Inefficiency is Good!

Fifty percent of the world’s wealth is held by 1% of the population.

The number of billionaires keeps growing.

The middle-classes of Europe, North America, China, Latin America, and those formerly prosperous Africa find themselves in a more tenuous economic position than they have been in a century.

What is going on?

Western governments have adopted a theory of trade that posits that increased trade yields increased wealth; therefore to increase wealth governments push to remove restrictions on trade. The European economic union is an example of this — all internal borders have been removed and they have adopted one currency.

The theory is that each country specializes in what it is best at. So since China or Mexico had lower wages, they could build things that required a lot of labor. And if the United States had a comparative advantage is Finance, Insurance and Real Estate (FIRE), it would dominate those areas, as well is things like software (Microsoft) of making movies (Hollywood).

It turns out that software coding, finance, and movie making skills are highly transferrable. India does them both very well. Taiwan and Israel are not second to the US in coding. Big firms like Microsoft increasingly move coding to the lowest priced labor, as Apple does with iPhone manufacturing.

It is also true that Financial services are very concentrated — a handful of people make enormously more money than your average American.

So even if (and this is debatable), the GDP of the US increased due to increased trade (we can buy cars from China but sell them banking services), it is not true that this wealth is equally shared. It tends to move wealth away from the middle and lower classes and toward those who are already at the top. See all those mega-mansions and mega-yahcts? There you go.

Also, Microsoft, Ford, GM, and Apple are not primarily software companies or car companies — they are legal entities, holding companies that navigate capital markets and legal, financial, and labor regimes to maximize the wealth held by that top 1% of shareholders while increasingly outsourcing the actual production of a good.

In fact, the more we monetize and finance the economy, reducing “transaction costs,” the more likely it is that those few people controlling the monetization and financing process will reap inordinate financial rewards, increasing the overall average not be distributing it, but by shifting it from those paid less to those paid more.

For example, Mitt Romney made his millions by buying companies and selling them, some of which ended up offshoring all jobs. This did not produce a net increase in jobs — it directly decreased jobs in the United States and increased jobs in, say, China, and put millions in his pocket. Did this increase economic efficiency? Sure it did. Did it increase global wealth? That is not clear. What is clear is that the lower 99% became poorer and and the top 1% gained even more.

Theoretically, overall global wealth increased as Mitt’s stock holdings went up. That is what economist and free-traders mean when they talk about efficiencies and overall increases in wealth.

But economic efficiency does not make the world a better place for the bottom 99%. (I’ll admit it, I’m a member of the bottom 99%, so I’m biased here).

This decrease in trade friction, the inability of small firms to compete against uber-capitalized industries (think of a family-owned grocery store competing against a Super-Walmart) may in fact increase overall global economic growth if measured in purely financial terms, but this increase in efficiency increases the flow to that top 1%, not everyone else.

Free trade advocates scoff at this loss, justifying it by saying it is good to drive out inefficient providers and, in turn, driving down the overall cost of goods and services. But as Henry Ford observed, if you don’t pay your workers well enough they won’t be able to buy the cars.

But we don’t have Henry Ford anymore. We have the Fed. Europe has their Central Bank. They engage in quantitative easing (printing of money) and artificially deflate interest rates to keep money flowing and people buying. This builds bubbles in asset prices such as the house you are renting from the bank (but you’ve bought into the lie that you own it). And larger and larger portions of our pitiful incomes go to “finance” that debt. The US is great a getting people into debt — debt is a wonderful tool to transfer wealth from the bottom 99% to the top 1%.

And let us not pretend for a minute that all his is “free enterprise.” The financial markets and money itself are products of the State. The State claims a monopoly on Money and gives it to it’s friends (the bankers) to lend to you and I at far more than it costs them. Banks lend money they don’t have (that’s the heart of fractional reserve banking) so they can collect the interest we pay. Effectively “home ownership” really means that we rent our homes from the bank).

So we live in a lie.

Now I am not a communist. I hate communism. Even the word “communism” is a lie because it implies a community or communal ownership. Communist governments are totalitarian governments owning and controlling everything. That means the party chief (like Fidel Castro or Mao or Pol Pot or Stalin) become billionaires in the name of the people. To this day, Fidel Castro has his billions stashed away in Swiss banks, just like Bill Gates.

Government ownership and control simply hastens the transfer of wealth to the top 1% and impoverishes the poor and middling classes. History proves this.

There is an example of a very inefficient economy that probably spreads out more wealth and yields more happier people (who believe themselves more in control of their lives) than what I’ve described above.

The Bristol Bay commercial fishing industry in Alaska is inefficient. As millions of Big Haul, Egegik River on the Pathfindersalmon swarm up the rivers during a six week time frame, thousands of small boats, exactly 32 feet long, crewed by two to five people, thrash about to catch the most fish they can to sell to the fish packers. This is very inefficient. If you want efficiency, you build the modern equivalent of fish wheels and eliminate the boats entirely. Set up fixed and mobile fish channelling systems that herd them by the millions into the maw of the processor. Eliminate inefficiency. Get rid of the middle-man (the independently owned fishing boats) Eliminate jobs. Increase the quality of the end product. Decrease time to market. Cut costs. This is vastly more efficient.

It may increase overall wealth only if you measure someone’s bank transfers or stock prices. Ninety-nine percent of this theoretical increase will accrue to the heavily financed foreign owned corporation that would build such fish factories.

The bulk of that increased wealth is pure paper money the really does nothing to help people live better.  If you discount for that — and the economists do not — there is a net global decrease in real wealth.

And you’ll put 2000 small business owners, and their 8000 direct hires out of a job, and hundreds of support workers (from hookers to mechanics) would be unemployed. All in the name of increasing efficiency and “global” wealth.

If the fish processors had their way, this is exactly what would happen. Global wealth increases — for that top 1%. (But they don’t tell you that part).

Here is another real world example. Everyone knows of Haiti. Haiti is slightly above North Korea in livability. It is so poor that everyone feels sorry for them. The US helped oust a dictator and since then billions upon billions of welfare payments, financial aid, grants and millions of tons of free food have flowed to the island. What is the net effect? The net effect is that all the small farms in Haiti have been destroyed because they can’t compete with free. Free rice is given out in Port-Au-Prince and the farmers go broke and the farmland becomes useless. Those living in the countryside ( and the hookers and mechanics) pack up and move to Port-Au-Prince. Then the earthquake comes and the houses fall down and kill 200,000 people. And then more aid comes and, blue tarps are handed out for housing, and the international aid community (a global industry in its own right) wrings its hands and demands more money and continues to undermine any domestic industry at all.

What Haiti needs is a good dose of inefficiency — let the price of chickens rise fold, as with rice, and people will move out of the urban slums, learn how to farm again, and eventually feed themselves.

Is it “efficient?” Hell no. But for the majority of people — the bottom 99% — it beats losing the family rice plot and chicken coop and living under a blue tarp and be dependent upon “efficiently” produced rice and chickens.

The one-world you see our leaders trying to implement has done exactly that. In Europe, on a larger scale, Germany accrues the benefits of open markets (Germany exports 50% of it’s gross domestic product) while Greece goes into debt because it can’t efficiently make whatever Germany makes (not just BMWs, but beer and sausage, too, which can be made anywhere in Greece).

I’m just saying Greeks would be better off with crappy and costly Greek beer (and own the brewery) than buying more efficiently produced (cheaper) German beer and being unemployed.

It is time to think different. Watch Europe. Our path is not sustainable.

Diversely yours,

Fritz Berggren, Ph.D.

2 thoughts on “Inefficiency is Good!

  1. Pingback: Find your Tribe | Fritz Berggren

  2. Pingback: What’s really going on . . . | Fritz Berggren, Ph.D.

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