The economy is currently seen as a machine we can optimize, but is more accurately seen as a complex adaptive system. In this view, it changes how we should approach, understanding any action will have an impact and will require constant adjustment. It also forces optimization of a second feature beyond efficiency, resiliency. If the machine metaphor is kept in place it will simply allow those who are in control to profit for longer then if we treated the economy as a complex adaptive system
In a CAS, there is no perfection or end in sight. The players adapt reflexively and this must always be taken into account. Relentless tweaking is the best route to steer towards a perfection that will never be achieved
Metaphors are so powerful, which is why changing the “economy is a machine” to the economy is a complex adaptive system is so important
Surrogation – when you surrogate the terrain for the map, when proxies become goals. The followers of great thinkers often take their ideas too far, mistaking more for better. More trade agreements, more efficiency, more division of labor is not always better
Economic effects are not independent. One action could cause more of that action as scale and efficiencies increase. Interdependence moves us from a Gaussian to a Pareto distribution
Pressure can help drive efficiencies and progress but it can also be taken too far if the incentives are not aligned. You just also introduce some limits and fridtion in order to ensure resiliency. These can be thought of as productive frictions in the long term. For example, pitchers are more likely to blow out their arms in the end of a game than the beginning. Pitch count restrictions help limit how much a pitcher can do and therefore prolongs the pitchers life in the long term
Must balance connectedness with separation, efficiency and resilience, pressure and friction, perfection and improvement
Anomalies are a treasure trove. Answers to really difficult problems tend to be found in Data points that don’t fit the current framework. Don’t ignore them, dive into them
Joe’s Stone Crab is the most profitable standalone restaurant in the US. It has been around for over 100 years (resiliency) and is profitable (efficiency). They treat their company like a CAS and don’t fall prey to linear and reductionist thinking. They understand how some frictions actually make the overall system healthier. Similarly, The Four Seasons takes a win/win mentality with every stakeholder and enjoys the longest employee tenure in the industry and massive profits. They take a holistic view and don’t have a “head of guest experiences” because they feel that is every employees’ responsibility. Slack is not the enemy – seek optimal slack rather than zero slack
To avoid proxies becoming a goal, use multiple internal proxies that tend to be contradictory to measure progress of the model against the goal. This forces a systems thinking rather than a reductionist one. Southwest Airlines uses 4 proxies – cost, customer satisfaction, employee satisfaction and profitability
Argues against monopolies as it leads to complacency, bloat and fragility. Great companies need great competitors to keep them great
What I got out of it
Fascinating deep dive into complex adaptive systems and how organizations can learn from complexity science how to build a robust firm that is also efficient. Efficiency is not the be all end all, some slack is necessary. Infinite tweaking and adjusting is necessary in an interconnected and dynamic world
The author argues that the standard account of monetary history is precisely backwards. We did not begin bartering, discover money, and then, lastly, create credit systems. It was the absolute opposite – debt and credit systems came first, then money, and then, in some places, barter systems
To argue with the king, you must use the king’s language
Interesting that it seems to be a universal that humans feel a moral duty to repay any loans made. In this sense, obligations are also thought of as debt. This book will discuss at length money‘s capacity to turn moral obligations into simple arithmetic. This ability has allowed for specific quantification of what is owed. Specific amounts owed is linked inherently to violence as it is now easy to see what is expected and rightfully owed to someone else. Converting human relations into mathematical numbers underlies much of the problems but are dealing with today
The author dispels the notion that a barter society was the foundation of money. This is widely believed, but nobody has been able to prove that this in fact was the system used by any large and thriving group of people
If money is simply a yardstick what does it measure? Debt. It is an IOU. It allows various people institutions and others who want to trade to be able to do so with less friction, come to a mutual agreement as to what constitutes a fair trade. Does not measure the value of the object as much as it does the trust that we have another human beings. The form the currency takes hardly matters as long as people trust it except it as an IOU and the government excepts it as a form of taxation can be considered currency
Unlike commonly thought, markets do not spring forth before governments, but the opposite. This contradicts what Adam Smith and many modern economist say. Governments spend a lot of their time and focus trying to create a market where one currently doesn’t exist. If Adam Smith was right and there was profit to be had, these markets would spring up spontaneously
Markets and taxation seem to have sprung up from the need to support large armies. If you could create or do something of value that the army would pay you for, all of a sudden you’ve created a vast machine to create valuable goods and sustain your army
The foundations of money seem to be things that were originally the most appropriate things to sacrifice to the gods. For example, oxen were often used as the currency the people spoken and they were also the most common sacrificial animal
If reciprocation is at the root of all exchange, debt could be considered the foundation of morality
Debt is a very specific sort of situation between specific people, people who consider each other similar – similar in status and skills in important ways but are currently unequal but there is a way to set matters straight. Hierarchy plays a huge role – if the debtor cannot restore equality, it is likely something other than debt or there is some larger problem. A debt can then be thought of as an exchange that is not yet brought to completion. Debt is what happens between equality. An interesting definition of debt is a situation or two equals decide one will no longer be equal until the debt is repaid
Saying Please and thank you is a democratization of equality, treating everyone the same way that you only used to have to treat lords in the past. “Thank you” derives from “I will remember this” and often times the reply is “it’s nothing” showing that there is no debt, nothing to repay or remember
The author makes an interesting argument that money first surfaced and evolved as a form of repayment for things that truly could never be repaid – human lives, for example
The author makes a distinction between commercial economies and human economies. Commercial economies are what the west is familiar with and human economies use currency as a means of keeping tabs on moral obligations, creating, maintaining and severing relations between people. It is more social than commercial. This is how a debt can start as a moral obligation but lead to immoral behavior and violence. Currency could never substitute for a human but in many cultures as human as a substitute for another human. You had to disentangle and rip the person from their context before they could be made upon or asleep. The person had to be abstract from what they truly are every move from any context and their web of relations never mind if people they were a human being
Times of war correlate with increased usage of precious metals as money whereas times of peace correlate with systems of credit as trust in the other person is enough
The author argues against the implicit assumption that paying back ones debt is akin to morality. In fact, some of our greatest institutions – the us government – have trillions of dollars of debt that it will likely never pay back.
Debt is the perversion of a promise
What I got out of it
Great books use their specific topic to open up a wedge to a whole world of ideas and topics. Debt falls into that category – such a rich history of human civilization, trade, economics, psychology, and more.
Latticework: success in investing based on a working knowledge of a variety of disciplines
Latticework is itself a metaphor. And on the surface, quite a simple one at that. Everyone knows what latticework is, and most people have some degree of firsthand experience with it. There is probably not a do-it-yourselfer in America who hasn’t made good use of a four-by-eight sheet of latticework at some point. We use it to decorate fences, to create shade over patios, and to support climbing plants. It is but a very small stretch to envision a metaphorical lattice as the support structure for organizing a set of mental concepts
Physics – Equilibrium
Physics is the science that investigates matter, energy, and the interaction between them – the study, in other words, of how our universe works. It encompasses all the forces that control motion, sound, light, heat, electricity, and magnetism, and their occurrence in all forms, from the smallest subatomic particles to entire solar systems. It is the intellectual foundation of many well-recognized principles such as gravitation and such mind-boggling concepts as quantum mechanics and relativity.
Equilibrium is defined as a state of balance between opposing forces, powers, or influences. An equilibrium model typically identifies a system that is at rest; this is called “static equilibrium.”
The concept of equilibrium is so deeply embedded in our theory of economics and the stock market, it is difficult to imagine any other idea of how these systems could possible work…One place where the question is being raised is the Santa Fe Institute, where scientists from several disciplines are studying complex adaptive systems – those systems with many interacting parts that are continually changing their behavior in response to changes in the environment…If a CAS is, by definition, continuously adapting, it is impossible for any such system, including the stock market, ever to reach a state of perfect equilibrium. What does that mean for the stock market? It throws the classic theories of economic equilibrium into serious question. The standard equilibrium theory is rational, mechanistic, and efficient. It assumes that identical individual investors share rational expectations about stock prices and then efficiently discount that information into the market. It further assumes there are no profitable strategies available that are not already priced into the market. The counterview from SFI suggests the opposite: a market that is not rational, is organic rather than mechanistic, and is imperfectly efficient.
The SFI pointed out 4 distinct features they observed about the economy: dispersed interaction, no global controller, continual adaptation, out of equilibrium dynamics.
Biology – Evolution
What we are learning is that studying economic and financial systems is very similar to studying biological systems. The central concept for both is the notion of change, what biologists call evolution. The models we use to explain the evolution of financial strategies are mathematically similar to the equations biologists use to study populations of predator-prey systems, competing systems, or symbiotic systems.
Complex systems must be studied as a whole, not in individual parts, because the behavior of the system is greater than the sum of the parts. The old science was concerned with understanding the laws of being. The new science is concerned with the laws of becoming
Social Sciences – Complexity, Complex Adaptive Systems, Self-Organized Criticality
Although Johnson’s maze is a simple problem-solving computer simulation, it does demonstrate emergent behavior. It also leads us to better understand the essential characteristic a self-organizing system must contain in order to produce emergent behavior. That characteristic is diversity. The collective solution, Johnson explains, is robust if the individual contributions to the solution represent a broad diversity of experience in the problem at hand. Interestingly, Johnson discovered that the collective solution is actually degraded if the system is limited to only high-performing people. It appears that the diverse collective is better at adapting to unexpected changes in structure.
Folly to think you can eliminate every waste, every performer who doesn’t meet the highest bar, and excel and survive. Can shift the entire bell curve to the right, but you still need the full spectrum
Notes: We have observed anecdotal evidence of emergent behavior, perhaps without realizing what we were seeing. The recent bestseller,Blind Man’s Bluff: The Untold Story of american Submarine Espionage, presents a very compelling example of emergence. Early in the book, the authors relate the story of the 1966 crash of a B-52 bomber carrying four atomic bombs. Three of the four bombs were soon recovered, but a fourth remained missing, with the Soviets quickly closing in. A naval engineer named John Craven was given the task of locating the missing bomb. He constructed several different scenarios of what possibly could have happened to the fourth bomb and asked the members of the salvage team to wager a bet on where they thought the bomb could be. He then ran each possible location through a computer formula and – without ever going to sea! – was able to pinpoint the exact location of the bomb based on a collective solution
It is when the agents in the system do not have similar concepts about the possible choices that the system is in danger of becoming unstable. And that is clearly the case in the stock market…The value of this way of looking at complex systems is that if we know why they become unstable, then we have a clear path to a solution, to finding ways to reduce overall instability. One implication, Richards says, is that we should be considering the belief structures underlying the various mental concepts, and not the specifics of the choices. Another is to acknowledge that if mutual knowledge fails, the problem may center on how knowledge is transferred in the system.
Psychology – Mr. Market, Complexity, Information
Another aspect of behavioral finance is what some psychologists refer to as mental accounting – our tendency to think of money in different categories, putting our funds into separate “mental accounts,” depending on circumstances. Mental accounting is the reason we are far more willing to gamble with our year-end bonus than our monthly salary, especially if it is higher than anticipated. It is also one further reason why we stubbornly hold onto stocks that are doing badly; the loss doesn’t feel like a loss until we sell
Philosophy – Pragmatism
Strictly for organizational simplicity, we can separate the study of philosophy into 3 broad categories. First, critical thinking as it applies to the general nature of the world is called “metaphysics”…Metaphysics means “beyond physics.” When philosophers discuss metaphysical questions, they are describing ideas that exist independently from our own space and time. Examples include the concepts of God and the afterlife. These are not tangible events like tables and chairs but rather abstract ideas that metaphysical questions readily concede the existence of the world that surrounds us but disagree about the essential nature and meaning of the world. The second body of philosophical inquiry is the investigation of 3 related areas: aesthetics, ethics, and politics. Aesthetics is the theory of beauty. Philosophers who engage in aesthetic discussions are trying to ascertain what it is that people find beautiful, whether it be in the objects they observe or in the state of mind they achieve. This study of the beautiful should not be thought of as a superficial inquiry, because how we conceive beauty can affect our judgments of what is right and wrong, what is the correct political order, and how people should live. Ethics is the philosophical branch that studies the issues of right and wrong. It asks what is moral and what is immoral, what behavior is appropriate and inappropriate. Ethics makes inquiries into the activities people undertake, the judgments they make, the values they hold, and the character they aspire to achieve. Closely connected to the idea of ethics is the philosophy of politics. Whereas ethics investigates what is good or right at the individual level, politics investigates what is good or right at the societal level. Political philosophy is a debate over how societies should be organized, what laws should be passed, and what connections people should have to these societal organizations. Epistemology, the third body of inquiry, is the branch of philosophy that seeks to understand the limits and nature of knowledge. The term itself comes from two Greek words: episteme, meaning “knowledge,” and logos, which literally means “discourse” and more broadly refers to any kind of study or intellectual investigation. Epistemology, then, is the study of the theory of knowledge. To put it simply, when we make an epistemological inquiry, we are thinking about thinking. When philosophers think about knowledge, they are trying to discover what kinds of things are knowable, what constitutes knowledge (as opposed to beliefs), how it is acquired (innately or empirically, through experience), and how we can say that we know a thing.
For pragmatism, anyone who seeks to determine the true definition of a belief should look not at the belief itself but at the actions that result from it. He called the proposition “pragmatism,” a term, he pointed out, with the same root as practice or practical, thus cementing his view that the meaning of an idea is the same as its practical results. “Our idea of anything, Peirce explained, “is our idea of its sensible effects.” In his classic 1878 paper, “How to Make Our Ideas Clear,” Peirce continued: “The whole function of thought is to produce habits of action. To develop its meaning, we have, therefore, simply to determine what habits it produces, for what a thing means is simply what habits it involves.”
A belief is true, James said, because holding it puts a person into more useful relations with the world…People should ask what practical effects come from holding one philosophical view over another
If truth ad value are determined by their practical applications in the world, then it follows that truth will change as circumstances change and as new discoveries about the world are made. Our understanding of truth evolves. Darwin smiles.
So we can say that pragmatism is a process that allows people to navigate an uncertain world without becoming stranded on the desert island of absolutes. Pragmatism has no prejudices, dogmas, or rigid canons. It will entertain any hypothesis and consider any evidence. If you need facts, take the facts. If you need religion, take religion. If you need to experiment, go experiment. “In short, pragmatism widens the field of search for God,” says James. “Her only test of probable truth is what works best in the way of leading us.”
Pragmatism, in summary, is not a philosophy as much as it is a way of doing philosophy. It thrives on open minds, and gleefully invites experimentation. It rejects rigidity and dogma; it welcomes new ideas. It insists that all possibilities should be considered, without prejudice, for important new insights often come disguised as frivolous, even silly notions. it seeks new understanding by redefining old problems.
One of the secret to Bill Miller’s success is his desire to take a Rubik’s Cube approach to investing. He enthusiastically examines every issue from every possible angle, from every possible discipline, to get the best possible description – or redescription – of what is going on. Only then does he feel in a position to explain. To his investigation he brings insights from many fields…He continually studies physics, biology, and social science research, searching for ideas that will help him become a better investor…In an environment of rapid change, the flexible mind will always prevail over the rigid and absolute…Because you recognize patterns, you are less afraid of sudden changes. With a perpetually open mind that relishes new ideas and knows what to do with them, you are set firmly on the right path.
Literature – self-education of a Latticework through books, Adler’s Active Reading
We must educate ourselves and the vehicle for doing so is a book supplemented with all other media both traditional and modern…So we are talking about learning to become discriminating readers: to analyze what you read, to evaluate its worth in the larger picture, and to either reject it or incorporate it into your own latticework of mental models…We can all acquire new insights through reading if we perfect the skill of reading thoughtfully. The benefits are profound: not only will you substantially add to your working knowledge of various fields, you will at the same time sharpen your skill at critical thinking.
The central purpose of reading a book, Adler believes, is to gain understanding…This is not the same as reading for information.
Reading that makes you stop and think is the path to greater understanding – not solely because of what you are reading but also because of the process of reflection in which you are engaged. You are learning from your own thinking as well as from the author’s ideas. You are making new connections. Adler describes as the difference between learning by instruction and learning by discovery. It’s evident of in the satisfaction we feel when we figure out something on our own, instead of being told the answer. Receiving the answer might solve the immediate problem, but discovering the answer by your own investigation has a much more powerful effect on your overall understanding.
Adler proposes that all active readers need to keep 4 fundamental questions in mind: what is the book about as a whole, what is being said in detail, is the book true, in whole or in part, what of it? The heart of Adler’s process involves 4 levels of reading: elementary, inspectional, analytical, and syntopical. Each level is a necessary foundation for the next, and the entire process is cumulative.
Elementary reading is the most basic level, the one we achieve in elementary education
In inspectional reading, the second level, the emphasis is on time and the goal is to determine, as quickly as possible, what the book is about. It has two levels: prereading and superficial reading. Prereading is a fast review to determine whether a book deserves a more careful reading. Look at the table of contents, index, how much can you learn about the main themes through this overview. Next, Adler recommends systematic skimming. Read a few paragraphs here and there, read the author’s conclusion. These two activities should take between 30-60 minutes and help you determine if it is worth your time to read the book
Analytical reading is the most thorough and complete way to absorb a book. Through analytical reading you will answer what is the book about as a whole and in detail and provide you the most complete answer to if the book is true. It has goals: develop a detailed sense of what the book contains, interpret the contents by examining the author’s own particular point of view on the subject; and to analyze the author’s success in presenting that point of view convincingly. Take notes, make an outline, write in your own words what you think the book is about, write the author’s main arguments
The fourth and highest level is what Adler calls syntopical reading, or comparative reading. In this level of reading, we are interested in learning about a certain subject, and to do so we compare and contrast the works of several authors rather than focusing on just one work by one another. Adler considers this the most demanding and most complex level of reading. It involves two challenges: first, searching for possible books on the subject; and then deciding, after finding them, which books should be read
The challenge for us as readers is to receive that knowledge and integrate it into our latticework of mental models. How well we are able to do so is a function of two very separate considerations: the author’s ability to explain, and our skills as careful, thoughtful readers. We have little control over the first, other than to discard one particular book in favor of another, but the second is completely within our control
I believe in…mastering the best that other people have figured out, [rather than] sitting down and trying to dream it up yourself…You won’t find it that hard if you go at it Darwinlike, step by step with curious persistence. You’ll be amazed at how good you can get…It’s a huge mistake not to absorb elementary worldly wisdom…Your life will be enriched – not only financially but in a host of other ways – if you do. – Charlie Munger, Poor Charlie’s Almanack
Decision Making – Continuously add more building blocks to your knowledge base in order to build more robust mental models
Failures to explain are caused by our failures to describe
Our institutions of higher learning may separate knowledge into categories, but wisdom is what unites them.
What I got out of it
A beautiful book on how to approach being a multidisciplinary thinker as it applies to investing.
Marc Levinson discusses the history of the container, the main
characters behind it, and the ramifications its introduction and adoption have
had on global trade. The basic
concept of the container was that cargo could move seamlessly among trains,
trucks, and ships.
The Box, I hope, has contributed to
public understanding that inadequate port, road, and rail infrastructure can
cause economic harm by raising the cost of moving freight.
Malcom McLean’s real contribution to
the development of containerization, in my view, had to do not with a metal box
or a ship, but with a managerial insight. McLean understood that transport
companies’ true business was moving freight rather than operating ships or
trains. That understanding helped his version of containerization succeed where
so many others had failed.
What is it about the container that
is so important? Surely not the thing itself. A soulless aluminum or steel box
held together with welds and rivets, with a wooden floor and two enormous doors
at one end: the standard container has all the romance of a tin can. The value
of this utilitarian object lies not in what it is, but in how it is used. The
container is at the core of a highly automated system for moving goods from
anywhere, to anywhere, with a minimum of cost and complication on the way. The
container made shipping cheap, and by doing so changed the shape of the world
economy. Low shipping costs helped make capital even more mobile, increasing
the bargaining power of employers against their far less mobile workers. In
this highly integrated world economy, the pay of workers in Shenzhen sets
limits on wages in South Carolina, and when the French government ordered a
shorter workweek with no cut in pay, it discovered that nearly frictionless,
nearly costless shipping made it easy for manufacturers to avoid the higher cost
by moving abroad.
As ship lines built huge vessels
specially designed to handle containers, ocean freight rates plummeted. And as
container shipping became intermodal, with a seamless shifting of containers
among ships and trucks and trains, goods could move in a never-ending stream
from Asian factories directly to the stockrooms of retail stores in North
America or Europe, making the overall cost of transporting goods little more
than a footnote in a company’s cost analysis. Transport efficiencies, though,
hardly begin to capture the economic impact of containerization. The container
not only lowered freight bills, it saved time. Quicker handling and less time
in storage translated to faster transit from manufacturer to customer, reducing
the cost of financing inventories sitting unproductively on railway sidings or
in pierside warehouses awaiting a ship. The container, combined with the
computer, made it practical for companies like Toyota and Honda to develop
just-in-time manufacturing, in which a supplier makes the goods its customer
wants only as the customer needs them and then ships them, in containers, to
arrive at a specified time. Such precision, unimaginable before the container,
has led to massive reductions in manufacturers’ inventories and correspondingly
huge cost savings. Retailers have applied those same lessons, using careful
logistics management to squeeze out billions of dollars of costs.
When transport costs are high,
manufacturers’ main concern is to locate near their customers, even if this
requires undesirably small plants or high operating costs. As transportation
costs decline relative to other costs, manufacturers can relocate first
domestically, and then internationally, to reduce other costs, which come to
loom larger. Globalization, the diffusion of economic activity without regard
for national boundaries, is the logical end point of this process. As transport
costs fall to extremely low levels, producers move from high-wage to low-wage
countries, eventually causing wage levels in all countries to converge. These
geographic shifts can occur quickly and suddenly, leaving long-standing
industrial infrastructure underutilized or abandoned as economic activity moves
The solution to the high cost of
freight handling was obvious: instead of loading, unloading, shifting, and
reloading thousands of loose items, why not put the freight into big boxes and
just move the boxes?
Interest in such a remedy was
widespread. Shippers wanted cheaper transport, less pilferage, less damage, and
lower insurance rates. Shipowners wanted to build bigger vessels, but only if
they could spend more time at sea, earning revenue, and less time in port.
Truckers wanted to be able to deliver to and pick up from the docks without
hour upon hour of waiting. Business interests in port cities were praying for
almost anything that would boost traffic through their harbors. Yet despite all
the demands for change, and despite much experimentation, most of the
industry’s efforts to improve productivity centered on such timeworn ideas as
making drafts heavier so that longshoremen would have to work harder. No one
had found a better way to ease the gridlock on the docks. The solution came
from an outsider who had no experience with ships.
It was easy enough to conclude that
containers would change the business, but it was not obvious that they would
revolutionize it. Containers, said Jerome L. Goldman, a leading naval
architect, were “an expedient” that would do little to reduce costs. Many
experts considered the container a niche technology, useful along the coast and
on routes to U.S. island possessions, but impractical for international trade.
The risk of placing multimillion-dollar bets on what might prove to be the
wrong technology was high.
These two unrelated developments—the
rise of New York, the neglect of Tampa and Mobile—revealed the economics that
would affect seaports as container shipping grew. For ports, capturing
container traffic was going to be expensive, requiring investments out of all
proportion to what had come before. For ship lines, the days when vessels
meandered along the coast, calling at every port in search of cargo, would soon
be over. Every stop would mean tying up an expensive containership that could
generate revenue and profit only when it was on the move. Only ports that could
be relied on for large amounts of freight were worth a visit, and all others
would be served by truck or barge. By the late 1950s, the lesson for public
officials already was clear. As container shipping expanded, maritime traffic
would be drawn to a small number of very large ports. Many established centers
of maritime commerce would no longer be needed, and ports would have to compete
to be among the survivors.
Behind this frenzied expansion of
long-neglected ports was the emergence of an entirely new line of thought about
economic growth. Manufacturing was almost universally regarded as the bedrock
of a healthy local economy in the 1960s, and much of the value of a port, aside
from jobs on the docks, was that transportation-conscious manufacturers would
locate nearby. As early as 1966, though, public officials in Seattle were
sensing that their remote city, with little industry, might be able to develop
a new economy based on distribution rather than on factories. The lack of
population close at hand would be no obstacle; Seattle could become not merely
a local port for western Washington but the center of a distribution network
stretching from Asia to the U.S. Midwest. “Commodity distribution has grown out
of the dependent sector to link production and consumption,” port planner
Ting-Li Cho wrote presciently. “It has become an independent sector that, in
return, determines the economy of production and consumption.
The container contributed to a
fundamental shift in the geography of British ports. In the precontainer era,
London and Liverpool had dominated Britain’s international trade, their docks
and warehouses filled with goods headed to or from factories located nearby.
The two ports each loaded one-quarter of Britain’s exports, with no other port
handling more than 5 percent. The container stripped Liverpool of its
competitive advantages. Its costs per ton of cargo were too high, and it was on
the wrong side of an island that was reorienting its trade toward continental
“Unless a container terminal is
available in Hong Kong to serve these ships the trading position of the Colony
will be affected detrimentally.” And no government anywhere was more aggressive
in preparing for the container age than Singapore’s. Immediately upon
independence, the new government launched a crash effort to build the economy
by drawing foreign investment, especially in manufacturing. Amid a general government
crackdown on dissent, the Port of Singapore Authority was able to slash the
size of longshore gangs from twenty-seven to twenty-three, institute a second
shift, and boost by half the amount of cargo handled per man-hour. It put forth
a plan in 1965 to build four berths for conventional ships at a site known as
the East Lagoon, which had a breakwater but no major docks. Within months, the
plan was scrapped. The containerships that were about to cross the Atlantic had
captured the interest of port officials. They announced in 1966 that instead of
conventional berths, they would build a port for containers. Singapore’s
strategy was to use containers to become the commercial hub of Southeast Asia.
With a $15 million World Bank loan covering nearly half the cost, the port
authority began work on a terminal at which long-distance vessels from Japan,
North America, and Europe could hand off containers to smaller ships serving
regional ports. Singapore’s containerport grew beyond all expectations. In
1971, before the new terminal opened, the Port of Singapore Authority forecast
190,000 containers after a decade in operation. Instead, it handled more than a
million boxes in 1982 and was the world’s sixth-largest containerport. By 1986,
Singapore had more container traffic than all the ports of France combined. In
1996, more containers passed through Singapore than through Japan. In 2005
Singapore became the world’s largest port for general cargo, pulling ahead of
Hong Kong, and some 5,000 international companies were using the island-state
as a warehousing and distribution hub. By 2014, the equivalent of 17 million
truck-sized containers moved across Singapore’s docks and the government-owned
port management company had itself become a multinational enterprise, operating
container terminals around the world and turning Singapore’s logistical
know-how into a major export—testimony to the power of transportation to
reshape the flow of trade.
The launch of so many vessels
resulted in a quantum jump in capacity. The basic economics of containerization
dictated as much. Once a ship line had made the decision to introduce
containerships on a particular route, other carriers in the trade normally
followed swiftly lest they be left behind. The capital-intensive nature of
container shipping put a premium on size; quite unlike breakbulk shipping, in
which an owner of “tramp” ships could eke out a profit picking up freight
wherever it could be found, a container line needed enough ships, containers,
and chassis to run a high-frequency service between major ports on a regular
schedule. When a ship line decided to enter a trade, it had to do so in a large
way—which meant that on every major route, several competitors were entering
with several vessels apiece. Capacity on the largest international routes
increased fourteen times over between 1968 and 1974.
United States Lines would achieve
what it took to succeed in container shipping: scale. Scale was the holy grail
of the maritime industry by the late 1970s. Bigger ships lowered the cost of
carrying each container. Bigger ports with bigger cranes lowered the cost of
handling each ship. Bigger containers—the 20-foot box, shippers’ favorite in
the early 1970s, was yielding to the 40-footer—cut down on crane movements and
reduced the time needed to turn a vessel around in port, making more efficient
use of capital. A virtuous circle had developed: lower costs per container
permitted lower rates, which drew more freight, which supported yet more
investments in order to lower unit costs even more. If ever there was a
business in which economies of scale mattered, container shipping was it.
The equation was simple: the bigger
the port, the bigger the vessels it could handle and the faster it could empty
them, reload them, and send them back out to sea. Bigger ports were likely to
have deeper berths, more and faster cranes, better technology to keep track of
all the boxes, and better road and rail services to move freight in and out.
The more boxes a port was equipped to handle, the lower its cost per box was
likely to be. As one study concluded bluntly, “Size matters.”
The true importance of the
revolution in freight transportation would be found not in its effect on ship
lines and dockworkers, but later, as the impact of containerization resonated
among the hundreds of thousands of factories and wholesalers and commodity
traders and government agencies with goods to ship. For most shippers, except
perhaps government agencies, the cost of transporting goods was decisive in
determining what products they would make, where they would manufacture and
sell them, and whether importing or exporting was worthwhile. The container
would reshape the world economy only when it changed shippers’ costs in a
Many nonfreight costs undoubtedly
fell with the growth of container shipping. Packing full containers at the
factory eliminated the need for custom-made wooden crates to protect
merchandise from theft or damage. The container itself served as a mobile
warehouse, so the traditional costs of storage in transit warehouses fell away.
Cargo theft dropped sharply, and claims of damage to goods in transit fell by
up to 95 percent; after insurers were persuaded that container shipping in fact
had fewer property losses, premiums fell by up to 30 percent. Faster ships and
reductions in the time needed to load and unload vessels at ports resulted in
lower costs for inventory in shipment. As Malcom McLean had understood back in
1955, it is the sum of these costs, not just the published rate of a ship line
or railroad, that matters to shippers.
Until then, vertical integration was
the norm in manufacturing: a company would obtain raw materials, sometimes from
its own mines or oil wells; move them to its factories, sometimes with its own
trucks or ships or railroad; and put them through a series of processes to turn
them into finished products. As freight costs plummeted starting in the late
1970s and as the rapid exchange of cargo from one transportation carrier to
another became routine, manufacturers discovered that they no longer needed to
do everything themselves. They could contract with other companies for raw
materials and components, locking in supplies, and then sign transportation
contracts to assure that their inputs would arrive when needed. Integrated
production yielded to disintegrated production. Each supplier, specializing in
a narrow range of products, could take advantage of the latest technological
developments in its industry and gain economies of scale in its particular
product lines. Low transport costs helped make it economically sensible for a
factory in China to produce Barbie dolls with Japanese hair, Taiwanese
plastics, and American colorants, and ship them off to eager girls all over the
world. These possibilities
The improvement in logistics shows
up statistically in reduced inventory levels. Inventories are a cost: whoever
owns them has had to pay for them but has yet to receive money from selling
them. Better, more reliable transport has permitted companies to obtain goods
closer to the time they need them, instead of weeks or months in advance, tying
up less money in goods sitting uselessly on warehouse shelves. In the United
States, inventories began falling in the mid-1980s, as the concepts of
justin-time manufacturing took root. Manufacturers such as Dell and retailers
such as Wal-Mart Stores have taken the concept to extremes, designing their
entire business strategies around moving goods from factory floor to customer
with minimal time in between. In 2014, inventories in the United States were
perhaps $1.2 trillion lower than they would have been had they stayed at the
level of the 1980s, relative to sales. Assume that the money needed to finance
those inventories would have been borrowed at, say, 8 percent, and inventory
reductions saved U.S. businesses roughly $100 billion per year.
Container shipping thrives on
volume: the more containers moving through a port or traveling on a ship or
train, the lower the cost per box. Places with lower demand or poorer
infrastructure will face higher transport costs and will be far less attractive
manufacturing sites for the global market. In the 1970s and 1980s, when many
U.S. industrial centers were dying, Los Angeles thrived as a factory location
because it was home to the nation’s busiest containerport, and Los Angeles
thrived as a port because it was well located to handle import volume from
Asia, not just for California, but for the entire United States. The Pacific
Rim became the world’s workshop for consumer goods, in good part, because large
ports for containers gave it some of the world’s lowest shipping costs:
The container has enabled logistics
centers such as these to prosper by adding value to global supply chains,
capturing jobs that were once performed elsewhere, or not at all.
Malcom McLean’s genius was acknowledged
unanimously: almost everyone save the dockworkers’ unions thought that putting
freight into containers was a brilliant concept. The idea that the container
would cause a revolution in shipping, though, seemed more than a little
far-fetched. At best, the container was expected to help ships recover a tiny
share of the domestic freight business and to benefit Hawaii and Puerto Rico.
Truckers ignored it. Railroads shunned it. Even as ship lines talked up the
container, most of them treated it as an adjunct to the business they knew,
just another one of the many shapes and sizes of cargo that they were
accustomed to storing in their holds. Labor was no more prescient.
Whether containerships and
containerports have reached their maximum efficient size, or even larger and
costlier ships and ports could give rise to yet more economies of scale, making
it still cheaper and easier to move goods around the globe, is a question of
considerable consequence for the world economy.
What I got out of it
Amazing how big of an impact the
simple container had – lowering transportation costs by orders of magnitude
which reshaped the global economy, leading to globalization, and cheaper and
better products for everyone due to specialization.
The idea of increasing returns has come up every few decades but Brian Arthur’s precise and fully-modeled papers caused us to clearly understand what kinds of models have what kinds of implications. One outstanding characteristic of Arthur’s viewpoint is emphatically dynamic in nature. Learning by using or doing plays an essential role, as opposed to static examples of returns to scale (those based on volume-area relations). The object of study is a history. Another distinctive feature of most of the work is its stochastic character. This permits emphasis on the importance of random deviations for long-run tendencies. Other tendencies include the multiplicity of possible long-run states, depending on initial conditions and on random fluctuations over time, and the specialization (in terms of process or geographical location) in an outcome achieved. Increasing returns may also serve as a reinforcement for early leading positions and so act in a manner parallel to more standard forms of increasing returns. A similar phenomenon occurs even in individual learning, where again successes reinforce some courses of action and inhibit others, thereby causing the first to be used more intensively, and so forth. There are in all of these models opposing tendencies, some toward achieving an optimum, some toward locking in on inefficient forms of behavior.
The papers here reflect two convictions I have held since I started work in this area. The first is that increasing returns problems tend to show common properties and raise similar difficulties and issues wherever they occur in economics. The second is that the key obstacle to an increasing returns economics has been the “selection problem” – determining how an equilibrium comes to be selected over time when there are multiple equilibria to choose from. Thus the papers here explore these common properties – common themes – of increasing returns in depth. And several of them develop methods, mostly probabilistic, to solve the crucial problem of equilibrium selection.
Arthur studied electrical engineering so was vaguely familiar with positive feedback already and became more intrigued when he read about the history of the discovery of the structure of DNA and read whatever he could about molecular biology and enzyme reactions and followed these threads back to the domain of physics. In this work, outcomes were not predictable, problems might have more than one solution, and chance events might determine the future rather than be average away. The key to this work, I realized, lay not in the domain of the science it was dealing with, whether laser theory, or thermodynamics, or enzyme kinetics. It lay in the fact that these were processes driven by some form of self-reinforcement, or positive feedback, or cumulative causation – processes, in economics terms that were driven by nonconvexities. Here was a framework that could handle increasing returns.
Great discoveries tend to come from outside the field
Polya Process – path-dependent process in probability theory
In looking back on the difficulties in publishing these papers, I realize that I was naive in expecting that they would be welcomed immediately in the journals. The field of economics is notoriously slow to open itself to ideas that are different. The problem, I believe is not that journal editors are hostile to new ideas. The lack of openness stems instead from a belief embedded deep within our profession that economics consists of rigorous deductions based on a fixed set of foundational assumptions about human behavior and economic institutions. If the assumptions that mirror reality are indeed etched in marble somewhere, and apply uniformly to all economics problems, and we know what they are, there is of course no need to explore the consequences of others. But this is not the case. The assumptions economists need to use vary with the context of the problem and cannot be reduced to a standard set. Yet, at any time in the profession, a standard set seems to dominate. I am sure this state of affairs is unhealthy. It deters many economists, especially younger ones, from attempting approaches or problems that are different. It encourages use of the standard assumptions in applications where they are not appropriate. And it leaves us open to the charge that economics is rigorous deduction based upon faulty assumptions. At this stage of its development economics does not need orthodoxy and narrowness; it needs openness and courage.
I did not set out with an intended direction but if I have had a constant purpose it is to show that transformation, change, and messiness are natural in the economy. The increasing-returns world in economics is a world where dynamics, not statics, are natural; a world of evolution rather than equilibrium; a world or probability and chance events. Above all, it is a world of process and pattern change
Positive Feedbacks in the Economy
Diminishing returns, what conventional economic theory is built around, imply a single economic equilibrium point for the economy, but positive feedback – increasing returns – makes for many possible equilibrium points. There is no guarantee that the particular economic outcome selected from among the many alternatives will be the “best” one. Furthermore, once random economic events select a particular path, the choice may become locked-in regardless of the advantages of the alternatives
Increasing returns do not apply across the board – agriculture and mining (resource-based portions) – are subject to diminishing returns caused by limited amounts of fertile land or high quality deposits. However, areas of the economy which are knowledge-based are largely subject to increasing returns. Even the production of aircraft is subject to increasing returns – it takes a large initial investment but each plane after that is only a fraction of the initial cost. In addition, producing more units means gaining more experience in the manufacturing process and achieving greater understanding of how to produce additional units even more cheaply. Moreover, experience gained with one product or technology can make it easier to produce new products incorporating similar or related technologies. Not only do the costs of producing high-technology products fall as a company makes more of them, but the benefits of using them increase. Many items such as computers or telecommunications equipment work in networks that require compatibility; when one brand gains a significant market share, people have a strong incentive to buy more of the same product so as to be able to exchange information with those using it already.
Timing is important too in the sense that getting into an industry that is close to being locked in makes little sense. However, early superiority does not correlate with long term fitness
Like punctuated equilibrium, most of the time the perturbations are averaged away but once in a while they become all important in tilting parts of the economy into new structures and patterns that are then preserved and built on in a fresh layer of development
Competing technologies, increasing returns, and lock-in by historical events
There is an indeterminacy of outcome, nonergodicity (path dependence where small events cumulate to cause the systems to gravitate towards that outcome rather than others). There may be potential inefficiency and nonpredictability. Although individual choices are rational, there is no guarantee that the side selected is, from any long term viewpoint, the better of the two. The dynamics thus take on an evolutionary flavor with a “founder effect” mechanism akin to that in genetics
Path dependent processes and the emergence of macrostructure
Many situations dominated by increasing returns are most usefully modeled as dynamic processes with random events and natural positive feedbacks or nonlinearities. We call these nonlinear Polya processes and show that they can model a wide variety of increasing returns and positive feedback problems. In the presence of increasing returns or self reinforcement, a nonlinear Polya process typically displays a multiplicity if possible asymptotic outcomes. Early random fluctuations cumulate and are magnified or attenuated by the inherent nonlinearities of the process. By studying how these build up as the dynamics of the process unfold over time, we can observe how an asymptotic outcomes becomes “selected” over time
Very often individual technologies show increasing returns to adoption – the more they are adopted the more is learned about them; in then the more they are improved, and the more attractive they become. Very often, too, there are several technologies that compete for shares of a “market” of potential adopters
Industry location patterns and the importance of history
This study indeed shows that it is possible to put a theoretical basis under the historical-accident-plus-agglomeration argument (mostly arbitrary location for determining where a city is established but then more people flock to it, it receives more investment, more buildings come up, etc. which leads to agglomeration and increasing returns).
When a prospective buyer is making purchasing decisions among several available technically-based products, choosing among different computer workstations, say, they often augment whatever publicly available information they can find by asking previous purchasers about their experiences – which product they chose, and how it is working for them. This is a natural and reasonable procedure; it adds information that is hard to come by otherwise. But it also introduces an “information feedback” into the process whereby products compete for market share. The products new purchasers learn about depend on which products the previous purchasers “polled” or sampled and decided to buy. They are therefore likely to learn more about a commonly purchased product than one with few previous users. Hence, where buyers are risk-averse and tend to favor products they know more about, products that by chance win market share early on gain an information-feedback advantage. Under certain circumstances a product may come to dominate by this advantage alone. This is the information contagion phenomenon
Self-Reinforcing Mechanisms in Economics
Dynamical systems of the self-reinforcing or autocatalytic type – systems with local positive feedbacks – in physics, chemical kinetics, and theoretical biology tend to possess a multiplicity of asymptotic states or possible “emergent structures”. The initial starting state combined with early random events or fluctuations acts to push the dynamics into the domain of one of these asymptotic states and thus to “select” the structure that the system eventually “locks into”.
Self-reinforcing mechanisms are variants of or derive from four generic sources:
Large set up or fixed costs (which give the advantage of falling unit costs to increased output)
Learning effects (which act to improve products or lower their cost as their prevalence increases)
Coordination effects (which confer advantages to “going along” with other economic agents taking similar action)
Self-reinforcing expectations (where increased prevalence on the market enhances beliefs of further prevalence)
Besides these 4 properties, we might note other analogies with physical and biological systems. The market starts out even symmetric, yet it ends up asymmetric: there is “symmetry breaking.” An “order” or pattern in market shares “emerges” through initial market “fluctuations.” The two technologies compete to occupy one “niche” and the one that gets ahead exercises “competitive exclusion” on its rival. And if one technology is inherently superior and appeals to a larger proportion of purchasers, it is more likely to persist: it possesses “selectional advantage.”
Some more characteristics: multiple equilibria (multiple “solutions” are possible but the outcome is indeterminate, not unique and predictable); possible inefficiency, lock-in, path dependence
We can say that the particular equilibrium is locked in to a degree measurable by the minimum cost to effect changeover to an alternative equilibrium. In many economic systems, lock-in happens dynamically, as sequential decisions “groove” out an advantage that the system finds it hard to escape from. Exiting lock-in is difficult and depends on the degree to which the advantages accrued by the inferior “equilibrium” are reversible or transferable to an alternative one. It is difficult when learning effects and specialized fixed costs are the source of reinforcement. Where coordination effects are the source of lock-in, often advantages are transferable. As long as each user has certainty that the others also prefer the alternative, each will decide independently to “switch”. Inertia must be overcome though because few individuals dare change in case others do not follow
Path Dependence, Self-Reinforcement, and Human Learning
There is a strong connection between increasing returns mechanisms and learning problems. Learning can be viewed as competition among beliefs or actions, with some reinforced and others weakened as fresh evidence and data are obtained. But as such, the learning process may then lock-in to actions that are not necessarily optimal nor predictable, by the influence of small events
What makes this iterated-choice problem interesting is the tension between exploitation of knowledge gained and exploration of poorly understood actions. At the beginning many actions will be explored or tried out in an attempt to gain information on their consequences. But in the desire to gain payoff, the agent will begin to emphasize or exploit the “better” ones as they come to the fore. This reinforcement of “good” actions is both natural and economically realistic in this iterated-choice context; and any reasonable algorithm will be forced to take account of it.
Strategic Pricing in Markets and Increasing Returns
Overall, we find that producers’ discount rates are crucial in determining whether the market structure is stable or unstable. High discount rates damp the effect of self-reinforcement and lead to a balanced market, while low discount rates enhance it and destabilize the market. Under high discount rates, firms that achieve a large market share quickly lose it again by pricing high to exploit their position for near-term profit. And so, in this case the market stabilizes. Under low discount rates, firms price aggressively as they struggle to lock in a future dominant position; and when the market is close to balanced shares, each drops its price heavily in the hope of reaping future monopoly rents. The result is a strong effort by each firm to “tilt” the market in its favor, and to hold it in an asymmetric position if successful. And so, in this case strategic pricing destabilizes the market
The simple dynamics and stochastic model of market competition analyzed in this paper reveals striking properties. First, positive feedback or self-reinforcement to market share may result in bistable stationary distributions with higher probabilities assigned to asymmetric market shares. The stronger the positive feedback, the lower the probability of passing from the region of relative prevalence of one product to that of the other. Second, when producers can influence purchase probabilities by prices, in the presence of positive feedback, optimal pricing is highly state-dependent. The producers struggle for market shares by lowering prices, especially near pivot states with balanced shares.
What I got out of it
Influential read discussing self-reinforcement, lock-in, increasing returns in knowledge-based economies/industries, path dependence, and more. Extremely applicable for business, investing, economics, learning, and more. A great mental model to have in your toolbox
This book is about how fast or not economic transformation is achieved. It argues there are 3 interventions the government can take to influence this process: maximize output from agriculture with highly intensive household farming (pushing up yields and outputs to its highest level which primes demands for goods and services), direct investment and entrepreneurs towards export-oriented manufacturing as it makes use of the limited skills of labor by working with machines and technology (subsidies should incentivize spending in technology and manufacturing), and interventions in the financial sector to focus capital on intensive small scale agriculture and manufacturing development. The state’s role is to keep money targeted at a development strategy which gets the highest rate of technological learning, giving the highest rate of return, and helping the country grow as sustainably as possible, improving the lives and outcomes of everyone .
Agriculture is the place to start with up-and-coming countries because the vast majority of their people are tied to the land. Structuring incentives so that these people can prosper creates the foundation for further economic success
By approximately evenly dividing up the land amongst the peasants and incentivizing a maximization of output (rather than profit), yields go through the roof which helped pay and feed these families. It allowed everyone to compete on an approximately equal footing and everyone believed they had a chance st success – which they did. This “gardening” approach is the most appropriate way to think about and structure agricultural societies early on as it can make full use of all the available labor. Surprisingly, these smaller plots owned by the farmers had far greater yields than many plantations – busting the myth of efficiency in large scale agricultural operations
The political elite tend to be out of touch with the agricultural peasants and therefore undervalue and under-appreciate their power and ability to help the economy
If you want industrialization, first fix agriculture
Even a total outsider can tell the difference between a plot of land tended by an owner vs. a tenant
A consistent application of these policies across different cultures and regions is a stark reminder that geography is not destiny
Farmers laid the foundation for industrialization and their household savings provided the base to build factories and later the market for the goods these factories made. Taiwan is the prime example in this case as many factories were built in rural areas and many farmers became industrial entrepreneurs. Indonesia and the Philippines are the negative examples – they nationalized land before the farmers could build up wealth and plantation inefficiency took hold. In addition, loopholes in policies so the rich could amass massive land holdings, put the poor at a disadvantage and worsened conditions
Besides owning the small fields, the farmers need the extension, marketing, and credit to progress
As rural laborers begin moving into higher paying industrial and service jobs, farming needs to rebalance from productivity towards profitability – shifting towards more mechanized farms away from gardening plots. The countries will need to specialize at this point, moving away from farm protection and subsidies and to a niche they can compete in. This shifts money to this area and gives other poor countries the chance to follow the same playbook
If there is one thing economic history can teach us is that there are no economic policies or laws which are sound forever
Manufacturing helps local people learn skills and to leverage the machines which they initially import, increasing productivity. Local entrepreneurs know the local market but they must compete with international firms in order to continue improving and to survive long-term without protection
Government must incentivize – through protection and subsidy – their rural entrepreneurs so they can get into large scale manufacturing rather than service industries at this phase. They must have export discipline – proving that their goods are competitive on a global stage and thus merit subsidies to grow.
The government shouldn’t pick winners as much as weed out losers. South Korea did this which is why they ended up with one or two massive companies in each sector without explicit state investment or control. Protectionism hurts in the short term but helps economies evolve and it’s people learn useful skills and in the long term is beneficial
Growing economies typically start industrialization with textiles later moving on to steel, shipbuilding, food stuffs, petro-chemicals, and eventually cars other heavy industry
While Taiwan what is the exemplar in land redistribution, South Korea took over as the exemplar of industrialization – setting up their entrepreneurs to have to compete with international markets and companies by providing enough subsidy and protection to let them grow, learn, and thrive
It is interesting to look in hindsight that Taiwan, South Korea, and Japan accomplish their amazing feats with no, or at least very few, trained economists. They simply followed the model of early America and later Germany
Government must not ask entrepreneurs to innovate for moral reasons. Rather they must accept and incentivize their animal spirits so that they can innovate, industrialize, and develop the country as is needed for their own benefit and for the benefit of all
More than ever, firms are able to flourish if they have the right state industrialization policies in place. Hyundai was able to flourish and become one of the world’s most successful car manufacturers from an unpromising start and a family with no automotive experience thanks to the favorable Korean policies
The goal is technological learning which hopefully leads to internal, domestic innovation. While land reform and infant industry regulations are difficult, there are no better options. Technical and technological progress equates to economic progress and history has shown that these difficult but necessary steps must be taken
Big business is incredibly important. There are smaller countries with big firms which have gotten rich but never the other way around. However, government must continuously restrain their entrepreneurs or else you end up with oligarchs like in Russia or SE Asia
Bank deregulation and removal of capital controls too early hurt developing economies such as Thailand or Indonesia. The agricultural and industrial sectors must be ready before these financial policies are enacted. Several different monetary and fiscal policy approaches have led to success but they all had the right policies, pointing at the right targets
In the Philippines, private banks would lend to the rich entrepreneurs at favorable terms which of course help them but didn’t help the country develop at all. However, ultimately what led to the downfall of economic collapse of the Philippines was their lack of export discipline which would have provided them with export loop feedback so that they could continuously improve and better compete on a global stage – improving their technical know-how across the country
Korea and the Philippines both borrowed extremely heavily and were in a lot of debt but Korea used that money to improve the technology and scale to a global level where the Philippines did not
Malaysia pumped too much money into real estate and the stock market instead of directing it towards industry. They tried to skip a step in order to compete and out do Singapore but this eventually led to an economic collapse and stagnated technological progress
Capital allocation must be tied to industrial policy and export performance or else capital will be deployed in low return investments. Government must incentivize and cajole entrepreneurs towards manufacturing and international markets. The financier is not the economic savior some suggest but responds to the environment around him which the government helps create. Foreign funds must not be allowed in too early and deregulation can only happen once manufacturing is humming and technological progress is underway
Banking systems are so effective because they respond to central bank policy which is controlled by government policy. It is a simple and effective method, easier to to control than bond and stock markets
There is no good understanding today of when a country should deregulate
China first tried the mass scale agriculture approach but soon realized it was ineffective so they transitioned to the gardening approach which greatly helped feed and put to work hundreds of millions. They also abandoned an approach where they would try to come up with everything internally and opened up trade to buy, borrow, and steal the best inventions and processes rather than trying to come up with everything internally
Chinese government has always been paranoid of being at the mercy of necessary food stuff importers. They have taken away a lot of farmland dedicated to these grains in the past decade and may soon change the policy so they secure enough food to be continue to be independent
It is yet to be seen if China’s close control of oligopolies can help the economy long term. So far they have been able to strike a balance between control and allowing the entrepreneurs and employees to profit
China has a heavy bias to public and state owned enterprises rather than private companies.
People worry about shadow banking systems which lend to wealthy citizens outside the direct view of the government in order to seek higher returns but this has existed in one form or another in every developing country. Whenever government policy favors agriculture and industry over finance, shadow finances will pop up
China’s financial policies are not as loose as many think if taken into context of Japan and Korea in similar stages, the size of their economy and the make up of their assets, and the fact that little money is owed externally. They are making great technological progress with the money they’ve borrowed but the best days of industrial-led policy development have passed so they will need to be more efficient moving forward. It is China’s size and not necessarily their innovative policies which have shaken the world. It does not yet have any world renowned firms and, if it is to take the next step developmentally, must improve its institutional policies
One of the key lessons when analyzing failed states is that they are isolated, closed off, and do not trade or interact with external countries. It has shown to be very hard, if not impossible to thrive if you are not open and trade with other countries
There is a weaker than expected correlation between education and rise in GDP. Most education occurs on the job and within firms rather than in school settings making industrial focus extremely important. If there is no industry to serve as a vehicle for learning, formal education may go to waste
Demographics, political pluralism / democracy are very important but is not touched on at length in this book
Rule of law is not one of the pillars for economic development but it is for overall development
Broadly, there are two types of economics. The first is akin to an education for developing countries in which the people require the skills needed to compete with their global peers. It requires nurture, protection, and competition. The second is more focused on efficiency and is applicable for more developed countries which needs less state intervention, more deregulation, freer markets and a larger focus on profits. The question is not if there are two but when they meet and how to best transition between the two. Where certain economically developed countries have fallen flat is that they fail to continue to evolve and develop. No policy is good forever and things must change. In addition, economic development is only one leg of the stool. Freedom, rule of law, environmental health, and individual autonomy are equally important and are needed for any country to prosper
There is no significant economy who has evolved successfully out of policies of free trade and deregulation from the get go. They require proactive interventions – namely in agriculture and industry that foster early accumulation of capital and skill
What I got out of it
For developing countries, the best way to prosper is to first redistribute land so the people can use gardening style agriculture to feed themselves and save some money, then government’s must create subsidies and protective policies so that internal industry can grow and flourish with the goal of increasing skill and technological know-how so that future innovation can happen, then finance comes into the picture and must be used to further direct these two areas effectively and sustainably
An enlightening book which lays out compelling arguments that consumer’s personal freedoms have been chipped away due to government regulations and that the economic controls put in place are in fact hindering and stalling the American economy.
Laissez faire, the invisible hand, and competition lead to more innovation and efficiency in every aspect of life whereas nationalization and state-run companies lead to bureaucracy and a slow down in innovation. Making the regulatory changes will be difficult to impossible to reverse but if the US wants to stay on top and keep moving forward, it is be necessary.
Free trade (no tariffs) is in the consumer’s best interest
America is an economic and political miracle arising out of two ideals – Adam Smith’s invisible hand and the Declaration of Independence
Greatest threat to human freedom is concentration of power
Even if can produce everything more efficiently than another country, it is not in our interest to produce everything. Should focus on what we do best
Huge difference between equal opportunity and equal outcome. Not everybody will, or should, “finish the race at the same time”. Equality of outcome destroys freedom
Competition is better for the consumer not because of businessmen’s altruism but because it is in their self interest
What I got out of it
Some very powerful arguments which call for fewer government handouts and less economic restrictions. Undoubtedly many of these changes would be very difficult to implement due to governmental gridlock but they should be striven for. I think this book pairs well with Taleb’s Antifragile.