On The Wealth of Nations

I recently finished reading the landmark classic The Wealth of Nations by Adam Smith. This book has been on my reading list for a long time, but I was discouraged by its length (1200+ pages). Having now read it, I am very glad I did. The breadth and depth of this book is – even after 239 years of publication – a monumental achievement.

Below are key excerpts from the book that I found particularly insightful:

As it is by treaty, by barter, and by purchase, that we obtain from one another the greater part of those mutual good offices which we stand in need of, so it is this same trucking disposition which originally gives occasion to the division of labour.

The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities.

The five following are the principal circumstances which, so far as I have been able to observe, make up for a small ~ pecuniary gain in some employments, and counter-balance a great one in others: first. the agreeableness or disagreeableness of the — employments themselves; secondly, the easiness and cheapness, or the difficulty and expence of learning them; thirdly, the constancy or inconstancy of employment in them; fourthly, the small or great trust which must be reposed in those who exercise them; and fifthly, the probability or improbability of success in them.

I shall conclude this very long chapter with observing that every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land, to increase the real wealth of the landlord, his power of purchasing the labour, or the produce of the labour of other people.

Political economy considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign.

The importation of gold and silver is not the principal. much less the sole benefit which a nation derives from its foreign trade. Between whatever places foreign trade is carried on, they all of them derive two distinct benefits from it. It carries out that surplus part of the produce of their land and labour for which there is no demand among them, and brings back in return for it something else for which there is a demand. It gives a value to their superfluities, by exchanging them for something else, which may satisfy a part of their wants, and increase their enjoyments. By means of it, the narrowness of the home market does not hinder the division of labour in any particular branch of art or manufacture from being carried to the highest perfection.

We must carefully distinguish between the effects of the colony trade and those of the monopoly of that trade. The former are always and necessarily beneficial; the latter always and necessarily hurtful. But the former are so beneficial, that the colony trade, though subject to a monopoly, and notwithstanding the hurtful effects of that monopoly, is still upon the whole beneficial, and greatly beneficial; though a good deal less so than it otherwise would be.

The discovery of America, and that of a passage to the East Indies by the Cape of Good Hope, are the two greatest and most important events recorded in the history of mankind. Their consequences have already been very great: but, in the short period of between two and three centuries which has elapsed since these discoveries were made, it is impossible that the whole extent of their consequences can have been seen.

When a landed nation, on the contrary, oppresses either by high duties or by prohibitions the trade of foreign nations, it necessarily hurts its own interest in two different ways. First, by raising the price of all foreign goods and of all sorts of manufactures, it necessarily sinks the real value of the surplus produce of its own land, with which, or, what comes to the same thing. with the price of which, it purchases those foreign goods and manufactures. Secondly, by giving a sort of monopoly of the home market to its own merchants, artificers and manufacturers, it raises the rate of mercantile !e and manufacturing profit in proportion to that of agricultural profit, and consequently either draws from agriculture a part of the capital which had before been employed in it, or hinders from going to it a part of what would otherwise have gone to it. This policy, therefore, discourages agriculture in two different ways; first, by sinking the real value of its produce, and thereby lowering the rate of its profit; and, secondly, by raising the rate of profit in all other employments. Agriculture is rendered less advantageous, and trade and manufactures more advantageous than they otherwise would be; and every man is tempted by his own interest to turn, as much as he can, both his capital and his industry from the former to the latter employments.

According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.

Commerce and manufactures, in short, can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government. The same confidence which disposes great merchants and manufacturers, upon ordinary occasions, to trust their property to the protection of a particular government; disposes them, upon extraordinary occasions, to trust that government with the use of their property. By lending money to government, they do not even for a moment diminish their ability to carry on their trade and manufactures. On the contrary, they commonly augment it. The necessities of the state render government upon most occasions willing to borrow upon terms extremely advantageous to the lender. The security which it grants to the original creditor, is made transferable to any other creditor, and, from the universal confidence in the justice of the state, generally sells in the market for more than was originally paid for it.

But if the empire can no longer support the expence of keeping up this equipage, it ought certainly to lay it down; and if it cannot raise its revenue in proportion to its expence, it ought, at least, to accommodate its expence to its revenue. If the colonies, notwithstanding their refusal to submit to British taxes, are still to be considered as provinces of the British empire, their defence in some future war may cost Great Britain as great an expence as it ever has done in any former war. The rulers of Great Britain have, for more than a century past, amused the people with the imagination that they possessed a great empire on the west side of the Atlantic. This empire, however, has hitherto existed in imagination only. It has hitherto been, not an empire, but the project of an empire; not a gold mine, but the project of a gold mine; a project which has cost, which continues to cost, and which, if pursued in the “”same way as it has been hitherto, is likely to cost, immense expence, without being likely to bring any profit; for the effects of the monopoly of the colony trade, it has been shewn, are, to the great body of the people, mere loss instead of profit. It is surely now time that our rulers should either realize this golden dream, in which they have been indulging themselves, perhaps, as well as the people; or, that they should awake from it themselves, and endeavour to awaken the people. If the project cannot be completed, it ought to be given up. If any of the provinces of the British empire cannot be made to contribute towards the support of the whole empire, it is surely time that Great Britain should free herself from the expence of defending those provinces in time of war. and of supporting any part of their civil or military establishments in time of peace, and endeavour to accommodate her future views and designs to the real mediocrity of her circumstances.

A must read for anyone seeking a deeper understanding of economics.

 

On The Price of Inequality

I just finished reading The Price of Inequality – How Today’s Divided Society Endangers Our Future – by Joseph E. Stiglitz. This book was a selected reading at the Houston Non Fiction Book Club that I am part of.

Below are key excerpts from the book that I found particularly insightful:

1- “But fully addressing a problem of the magnitude, depth, and duration of inequality in the United States will take comprehensive actions, of a kind that will require bipartisan support. Traditionally persons in both parties have understood that a nation divided cannot stand—and the divisions today ire greater than they have been in generations, threatening basic values, including our conception of ourselves as a land of opportunity Will we once again pull back from the brink? This book is written in the hope that we can and that we will—if only we grasp what has been happening to our economy and our society.”

2- “As we talked, it was clear to me that while specific grievances varied from country to country and, in particular, that the political grievances in the Middle East were very different from those in the West, there were some shared themes. There was a common understanding that in many ways the economic and political system had failed and that both were fundamentally unfair.”

3- “Three themes resonated around the world: that markets weren’t working the way they were supposed to, for they were obviously neither efficient nor stable; that the political system hadn’t corrected the market failures; and that the economic and political systems are fundamentally unfair. While this book focuses on the excessive inequality that marks the United States and some other advanced industrial countries today it explains how the three themes are intimately interlinked: the inequality is cause and consequence of the failure of the political system, and it contributes to the instability of our economic system, which in turn contributes to increased inequality—a vicious downward spiral into which we have descended, and from which we can emerge only through concerted policies that I describe below.”

4- “This book is about why our economic system is failing for most Americans, why inequality is growing to the extent it is, and what the consequences are. The underlying thesis is that we are paying a high price for our inequality—an economic system that is less stable and less efficient, with less growth. and a democracy that has been put into peril. But even more is at stake: as our economic system is seen to fail for most citizens, and as our political system seems to be captured by moneyed interests, confidence in our democracy and in our market economy will erode along with our global influence. As the reality sinks in that we are no longer a country of opportunity and that even our long-vaunted rule of law and system of justice have been compromised, even our sense of national identity may be put into jeopardy.”

5- “Given a political system that is so sensitive to moneyed interests, growing economic inequality leads to a growing imbalance of political power, a vicious nexus between politics and economics. And the two together shape, and are shaped by societal forces—social mores and institutions—that help reinforce this growing inequality.”

6- “The journalist Jonathan Chait has drawn attention to two of the most telling statistics from the Economic Mobility Project and research from the Economic Policy Institute Poor kids who succeed academically are less likely to graduate from college than richer kids who do worse in school Even if they graduate from college, the children of the poor are still worse-off than low-achieving children of the rich, None of this comes as a surprise: education is one of the keys to success; at the top, the country gives its elite an education that is the best in the world. But the average American gets just an average education—and in mathematics, key to success in many areas of modern life, it’s subpar.”

7- “Our political system has increasingly been working in ways that increase the inequality of outcomes and reduce equality of opportunity This should not come as a surprise: we have a political system that gives inordinate power to those t the top, and they have used that power not only to limit the extent of redistribution but also to shape the rules of the game in their favor, and to extract from the public what can only be called large “gifts.” Economists have a name for these activities: they call them rent seeking, getting income not as a reward to creating wealth but by grabbing a larger share of the wealth that would otherwise have been produced without their effort.”

8- “Three factors contributed to this increased monopolization of markets. First, there was a battle over ideas about the role that government should take in ensuring competition.Chicago school economists (like Milton Friedman and George Stigler) who believe in free and unfettered markets argued that markets are naturally competitive^^ and that seemingly anti-competitive practices really enhance efficiency A massive program to “educate” people, and especially judges, regarding these new doctrines of law and economics, partly sponsored by right-wing foundations like ^he Olin Foundation, was successful…A second factor giving rise to increased monopoly is related to changes in our economy. The creation of monopoly power was easier in some of the new growth industries. Many of these sectors were marked by what are called network externalities.”

9- “In many societies, those at the bottom consist disproportionately of groups that suffer, in one way or another, from discrimination. The extent of such discrimination is a matter of societal norms. We’ll see how changes in social norms—concerning, for instance, what is fair compensation—and in institutions, like unions, have helped shape America’s distribution of income and wealth. But these social norms and institutions, like markets, don’t exist in a vacuum: they too are shaped, in part, by the 1 percent.”

10- “I have emphasized that the problems concern globalization as it has been managed. Countries in Asia benefited enormously through export-led growth, and some (such as China) took measures to ensure that significant portions of that increased output went to the poor, some went to provide for public education, and much was reinvested in the economy to provide more jobs. In other countries, there have been big losers as well as winners—poor corn farmers in Mexico have seen their incomes decline as subsidized American corn drives down prices on world markets.”

11- “What is striking about the United States is that while the level of inequality generated by the market—a market shaped and distorted by politics and rent seeking—is higher than in other advanced industrial countries, it does less to temper this inequality through tax and expenditure programs. And as the market-generated inequality has increased, our government has done less and less.”

12- “Government today plays a double role in our current inequality: it is partly responsible for the inequality in before-tax distribution of income, and it has taken a diminished role in “correcting” this inequality through progressive tax and expenditure policies.”

13- “The central thesis of this chapter and the preceding one is also that inequality is not just the result of the forces of nature, of abstract market forces. We might like the speed of light to be faster, but there is nothing we can do about it. But inequality is, to a very large extent, the result of government policies that shape and direct the forces of technology and markets and broader societal forces. There is in this a note of both hope and despair: hope because it means that this inequality is not inevitable, and that by changing policies we can achieve a more efficient and a more egalitarian society; despair because the political processes that shape these policies are so hard to change.”

14- “We have seen how inequality gives rise to instability, as a suit of both the deregulatory policies that are enacted and the policies that are typically adopted in response to the deficiencies in aggregate demand. Neither is a necessary consequence of inequality: if our democracy worked better, it might have resisted the political demand for deregulation and might lave responded to the weaknesses in aggregate demand in ways that enhanced sustainable growth rather than creating a bubble.”

15- “Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is this: the erosion of our sense of identity in which fair play, equality of opportunity, and a sense of community are so important. America has long prided itself on getting ahead, but the statistics today, as we’ve seen, suggest otherwise: the chances that a poor or even a middle-class American will make it to the top in America are smaller than in many countries of Europe. And as inequality itself creates a weaker economy, the chance can only grow slimmer.”

16- “Another vicious circle has been set in play: political rules of the game have not only directly benefited those at the top, ensuring that they have a disproportionate voice, but have also created a political process that indirectly gives them even more power. We have identified a whole series of forces contributing to the disillusionment with politics and distrust of the political system. The yawning divide in our society has made it difficult to reach compromise, contributing to our political gridlock.”

17- “As one of the world’s experts on globalization, the Harvard University professor Dani Rodrikhas pointed out, one cannot simultaneously have democracy, national self-determination, and full and unfettered globalization.”

18- “We are often told that this is the way it has to be, that globalization gives us no choice. This fatalism, v which serves those benefiting from the current system, obscures reality: the predicament is a choice. The governments of our democracies have chosen an economic framework f for globalization that has actually tied the hands of those democracies. The 1 percent was always worried that democracies would be tempted to enact “excessively” progressive taxation under the influence, say, of a populist leader. Now citizens are told they can’t do so, not if they want to partake of globalization. In short, globalization, as it’s been managed, is narrowing the choices facing our democracies, making it more difficult for them to undertake the tax and expenditure policies that are necessary if we are to create societies with more equality and more opportunity But tying the hands of our democracies is exactly what those at the top wanted: we can have a democracy with one person one vote, and still get outcomes that are more in accord with what we might expect in a system with one dollar one vote.”

19- “Of course, not every government effort is successful, or as successful as its advocates would have liked. Indeed, when the government undertakes research (or supports new private sector ventures), there should be some failures. A lack of failures means you are not taking enough risks. Success occurs when the returns from those projects that succeed are more than enough to offset the losses on those that fail And the evidence in the case of government research ventures is unambiguously and overwhelmingly that the returns from government investments in technology on average have been very, very high—^just think about the Internet, the Human Genome Project, jet airplanes, the browser, the telegraph, the increases in productivity in agriculture in the nineteenth century, that provided the basis for the United States’ moving from farming to manufacturing.”

20- “That there are successes and failures in both the public and the private sector is clear. And yet many on the right seem to think only the government can fail.”

21- “The powerful try to frame the discussion in a way that benefits their interests, realizing that, in a democracy they cannot imply impose their rule on others. In one way or another, they have to “co-opt” the rest of society to advance their agenda. Here again the wealthy have an advantage. Perceptions and beliefs are malleable. This chapter has shown that the wealthy have the instruments, resources, and incentives to shape beliefs in ways that serve their interests. They don’t always win—but it’s far from an even battle. We’ve seen how the powerful manipulate public perception by appeals to fairness and efficiency, while the real outcomes benefit only them.”

22- “We can take advantage of the extent to which different taxes and expenditures stimulate the economy, spending more on programs that have large multipliers (where each dollar of )ending generates more overall GDP) and less on programs that have small multipliers; raising taxes from sources with low multipliers while cutting taxes on those with high multipliers.”

23- “The lack of faith in democratic accountability on the part of those who argue for independent central banks should be deeply troubling. Where does one draw the line in turning over the central responsibilities of government to independent authorities. The same arguments about politicization could be applied to tax and budgetary policies. I suspect some in the financial market would be content to turn those responsibilities over to “technical experts.” But here’s the hidden agenda: the financial markets would not be content with just any set of technical experts. They prefer, as we have seen, “experts” who shared their views—views that support their interests and ideology. The Federal Reserve and its chairmen like to end that they are above politics. It is convenient not to be accountable, to be independent. hey see themselves as simply wise men and women, public servants, helping to steer the complex ship of the economy. But if there was any doubt of the political nature of the Fed and its chairmen, it should have been resolved by observing the seemingly shifting positions of the central bank over the past twenty years.”

24- “Inflation targeting was based on three questionable hypotheses. The first is that inflation is the supreme evil; the second is that maintaining low and stable inflation was necessary and almost sufficient for maintaining a high and stable real growth rate; the third is that all would benefit from low inflation.”

25- “While the advocates of these policies may claim that they the best policies for all, this is not the case. There is no  single, best policy. As I have stressed in this book, policies lave distributive effects, so there are trade-offs between the interests of bondholders and debtors, young and old, financial sectors and other sectors, and so on. I have also stressed, however, that there are alternative policies that would have led to better overall economic performance—especially so if we judge economic performance by what is happening to the well-being of most citizens. But if these alternatives are to be implemented, the institutional arrangements through which the decisions are made will have to change. We cannot have a monetary system that is run by people whose thinking is captured by the bankers and that is effectively run for the benefit of the those at the top.”

26- “The Economic Reform Agenda…Curbing the financial sector…Stronger and more effectively enforced competition laws…Improving corporate Governance-especially to limit the power of the CEOs to divert so much of corporate resources for their own benefit…End government giveaways—whether in the disposition of public assets or in procurement…End corporate welfare—including hidden subsidies…Legal reform—democratizing, access to justice, and diminishing the arms race…Create a more progressive income and corporate tax system—with fewer loopholes…Create a more effective and effectively enforced estate tax system to prevent the creation of a new oligarchy…Improving access to education…Helping ordinary Americans save…Health care for all…Strengthening other social protection programs…Tempering globalization: creating a more even playing field and ending the race to the bottom…A fiscal policy to maintain full employment—with equality…A monetary policy—and monetary institutions—to maintain full employment…Correcting trade imbalances…Active labor market policies and improved social protection…Supporting workers’ and citizens’ collective action…Affirmative action to eliminate the legacy of discrimination…A growth agenda, based on public investment.”

Regards,

Omar Halabieh

The Price of Inequality

On The Master Switch

I recently finished reading The Master Switch – The Rise and Fall of Information Empires – by Tim Wu.

The main premise of the book, as stated by the author: “To understand the forces threatening the Internet as we know it, we must understand how information technologies give rise to industries, and industries to empires. In other words, we must understand the nature of the Cycle, its dynamics, what makes it go, and what can arrest it. As with any economic theory, there are no laboratories but past experience…The pattern is distinctive. Every few decades, a new communications technology appears, bright with promise and possibility. It inspires a generation to dream of a better society, new forms of expression, alternative types of journalism. Yet each new technology eventually reveals its flaws, kinks, and limitations. For consumers, the technical novelty can wear thin, giving way to various kinds of dissatisfaction with the quality of content (which may tend toward the chaotic and the vulgar) and the reliability or security of service. From industry’s perspective, the invention may inspire other dissatisfactions: a threat to the revenues of existing information channels that the new technology makes less essential, if not obsolete; a difficulty commoditizing (i.e., making a salable product out of) the technology’s potential; or too much variation in standards or protocols of use to allow one to market a high quality product that will answer the consumers’ dissatisfactions. “

Below are key excerpts from the book that I found particularly insightful:

1- “In fact, the place we find ourselves now is a place we have been before, albeit in different guise. And so understanding how the fate of the technologies of the twentieth century developed is important in making the twenty-first century better.”

2- “Schumpeter’s cycle of industrial life and death is an inspiration for this book. His thesis is that in the natural course of things, the new only rarely supplements the old; it usually destroys it. The old, however, doesn’t, as it were, simply give up but rather tries to forestall death or co-opt its usurper—a la Kronos—with important implications.”

3- “We have seen how important outsiders are to industrial innovation: they alone have the will or interest to challenge the dominant industry. And we have seen the power of considerations beyond wealth or security—factors outside the motivations of the ideal rational economic actor—in inspiring action to transform an industry.”

4- “Here, then, we come to the second weakness that afflicts centralized systems of innovation: the necessity, by definition, of placing all control in a few hands. This is not to say that doing so holds no benefit. To be sure, there is less “waste”: instead of ten companies competing to develop a better telephone—reinventing the wheel, as it were, every time—society’s resources can be synchronized in their pursuit of the common goal. There is no duplication of research, with many laboratories chasing the same invention. Yet if all resources for solving any problem are directed by a single, centralized intelligence. that mastermind has to be right in predicting the future if innovation is to proceed effectively. And that’s the problem: monopoly presumes a prescience that humans are seldom capable of. “

5- “For the combined forces of a dominant industry and the federal government can arrest the Cycle’s otherwise inexorable progress, intimating for the prevailing order something like Kronos’s fantasy of perpetual rule.”

6- “Whether sanctioned by the state or not, monopolies represent a special kind of industrial concentration, with special consequences flowing from their dissolution. Often the useful results are delayed and unpredictable, while the negative outcomes are immediate and obvious.”

7- “But what prevented monopoly and all centralized systems from realizing these efficiencies, in Hayek’s view, was a fundamental failure to appreciate human limitations. With perfect information, a central planner could effect the best of all possible arrangements, but no such planner could ever hope to have all the relevant facts of local, regional, and national conditions to arrive at an adequately informed, or right, decision.”

8- “As an object lesson in the way information networks can develop, it gives us occasion to consider what we truly want from our news and entertainment, as opposed to what sort of content we might be prepared to sustain, however passively, with our fleeting attention. For cable offered choices really only in the commercial range—(-enough, however, to suggest what a truly open medium could deliver to the nation, for better and for worse.”

9- “With its hefty capitalization, it offers the information industries financial stability, and potentially a great freedom to explore risky projects. Yet despite that promise, the conglomerate can as easily become a hidebound, stifling master, obsessed with maximizing the revenue potential and flow of its intellectual property. At its worst, such an organization can carry the logic of mass cultural production to any extreme of banality as long as it seems financially feasible.”

10- “For the information industries that now account for an ever increasing share of American and world GDP, the coming decade will be given over to a mighty effort to seize territory, to bolt the competition from its habitat. But this is not a case of one pack of wolves chasing another out of a prime valley. While it may sound fanciful, the contest in question is more like one of polar bears batting lions for domination of the world. Each animal, insuperably dominant in its natural element—the polar bear on ice and snow, the lion on the open plains—will undertake a land grab where it has no natural business being. The only practicable strategy will be a campaign of climate change, the polar bears seeking to cover as much of the world with snow as they can, while the lion tries to coax a savannah from the edges of a tundra. Sounds absurd, but for these mighty predators, it’s simply the law of nature.”

11- “The democratization of technological power has made the shape of the future hard to know, even for the best informed. The individual holds more power than at any time in the past century, and literally in the palm of his hand. Whether or not he can hold on to it is another matter.”

12- “The American political system is designed to prevent abuses of pubic power. But where it has proved less vigilant is in those areas where the political meets the economic realm, where private economic power comes to bear on public life…We like to believe that our safeguards against concentrated political power will ultimately protect us from the consequences of accumulated economic power. But this hasn’t always been so.”

13- “For history shows that in seeking to prevent the exercise of abusive power in the information industries, government is among those actors whose power must be restrained. Government may function as a check on abusive power, but government itself is a power that must be checked. What I propose is not a regulatory approach but rather a constitutional approach to the information economy. By that I mean a regime whose goal is to constrain and divide all power that derives from the control of information.”

14- “Let us. then, not fail to protect ourselves from the will of those who might seek domination of those resources we cannot do without. If we do not take this moment to secure our sovereignty over the choices that our information age has allowed us to enjoy, we cannot reasonably blame its loss on those who are free to enrich themselves by taking it from us in a manner history has foretold.”

Regards,

Omar Halabieh

The Master Switch

On Why Not?

I recently finished reading Why Not? How to Use Everyday Ingenuity to Solve Problems Big and Small by Barry Nalebuff and Ian Ayres.

Below are five key lessons from the book, in the form of excerpts:

1- “Some people have the notion that coming up with concrete solutions for real-world problems is somehow reserved for the experts – that the techniques for innovation are beyond the capacity of the typical person. Baloney. Innovation is a skill that can be taught. And what’s more, the potential for innovation is all around us. The problem is that the sense of innovation as everyday ingenuity often gets lost in our high-tech world. That is a problem we aim to fix with this book.”

2- “Most “original” ideas aren’t completely original, but instead are the result of two basic methods for generating ideas: problems in search of solutions and solutions in search of problems. People usually think of problem solving as a search for solutions. But in everything we do, we look for symmetries. Thus, we also see that problem solving can be a search for problems once you’ve found a good solution. Both approaches have their advantages.”

3- “What would Croesus do? Why Don’t you feel my pain? Where else would it work? Would flipping it work?…We have now introduced four central idea-generating tools: WWCD, internalization, translation, and symmetry…Now, you might be asking, are these the only tools out there for generating ideas? The answer is clearly no. There are rich theories of how scientific discoveries play out over time – incrementally adding to our knowledge through systematic and painstaking experimentation. But our why-not tools are geared toward discovering solutions that in a sense already exist but have just bot been put into effect…You need to learn different tools because some solutions can best be found with particular tools.”

4- “Principled problem solving means that you take into account the principles that any solution must satisfy. The more of these principles you can identify, the closer you are to the solution. There may be fewer options to explore, but those are the right ones to focus on…While we typically think of filters as constraints, we want to convince you that identifying the underlying attributes of any solution can be liberating and can actually help you generate ideas.”

5- “Coming up with a great idea is only the beginning of the battle. If you really want to change your company or the world, you need to sell the idea and you need others to buy in. The art of persuasion is particularly important because, and we’ve repeatedly emphasized, many ideas for great new products or services are not great ideas to start new businesses. Sometimes – usually, in fact – the best entity to put the idea into practice will be an existing firm. Even if your idea is, objectively speaking, brilliant, you won’t necessarily have an easy time selling others on it. Be prepared to encounter remarkable levels of resistance and prejudice along the way.”

Regards,

Omar Halabieh

Why Not?

On The Great Crash 1929

I recently finished reading The Great Crash 1929 by John Kenneth Galbraith.

As John best summarizes it: “The task of this book, as suggested on an early page, is only to tell what happened in 1929. IT is not to tell whether or when the misfortunes of 1929 will recur. One of the pregnant lessons of that year will by now be plain: it is that very specific and personal misfortune awaits those who presume to believe that the future is revealed to them. Yet, without undue risk, it may be possible to gain from our view of this useful year some insights into the future. We can distinguish, in particular, between misfortunes that could happen again and others which events, many of them in the aftermath of 1929, less improbable. And we can perhaps see a little of the form and magnitude of the remaining peril. ”

A great book that captures the environment and culture that lead up to the market collapse in 1929. The learnings are timeless and can easily apply to the financial crash of 2008 as they did back in 1929. A highly recommended read for anyone interested in finance, economics, investing and/or regulation.

Below are excerpts from the books that summarize key learnings:

1- “No one can doubt that the American people remain susceptible to the speculative mood – to the conviction that enterprise can be attended by unlimited rewards in which they, individually, were meant to share. A rising market can still bring the reality of riches. This, in turn, can draw more and more people to participate. The government preventatives and controls are ready. In the hands of a determined government their efficacy cannot be doubted. There are, however, a hundred reasons why a government will determine not to use them.”

2- “It follows that the only reward to ownership in which the boomtime owner has an interest is the increase in values. Could the right to the increased value be somehow divorced from the other and now unimportant fruits of possession and also from as many as possible of the burdens of ownership, this would be much welcomed by the speculator. Such an arrangement would enable him to concentrate on speculation which after all, is the business of a speculator. Such is the genius of capitalism that where a real demand exists it does not go long unfilled. In all great speculative orgies devices have appeared to enable the speculator so to concentrate on his business.”

3- “One of the oldest puzzles of politics is who is to regulate the regulators. But an equally baffling problem, which has never received the attention it deserves, is who is to make wise those who are required to have wisdom…For these people, however, every proposal to act raised the same intractable problem. The consequences of successful action seemed almost as terrible as the consequences of inaction, and they could be more horrible for those who took the action.”

4- “Between human beings there is a type of intercourse which proceeds not from knowledge, or even fro lack of knowledge, but from failure to know what isn’t know… Wisdom, itself, is often an abstraction associated not with fact or reality but with the man who asserts it and the manner of its assertion.”

5- “Mark Twain – Don’t part with your illusions; when they are done you may still exist, but you have ceased to live.”

6- “Thus viewed, the stock market is but a mirror which, perhaps as in this instance, somewhat belatedly, provides an image of the underlying or fundamental economic situation. Cause and effect run from the economy to the stock market, never the reverse.”

7- “Bagehot – Every great crisis reveals the excessive speculations of many houses which no one before suspected.”

8- “Moreover, regulatory bodies, like the people who comprise them, have a marked life cycle. In youth they are vigorous, aggressive, evangelistic, and even intolerant. Later they mellow, and in old age – after a matter of ten or fifteen years – they become, with some exceptions, either an arm of the industry they are regulating or senile.”

9- “Far more important than rate of interest and the supply of credit is the mood. Speculation on a large scale require pervasive sense of confidence and optimism and conviction that ordinary people were meant to be rich. People must also have faith in the good intentions and even in the benevolence of others, for it is by the agency of others that they will get rich…Savings must also be plentiful. Speculation, however it may rely on borrowed funds, must be nourished in part by those who participate…Finally, a speculative outbreak has a greater or less immunizing effect. The ensuing collapse automatically destroys the very mood speculation requires. It follows that an outbreak of speculation provides a reasonable assurance that another outbreak will not immediately occur.”

10- “There seems little question that in 1929, modifying a famous cliche, the economy was fundamentally unsound…five weaknesses seem to have had an especially intimate bearing on the ensuing disaster. They are: 1) The bad distribution of income, 2) The bad corporate structure, 3) The bad banking structure, 4) The dubious state of the foreign balance, 5) The poor state of economic intelligence.”

11- “Here, at least equally with communism, lies the threat to capitalism. It is what causes men who know that things are going quite wrong to say that things are fundamentally sound.”

Regards,

Omar Halabieh

The Great Crash 1929

On Financial Regulations

The aftermath of the financial crisis, has seen nothing short of a veritable crusade against the financial institutions around the world. The primary weapon used: financial regulations. Looking back however, financial regulations are not new and have been extensively used in the past. Yet, every financial crisis, including the most recent one, has eclipsed the ones in the past (minus the interventions).   One item that is completely missed is that regulations tend to focus almost exclusively on the supply side of the supply/demand curve. What they fail to address is the inherent demand that exists in the investment/consumer community. In numerous other applications, addressing the supply side without curbing the demand side has not led the required outcomes (look at drugs for instance).

In short, as long as the demand exists, innovations in new supplies (financial instruments) will emerge to satisfy them. The major question is, how can the demand be better managed, through regulation or other methods. This is a questions I continuously think about. Further comments to follow.

Regards,

Omar Halabieh

Disclosure: Long C and NYB.