Big Oil

Originally Published in eFlourishing Issue 13, May 3, 2010

A few days ago, British Petroleum lost the Deepwater Horizon rig in the Gulf of Mexico. Lawsuits have been filed, and many are probably justified. The loss to BP, just in terms of oil not produced, is about $600,000 per day.

The Deepwater Horizon disaster will undoubtedly cause companies working offshore to amend their safety procedures. Who can afford not to learn from their own and others’ mistakes? Nevertheless, this disaster will give the environmental activists plenty of ammunition to rouse the hoi polloi for years to come.

Remember though, nearly everything you enjoy in your life is connected to oil. As Robert Bryce says in his new book, Power Hungry (Public Affairs, 2010), if oil didn’t exist, we’d have to invent it. Thanks to oil, and the bright boys and girls who work with it, we have shatterproof glasses, ultra-durable synthetic rubber tires, medical implants, bacteria-resistant refrigerators, HDTVs, and Smart Phones, just to name a few sophisticated, but commonplace, items. You can find hundreds of other things made of oil, almost without trying. 

Did you know that almost a third of all global oil production comes from offshore drilling platforms? Or that multinational companies are mostly prevented from accessing the onshore oil reserves controlled by OPEC and government? That means that deep water exploration and drilling is what’s left for them to help meet a growing global demand for oil and the oil-related products we can’t live without.

There is no need to feel sorry for these companies, but realize that theirs is a demanding job, and that disasters like Deepwater Horizon are extremely rare. Unlike natural disasters, like Eyjafjallajökull, the recent volcanic eruption in Iceland, oil companies provide us with basic materials for an incredible array of products, enhancing virtually every aspect of our daily lives.  The benefits that accrue to humanity from oil production far outweigh the cost of the occasional blowout or spill. Moreover, the victims of the Deepwater Horizon accident will recover damages from the culpable parties. That’s why we have a civil court system. So, if you’re tempted to join a crusade against offshore drilling, keep in mind that big oil and your high-tech 21st century lifestyle are joined at the hip.  

[All information from www.robertbryce.comPower Hungry by Robert Bryce, Public Affairs, 2010, www.wsj.com, and www.nytimes.com.  Subscription may be required.]

Optimism is Realism

Originally Published in eFlourishing Issue 18, June 9, 2010

That three-word epigram has informed Nick Murray’s written and spoken work for at least twenty years, forty is more likely. Now, Mr. Murray recommends The Rational Optimist, Harper Collins, 2010. The author, Matt Ridley, earned a PhD. in Zoology from Oxford and, for several years, was the science editor at The Economist. In 1999, he authored, and I read, the best-seller, Genome: The Autobiography of a Species in 23 Chapters. He is also the author of The Red Queen: Sex and the Evolution of Human Nature, The Origins of Virtue, The Agile Gene, and Francis Crick: Discoverer of the Genetic Code. Qualified, he definitely is.

According to Ridley, the story of optimism begins roughly 200,000 years ago, when early humans discovered the catallaxy: the ever-expanding possibilities generated in a society based on specialization and the division of labor. (Ridley attributes the term catallaxy to Nobel Prize winning economist F.A. von Hayek, but justice requires me to add that Catallactics was first the life’s work and term of Hayek’s teacher, the immortal Ludwig von Mises.) Anyway, Ridley is a master teacher and storyteller. He calls upon a cosmic range of material from historical, anthropological, genetic, and economic research to construct an inductive proof of his thesis that – in Nick Murray’s words – optimism is realism.  

…did you know that 14,000 years ago, obsidian from Anatolia was being transported along the Euphrates through the Damascus Basin and the Jordan Valley? Seashells were going in the opposite direction.

…have you ever thought of farming as the extension of specialization and exchange to include other species than humans? Horses, oxen, and the genetic modification of wheat?

One of my favorite stories in the book is that of Borlaug’s genes. After WWII, utilizing the research of scientists like Cecil Salmon (on MacArthur’s staff in Japan) and Orville Vogel (Oregon State University), Norman Borlaug pioneered and promoted a genetically altered (the Rht1 gene), short-stemmed wheat in Mexico. By 1963, Borlaug’s varieties were 95% of Mexico’s wheat crop, and had increased Mexico’s wheat production six-fold in twelve years. Borlaug then lobbied for his new wheat varieties in Pakistan and India, two countries desperately in need of increased food supplies. By 1968, the wheat harvest in both of those countries exceeded storage and processing capacity. Grain was even stored in schools, and India issued a postage stamp to celebrate the wheat revolution. In 1970, Norman Borlaug received the Nobel Peace Prize. (In those days, that prize was still awarded to people who actually deserved it.)

According to Ridley, since 1900 the earth’s population has quadrupled. Land under cultivation has increased only 30%, but yields have increased 400%, and the total crop harvest has increased 600%. Doing the math, per capita food production has increased 50% – thanks to genetic science and fertilizer derived from fossil fuels. (I’m not making that up; it’s in the book.)

Ridley goes on to tell how Bishop Wilberforce was aided in the abolition of slavery in Britain by the industrial revolution. He tells how (from 1750 to 1850) the entrepreneurial owners of British cotton mills overwhelmed the colorful calicos of India, despite paying a wage five times greater and shipping their wares over 13,000 miles. Even slave power couldn’t compete with coal-fired steam.

“The list of innovations achieved by the pharaohs,” Ridley writes, “is as thin as the list of innovations achieved by British Rail or the US Postal Service.” On the other hand, “…the Philistines invented iron; the Canaanites the alphabet; and their coastal cousin, the Phoenicians, glass.” Innovation and progress are the necessary and direct results of specialization and exchange, and the absence of overbearing government.

According to Ridley, the human desire to exchange ideas is genetically encoded; like nest building in birds. Unlike bird’s nests, though, ideas beget other ideas, bigger and better. There are no limits to what we human beings can achieve through the catallaxy, when left free to do so. Ridley offers some exciting and surprising possibilities for the 21st century.

Every investor, financial advisor, teacher, professor, journalist, and policymaker should read this book. So should every American concerned about the future. (359 pages of text and 59 pages of endnotes and references. Available at Amazon for $16.72.

The Catallaxy Revisited

Originally Published in eFlourishing Issue 19, June 15, 2010

 “We see in almost every part of the annals of mankind how the industry of individuals, struggling up against wars, taxes, famines, conflagrations, mischievous prohibitions, and more mischievous protections, creates faster than governments can squander, and repairs whatever invaders can destroy.”

– Thomas Babington Macaulay (1800 – 1859), quoted in The Rational Optimist, by Matt Ridley.

Because I am a confirmed optimist, some of you may think that I don’t understand how bad things are out there. I assure you that I do, and this article is offered in evidence.

According to Neil Barofsky, special investigator general for TARP (Troubled Asset Relief Program), the United States has now spent approximately $3 trillion on programs designed to heal our financial system and replace jobs lost during the recent financial crisis and recession.

As I mentioned a couple of weeks ago, the European Union (EU) has created a loan fund of almost €1 trillion (Euros). The fund’s purpose is to rescue euro zone countries like Portugal, Italy, Greece, and Spain – unfortunately, but accurately, referred to in the media as “the PIGS”. The European Central Bank (ECB) has announced that it’s ready to buy both government and private bonds “to ensure depth and liquidity” in the market for deadbeat debt. The Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank have all agreed to help facilitate this bailout. This is a spendthrifts’ consolidation loan, complete with austerity mandates that, in my opinion, will ultimately lead to violence. In Europe, I believe that that’s the good news.

Just as in our mortgage meltdown, banks are at the epicenter of the current European debt and currency crisis; and German banks are some of the most highly leveraged institutions in the world.

I could go on, but I think the point is made. Ballooning budget deficits, already out of control prior to the orgy of bailout and stimulus spending, are beyond ineffective; in my opinion. (I have intentionally omitted the $100 trillion of unfunded liabilities associated with Social Security and Medicare, and the truly negative budget implications of Obamacare that don’t kick in until 2014. What would be the point?) We should learn from the poor Europeans, whose cradle-to-grave entitlement dogma is rotting their once-great civilizations.

I get all that, and I understand why people are concerned.

Nevertheless, I remind you that some American non-financial corporations have more cash on their balance sheets than at any time in more than fifty years. That does not mean that there are no opportunities for businesses to expand and profit; there are many. Rather, with interest rates on savings still less than 1%, increasing corporate cash may be a measure of the irrationality and unpredictability of government policy. Prudence trumps profit.

Last week, I suggested that you read The Rational Optimist: How Prosperity Evolves, by Matt Ridley. That recommendation stands, and will stand; it’s an important book, and one that is destined to become a classic. It reveals that throughout human history, voluntary exchange in the marketplace has been the golden goose of human progress. Exchange is to human nature as nest building is to birds – it’s what we do. Over the past two centuries, exchange has been greatly facilitated by advancements in transportation and communication technologies. Progress has gone viral. Today, American business represents humanity performing its highest functions at an extraordinary level of proficiency; it is the most rational, most innovative, most life-serving, most achievement oriented, and the most forward-looking institution in the history of the world.   

Be an optimist.

*Deficits: 2008 = $680.469 billion; 2009 = $1.471 trillion; 1Q2010 = $328.929 billion.

Sources:

Heflin, Jay, The Hill, May 20, 2010. http://thehill.com/blogs/on-the-money/banking-financial-institutions/93285-government-has-spent-3-trillion-and-counting-on-financial-crisis

Bureau of Economic Analysis, March 26, 2010. http://www.bea.gov/newsreleases/national/gdp/2010/gdp4q09_3rd.htm

Council of Economic Advisers. http://www.whitehouse.gov/administration/eop/cea/estimate-of-job-creation/

McPheters, Lee, February 3, 2010. http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1857

Bureau of Labor Statistics, U.S. Department of Labor, May 7, 2010. http://www.bls.gov/news.release/pdf/empsit.pdf

Vision, Will, and Work

My father-in-law, Don Petterson, often said that Charlie Fleming was the smartest man he’d ever known, and Don was no slouch himself. He had bootstrapped himself from a broken home in the 1930’s and a near fatal wound suffered on Peleliu to his position as a respected leader in the small town of Beloit, Kansas. It was 1966, and I remember the day well; it was my wedding day, and my first encounter with Charlie Fleming. Charlie had married Don’s sister in 1948, and he and Norma attended our wedding. Even then, as a distracted, know-nothing pup, I could see that Charlie was special.  

Charlie was born on a farm west of Stockton, Kansas in 1921. Like many boys born in that year, Charlie served in the Army during WWII. After the war, he moved to Beloit to start a business with his friend, Orland Hazen. Charlie was a farm kid, and he liked to tinker. In 1945, Charlie and Orland bought the rights to the famous Diamond Packer, improved it, and began production in a small garage in Beloit. Sunflower Manufacturing was born.  

Charlie was well-known for his warm, engaging smile, a wonderful sense of humor, and especially, for his honesty and integrity. Those qualities made him an effective salesman for the Diamond Packer, and Sunflower’s sales grew steadily right from the start.  

Not satisfied with a one trick pony, though, Orland and Charlie worked hard to develop new products for Sunflower’s line. In 1961, Sunflower introduced a three section, flexible, stubble mulch plow that followed natural field contours, as well as terraces.  That was Sunflower’s first flexible tillage product, and the first flexible plow in the market. In that first year, Sunflower produced only ten flexible blade plows, but in 1962 sales exploded. In that year, Sunflower sold six hundred units of the innovative new product.  

The success of the flexible blade plow created a new and increasing demand for other flexible tillage tools. Smart marketers that they were, Charlie and Orland introduced a flexible chisel plow in 1967, and in 1968, a flexible offset disc. By today’s standards, those first tillage products were somewhat crude, but they were best in class at the time. It helped that Sunflower already had an exceptional reputation for service after the sale.  

In 1971, responding again to feedback from its dealers and end-user customers, Sunflower redesigned its entire tillage line. Sales and earnings began doubling every year. When I moved to Beloit in 1976, Sunflower’s monthly sales had just topped $1 million for the first time, and an aggressive expansion was underway.  

By the late 1970’s, Sunflower had a highly skilled management team in place, along with an excellent sales and technical staff – including members of both the Hazen and Fleming families. But, Orland had died in 1969, and Charlie was ready to slow down and spend more time on his Mitchell county farm. Sunflower was sold to Core Industries of Bloomfield Hills, Michigan in 1977, and Charlie retired in 1981.  

In the years since, Sunflower has continued to be guided by the entrepreneurial vision of its founders. In 2002, the company was sold to the agricultural giant, Agco, and today, Sunflower Manufacturing still provides tillage and planting equipment.  

 

June 18, 2010, Linda, Janelle, and I were present as Norma, family and friends, and the people of Beloit – all of whom have so much to thank him for – bid Charlie Fleming a final farewell with these words that surely define his attitude toward life:  

 And I think to myself:  

“What a wonderful world!”  

 Yes, I think to myself:  

“What a wonderful world!”  

 (Words and music by Robert Thiele and George David Weiss, performed by Judd Thierolf and Josh Fuller)

Liberty Has A Country (to Reclaim)

“Humanity has won its battle. Liberty now has a country.”

                                 – Gilbert du Motier, Marquis de La Fayette (1757 – 1834)
  

July 4, 2010 marked the 234th anniversary of the signing of the Declaration of Independence. Each year at this time, we should pause to consider its meaning.

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are Life, Liberty and the pursuit of Happiness.”

Here is what those words mean to me:

Rights apply to individuals, not groups. In the Federalist Papers, Number 10, James Madison, the principle architect of the U.S. Constitution, addressed the danger of a democracy bringing factions [political parties] into power: “[S]uch democracies have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security or the rights of property.”

Rights are inherent in our nature as human beings – endowed by their Creator. Like Thomas Jefferson, one need not believe in a proactive God [Jefferson was a deist] for the meaning of that phrase to be clear: No government gives us our rights, and no government can take them away, (though governments can – and often do – violate them.) In Jefferson’s Summary View of the Rights of British America, he wrote that free people claim their rights “as derived from the laws of nature, and not as the gift of their Chief Magistrate.” It is, however, the primary purpose of a just and proper government to protect individual rights.

Rights are not entitlements. In a letter to Isaac Tiffany, Jefferson defined liberty as “unobstructed action according to our will within limits drawn around us by the equal rights of others.”  We may work for the things we want, but we may not expect the government to violate the rights of others to provide us with free lunches – or houses or health care. James Madison declared in Congress, “I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents.”

Rights include the right to property. Without property rights, no other rights are possible. If the government can seize the fruits of your labor, doesn’t that make you a slave? If you are a business owner, with the government regulating virtually every aspect of your enterprise, doesn’t that make you a pawn?

Rights are blind to position or wealth. All men – rich or poor, famous or obscure – are equal with respect to their natural rights. John Adams wrote in A Defense of the Constitutions of Government of the United States, “[I]t must be remembered that the rich are people just as well as the poor; that they have rights as well as others; that they have as clear and as sacred a right to their large property as others have to theirs which is smaller; that oppression to them is as possible and as wicked as to others.”  

In my opinion, rights are violated only by force or fraud. Our rights are not violated when someone earns billions betting against the housing market. Our rights are not violated when Rush Limbaugh or Jon Stewart say things we find offensive. Our rights are not violated when we are not hired or given a raise. Our rights are violated when we are forced by the government to pay or receive wages or benefits different than we would otherwise pay or accept. Our rights are violated when the government seizes our property for sale to others for private development.

Two hundred and thirty-four years after its signing, The Declaration of Independence still stands as history’s most eloquent testament to Liberty. Critically, the future of our nation depends on our understanding and reclaiming the principles upon which it is based. Respectfully, I suggest that we should each read the Declaration of Independence in its entirety; and write out in our own words what it means. Better yet, we should do this with our children or grandchildren. Liberty has a country to reclaim.

What Really Propels the Global Economy?

The great management consultant and author, Peter Drucker, wrote somewhere that one way to predict the future is to take full account of things that have already happened. For example, Drucker wrote that it should have been clear by 1908 that Henry Ford had changed the public’s image of the automobile from rich man’s toy to a new mode of transportation desired by virtually everyone. Nevertheless, buggy makers and blacksmiths felt blindsided. William C. Durant did not. He saw the road ahead and created the Chevrolet brand, and founded the first multi-line car company, General Motors.

Many people today see “green technology” as the thing that has already happened (or will happen soon) to change the world economy. Before you buy into that idea, I think you should read Vaclav Smil’s new book. In Prime Movers of Globalization, Smil offers a history of two key technical developments that have driven globalization, and should continue to power the world economy.

You may be surprised to learn that those two technologies have nothing to do with either the Internet or wind power. Instead, Smil points to the high-compression non-sparking internal combustion engines invented by Rudolf Diesel in the 1890s and the gas turbines designed by Frank Whittle and Hans-Joachim Pabst von Ohain in the 1930s. Smil says that the massive diesel engines that power cargo ships and the gas turbines that propel jet engines are more important to the global economy than any corporate structure or international trade agreement.

The lengthy processes of development, commercialization, and diffusion throughout the world that the diesel engine and the gas turbine went through, Smil argues, provide perfect examples of gradual technical advances that receive little attention, but have resulted in epochal shifts in global affairs and the global economy. One might say that Smil is the Peter Drucker of energy.

Vaclav Smil is currently a Distinguished Professor in the Faculty of Environment at the University of Manitoba in Winnipeg, Canada. He is the author of (or contributor to) more than two dozen books on energy and energy related matters, including Energy Transitions: History, Requirements, and Prospects, published by Praeger in May of this year. Prime Movers of Globalization is published by MIT Press and was released August 10th. You can order both at Amazon now.

Business As It Might and Ought To Be

“Some men have convictions and lack courage; some men have courage and lack convictions; and some men have both. The difference between civilization and barbarism may be measured by the degree of safety to life, property, and the pursuit of the various callings men are engaged in.”

             – James J. Hill (1838 – 1916)

James Jerome Hill was born in Eramosa Township, Upper Canada (now Ontario) in 1838. He had only nine years of formal schooling, and thanks to a bow and arrow accident, only one eye. He quit school in 1852 due to the death of his father. Nonetheless, he was adept at algebra, geometry, land surveying, and English.

After working as a clerk in Kentucky, where he learned bookkeeping, Hill decided to move permanently to the United States and settled in St. Paul, Minnesota. His first job in St. Paul was with a steamboat company, where he worked as a bookkeeper. By 1860, he was working for wholesale grocers, for whom he handled freight transfers, especially dealing with railroads and steamboats. Through this work, he learned all aspects of the freight and transportation business.

In 1879, Hill and a group of partners purchased the bankrupt St. Paul and Pacific Railroad. As General Manager of the railroad, Hill began immediately to upgrade and expand the line.

“What we want”, he famously said, “is the best possible line, shortest distance, lowest grades, and least curvature we can build. We do not care enough for Rocky Mountains scenery to spend a large sum of money developing it.” Hill got what he wanted, and in January 1893 his Great Northern Railway, running from St. Paul, Minnesota to Seattle, Washington – a distance of more than 1,700 miles – was completed. The Great Northern was the first transcontinental built without public money and one of the few transcontinental railroads not to go bankrupt. 1

Hill was not just an outstanding businessman. He was also a great philanthropist, and in 1913, he endowed the James J. Hill Reference Library 2 in St. Paul, Minnesota. The library opened in 1921, and today is one of the nation’s premier sources of information for small businesses, business researchers, scholars, and business reporters.

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1 The principle source for this article was the beautifully written and illustrated biography, James J. Hill and the Opening of the Great Northwest, by Albro Martin, Minnesota Historical Society Press, 1991. I also consulted Wikipedia.

For more information on the James J. Hill Reference Library, see http://www.jjhill.org .