Economics in One Lesson – Henry Hazlitt

August 10, 2012

Devon Sampson Economics , , , , , , Leave a comment

(These notes are just the tip of the iceberg. “Economics in One Lesson” is one of the most brilliant, yet approachable, books on economics ever written, and you can download it in PDF format for free HERE.

Note: All notes below are direct quotations from the book unless surrounded by parentheses.)
 
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The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. (5)

[The argument that war helps the economy] confuses need with demand. The more war destroys, the more it impoverishes, the greater is the postwar need. Indubitably. But need is not demand. Effective economic demand requires not merely need but corresponding purchasing power. (14)

If (people) lose the whole dollar when they lose, but can keep only a dime of it when they win, they decide that it is foolish to take risks with their capital. (24)

There is a strange idea abroad, held by all monetary cranks, that credit is something a banker gives to a man. Credit, on the contrary, is something a man already has. He has it, perhaps, because he already has marketable assets of a greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. (28)

It should be immediately obvious that if the loans we make to foreign countries to enable them to buy our goods are not repaid, then we are giving the goods away. (71)
 

The idea that an expanding economy implies that all industries must be simultaneously expanding is a profound error. In order that new industries may grow fast enough it is necessary that some old industries should be allowed to shrink or die.

They must do this in order to release the necessary capital and labor for the new industries. If we had tried to keep the horse-and-buggy trade artificially alive we [would] have slowed down the growth of the automobile industry and all the trades dependent on it. (87)

 
It is only the much vilified price system that solves the enormously complicated problem of deciding precisely how much of tens of thousands of different commodities and services should be produced in relation to each other. These otherwise bewildering equations are solved quasi-automatically by the system of prices, profits, and costs. (94)

The much-reviled speculators are not the enemy of the farmer; they are essential to his best welfare. The risks of fluctuating farm prices must be borne by somebody; they have in fact been borne in modern times chiefly by the professional speculators. (98)

You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation. (116)
 

We cannot in the long run pay labor as a whole more than it produces. The best way to raise wages, therefore, is to raise labor productivity. (118)

 
One function of profits, in brief, is to guide and channel the factors of production so as to apportion the relative output of thousands of different commodities in accordance with demand. No bureaucrat, no matter how brilliant, can solve this problem arbitrarily. (143)

Inflation throws a veil of illusion over every economic process. It confuses and deceives almost everyone, including even those who suffer by it. We are all accustomed to measuring our income and wealth in terms of money. (154)

Deficit spending, once embarked upon, creates powerful vested interests which demand its continuance under all conditions. (156)

At times when there is capricious government intervention in business, and when business does not know what the government is going to do next, uncertainty is created. Profits are not reinvested. Firms and individuals allow cash balances to accumulate in their banks. They keep larger reserves against contingencies. This hoarding of cash may seem like the cause of a subsequent slowdown in business activity. The real cause, however, is the uncertainty brought about by the government policies. (163)
 

If no effort is made to tamper with money rates through inflationary governmental policies, increased savings create their own demand by lowering interest rates in a natural manner. (169)

 
Under a system of division of labor, in short, it is difficult to think of a greater fulfillment of any human need which would not, at least temporarily, hurt some of the people who have made investments or painfully acquired skills to meet that precise need. (181-2)
 

To see the problem as a whole, and not in fragments: that is the goal of economic science. (183)

Linchpin – Seth Godin (Chapter 1: The New World of Work)

March 12, 2012

Devon Sampson Business , , , , , , , Leave a comment

This book is about love and art and change and fear. It’s about overcoming a multigenerational conspiracy designed to sap your creativity and restlessness. It’s about leading and making a difference and it’s about succeeding. I couldn’t have written this book ten years ago, because ten years ago, our economy wanted you to fit in, it paid you well to fit in, and it took care of you if you fit in. Now, like it or not, the world wants something different from you. We need to think hard about what reality looks like now.

-Seth Godin: Linchpin, page 2

It is becoming much easier for companies to replace people, therefore Godin argues that the only way to be truly secure is to be indispensible.

Godin argues that people get brainwashed into repressing their talents and dreams to work as factory cogs because of an implicit, attractive promise made by companies and bosses: “follow these instructions and you don’t have to think.” (9)

“Like scared civilians eager to do whatever a despot tells them, we give up our freedoms and responsibilities in exchange for the certainty that comes from being told what to do.”

Seth Godin’s criticism of The E-Myth Revisited: “If you make your business possible to replicate, you’re not going to be the one to replicate it. Others will. If you build a business filled with rules and procedures that are designed to allow you to hire cheap people, you will have to produce a product without humanity or personalization or connection. Which means that you’ll have to lower your prices to compete. Which leads to a race to the bottom.” (11)

The day-laborers that wait in front of hardware stores looking to be picked up for cheap labor are not much different than most businesses and employees. They stand next to a bunch of other similar entities, waiting to be picked – usually by someone who is pressed for time and is just looking for which one seems the cheapest.

A problem: “Consumers are not loyal to cheap commodities. They crave the unique, the remarkable, and the human.” (13)

“There are no longer any great jobs where someone else tells you precisely what to do.” (14)

“History is now being written by the artists while the factory workers struggle. The future belongs to chefs, not to cooks or bottle washers. It’s easy to buy a cookbook (filled with instructions to follow) but really hard to find a chef book.” (18)

“Our world no longer fairly compensates people who are cogs in a giant machine. There’s stress because for many of us, that’s all we know. Schools and society have reinforced this approach for generations.” (19)

Capitalism demands the best in us, and as such, attendance-based compensation (ABC) jobs in which you just have to show up to get a paycheck are dwindiling. Getting an unskilled job is like putting yourself in the path of a buzzsaw.

“You don’t become indispensable merely because you are different. But the only way to be indispensable is to be different. That’s because if you’re the same, so are plenty of other people.” (27)

Fooled by Randomness – Nassim Nicholas Taleb

January 4, 2012

Devon Sampson Business, Human Psychology , , , , , , Leave a comment

At least in terms of Expected Value it is far better to be a dentist than a rock star, because dentists earn consistently large salaries while the majority of rock stars earn very little, and even those that do become successful and make millions don’t swing the profession’s average salary to the level of dentists.

And if lack of variance is valuable to you, than being a dentist becomes even more attractive!

Statistical example of the lack of variance in the long-term relative to the short-term: “A 15% return with 10% volatility (or certainty) per annum translates into a 93% probability of success in any given year. But seen at a narrow time scale, this translates into a mere 50.02% probability of success over any given second” (65)

“(T)here are Monte Carlo generators designed to structure such texts and write entire papers. Fed with ‘postmodernist’ texts, they can randomize phrases under a method called recursive grammar, and produce grammatically sound but entirely meaningless sentences that sound like Jacques Derrida, Camille Paglia, and such a crown.” (73)

If you let an infinite amount of monkeys type on typewriters, it is 100% certain that one will type a word-for-word copy of The Iliad.

“The following inductive statement illustrates the problem of interpreting past data literally, without methodology or logic:” (120)

I have just completed a thorough statistical examination of the life of President Bush. For fifty-eight years, close to 21,000 observations, he did not die once. I can hence pronounce him as immortal, with a high degree of statistical significance.

It’s easier to remember a logically linked story than an assortment of unrelated facts. Causality is easier to commit to memory, so sometimes we create it where it doesn’t exist.

“If you meet someone randomly, there is a one in 362.25 chance of your sharing their birthday…Now let us look at a situation where there are 23 people in a room. What is the chance of there being 2 people with the same birthday? About 50%. For we are not specifying which two people need to share a birthday; any pair works.” (159 – The Birthday Paradox)

“When the statistician looks at the data to test a given relationship…odds are that the results can be taken seriously. But when one throws the computer at data, looking for just about any relationship, it is certain that a spurious connection will emerge, such as the fate of the stock market being linked to the length of women’s skirts. And just like the birthday coincidences, it will amaze people.” (160)

“Data that is perfectly patternless would be extremely suspicious and appear to be man-made. A single random run is bound to exhibit some pattern – if one looks hard enough.” (169)

“Our brain is not cut out for nonlinearities…Our emotional apparatus is designed for linear causality.” (179)

Studies have shown that people are almost incapable of making the simplest decisions without emotions (Tested by surgical ablation on a piece of the brain to suspend the ability to register emotion, isolating logic. Subjects couldn’t get out of bed in the morning and wasted entire days weighing various decisions.) This is why psychologists call emotions “lubricants of reason.”

“No matter how sophisticated our choices, how good we are at dominating the odds, randomness will have the last word. We are left only with dignity as a solution – dignity defined as the execution of a protocol of behavior that does not depend on the immediate circumstance.” (246)

“There developed a social model for a stoic person, like the gentlemen in Victorian England. Its tenets can be summarized as follows: The stoic is a person who combines the qualities of wisdom, upright dealing, and courage. The stoic will thus be immune from life’s gyrations as he will be superior to the wounds from some of life’s dirty tricks.” (248)

“(E)conomics is a narrative discipline, and explanations are easy to fit retrospectively.” (257)

“It took me an entire lifetime to find out what my (core framework) is. It is: We favor the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract. Everything good (aesthetics, ethics) and wrong with us (Fooled by Randomness) with us seems to flow from it.” (262)

“Free to Choose” by Milton Friedman

December 29, 2011

Devon Sampson Politics , , , , , , Leave a comment

I hope you all have had a great holiday season. Here at the Bank of Notes, we want to give our readers a present as well – so here is Part 1 of Milton Friedman’s legendary 10-part miniseries “Free to Choose”. Each episode starts out with 20-30 minutes of Friedman discussing an economic issue in a fairly succinct manner, while showing video of the various world economies discussed.

However, it is the second half of each episode that makes this series truly epic. Milton Friedman debates various academics, usually of liberal or socialist inclinations, on the topic of the episode (eg: Episode 1 discusses the merits of free markets). It doesn’t take long, however, for these debates to turn into total bloodbaths – which Friedman emerges from triumphant and unscathed. In fact, Friedman dissects and eviscerates arguments against individual rights with such precision that it appears effortless – and to the Nobel Prize winner, it is, because he has an unshakable conviction in his principles and a comprehensive understanding of the logical validity of his arguments.

Economics has long been referred to as “the dismal science”, but Milton Friedman’s uncompromising, unrelenting advocacy of liberty and individual rights has inspired me more than any speech, public figure, or movie (and certainly any academic) has in a very long time.