Why Homeschooling?

This is adapted from an email I recently sent to a friend, who asked, “Why do you plan to homeschool your child?”

Education is informed by parenting and values

When we think about the purpose of parenting, we take a page out of Maria Montessori’s handbook and assume that our Little Lion basically has everything he needs already inside of him to be who he is going to be. It is not our job to give him personality, values or direction in life. Since we brought him into the world through no choice of his own and in a helpless state, it is our job to care for him and aid him in his own natural development so he can achieve independence and be whoever it is he will be. We hope to provide positive models and examples of what kind of person he can be and believe we will inevitably teach him the only thing we can teach him — who we are — by simply being authentic around him, but we don’t see it as our job to select values for him and teach him that he should value them.

We think this is different from a “traditional” parenting model which is built around the idea of the parents instructing the child in a particular set of values so they can become a “good” instance of that kind of person. For example, a Catholic parent might hope to raise a “good Catholic” and make religious values part of the child’s upbringing and instruction. A sports enthusiast might hope to see his child become a “good golfer”, and so instruct the child on the techniques and discipline necessary to excel at the sport. Thinking culturally, a Chinese person might see it as important to raise a “good Chinese child” with all the cultural implications that entails in terms of diet, attitudes toward life, behaviors and interests.. A materialist might think it important to raise a child who is a “good moneymaker”. And so on. We don’t see “goodness” as a goal of our efforts as parents, necessarily.

Our value framework

That being said, we are people and we do have values. We operate within a paradigm of what we see as desirable behavior, values and goals and what we see as opposed or detrimental to those things. This can’t seem to be avoided as thinking, acting beings– every moment we are faced with choices and the act of choosing implies moving toward some things and away from other alternatives. If one’s life has any consistency, these values and choices add up and create some coherence. Our coherence forms around interdependence and voluntaryism. We prefer a paradigm where people interact with one another on a peaceful basis, out of mutual desire and aimed at mutual benefit. This stands opposed to the narrative of “zero sum” and “dog eat dog”, where some must be slaves and some must be masters. We don’t see value in “using” people, which is one reason why we don’t plan to “use” our son to fulfill our own desires to create a good X.

By not pursuing “traditional” parenting, we have to use some other system of values to guide our choices and this is it. It inevitably informs our education decisions.

Education is socialization

Our theory of education is that education inevitably involves two concepts: grasping cause-effect relationships existent in reality and the pattern of facts that occurs as a result, and transmitting a system of values explicitly and implicitly about the role of individuals in society (what people refer to as socialization). Far from naively believing that education should only be about teaching cause-effect and facts, we embrace the reality that it is the very selection of which cause-effect relationships and which facts to focus on in a system of education that is itself a form of meta-socialization, before even formal social instruction is reached.

The intersection of parenting, values and education

Now I will try to put these three pieces together– our desire to give our child sufficient degrees of freedom to realize his inherent potential free of interference or intervention from us or others, our own system of values which idealizes free exchange, and our belief that education accomplishes two things in instructing a student about the nature of reality and also about their social role.

There seems to be an appropriate educational means to each set of values or goals in life. If you want a religious society, you need an education system focused on religious instruction. If you want a democratic society, you need an education system open to all and controlled by the government. If you want a free society, you need an education system (or lack of one!) that acknowledges individual differences and caters to them.

When I think about some of the alternatives we can consider when educating our child, they seem to fall short in various meaningful ways. Public or private, our child’s education will largely be guided by dictates of minimum standards and required instructional curricula handed down by people we don’t know from hundreds of miles away. We are socializing our child to understand that parents don’t have an important role to play in developing and implementing an educational program in their child’s life, this is something that can be given to “society” and its representatives, therefore, the child is to serve society because it is being instructed in things society deems it important for it to learn.

We will be telling our child that what it thinks is interesting, exciting, or important to learn is not germane to the process of education. We will be telling our child that education is something that happens in a prescribed place for a prescribed amount of time under tutelage of people who are “approved to teach.”

This seems like an overly regimented way to approach learning that denies the diversity of learning opportunities we believe actually exist. Our child won’t be able to listen to their own mind and body in knowing when to focus on studying something and when to take a break. And they will be inculcated into a pattern of hoop-jumping and test-taking that will push their sense of self outward, to what other people think about their competencies and capabilities, rather than inward in terms of what they think of these things relative to their values and goals.

It’s possible specific, market-based institutions can serve an educational role in our child’s life at various times and for various reasons, but it’s unlikely our educational habits will ever involve the kind of structure where we say goodbye to our child in the morning and hello in the afternoon, Monday through Friday. Homeschooling seems to meet our needs better.

How we plan to homeschool

So what does our homeschool curriculum look like? There are really only three “subjects” we think it is important we instruct our child in, at his own pace and based on his own developing interest– reading, writing and arithmetic. If our child learns to read, he will be able to follow his own interests by studying texts and other written resources imparting knowledge to any degree he would like. If he can write, he can communicate his ideas in another way besides verbally and improve his ability to connect and exchange with others. And if he can do basic math, he can think about personal circumstances (finance, time-keeping, etc.) and the nature of reality (“science”) in more sophisticated ways. These three disciplines are the fundamental building blocks of all other subjects of human knowledge he might like to instruct himself in. We would encourage him to consider learning these things and make every effort to provide him excellent instruction whenever he desires it until he has competency or mastery over them.

From there, the world is his oyster. He can be a self-guided learner and follow his passions, instincts and curiosities wherever they might lead. And we believe that by creating a paradigm for him from the get go that moves at his pace, he will maintain more innate enthusiasm for learning and growing than if he is faced with a “mandatory curriculum” and told he has to learn things he isn’t interested in and doesn’t care about, which don’t help him solve real problems he is facing. And we believe that by observing us, he will come to see the desirability of reading, writing and arithmetic because it will allow him to have more meaningful interactions with us.

Acknowledging our limits, embracing a child’s potential

Beyond that, we just don’t think we’re competent, as parents, people or anything else, to successfully predict what his life will be like and what knowledge he’ll need to be “successful” at it. As a result, our plan is to put a lot of trust and faith in him to figure it out with limited initial guidance. We’re excited to see who he will become and we hope this approach will be less stressful and more loving for all involved when we let go of the standard parent temptation to fight a child’s nature and try to shape them into something more “desirable” or good, from the parent’s point of view.

And this is why we’re interested in RIE, by the way, we feel it is laying the groundwork for the type of relationship we’re planning to build with our Little Lion, and we think it dovetails with our belief in trusting him to be who he is and giving him the framework and structure to thrive as such.

The Thousand-Year Reich Fallacy

Nothing is more permanent than “temporary” arrangements, deficits, truces, and relationships; and nothing is more temporary than “permanent” ones.

~Nassim Taleb

The Nazi regime in Germany, which was early on referred to as the “Third Reich”, was also popularly referred to as the “Thousand-Year Reich”, the implication being that it was a regime which would stand the test of time and last over a period of many multiple generations.

An intellectual problem I’ve always had with this is that the seemingly ever-lasting circumstance has an explicit, definite end point. In the case of the Thousand-Year Reich, that end point is 1,000 years from the time it was established– and then what? More importantly, why only 1,000 years? If the Thousand-Year Reich represents some kind of political ideal, how would it be possible for the society underneath it to transcend these arrangements over any conceivable period of time? And what changes in circumstance would lead them to do so?

As an observer of financial markets and business cycles for going on a decade, I see the “Thousand-Year Reich Fallacy” with some frequency. For example, a market prognostication might be made in the following form: “Earnings growth is strong and sustainable, rather than seeing the S&P 500 tail off from current levels, I believe it will continue to rise and will be ten or fifteen years before we see a correction.”

Ignoring even the problematic metaphor of a “correction” in this context, I always find myself thinking in these circumstances– and then what? And what is it, 10 or 15 years from now, that finally precipitates this change in price?

The most obvious example of the Thousand-Year Reich Fallacy (which is really just a variant of the hot hand fallacy) lately is the specious reasoning we hear about about Zero-Interest Rate Policy (ZIRP), its longevity and the “new normal” economic paradigm it engenders. Many people, simpleton and sophisticate alike, have reasoned that central banks have painted themselves into a corner with their ZIRP attempts and having arrived at this corner, there is no way out that will not impose enormous social costs to exit, which they are beyond reluctant to effect as a result. The implication is that interest rates will not rise because they can not rise without grave disruption to economic activity.

The incentives of ZIRP and even NIRP (Negative-) are intuitively perverse. Under ZIRP, borrowers pay no costs and lenders earn no return for parting with their money, meaning lenders have become indifferent from the standpoint of time preference, preferring a dollar today equally to a dollar tomorrow. Under NIRP, borrowers are rewarded for borrowing and lenders are glad to pay them for their privilege, meaning that lenders prefer a fraction of their dollar tomorrow to their whole dollar today. Anyone who listens to this realizes that this is not a sustainable arrangement, ceteris paribus, and that studied in isolation they would not willingly behave that way as a lender.

So, the Thousand-Year Reich must come to an end. But when? And why? Here is where the fallacy rears its ugly head, as people will project an arbitrary time frame which seems sufficiently long to hedge against immediate uncertainty, ie, 20 years, 30 years, but they will not then reason about what changes must occur 20 years or 30 years from now that bring ZIRP/NIRP to an end.

For ZIRP/NIRP to truly be the “new normal”, there can not be any end point to it. But it is not anticipated to be the new normal, but only a Twenty-Year Reich. But what then? And why will it remain stable along the way?

The funny thing about the Thousand-Year Reich fallacy is how short of the initial timeline events end up, and how violently the trend unravels. In the case of Nazi Germany, a regime slated to last 1,000 years in fact lasted 12 years, from 1933 to 1945. Of course, it was a horrible 12 years, punctuated by a ghastly death toll, gross destruction of capital and property in Germany and abroad, and enormous political ramifications that reverberated outward from Berlin and into the present day. All the martial glory, all the eternal recognition and all the national greatness imagined at its inception was dashed to the rocks in just over a decade which, for those experiencing it, must’ve seemed like 1,000 plus forever years.

The ZIRP/NIRP paradigm is a similarly crowded trade from a social expectations standpoint. Anecdotally, I have seen that it is believed from shady, proletarian used car lot operators in Appalachian Tennessee, to educated, middle-aged professional bankers on the West Coast. Everyone knows it can’t go on forever, but they can’t see how it will end in the next five, ten or even fifteen years and certainly no one wants to try to imagine what it might be like. It will be truly unprecedented. But it will end, because it must end, and since it will end it’s worth thinking about what it is that will deliver the finishing blow, and why it could be a much shorter Reich than one could anticipate right this very moment.

Review – Invisible Wealth

Invisible Wealth: The Hidden Story of How Markets Work

by Arnold Kling, Nick Schulz, published 2011

Recently I found myself rooting around the in archives of sites like Let A Thousand Nations Bloom and Distributed Republic and I selected a few recommended titles about the frontier of economics, politics and soft institutions (culture, legal norms, etc.) looking for answers to these questions mentioned in an earlier post:

  • Why do political borders and different legal systems seem to have such disparate impacts on economic development?
  • Which follows which, the culture/political system or the economy?
  • How sound is the idea of “competition amongst governments” and why don’t we see more countries’ policies moving toward a “developed” mean?

Invisible Wealth proved helpful in thinking more deeply about the first two questions, but it really didn’t offer any insights on the third question. The book is a mixture of introductory lessons on concepts from “Economics 2.0” intermixed with interviews from numerous academic economists who have done research in the field of the interplay between economic development and social institutions. The strongest parts of the book are the interviews with the economists. The introductory lessons suffer from too many mixed metaphors (hardware/software layer, Malthusian meadow/food court, innovation as the heart of the economy) and the insistence on delineating economic ideas as part of 1.0 or 2.0 thinking seems contrived and forced, not only because there is no existing group of economic thinkers who so identify themselves as adhering to one system of ideas or the other, but also because there is an entire school of thought, the Austrian school of economics, which recognized the importance of both 1.0 and 2.0 concepts and successfully integrated them decades ago, but which gets no spotlight aside from the consistent mentions amongst the interviews of the importance of the work of FA Hayek as an exemplar.

Briefly, Economics 1.0 is supposedly Classical Economics, which sees all economic issues in terms of the three basic inputs of land (original, unprocessed resources), labor (the effort and ingenuity of human beings interacting with those resources) and capital (the factors of production generated by mixing land and labor for future production). E1.0 is obsessed with equilibrium and static economic models, which are amenable to mathematical and statistical analysis. In contrast, Economics 2.0 acknowledges the important role of entrepreneurs in managing change and dynamism in the economy. Sadly, the authors neglect the ultra-important dimension of TIME and the role this plays in production and the coordinating activities of entrepreneurs… which is why the Austrian school again seems incredibly advanced compared to this offering and might be categorized as Economics 3.0. But even ignoring time, E2.0 is a big advance on E1.0 in acknowledging change as not only a real phenomenon of economic systems that is neglected by E1.0, but also the central element of economic development and growth. For development to take place, change must occur, and for change to occur, there must be actors with an interest and incentive in causing the change.

This shifts the analysis from studying the mineral resources or accumulated capital of a community, to studying the existence and behavior of entrepreneurs as innovators improving economic outcomes for everyone. The question begged then is, “Why do some economies have a lot of entrepreneurs, or very talented ones, while others have none or poor ones (or corrupt ones who get wealthy making people worse off)?” And for an answer to that question, one must explore the role of institutions.

With institutions, whether we’re talking E2.0 or E3.0, it’s clear that the science is still developing on which institutions are important for development, what role they play and how they can be successfully built (a significant meta-problem, because often there is feedback between a poor economy and difficulty building strong institutions and so on). There are also so many potential institutions to consider that the analysis can quickly get complicated, for example:

  • Property rights (how to define, how to enforce, what can/can’t be owned and by whom)
  • Legal norms (ie, tendency to rule a certain way in a certain type of case)
  • Legislation (ie, “the law” that will be enforced, including civil, criminal and regulatory policies)
  • “Culture” (accepted behaviors, social expectations, traditions, ideals, even aesthetics)
  • History (this is an odd one because it is so intangible and uncontrollable, but the history that each community comes from has a real effect on shaping other institutions and thus economic outcomes)
  • IQ (more on summary findings from Hive Mind below)
  • Religion
  • The family

I think this is why the interview portions of the book really shine. It is here that we get a lot of competing theories of development and which institutional factors are most important and why. They not only highlight how unsettled this part of economic or social science is, but also they provide outstanding examples of how critical each of these factors can be. And there is a clear distribution of insight and intelligence demonstrated by these interviews as well– while almost all of the interviewees have earned numerous awards and accolades, including Noble Prizes, for their economic work, several stand out as innovative giants while others seem to trade in the same, tired old statist fallacies of yore. What follows are some of the quotes I thought were most fascinating.

Robert Fogel

RF emphasized the role of technology in development, because as he says, “technological advance is the basis for all economic growth.”

One measure of economic development he suggested was looking at life expectancy. A rising life expectancy implies that people are able to produce sufficient resources to protect themselves from basic environmental and health risks. However, in looking at the historical data, there is an interesting trend in early industrial European societies by which rural populations maintained higher life expectancies than urban dwellers until around the turn of the 20th century. He blamed this on changes in technology, because

when you walked around in New York City, you were breathing pulverized horse manure, a much worse pollutant than the exhaust of automobiles

That idea grabbed me, both because it is vivid and disgusting, but also because it highlights that economic development is fraught with risk and even though the “ultimate” destination of economic development might be a less toxic technology like automobiles, the “path” along the way might include way points with more toxic technology (pathogen-laden pulverized horse manure) which is worse for health outcomes than taking your chances with subsistence-level existence in the countryside. A question I had which wasn’t explored in the discussion is why a.) city municipal services failed to keep the volumes of horse manure out of the streets as part of a sanitation program or b.) why market entrepreneurs didn’t collect and sell this “fertilizer” back to the countryside? It could be a technological problem within a technological problem.

Fogel also emphasized that the rate of technological change appears to be increasing in industrial economies:

it took four thousand years to go from the invention of the plow to figuring out how to hitch a plow up to a horse… it took 65 years to go from the first flight in a heavier-than-air machine to landing a man on the moon

Now, the example is cherry-picked and there are probably still a lot of technologies we’re using that are 10,000 years old (for example, if we ever primarily grow crops indoors, one could say “It took us 10,000 years to go from growing crops outdoors, to figuring out how to grow them indoors”, which seems like a really long time to figure out what will at that point be a best practice idea) but it still has impact.

He also mentioned the importance of economic development for the well-being of the aged:

you need to have a successful and rapidly growing economy in order for standards of living for the elderly to improve

I think this is true because the savings of the elderly need to earn an increasing return in real terms for their standard of living to improve without being forced to consume their capital, which puts a fixed timeline on their survival once they run out of capital entirely. And the only way their savings can earn a greater real return over time is if the entire economic pie is growing. It’s an interesting example of the connection between economic growth and and humane conditions.

Robert Solow

RS highlighted the complexity of the problem of solving poverty in poor countries:

Without appropriate institutional infrastructure, without the right local incentives, without complementary human capital, aid and investment will be wasted… poor countries are not only poor in capital, they are poor in the factors that make for “total factor productivity”

This is a direct application of E2.0 thinking contrasted with E1.0 thinking. The E1.0 aid crowd believes that if you just redistribute enough of the world’s wealth to the poor countries, they’ll be able to escape poverty. But RS emphasizes that they’re not just poor in terms of resources but also in terms of institutions which allow them to manage and develop resources. If this is true (and I think it is), it certainly gives one pause before hitting the “Donate to Charity”-button.

Paul Romer

PR focused on changes in technological systems and the economic impact that comes from replacing an old technology with a new one:

We didn’t get that much more light by producing hundreds of thousands of candles per person, but by switching from candles to gas

He also discussed the way technological development may improve our capacity to make further discoveries,

it may be inherent in the process of discovery that the more we learn the faster we can learn

and the impact that improvements in institutional technology have allowed us to harness those discoveries with greater efficiency:

the modern university and research system was designed not to create property rights but to lead to the rapid dispersal of new information; academics were rewarded based on the priority with which they disclosed information, so that the first person to disclose gets all the professional credit for discovering something new

[…]

what we’ve done is created better institutions over time, so that we now exploit the opportunities for discovery much more effectively than we used to

The most important insight from his interview was that growth requires change, and change creates “winners” and “losers”, and it’s easy for the losers to become a special interest group and lobby the government to arrest the change:

everyone wants growth but nobody wants change, and you’ve got to have both or you’ve got to have neither… change accompanies growth… when you have change, there will inevitably be winners and losers… we can’t let a small group of losers — either absolute losers or relative losers — stop the process of growth that will benefit most people going forward

Incidentally, this is why countries pursuing socialist policies stagnate. Socialism is a policy that preserves the status quo and tries to equalize outcomes that are created by change. Inevitably, equalizing outcomes ends up stopping the change itself and thus stagnation sets in.

Joel Mokyr

JM was actually one of my favorite interviews, so I will quote him extensively.

First, he talked about the reasons why humanity has gotten increasingly technologically advanced over time:

inventions are made when there is a minimum epistemic base… you cannot build a nuclear reactor by accident… but you can invent aspirin quite serendipitously, without having the faintest clue about how it works

[…]

We invent something, and sometimes we know a little bit about how it works, sometimes we know nothing, sometimes we know quite a bit, but in all cases, as we use it more, the epistemic base gets wider.

This technological advancement requires time, and a bit of luck, because

the only way we can think about technology is in evolutionary terms… a kind of science that makes no predictions

That’s also a really interesting idea because some economists have claimed that “science is prediction” and thus any economics which does not concern itself with empiricism and making valid predictions is not scientific. But here we have two examples (evolution, and technology) of sciences where prediction is not possible. Does that mean they are not scientific?

Later, JM goes into an explanation of the way changing technology led to economic development, and the way economic development impacted institutions and social ideas, and then the way this fed back into attempts to limit technological development and, by extension, economic development:

If you look at Europe in 1650 or 1700, what you see is a very sophisticated set of economies. They have just basically finished exploring the rest of the world, and there has been great deal of commerce and trade — joint stock companies are emerging, insurance is emerging. This is a fairly sophisticated commercial economy. The problem is, there are lots of special interests trying to get exclusionary arrangements that are good for them but bad for the economy. This is a system in which property rights are well defined and enforced, as Douglass North loves to say, but also rather distortive in the sense that you have lots of exclusionary arrangements. In other words, for the economy to function well, you don’t just need good property rights, you also need what we could call, somewhat vaguely, “economic freedoms.” You need labor mobility; you need to get rid of guilds; you need to get rid of monopolies, both local and global; you need to get rid of all kind of regulations; and above all, you need free trade. And if you don’t have that, you’re going to end up in a society that will not be able to grow.

Nowadays we have a different term for this. We call it corruption. We always say, look at countries like Russia or the Central Asian nations — these countries will never have good economies because they are corrupt. But corruption is really just a special form of what we call, in economic jargon, “rent-seeking.” I argue in my book that one of the things that happens in eighteenth-century Europe is a reaction against what we today would call rent-seeking, and that this, to a great extent, is what the Enlightenment was all about. The Enlightenment wasn’t just about freedom of religion and democracy. It wasn’t to be about democracy at all, but never mind that. It was about freedom of religion, tolerance, human rights– it was about all of those things. But it was also a reaction against mercantilism, and you find that attitude in certain people who were very important in the Enlightenment. Above all, of course, the great Adam Smith.

[…]

when you look at the few places in Europe where the Enlightenment either didn’t penetrate or was fought back by existing interests, those are exactly the countries that failed economically [Spain, Russia]

This is definitely a different take on the Enlightenment than I have come across before, but it makes a lot of sense to me and seems to do a good job of integrating economic, technological and political phenomena of the time period!

nobody has held technological leadership for a very long time… technology creates vested interests, and these vested interests have a stake in trying to stop new technologies from kicking them out in the same way that they kicked out the previous generation

That is the feedback loop mentioned earlier, and why the Enlightenment might have been a reaction against a vested interest reaction.

Cardwell’s Law: the more open the world is, the more free trade, the more ideas and people can move from one country to another, the less likely it is that technological progress will come to an end

This idea gives hope that there is a case for rational optimism assuming liberal social institutions around the world.

if you change the institutions but don’t change the culture, you’re not going to change the institutions

[…]

the degree to which we hold fast to the wisdom of earlier generations is an incredibly important element in how innovative a society is, because if you think about it, every act of invention is an act of rebellion

This suggests that “conservativism” as a social policy might lead to stunted economic development, depending upon when marks the beginning of what traditions and systems one is trying to conserve. It also highlights the problem that RS mentioned, namely, that there is complex interactivity between social institutions which enable economic growth and it’s possible that a “backwards” culture could interfere with or limit the effectiveness of “progressive” social institutions as a whole, so it’s not as simple as, say, invading a country and giving them a modern political constitution (ignoring the obviously negative social impact of a war!)

And this might seem like a throwaway quote, but I thought it was interesting:

Over most of history people have not voted their pocketbooks — Marxists included.

Thankfully! Because if they did, or do, then it will be truly hopeless to expect any kind of reform ideology to take place in the face of billions of people who could “vote their pocketbook” and keep instituting handout systems that impoverish everyone.

William Easterly

WE focused on the appropriateness of specific institutions to solving specific problems, namely, the planner-mentality to solving poverty. He looks at poverty as a circumstance created by a lack of innovation, and he identifies planning as a practice which is antithetical to innovation. Thus, planning can not solve poverty:

Planners think that the end of poverty requires a comprehensive, administrative solution. They’re trying to do something that’s a lot like central planning in the old, Soviet-style economies, in the context of poverty reduction.

[…]

It’s as if central planning has been totally, mercifully extinguished everywhere else except [in the areas with] the world’s desperate, poorest people, who can least afford such a dysfunctional solution to their problems — [areas] where it would be much better to imitate the mentality of free markets, which are all about giving financial incentives and motivating people to meet consumer needs.

[…]

corporate planning is just about scaling up a solution after you find something that works… you can’t use planning to find what works

William Lewis

WL, like JM, emphasizes the way that institutions can be used to enable and unleash innovative forces, or to restrict and restrain them. He also talks about attitudes of people in the industrialized West who are trying to create panacea solutions for people in poor countries:

Just because people are not educated does not mean that they are incapable, which is a mistake educated people in the West often make.

He points out that if the opposite were true, poverty would be a necessary part of the social landscape for much of the world for at least the next 50 years while several generations of people are being educated. But this wasn’t the pattern of development in the industrial countries before they obtained their industrial development and he doesn’t think it’s a good assumption for the remaining non-industrial countries as well.

No producer – no producer – has ever asked for more competition. So these domestic producers are really the secret enemies of globalization and they are exerting a lot of influence against it.

There’s that feedback loop! And it gives us an insight into the truth of protectionist policies, which don’t enable development but rather enable special interest groups to profit patriotically.

[Gordon] Wood showed that at the time of the Revolution, consumerism exploded in the United States. And consumerism was associated with fundamental notions of individual rights. Prior to that, at least in the feudal societies of Europe, consumption was viewed as a luxury to which only the land-owning class was entitled.

I’ve got a Gordon Wood book on my stack right now so I am excited to explore this idea further, this is another example of integrating economic and political ideas holistically and applying them to the analysis of a historical period to yield an interesting result.

And of course, the way you make a plan happen is by having a plan for production, not for consumption. There is no way you can plan or affect the individual choices that people make as individuals when they buy things, but you certainly can affect strongly what they have to buy through production planning. So this whole producer orientation was aided and abetted in modern times by the planning idea. It’s easy to see where the idea came from in feudal times– basically, the landowners and the people who owned the capital could control what happens. They were the only ones who had the ability to do anything. This whole battle for individual rights, for the political philosophies based on individual rights, and for what immediately comes from those political philosophies — namely, the idea of consumer rights — has expanded around the world to a relatively small degree.

Earlier I had mentioned [amazon text=Hive Mind&asin=0804785961]. Here are some “institutional” effects of High IQ societies, according to the author.

High IQ:

  1. Correlated with higher savings, which means more capital which raises the productivity of all labor
  2. Correlated with more cooperation, which means less corrupt government and more productive businesses
  3. Correlated with social market orientation, a form of social organization key to widespread prosperity
  4. Better at using “weakest link” team-based technology

So one challenging idea from Invisible Wealth and some of these interviews is that poor countries, in so far as they demonstrate low average IQs, as well, may have a more difficult time creating the institutional arrangements necessary to allow for sustained economic development. That has many ramifications for social policy if it’s true!

I noticed also that this idea about the importance of institutions is exactly what Hernando de Soto was discussing in his The Mystery of Capital, which I read last year. His approach was to emphasize property rights and formal versus informal economies. His argument was that poor countries tend to have major urban areas centered around the political capital where the elites in power and their cronies have the benefit of property rights enforcement and thus are able to build and accumulate capital, whereas the squatters and poor folk in the outlying communities not only have no property rights but are actively prevented from developing them or having them recognized by the formal legal system. The result is an estimate of trillions of dollars of capital “frozen” in informal structures which limit their exchangeability and thus their value, usefulness and ability to be improved or accumulated over time.

Recession Risk, The Ultimate Risk Paradigm Of Modern Business Operations

The business cycle rotates periodically between boom and bust. This is one of the inevitable consequences of centrally planning the economy’s interest rates and forcing them below their market equilibrium levels. Because it is inevitable, it is “predictable” and thus every business person must conduct their affairs in light of the fact that at some point in the future they will be faced with a recession. The key measure of risk for a business person operating in a central bank-managed economy, then, is “How will I feel when the recession comes?”

If a recession poses no risk to the financial structure of his holdings and he is positioned in his operations to weather a storm, he may be termed “low risk.” If instead a recession represents an existential threat and/or the potential for severe hardship for his operations, he may be termed “high risk.”

As an ideal, a sufficiently low risk operator should eagerly anticipate a recession as it will represent a cheap buying opportunity during which he will consolidate the failing enterprises of his competitors, scooping up their assets at bargain prices and thereby leap ahead of them without the use of leverage or cheap competitive tactics. Conversely, a sufficiently high risk operator will find the economic Sword of Damocles plunging through his neck in a recession, permanently severing the connection between himself and his former assets. How then to manage financial and operational risk so that continued growth can occur in a manner that is sustainable in all possible economic environments?

In terms of financial risk, we could sort our assets in two ways, by asset quality and by financing quality. The asset with the highest asset quality is the one which has the largest earnings yield relative to its current value. The asset with the highest financing quality is the one which is cheapest to own (ie, annual interest cost).

Practically speaking, sorting assets by asset quality and financing quality and then selling low quality assets and paying down outstanding debt would move an organization toward a more favorable balance between asset quality and finance quality, with an emphasis on equity in the balance sheet. The capital that is freed up in the process is now available to purchase a higher quality asset in the future.

In a recession, the cash flows from low quality assets dwindle while the finance charges on debt remain fixed; not only does such a mixture create a problem in a recession but it falsifies the true “free cash” position of the company in a boom because, to operate prudently, extra cash must be maintained on the balance sheet to offset the risk this low quality asset and debt represent should a recession appear.

The insistence on focusing on the management of financial risk first offers us clues as to a sound growth strategy overall. To be successful and sustainable through all potential economic conditions, growth must be purposeful and planned and should only occur when three conditions are met: there is abundant free cash on the balance sheet, the organization has people “on the bench” and ready for new opportunities and a good buying opportunity (represented by a fair or discount to fair value price) presents itself.

A debt-laden balance sheet is not cash rich because the cash which may be present is actually encumbered by the debt as an offset in a recessionary environment. When we are talking about a cash rich balance sheet, we’re by implication talking about an unlevered balance sheet. Otherwise, the cash is not “free” but rather is “phantom” cash– it will disappear the moment adverse economic conditions present themselves.

The organizational bench condition may be harder to evaluate objectively, but there is a decent rule of thumb. When people in each position in the organization are sufficiently organized to handle their own responsibilities with time to spare, there is organizational bandwidth to spend on promotions and new responsibilities, such as management of newly acquired assets. In contrast, when people in relatively higher positions within the organizational hierarchy are spending their time doing the work of people relatively lower in the organizational hierarchy, it indicates that there is a shortage of quality personnel to fill all positions and that those personnel available are necessarily being “mismanaged” with regards to how they are spending their time as a result.

Further, it implies the risk that growth in such a state might further dilute and weaken the culture and management control of both legacy assets and those newly acquired. This is a risky situation in which every incremental growth opportunity ends up weakening the organization as a whole and creating hardships to come in the next recession. If it’s hard to find good people, inside the organization or without, and there is a general attitude of complacency about what could go wrong in a recession, it is a strong indicator that underperforming assets should be sold and the balance sheet delevered to reduce organizational risk in the event of a recession.

Growth should be fun, exciting and profitable. If it’s creating headaches operationally, or nightmares financially, it should be avoided. You shouldn’t own or acquire assets you don’t love owning. Perhaps the best rule of thumb overall is to ask oneself, “Does owning this asset bring us joy?” If yes, look for opportunities to buy more. If no, sell, sell, sell!

Ultimately, there are three ways to get rich: randomly, with dumb luck and unpredictable market euphoria for the product or service offered (billion-dollar tech startups); quickly, with a lot of leverage, a lot of luck in terms of market cycles and a lot of risk that you could lose it all with poor timing (private equity roll-up); and slowly, with a lot of cash, a lot of patience and a lot less risk while taking advantage of the misery of others during inevitable downward cycles in the economy.

If you were fearful in the last economic cycle, it suggests your financial and organizational structures were not as conservative as you might have believed. It may be an ideal, but it’s one worth reaching for: a recession represents a golden buying opportunity for a cash rich organization to leap ahead of the competition and continue its story of sustainable growth and success.