Industry, Energy, and the Moral High Ground

Originally published in Flourishing Mar Apr 2013

I was watching television last night (March 26), when I was disturbed by a news item scrolling across the bottom of the screen.  Paraphrasing, the message was that the U.S. State Department will open new hearings on the Keystone XL pipeline project on April 18.  Huh?  I thought Hilary’s State Department had given President Obama clear passage to a decision on Keystone XL way back in 2012, long before the election.   And, I thought I’d read not long ago that the EPA Administrator was planning to resign, because she thought the President was going to approve the Keystone XL project.  So I checked, and my memory was correct.

This is why central planning and heavy-handed regulation don’t work; or perhaps I should say they don’t work for the American people or for economic progress.  We all know intuitively, I think, that political calculations in Washington more or less continuously trump reason and reality.  So, I’ve never understood how we get suckered into the belief that patently demagogic politicians and their swarm of camp followers can make better economic, environmental, and public safety decisions than the often brilliant and generally hard-working people who strive every day to offer life-enhancing products to increasingly discerning customers for a profit.  The historical evidence and our own life experience is virtually all to the contrary.  

We in the western world are the beneficiaries of the greatest development in human history—the Industrial Revolution—which enabled higher human productivity, more leisure time, faster and safer transportation, more complex scientific discoveries, safer and more comfortable places to live, and longer lives, to name just a few of its benefits; and left in its wake the Information Revolution and the emerging Biological Revolution. 

So, instead of trusting everything to the posers in Washington, I think we might want to once again embrace the free market principles that gave us that Industrial Revolution.  We could start, for example, by stopping the endlessly redundant nit-picking of every industrial project for the remote, one-in-a billion chance that somewhere, sometime, somehow, a pipeline will rupture and leave a temporary stain the size of a football field in some farmer’s patch of corn.  I mean no offense to the farmers, but do we think that the aggrieved farmer—who does retain his property rights—will not be recompensed, contractually or through the courts?

But wait, didn’t I also hear on the news yesterday that a Canadian freight train had derailed in Minnesota, spilling oil in a farm field?  Maybe we should weigh that all but trivial event—which I’m sure captured the President’s attention—against the incalculable human benefits of petroleum-based energy.  And, if you please, I’ll include nuclear and coal-based energy in my argument, too.

Really, it should be a moral embarrassment to us that in today’s world, millions of people die every year due to a lack of dependable energy supplies.  Isn’t it amazing that we environmentally aware, creature-sensitive Americans have cordoned off centuries worth of potential energy supplies in the form of natural gas, nuclear power, oil, and coal in the name of  “saving the planet”.  Rather than promote a better quality of life for desperate human beings throughout the rest of the world—which we could readily do at great economic, cultural, and moral benefit to ourselves—we instead celebrate, as  moral idealism, battery-powered cars with a driving range rivaling the distance of Tiger Woods’ 6 iron; and sorting through trash to put everything in its proper bin.  That’s a pitifully vapid—not to say inverted—path to moral self-esteem, don’t you think?

I’ve been watching this nonsense and remaining mostly silent for upwards of forty years.  But, yesterday I read something that was said by the greatest cultural icon of the 20th century in America:  Our lives begin to end the day we remain silent about the things that matter.   So—not to offend or debate, but to educate—my self-imposed muzzle has been removed.  (I know that you know that I write to you out of love; and if you’re not convinced by my argument, that’s ok.  I won’t hold it against you, and I’d appreciate the same consideration.)

We Americans have taken industrial and material progress for granted, and we’ve carelessly embraced “going green” as a moral ideal–expecting that the unprecedented standard of living we’ve enjoyed would continue.  For forty years, we’ve permitted relatively small, but politically connected and well-funded, groups of anti-industrial environmentalists to roadblock new energy production and industrial development at nearly every turn.  Some call them “tree-huggers”; but since I love trees—just as I value the clean air and clean water,  which are available only in the most energy–intense industrial economies—I just say they’re wrong.   Since policies have consequences, we’re paying the price for the government’s stifling of innovation, productivity, and growth in the energy industry with nearly nationwide economic stagnation and fruitless “green energy” cronyism.   “Going green” is doing more damage to our moral and economic future with every day that passes. 

If we freedom-loving, prosperity-seeking people continue to grant the anti-industrialists the moral high ground they claim to represent with their “green energy” agenda, they may continue to inspire support for their “green economy” suicide pact.  But, don’t miss my main point:  To sacrifice the modern human environment we enjoy here in America—fueled by petroleum, nuclear, and coal-based energy—to the non-human environment, as the anti-industrialists insist we do, is not just bad economic policy, it is immoral.  A mere moment’s reflection on the living conditions that exist in the non-industrialized world is evidence enough of that fact.  So, do we want to live like they do?  Or do we want to help them live like us?  Because those are our choices. 

The anti-industrialists like to talk about “industrial policy” by which they mean the obstruction of private industry initiatives and the demise of the large-scale energy production our modern economy requires.  The only industrial policy we really need to assure ourselves of a healthy environment, and to restore prosperity and abundance, is one which respects private property rights and individual self-determination.  As the history of western civilization since the beginning of the Industrial Revolution has demonstrated, human ingenuity and the natural human desire to create better lives for ourselves and our families will take care of the rest. mh

A Notable February Birthday

Originally published in Flourishing Jan/Feb 2013

Joseph Alois Schumpeter believed that capitalism would be destroyed by its successes.  He predicted that by its unparalleled economic output, capitalism would spawn a large intellectual class that made its living by attacking the system of economic freedom that made its own existence possible.  But, unlike Karl Marx, Schumpeter didn’t take pleasure in his predicted destruction of capitalism.

In his most famous book, Capitalism, Socialism, and Democracy1, Schumpeter defended capitalism, primarily for nurturing entrepreneurship.  Indeed, he was among the first to distinguish entrepreneurship from inventing and inventions, pointing out that entrepreneurs also innovate by creating new uses for old products, new markets, and new forms of business organization and management.  The question he said is not “how capitalism administers existing structures, … [but] how it creates and destroys them.”  This “creative destruction” is what causes continuous economic progress and improvements in the standard of living for everyone.

Schumpeter was also a giant in the history of economic thought. His magnum opus, History of Economic Analysis2, was edited by his third wife, Elizabeth Boody, who had a PhD. in English; and published posthumously in 1954.

Joseph Schumpeter was born on February 8, 1883 in Třešť, Habsburg Moravia, then part of Austria-Hungary, where his parents owned a textile factory. 

Though his father died when Joseph was just four years old, he was very familiar with business when he entered the University of Vienna to study economics and law.  While there, he was one of the more promising students of the great Austrian economist, Eugen von Böhm-Bawerk.  He earned a PhD.  in 1906, and at the age of twenty-eight he published his first major work, Theory of Economic Development3. 

After serving in several teaching appointments throughout Europe, and a brief stint as Finance Minister of Austria; Schumpeter immigrated to the United States in 1932, accepting a permanent position at Harvard.  He remained at Harvard until his retirement in 1949. 

Joseph Alois Schumpeter died at his home in Connecticut on January 7, 1950.

********************

 1.  1942. Capitalism, Socialism and Democracy.New York: Harper and Brothers. 5th ed. London, George Allen and Unwin, 1976.

2.  1954.  History of Economic Analysis. Edited by E. Boody. New York, OxfordUniversity Press.

3.  1912.  The Theory of Economic Development. Leipzig: Duncker and Humblot. Translated by R. Opie. Cambridge: HarvardUniversity Press, 1934. Reprint. New York, OxfordUniversity Press, 1961.

Hercules vs. the Hydra

Originally published in Flourishing November/December 2012

In the June 2012 issue of this newsletter, I asked you to think about the reasons for America’s high unemployment rate.  Then in the next two issues, I wrote that government interference in the form of minimum wage laws have helped raise the unemployment rate among black inner city youth to nearly 40%; and that laws favoring union bosses over non-union workers have in many states forced wages to uneconomic levels. 

The important thing to keep in mind is that for most businesses, wages are their most significant cost.  So, when the price of labor is forced to uneconomic levels by government interference, unemployment and business failures are certain to be the result.  The principle also applies to government mandated, one-size-fits-all, health insurance benefits. All labor costs—however necessary or desirable they may seem—consume capital that might otherwise be deployed in new business investment and in creating new jobs. 

Now, as an exemplar of government overreach in other areas, let’s consider the national 55 miles-per-hour speed limit.  Passed by Congress in 1974 with the intention of reducing fuel consumption, that law—when it was obeyed—increased labor costs for the obvious reason that it required at least twenty percent more time for shippers to deliver the goods.  Because it was virtually unenforceable and widely ignored, the 55 miles-per-hour speed limit was ultimately repealed in 1995.  That alone tells you just how economically silly the law was. 

Then consider that from January 1, 2009 through December 31, 2011, the Code of Federal Regulations has increased by 11,327 pages.  According to the Office of Management and Budget, that brings the total register of federal regulations to 169,301 pages.  That’s a stack of paper 32 feet high.  I’m not sure I can throw a football that high.  Common sense tells me that every one of those pages adds to the cost of doing business.  And, what are the odds that in 169,301 pages of regulations there will be contradictory and ambiguous rules? The probability must be pushing 100%.  If I’m right, a regulatory violation is virtually guaranteed for every business in America.  That makes me suspect that the real purpose of our government is not to catch criminals, but to create them. I have to ask, “How many productive jobs could be created with the dollars it takes to pay and entertain the little Caesars who dream up 11,327 pages of regulations in just three years?”

Taxes come at businesses from virtually every legislative body, and for an unending variety of “needs”.  These costs—with the exception of most sales taxes—are not generally passed along to consumers, as is frequently claimed. It’s a myth; like labor costs, they’re usually paid out of capital.  Virtually every dollar taken out of the private economy by taxes is consumed; either by the government directly—where waste, fraud, and abuse are notoriously rampant—or by those who are the beneficiaries of government largess.  These are all dollars that won’t be voluntarily invested in the expansion of existing businesses, the launching of new enterprises, or the creation of new jobs.  Higher business taxes mean fewer jobs. 

Contrary to another myth, most entrepreneurs and business managers aren’t keen to take unnecessary risks.  In recent years, though, they’ve faced bellicose, irresponsible, and undeserved taunts and vague economic threats; all for the purpose of media attention and/or political expediency.  When the most productive people in America are collectively demonized by politicians and pundits for allegedly being selfish, predatory, unpatriotic, and unnecessary—as if every successful business in America is run by Bernie Madoff or Vito Corleone—is it any great surprise that many companies, especially relatively small businesses with 50 to 500 employees and limited legal budgets, are reluctant to expand and hire new workers?  I think not.

Finally, if this discussion wore you out or made you angry—as it just did me—I’m sorry.  But, just imagine how a business executive or small business owner must feel.  Concerned for the welfare of her employees and their families, responsible to her bankers and her investors, trying desperately to provide quality products and services to her customers—all the while dealing with government’s taxes, rules, mandates, and threats—she  must feel as Hercules felt in his battle with the Hydra.  She is my hero. mh

The Unemployment Question (Part Two)

Originally published in Flourishing September/October 2012

Last month I discussed the effects of minimum wage laws, particularly on young and unskilled workers.  I showed that by mandating a cost of labor in excess of that labor’s value to employers, the government causes high levels of unemployment among these groups of workers.

Similarly, by mandating that companies recognize and negotiate with unions, government often causes even highly-skilled workers’ wages and benefits to rise to uneconomic levels.  Since companies have budgets with limited income and fixed costs—like land, machinery, and buildings—higher wages and benefits mean that fewer workers can be employed.  Of course, companies can try to raise their prices to cover their higher labor costs, but I invite you to ask any GM or Chrysler shareholder how that worked out. 

In 2007, just before the housing and credit meltdown, The Center for Automotive Research1 estimated that Detroit’s automakers were paying $6365 per hour for production labor and benefits, while Toyota was paying 4750 in its American auto plants.

At about the same time, CNBC reported2 that U.S. automakers had a future burden for union-negotiated healthcare benefits of $1,500 per car, which Toyota and other non-union auto manufacturers did not have.  Indeed, GM was referred to as a “benefits” company, not as an auto manufacturer.  In 2007, GM lost $38.7 billion – a loss of $4,055 per car sold. In that same year, Toyota earned a profit of $17.1 billion – a profit of $1,874 per car sold.  

In 2008, the U.S. auto industry lost more than 400,000 jobs.  Most have not returned. 

When government chooses sides in the business arena—sooner or later—both sides will lose.  mh

(The Unemployment Question will conclude in the next issue.)

+++++++++++++

1.  Katie Merx, “UAW Contract: Nuts and Bolts,” Free Press, September 29, 2007.

2.  Phil LeBeau, “GM and UAW Seal Deal: Was the Strike Worth It?” CNBC, September 26, 2007.

Ideas Having Sex–Redux

Originally published in Flourishing September/October 2012 

Some time ago (April 2011), in an article entitled Ideas Having Sex, I shared with you one of my favorite books, The Rational Optimist1, by Matt Ridley.  In contrast to the financial media, who have a vested interest in promoting crises and conflicts, Ridley’s fundamental message is that optimism is the rational approach to life.

According to Ridley, who is a Scottish geneticist, human beings long ago learned the benefits of voluntary and mutually beneficial exchange.  (You may have noticed that those who have not learned the art of such exchange are most often found to be criminals or demagogues.)  The art of voluntary and mutually beneficial exchange, especially here in America, has become part of our cultural DNA.  We call it “win-win”, and it explains why our unique experiment in economic freedom created a cultural and economic expansion that snowballed into an empire of benevolence and wealth.

Tom Gardner, co-founder of the Motley Fool newsletter companies, recently endorsed2 Matt Ridley’s theme, “Exchange is to cultural evolution as sex is to biological evolution.”  And the extension, “Most powerful of all is the exchange of ideas.”  Paraphrasing Gardner:  …while the exchange of hard goods is at any given moment a zero sum enterprise, an idea can be shared to an infinite degree – hundreds or even billions of people can benefit from a single idea.   Moreover, ideas may combine with a virtually infinite number of other ideas, thus creating exponentially expanding human benefits; as, indeed, they already have.

Gardner points out that in today’s networked world, the benefits of voluntary exchange of ideas include greater literacy, greater transparency, more shared best practices, and deeper empathy and mutual awareness than ever before in human history.  Our lives are richer because of the Internet and wireless communication technology. 

I recently thought to download from Amazon’s Cloud Player to my iPod a song I’ve always enjoyed and taken inspiration from, Lacy J. Dalton’s hit single, The Boys of 16th Avenue3.  It was written by Thom Schuyler in 1983, and recorded by Dalton in the same year.  It celebrates the “million dollar spirit” of aspiring young musicians, who give up everything else to follow their dreams to Nashville.  I hadn’t heard it for a long while, but when I played the song a few days ago, I was struck by this line:

There’s cowboys, drunks, and Christians,
Mostly white and black and blue.
They’ve all dialed the phone collect to home
From 16th Avenue.

Forget for a moment the remarkable fact that my iPod (for which I paid less than a hundred dollars) has more computing power than all the Apple computers on the planet in 1983; what struck me about those lyrics was—though I’ve placed more than a few collect calls in my time—that I can’t remember the last time I saw a telephone booth.  And, who among us does not now carry a smart phone they can’t live without? 

I have no opinion on the future of smart phones; the iPod, or of Apple, the company that makes and sells it; or of Amazon, the ubiquitous, world-wide Internet shopping mall.  But I’m very sure that the future of the world economy is not in the hands of criminals or demagogues.  These people do exist—indeed, they swarm—and they are an impediment to progress.  But, the future is, as it has always been, in the hands of the creators—people who today may have, like the boys of 16th Avenue in 1983 or the cofounder4 of Apple in 1976—little else than a million dollar spirit, one good idea, and a burning desire to manifest their talents in the marketplace of voluntary exchange.  Today, ideas are dispersed, democratized, and mated with other ideas at light speed; and many are then concretized in the lives of millions of people through investors like you and me, and the managers and marketers and laborers of the world’s great companies.  The iPod is just one example. 

The proliferation and mating of ideas has been expanding human horizons for nearly one hundred thousand years; and that omnipresent, long-term trend is not seriously threatened by today’s faux-populist politicians or by the vainglorious sideshow we call “network news”.  Still, I can appreciate that despite decades, centuries, and millennia of accelerating improvement in the human condition, our contemporary politicians and pundits have the volume and circuitry to influence our thinking in ways we may not fully realize.  For example, during every market setback, I hear people echoing CNBC and its ilk with questions like,  “But, what if the economy/market doesn’t recover?”  I know that some advisors, in response to such queries, are telling people to turn off the television, and that’s probably fine advice, as far as it goes.  But, I still think it wouldn’t do any harm, and it might do much good, for investors to read—for calming, historical perspective—books like The Rational Optimist, by Matt Ridley.  For another setback is surely coming, though we cannot know when or from what level. mh

1.  http://www.amazon.com/The-Rational-Optimist-Prosperity-Evolves/dp/006145205X

2.  http://newsletters.fool.com/   (subscription required)

3.  http://en.wikipedia.org/wiki/Thom_Schuyler

4.  Steve Jobs, by Walter Isaacson, Simon and Shuster, October 24, 2011.

A Notable Spring Birthday

Originally published in Flourishing April/May 2012. 

Friedrich August von Hayek was born in Vienna, Austria on May 8, 1899.  A prolific author, he made fundamental contributions in political theory, psychology, and economics. In his book Commanding Heights (1998), Daniel Yergin called Friedrich Hayek the “preeminent” economist of the last half of the twentieth century.

The major problem for any economy, Hayek argued, is how people’s actions are coordinated. He noticed, as Adam Smith had, that in a free market, the spontaneous price system did a remarkable job of coordinating people’s actions, even though that coordination was not part of anyone’s intent.

By “spontaneous” Hayek did not mean that prices were unplanned; rather, he meant that they are planned by each independent economic actor, based on his own unique circumstances, rather than by a central planning authority.  In other words, the current state of the market was not designed by anyone, but evolved slowly as the result of voluntary human interactions.

One cause of unemployment, he said, was increases in the money supply by the central bank. Such increases, he argued in Prices and Production (1931), would drive down interest rates, making credit artificially cheap. Businessmen and consumers would then make capital investments and long-range purchases that they would not have made if they had understood that they were getting a distorted price signal from a manipulated credit market.

Hayek died in 1992, but his theories, gleaned from events of the 1920s and 1930s, have proved prescient in the bursting of the Tech Bubble and the Housing Bubble. mh

Fishing for the Truth

Originally published in Flourishing April/May 2012.

It’s been said that a fish is unaware of the water in which he lives.  Similarly, many Americans have no awareness of the nature or institutions of capitalism, which make modern life the miracle it has become.  Ignoring pandemic corruption in government, and thanks to swarming political demagogues, abetted by a similarly corrupt and swarming mainstream media, many people see only instances of corruption on Wall Street and conclude that capitalism itself is corrupt.

This brings up an interesting question:  Why do even the avowed anti-capitalists rely so thoroughly on the products and institutions of capitalism?  They do it, because – as a fish lives in water – they have no choice.  Capitalism and its institutions are how human beings deal with each other spontaneously, naturally, rationally, and harmoniously.  The alternative, as history testifies – and much of Europe shows currently – is not some other viable and lasting system, but mob violence and the virtual collapse of all economic activity. 

Capitalism is the system used by anyone who wants to get things done through peaceful and voluntary cooperation with others.  Even where it has to work outside of the law, capitalism still finds some kind of traction.  Indeed, this underground capitalism, the global black market, has grown into a vast $10 trillion shadow superpower1.  We’re not talking drug dealers and human traffickers here, but networks of peaceful entrepreneurs quietly trading everything from sand and shovels to haircuts and hosiery. 

This underground capitalism is one of the world’s largest employers.  Nearly two billion people are working in jobs that are neither registered nor regulated2. They are usually paid in cash and they are frequently avoiding income taxes.  At best, this is a primitive form of capitalism, and the inexhaustible Peruvian economist Hernando de Soto3 has repeatedly shown that this is the price paid by corrupt and over-regulated economies for ignoring the virtues of free markets and the institutions of capitalism, including – most notably for de Soto – property rights and the institution of bank lending, which those rights engender.

However, we’re talking about America, the world’s most sophisticated economy.  So, suppose an American entrepreneur begins by borrowing against his savings or other valuable and legally titled assets at his local community bank; and that as his business grows, he decides to incorporate and sell shares in his business to investors.  If growth continues, he might then expand further by seeking foreign direct investment in his business in the form of additional loans that would allow him to manufacture and sell his products in countries like China and India, or Chile, Brazil and Argentina –even Europe.  But, such erudite investors might not commit to making these loans unless they’re able to limit their liquidity risk by securitizing those loans for potential resale to other investors in secondary markets, or to limit their exposure to default risk with a type of financial insurance known as a credit default swap.  How many business owners do you suppose have the ability to do all this without help?

Exactly!  That brings us back to our local community banker who first helped our “little guy” get started with a loan against his home, or his farm, or his VW microbus. Much later, perhaps, come those guys in expensive suits and ties, who know how to make billion dollar deals over dinner at Del Posto4 in New York.  We may not see it, nor fully understand it, but this is indicative of the cooperative division-of-labor process that can provide us with the miracles of modern life – from  iPods to artificial hips.  It also helps make America the world’s richest, deepest, and most resilient economy5.  [The European Union (EU) is ranked number one in GDP ($15.39 trillion versus $15.04 trillion); but of course, the EU consists of twenty-seven countries.]

Community banks are essential to local prosperity, and most of us recognize that.  But, we must also know that international banking and finance are necessary for First World prosperity and, not coincidentally, for turning New York City into a superlative urban playground, not only for the well-turned-out, but for you and me, too.

Despite the improvident pejoratives hurled by its critics, if modern capitalism didn’t exist, we would simply have to invent it.  My proof is that where it doesn’t exist, people do try to invent it. To truly prosper, a country must make it possible for savings to become capital. That means that we require banking and all of the people and institutions involved in raising, managing, and distributing capital to its highest and most effective uses.

The truth is that capitalism and its institutions of high finance are the water we swim in; and corruption aside, Wall Street’s profits are a small price to pay for our innovative and bountiful civilization.  mh

1 http://www.foreignpolicy.com/articles/2011/10/28/black_market_global_economy

2 ibid

3 The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else,  Hernando de Soto, PhD.  Basic Books, 2000.

http://delposto.com/home.htm

5 https://www.cia.gov/library/publications/the-world-factbook/rankorder/

Life Without Oil

Originally published in Flourishing February 2012

Today, it’s common wisdom – if that’s the right word – to think of our environment as something that starts out healthy, but that we’ve messed up. The worst thing we produce, it is alleged, is “oil”. That just drives me crazy, because it’s the inverse of my entire life’s experience. Yours, too.

In the very early 1950’s, I attended kindergarten at Simpson Elementary School in Russell, Kansas. Our family lived in a rented house – a shack really – a few blocks away on Elm Street (no, not that Elm Street). I remember the day an oil-drilling rig pulled into our unpaved driveway and backed up across the street into the vacant lot next to my friend Nancy’s house. A few weeks later, the rig pulled out and a pump was installed; a black oil storage tank, too. Ker-thump, ker-thump, ker-thump. I was fascinated to watch the head of that pump bob up and down; and it never stopped. Drilling to China, maybe. Ker-thump, ker-thump – twenty-four hours a day. Like a beating heart. I don’t remember being frightened or otherwise damaged by the well, but I do remember that my mother was worried about a polio outbreak in our town that summer that had killed or crippled several neighborhood children about my age.

A few years later, from about the age of ten, my friends and I would swim in the Saline River as it flowed through the Bemis (oil) Field in Rooks County, Kansas between Hays and Plainville. The Boy Scout troop of which I was a member had access to a small cabin and skeet-shooting range in the area. Local oil producers had suspended some of their pipelines above the river, hanging them on steel cables. The pipelines occasionally leaked, but we weren’t concerned about the thin glassy film floating on the river’s surface; we were too busy watching for snakes. The suspended lines were also an adventuresome way to cross the river, swinging as they did from our shifting weight and a gusting high plains wind.

If you had been there with me, you would know that I was more endangered by the campfires we built from cow dung and fallen cottonwoods—or by the aforementioned snakes – than by the oil all around us. We strained and then boiled the drinking water we got from the river, not to rid it of oil – that floats to the top and is easily avoided by dipping your pail more deeply into the stream – but of bird droppings and other such “natural”, non-floating contaminates.

Amazingly, here I am, more than fifty years later, timeworn perhaps, but undamaged by the oily environment of my youth. The greatest risks to my health now seem to be appetite and sloth.

As I look back, I sometimes compare my life with oil to the life of Carl Petterson, Linda’s great-great-grandfather. When Carl came to America from Sweden more than one hundred and twenty five years ago, his first Kansas home was a sod-covered dugout in what is now the Green Mound neighborhood of southeastern Mitchell County. Even a kerosene lamp would have been a luxury for Carl, as I’m sure it might have been for some your ancestors. His nights were lit only by the moon, firewood, and lightning.

Carl didn’t have creosote posts or diesel-powered tractors. He fenced his eighty acres with hand-hewn limestone post-rock, and he walked his plow behind a horse. Still, Carl did well enough to leave five acres of his land for a church, and another five for the church cemetery, where Linda and I will be buried.

Today, his descendants can cultivate his eighty acres and mow his cemetery in less time than it took Carl to hitch up his horse and plow.

I could, of course, tell a similar story about Isaac Martin Harvey, who was born in London, and his son George Washington Harvey, who was born in Peoria, Illinois. They settled together on land that now forms the bottom of Lake Afton west of Wichita and south of Goddard. You know that Afton is a man-made lake providing an important water supply to area residents, as well as a relaxing place for recreation. It was developed in the 1930’s–and is currently maintained—with the use of machinery powered by refined derivatives of oil.

Contrary to modern assumptions, nature doesn’t give us a healthy environment to live in. For those who think that oil and oil pipelines are “dirty” and “unnatural”, I suggest reading some history* about more “natural,” pre-industrial times—or visiting a country where people are still living in “natural,” pre-industrial conditions. One might study places and times where the streets and streams were (and are) filled with both human and animal excrement; where childhood mortality exceeded (and still exceeds) fifty percent; where walking is the standard mode of transportation; and where gas stations and power plants are unheard of. I could go on, but you know all this. Many of you have been there and done that.

We in America live in an environment where the air we breathe, the water we drink, and the food we eat will not make us sick; and where we can even cope with natural catastrophes like Greensburg and Joplin. These are achievements made possible by cheap and abundant energy, e.g. oil. We can live this way only by getting machines—powered mostly by oil and its derivatives—to do more than ninety-nine percent of our physical, and even mental, work for us.

Products derived from oil are what we need to build and maintain comfortable, climate controlled homes. We need oil to produce and transport vast quantities of fresh and frozen food, to build hospitals, and to manufacture pharmaceuticals and orthopedic devices; etc., ad infinitum.

And, how do we travel across the country and around the world, very often for the sole purpose of safely enjoying the most beautiful parts of nature, which pre-industrial people had neither the time nor the energy to do? Oil.

I know that you believe in making decisions based on facts, not fantasies. So, consider the fact that so-called “green” technologies have given us no evidence that they can produce the plentiful, cheap, reliable energy that a modern and healthy human environment requires. Despite more than forty years of government subsidies, which draw resources from more viable and freely chosen purposes, and utopian “green” fantasies incessantly promoted by the government, the media, and in our schools, only two percent of the world’s energy comes from solar and wind technologies. Even that two percent must be backed up by conventional power-generating sources like nuclear, coal, hydro, natural gas—and oil. The sun is helpless at night; and even in Kansas, the wind is calm sometimes. But, these are the least of the obstacles to “green” energy efficiency. The laws of physics pose far greater, even insoluble, problems.

I know I’m old-fashioned: I still believe in a day’s work for a day’s pay and stuff like that. But it’s amazing to me that we’re so gullible as to take energy advice from politicians who tell us to trust our health and prosperity to unproven unprovable and wasteful “green energy” technologies. All the while, they condemn as “dirty” the very energy source—oil—that has brought us the cleanest, healthiest, most prosperous environment in the history of mankind.

Go figure. There are literally billions of people around the world who yearn for a liquid fuel, carried through a magnificently stout pipeline – or any pipeline – to help them create a modern human environment for themselves and their families. Yet here we are, so pleased with our own “green-ness” that we take the practical and affordable energy we get from fossil fuels for granted. And now, we’re actually putting another clamp on the aorta of our energy-driven, oil-dependent economy by postponing the proven, subsidy-free, Keystone XL Pipeline.

Our nature as human beings is to use our intelligence to create more livable and more comfortable environments for our families and ourselves. Dug-outs and dung fires will no longer do. Moreover, in America, we don’t need rulers or czars to dictate or approve what, where, and how we can produce and transport the energy our lives require. Perhaps I digress, but I don’t think so.

We are intelligent and independent individuals living in a society dedicated to liberty and prosperity. As such we have every right and obligation to embrace market-based energy production and privately financed transportation systems; in particular, the Keystone XL Pipeline which is needed now to bring oil from Canada to America’s gulf coast refineries.

The Keystone XL Pipeline would double the capacity of the existing Keystone from 591,000 barrels of oil per day to 1.3 million barrels. The CEO of Gulf Oil estimates that Keystone XL would save American consumers about $.20 per gallon on the price of gasoline. Alternatively of course, we can continue to import that oil from Saudi Arabia. No joke, that’s another price we’ll pay for being “green”.

So, the “dirty oil” objection is really just a dirty trick. Every energy source creates some kind of unpleasant byproduct. I’ve already mentioned firewood and cow dung, and I trust your experience is close enough to my own, that no further detail is needed. I could tell you about the side-effects of mining the materials that go into solar panels and windmills, and the incredible amount of coal and oil that goes into manufacturing, transporting, and assembling their parts, but you can easily intuit all of that for yourself. The “dirty oil” objection is just a shell game used by scoundrels—and that is exactly the right word—to divert our attention from the fact that they really don’t want any kind of industrial development at all.

Let me say it again, plainly: Virtually every necessity and convenience of modern life depends on the production and flow of oil—a Herculean task. It is sheer fantasy to imagine that the likes of Solyndra or Beacon Power will ever match the life-enhancing power of North America’s great oil industry. mh

* A good place to start is Civilization and Capitalism, 15th-18th Century, Vol. I: The Structure of Everyday Life, Fernand Braudel, University of California Press, 1992.

Faulty Lens Follow-Up

Originally published in Flourishing January 2012

In the November issue of this newsletter, I discussed the Occupy Wall Street protestors, saying that they were viewing the world through a “faulty intellectual lens”.  The point of the article was that many of the protestors are confused.  Among other things, they don’t understand the “capitalist function”, which is to provide financing for the improvement of the human condition.

So, I was very pleased to read* about protestor Tracy Postert.

Tracy has a PhD. in biomedical science, with a specialty in pharmacology.  Frustrated at being unable to find a job in academia, she held signs in Zucotti Park saying “Reagan Sucks”, and “I’ll Vote After the Revolution”.  (Yes, the logic escapes me, too.)

Tracy finally realized that those signs weren’t helping her find a job, and she put up a new one: 

PhD. Biomedical Scientist Seeking Full Time

Employment—Ask Me for My Résumé

And, what do you know?  Wayne Kaufman, Chief Market Analyst at John Thomas Financial (located at14 Wall Street) saw her sign, read her résumé, called her in for an interview, and offered her a job analyzing medical companies as potential investments.

She accepted.

Tracy is now studying to become a Chartered Financial Analyst, saying, “I want to get a perfect score.”

Q.E.D. (quod erat demonstrandum) The way you look at things really does make a difference.  mh

*Occupier Gets an Occupation, nypost.com, December 5, 2011.

Entrepreneurs, Capitalists, and Income Inequality

Originally published in Flourishing January 2012.

In 2009, there were 211,254,000 Americans over the age of fifteen who earned income.  If you earned more than $205,000 in 2009 you were in the top 1%.  If you earned $55,301 or more, you were in the top 20%.  Median household income in 2009 was $49,777. * 

So, for those of you in the top 1%, please know that I appreciate that you don’t have to be on Wall Street, much less the head of Goldman Sachs, to earn at that level.   I also know that none of you started in the top 1%, and I know that concerns about falling from the 1% can keep you awake at night.  Nobody wants to travel backwards in life. 

For the rest of us, it might be helpful to ask, who are the 1%?  The answer is that they come from all walks of life, but they generally fall into three broad categories.

Many of the top 1% of income earners in Americaare small business owners or entrepreneurs.  An entrepreneur can be defined as someone who acts to identify and fulfill the needs and desires of others in the marketplace in an attempt to earn money over and above the cost of acting; e.g., to earn a profit. 

Entrepreneurship—or running a business—involves every bit as much creativity as oil painting or novel writing. It requires imagination, understanding of the relevant tools and resources, and combining them into something new and different and valuable to others.  It’s hard work, even if—and especially because—it’s mostly mental work.  Very few people want to think as much, work as hard, take as much personal risk, or assume as much responsibility as is required of the successful entrepreneur and small business owner.

Others in the top 1% of income earners inAmericainclude highly skilled professionals, such as doctors, lawyers, executives, athletes, and entertainers.  Let’s give them their due; most of them work really hard, put in very long hours, and they have to study and train continuously to keep up with the demands of their professions.  For better or worse, most of us are lacking either the candlepower, or physical attributes, or work ethic that it usually takes to succeed in these challenging fields of endeavor.

That brings me to the capitalists, who make up a substantial portion of the 1% and much of the top 20%.  Most of today’s capitalists are people just like you and me.  In fact, they include you and me.  So, what do we do that makes us capitalists?

We do two things, and each is an incredibly valuable service to our fellow human beings; and each was an essential factor in the advance of our species from cave-dweller to homeowner, from fruit scavenger to grocery shopper.  The two things?

We defer consumption (we wait); and B) We assume risk.

Deferred consumption (waiting) was and is essential to human advancement for the simple reason that the production of food, clothing, and shelter takes time.  While we capitalists are waiting for the return of our money, entrepreneurs are using it to build and finance factories, houses, and automobiles; to create and market cell phones; to plant and harvest crops; and to do a million other things that take both time and money—a lot of time and a lot of money.  Because we wait for the return of our money (our capital), entrepreneurs and businesses can offer their hourly or salaried employees a regular paycheck.

We capitalists also bear the risk that the money we’ve saved and invested (rather than consumed) will be lost.  While the worker expects to be paid regularly, usually at least once a month, the capitalist may have to put his money at risk for years while awaiting a return on his investment. 

Sometimes, of course, two or more of the roles of entrepreneur, professional, capitalist, and employee are combined in one person.  And for each of those functions, it’s reasonable to expect compensation—sooner or later—depending on the terms and performance of each role. So now, let’s consider the fact of income inequality. 

First, although members of each of the three top earning groups I’ve just discussed are typically very smart, work really hard, and are very disciplined; that’s not the only reason they are in the top 20%, or even the top 1%.  We know this, because there are millions of smart, hardworking, and disciplined people, who are not in the top 20%.

The most basic reason that people make it into the top tiers of income earners is that there is a significant demand for who they are, or for what they do, or for what they’re selling—and they fulfill that demand more effectively or more completely than their competitors.  Each and every day, millions of Americans, and billions of people around the world, make purchasing decisions.  Those decisions ultimately determine what every product and service will cost, how many of each will be produced, and who will be rewarded.

If you’re a really good soldier, marine, or sailor; or teacher, or policeman, or fireman; or if you’re working in any of the thousands of worthy occupations from which we all choose, and you’re not in the top tiers of income earners, that may not seem fair.  But, of course, each of us makes our own “purchasing decision” when we decide what kind of work we want to do.   

We know going in what the potential of any job or career is or might be.  That potential is set by the demand for our occupation, how well we perform in it, and how many others are competing with us for a limited number of jobs, customers, clients, patients, investment opportunities, etc.

For example, investment bankers generally earn more than accountants, because, although accountants may be just as smart and hard-working, they are usually less tolerant of risk.  There are many more good accountants, therefore, than there are really good investment bankers.  A good chef will usually earn more than a short-order cook for very similar reasons.  In any field, skill and the willingness to tolerate risk and uncertainty are rarities, and they are usually accompanied by higher compensation. 

Which brings me to the concept of The Pyramid of Ability and The Law of Comparative Advantage

When it comes to playing basketball, I’m no Michael Jordan.  Heck, I’m no Jay Hrabik.  You may not know Jay, but he was the best player on our high school basketball team. (I was the 25th player on a team of 12.)  After serving in the U.S. Army for three years during theVietnamera, Jay became a CPA; but I’m getting ahead of myself.

After high school, and before Jay enlisted in the Army, he and I worked together at Bike’s Burger Bar.  Though Jay still disputes it, our skills as hamburger flippers were about equally developed.  I’m just guessing, but in hamburger flipping, Michael Jordan could probably have kept pace with either of us.  My point is that on the pyramid of ability, the three of us may have been equally talented hamburger flippers, and if we had all held that job at that time, we might have earned similar incomes. 

Again, I’m just guessing, but it’s very possible that Michael Jordan could have become either an investment advisor or an accountant.  On the pyramid of ability with regard to numbers, Jay, MJ, and I may have been similarly skilled, and we might have earned similar incomes, just as in flipping burgers. 

The good news for Jay and me is that fewer people can qualify to be accountants and investment advisors than can flip hamburgers.  That helps to explain why we gave up our jobs at Bike’s Burger Bar. 

But, Michael Jordan not only waived the opportunity to flip burgers, he passed on the chance to become either an accountant or an investment advisor.  That may not have been good news for the few people who would have become MJ’s clients, but it was great news for the millions of people who enjoyed watching “His Airness” play basketball. 

That’s The Law of Comparative Advantage, which probably also explains why Michael Jordan is making underwear commercials, and I’m not.   Neither, as far as I know, is Jay.

Do I resent the fact that Michael Jordan is in the top 0.01% of income earners?  Would I be better off if Michael Jordan earned less than he does?  Is Michael Jordan somehow taking something away from me? 

If Jay had grown up in another town, would that have made me a better basketball player?  If Michael Jordan had earned less money, would I have earned more?

The answers to all of these questions are obvious:  No!

Now, imagine that instead of becoming the greatest basketball player of all time, Michael Jordan had become a billionaire oil producer; or a billionaire investment banker; or a billionaire movie star. Are the answers any different? 

They are not.  Each of us is judged in the marketplace by our employers and our potential employers, our customers and our potential customers, our clients and our potential clients, our fans and potential fans.  Through their purchasing decisions, they tell us what our products and services are worth to them, and we can choose whether to provide them, or not. 

The incredibly wide range of products and services—and the equally wide  range of qualities and skills—offered in the marketplace, explains why there is such a wide range of income. 

Sometimes, we may feel we’re being judged unfairly or inaccurately.   But if that’s truly the case, it’s our responsibility to seek other markets or to develop new skills.  mh

*http://politicalcalculations.blogspot.com/2010/12/thats-your-us-income-ranking.html