currently known as North America is undergoing several major transitions. The first major transition is a movement away from national sovereignty towards a regional center of economic influence under the auspices of the North American Free Trade Agreement, NAFTA. The second major transition is the form of governance that will be over newly formed NAFTA region. Some form of governance needs to emerge since all the participating national identities are consumed in the larger organization and newer identity. Will that be a Islamic Caliphate, a Progressive ideology, or will a constitutional form of Government prevail. The final major transition is the character of the economy within the NAFTA region. In this discussion, the focus is a little on the regionalization effort and more on the character of the economy as well as on the character of business.
The movement towards a regional center of economic influence is evidenced by the NAFTA treaty coupled with the rapid infusion of foreign nationals effectively dissolving the international borders between the participating nations; Canada, The United States, and Mexico. NAFTA, as a treaty, originated from the Montreal Economic Treaty during the Reagan years. The objective was to reduce the wage differential between the US and Mexico in order to reduce illegals coming across the border for work. In 1992, U.S. political leadership converted NAFTA to a new political system in order to advance a regional center of economic influence. Henry Kissinger commented on the passage of NAFTA during 1992, as a regionalization effort, that “...is not a conventional trade agreement, but the architecture of a new international system [of goverment]" (Henry Kissinger Los Angeles Times, 1993).
Since 1992, the political leadership has been expediting the regionalization as anxious ideologues leap at the opportunity to advance their ideology that may have the effect of superceding the US Constitution. The construction of NAFTA superhighway, Figure 4, if not intended, has the effect of increasing the freedom of movement throughout the region for Mexican and Canadian nationals. While the original effort to build a new superhighway was effectively stopped, a new effort has now been adopted expanding the existing highway infrastructure for the same purpose. Fannie Mae and Freddie Mac, if not intended, has had the effect to quickly stabilize immigrants in homes. Likewise, the ability to vote, obtain a driver license and healthcare are instruments that, if not intended, have the effect to stabilize immigrants more quickly than the traditional course of three generations. The passage of nationalized healthcare on March 21, 2010 brought the region closer to a regional healthcare system as Canada and Mexico are already on socialized healthcare.
Since 1992, the political leadership has been expediting the regionalization as anxious ideologues leap at the opportunity to advance their ideology that may have the effect of superceding the US Constitution. The construction of NAFTA superhighway, Figure 4, if not intended, has the effect of increasing the freedom of movement throughout the region for Mexican and Canadian nationals. While the original effort to build a new superhighway was effectively stopped, a new effort has now been adopted expanding the existing highway infrastructure for the same purpose. Fannie Mae and Freddie Mac, if not intended, has had the effect to quickly stabilize immigrants in homes. Likewise, the ability to vote, obtain a driver license and healthcare are instruments that, if not intended, have the effect to stabilize immigrants more quickly than the traditional course of three generations. The passage of nationalized healthcare on March 21, 2010 brought the region closer to a regional healthcare system as Canada and Mexico are already on socialized healthcare.
| Figure 4: NAFTA Superhighway Map. Source: NASCO |
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The regionalization phenomenon extends beyond geo-political systems to other systems. For example, power companies have been consolidating and regionalizing power systems. The same has occurred with the phone companies, and now health care is consoldating under the nationalized healthcare system. We observe companies like Duke-Progressive Power consolidating control of the American SouthEast power distribution. Kaiser-Permamente has consolidated healthcare control of the American West. The phone companies have gained regional control such as Bell South. Even the grocery industry is regionalizing with Von's in the SouthWestern US and Publix in the SouthEastern US. These regionalized centers of supply point control cross state lines. Thus, states rights are challenged as power shifts to interstate trade and control of the federal government. This regionalization of supply points will continue to increase and dissolve state sovereignty.
Whether this regionalization is deliberate or natural course of a systematic pattern, the advancement an economic center of influence and dissolve national and state sovereignty is emerging as an inevitable future for the North American region. Such regionalization has tremendous impacts on industry, commerce, and individual lives.
The Free Market Capitalism and Business
As regionalization expands, the character of the economy in the emerging regional center of economic influence is an underpinning of the governmental form. Socialized and Marxist's governance is reliant upon the notion of social justice or the use of governmental methods to redistribute wealth to those deemed less fortunate by the aristocracy in a command economy. The social justice operative mechanism of redistribution is analogous to institutional theft which is considered to be the worst form of theft since people are denied just fruits of their labor. A competitive model is Ayn Rand's worldview detailed in her works "Atlas Shrugged". This model is a separation between economics and government similar to the separation of Church and State. Rand's model is ultimately a Godless society focused on economic pride or gain. The character of the economy in a Democracy is free market capitalism which places human creativity in service of humanity.
In the free market economy industry and business redistribute wealth based on value-added or created value. The free market is considered natural because when freed of all regulations and other constraints such as taxation the free market character persists. While this discussion uses the term free market most societies impose some degree of controls and constraints on the market. Thus, a free market, in practical terms, is considered one with minimal controls and constraints. The free markets existed long before modern complex economies emerged out of feudal Europe. Unregulated markets operated over 2000 years ago throughout the Middle East, Greek, and Roman Empires. The largest Roman seaport and marketplace was locate in Pozzuoli, Italy called the Serapeum, Image 1. (note: The term Serapeum is actually a religious temple. The Italian Government officially recognizes the site as such. Scholars and the locals acknowledge the site as an ancient marketplace.)
| Image 1: The Serapeum Ruins, Pozzuoli, Italy. Photo taken by JT Bogden, February 2008 |
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The efficiencies in a free market are also considered to be natural as opposed to human induced efficiency efforts when an inefficiency is perceived by the aristocracy and/or government in a command economy. For example, anti-trust lawsuits and regulations have often been touted as supportive of competition and the free market. However, the application of anti-trust lawsuits has typically emerged out of power struggles between Governmental enforcement of regulations and industry compliance.
During the 1970's the U.S. Congress was instituting many environmental and labor laws that dramatically affected industry. Industry reacted sternly using economic influences to apply pressure to Governmental leadership in efforts to change the direction of the legislation. Governmental leadership fearing industry had become too powerful sought to marginalize the influence by breaking up large corporations using anti-trust lawsuits. Some analyst tout that the computer revolution was actually delayed until 1985 because of anti-trust lawsuits during the 1970's. Henry Novell of Novell Systems was employed at Bell labs when the anti-trust lawsuits stopped AT&T from entering the computer networking market during the 1970's and forced the breakup of Bell Systems forming Lucent in place of Bell Labs. Novell left and formed Novell Systems networking computers about 7 years later. "Antitrust policy over the last 25 years can claim substantial achievements. First, the stated terms of the debate have shifted to consumer welfare and efficiency, and away from vague and easily misused goals such as dispersion of political and economic power," (Bittlingmayer 2002, p 52).
Regardless, of the reasons or outcomes the point is that, in this case, governmental efforts at improving competitive efficiencies was tainted with political bias and may have never achieved the efficiencies sought. The efficiencies were observed later as an outcome of deregulation efforts during the 1980's in a return to more free markets. Such deregulation lead to competitive forces in the airline industry, telecommunications, and other industries.
During the 1970's the U.S. Congress was instituting many environmental and labor laws that dramatically affected industry. Industry reacted sternly using economic influences to apply pressure to Governmental leadership in efforts to change the direction of the legislation. Governmental leadership fearing industry had become too powerful sought to marginalize the influence by breaking up large corporations using anti-trust lawsuits. Some analyst tout that the computer revolution was actually delayed until 1985 because of anti-trust lawsuits during the 1970's. Henry Novell of Novell Systems was employed at Bell labs when the anti-trust lawsuits stopped AT&T from entering the computer networking market during the 1970's and forced the breakup of Bell Systems forming Lucent in place of Bell Labs. Novell left and formed Novell Systems networking computers about 7 years later. "Antitrust policy over the last 25 years can claim substantial achievements. First, the stated terms of the debate have shifted to consumer welfare and efficiency, and away from vague and easily misused goals such as dispersion of political and economic power," (Bittlingmayer 2002, p 52).
Regardless, of the reasons or outcomes the point is that, in this case, governmental efforts at improving competitive efficiencies was tainted with political bias and may have never achieved the efficiencies sought. The efficiencies were observed later as an outcome of deregulation efforts during the 1980's in a return to more free markets. Such deregulation lead to competitive forces in the airline industry, telecommunications, and other industries.
One Business Model to Consider
Counter to popular thought, the free market model of business, Figure 5, is not one of a bottom line but instead one that is a zero sum in the long term for business. The bottom line, Profit = Revenue - Cost from the income statement and resulting business ratios, has its place metering efficiencies during the short term. Businesses are usually started and operated in order to support a lifestyle for the owner and their family based on the value-created in the business. In the end, the business is sold putting cash in the pockets of humans upon sale or liquidation. Thus again, the business is a vehicle to put purchasing power into the pockets of people in order to give levity to their lives. The business is a zero sum in the long term and redistributes wealth based on created value. That being said, free market business is actually all about the well being of people and is based on their productivity or ability to do good.
| Figure 5: Free Market Business Model |
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Its Really All About the People
There is an ole adage that circulated on the state of our lives remarking that at least we got jobs and can put bread on the table. When we made more we were willing on our own accord to be charitable, to give from the heart. In a Democracy and free market, individuals are compelled through a social conscience as opposed to a social justice to be charitable with excess. Charity is usually driven by one's worldview. However, America has been struggling with its identity as the forces of multi-culturism are reflected in the society and government.
I want to reflect on the classic movie, "Its a Wonderful Life". Jimmy Stewart had a social conscience helping people not only get by but also achieve their dreams. In time, that same charity flowed back to Jimmy Stewart after, through misfortune, his bank came up short on its receipts. In the recent biographical story of James Braddock, "Cinderella Man", Braddock sought to put bread and butter on the table during the 1930's remarking that he returned to boxing, his job, to fight for his family endearing the hearts of millions. In both these instances, it was a social conscience and productive work that overcame adversity in peoples lives.
Wrap Up
Current economic cycles are pointing towards a new economy and a new way of living. These economic cycles coupled with political reforms and supply point consolidation are reshaping current political systems into regional centers of economic influence. As the new regional economy develops concerns arise regarding the type of economy and governance. As competitive ideologies battle for dominance, the casualties are human livelihoods and the quality of life.
Competitive systems such as progressivism better known as socialism or communism in the worst form marginalizes human creativity and denies humans just compensation though the operative mechanisms of egalitarianism, welfarism, and social justice which amount to nothing more than institutional theft.
The strongest socio-economic and political system is democracy and free market capitalism due to the support for giving levity and dignity to individuals. Wealth is redistributed based on productive work as individuals receive just compensation for their efforts. Free market mechanisms such as innovation, creative destruction, and creativity in service to humanity improve the quality of human life. Choices will need to be made and leadership chosen who will uphold the dignity and levity of life for everyone.
References:
Bittlingmayer, G. (2002). The antitrust emperor’s clothes.Resourced from http://www.cato.org/pubs/regulation/regv25n3/v25n3-11.pdf
Hipple, S. (2014). Business Conditions and Outlook. East Tennessee State University.
Palmer, T. G. (2011). The Morality of Capitalism: Introduction. United States of America: Jameson Books, Inc.
