Category: Austrian Economics (Page 1 of 2)

Capitalism Epochs and Pendulum Arguments

I have long been interested in pendulum arguments. These are the sort of arguments where the position swings drastically from one position to another. For example, capitalism versus of socialism, centralised versus decentralised, or technology-driven change versus business-driven change.

I think these pendulum arguments ultimately turn out to be false dichotomies or otherwise the result of incomplete models. Like real pendulums, they can be stopped by adding a “third thing”. Imagine the image of a pencil being stabbed into the middle of the pendulum which dramatically stops it swinging.

This “third thing” is usually something that is not typically considered part of the domain of the argument. It changes the model.

I’m finding this talk interesting, with the key slides reproduced below:

The idea of “financial capitalism” versus “production capitalism” is a likely controversial tweak to our idea of capitalism.  The model appears to fit:


I have a bit of an ideological issue with the other that the switch to the “deployment” / “production capitalism” phase “doesn’t happen automatically – i.e. that it requires governance help.  I suspect that this is a causation versus correlation debate.  Possibly Carlota is playing to her audience.

Innovate or Legislate? (Spoiler: it’s the first one)

IT News is all about government intervention today.

Leading with stories on the London Taxi blockade and the likely unpopular stance of the AIIA to recommend not introducing legislation to address the so-called “Australia tax” on IT products and services.

It all comes back to innovation.  Uber, who the Taxi drivers are complaining about, is innovating.  They’ve developed a high quality service that customers want.  They are disrupting an industry.  They are doing what every management consultant has been telling them to do (though I’m not suggesting that’s why they’re doing it).

As usual, their competitors want protection from the government.  Which seems unfair and all very anti-competative of the taxi drivers but I understand where they are coming from.  They don’t just want protection – they want protection in exchange for the all of the regulation they have had to endure in the past:

“Why, asked the drivers, is Uber allowed to compete in an industry that is otherwise highly regulated?”

Fair point.  Previous legislation has an impact of future expectations – remember that.

Quote focusonthecontent

Back here in Australia, where Microsoft has admitted it is engaging in the horrendous crime of “charging what Australians could bear” – AIIA is recognising that legislation that caps prices will just as likely cause exits from the market as it will cause lower prices. Just like minimum wage legislation – however desirable in its intended outcome – can’t help but cause jobs to disappear.

But what if it’s not just that Australia can bear higher prices?  What if this just plays to our pride in being a lucky and prosperous country?  What if Australia’s payment of higher prices reflects an innovation challenge?

It’s not all about price elasticity.  There is another major competitive force at work here – the threat of alternatives.  Perhaps the reason Australia appears to bear higher prices isn’t because of the prosperity of the lucky country no matter how much we want to believe it.

Perhaps Australia is paying more for IT products and services because our knowledge of alternatives is less.  

I’m a happy Apple customer so I’m not knocking Apple products at all. But Apple was slow to make a dent in the Asian market because there are so many other options there. Success in Australia’s limited option market probably helps fund expansion into Asia (speculation).

Knowledge and availability of alternatives is an important force in competition and therefore prices.  I’d argue that availability isn’t a problem in Australia (though it might be if you tried to regular price) but rather the problem is knowledge of alternatives.

I’m not just talking about alternatives to Microsoft Office like OpenOffice, LibreOffice, Google Doc, etc. I’m talk about alternatives to Microsoft Office like focusing on the content!   Like not needing to write a long complex document to get things done.  Like maybe using Photoshop instead and creating something a little more visual.

I’m also talking about alternatives like experimenting with your digital channels to try out new integrations with your customers using the devices they already use. Rather than writing an internal document to explain to a disengaged management team something they should already know. Take that team to a customer site.  Or at least show them the data you have collected about in-store traffic flow.

AIIA has the right idea. The legislative framework needs to create the environment for innovation here in Australia. Not to try and protect us from the companies we freely purchase products and services from. The Australian response doesn’t always have to be legislate, or boycott, or feel helpless. Sometimes it has to be – innovate.

Corporations – thought of the day

I think it’s time I made clear something I’ve honestly believed for a long time.

I think capitalism is a really good system. I think “freedom” is the only moral political system. I think the Austrian Economists at are right.

But I think capitalism and corporatism are different.

As one of my favorite intellectuals I’ve never met (Peter Klein) would probably agree, it’s all about entrepreneurship.

I think the anti-capitalism interpretations of Naomi Klein’s work, and the anti-capitalist interpretations of the whole “occupy Wall Street” movement, are flawed.

And finally – and this is the point of this post – I believe that all corporations exist for only four reasons:

1. To provide a mechanism for fascinating and productive individuals who are too scared to start their own business to be “successful”

2. To provide a mechanism for economically, socially, or future-trendy savvy people to be successful through investment and non-participatory involvement

3. To allow people like me, who are fascinated by the way organisations work, to make them better. Just for our own personal satisfaction.

4. To either make individuals happier by the products and services they provide – or to fail

This is what I believe. It’s also why I think Alan Joyce is cool.

Healthy information eating

I’m looking forward to a few weeks off before I begin a new role in a technology & management consulting company (which I’m also very much looking forward to).

I’m planning on going on an ‘information diet’ during my break and have already cleared inboxes, unchecked starred items, and unsubscribed from plenty of RSS feeds.

But what sort of a diet would it be if I didn’t ensure I got enough nutrition?  So I’ve also enrolled in a course at the Mises Academy.  I’ve chosen “Networks and the Digital Revolution: Economic Myths and Realities” because I’ve always liked reading snippets of Peter Klein.

One of the features of the Mises Academy (other than that the courses are cheap and on line) is that the readings are generally available for free.  While working through the readings for my course I came across:

… They hit gold with ”The Nature of the Firm,” a 1937 paper written by the Nobel laureate Ronald Coase.

The Coase paper asked a deceptively simple question: If the market is such a great tool for allocating resources, why isn’t it used inside the firm or company? Why doesn’t one worker on the assembly line negotiate with the worker next to him about the price at which he will supply the partly assembled product?

That sort of negotiation rarely happens. Instead of using markets, companies tend to be organized as hierarchies, using a chain of command and control rather than negotiation, markets and explicit contracts. Paradoxically, the primary unit of capitalism, on close inspection, looks a lot like central planning.

Mr. Coase didn’t just ask this question; he also provided a provocative answer: it all hinges on the costs of making transactions. What economists call firms, he said, are essentially groups of activities for which it is more effective and less costly to use command-and-control than markets to have things done.

New-economy advocates found this a compelling idea. One consequence of the Internet has surely been to make it cheaper to communicate. This should, in turn, lower transaction costs and change company boundaries. Their conclusion was that companies would inevitably downsize and outsource, spin off unnecessary functions, and carry out more and more transactions using the Internet instead of internal memos.

Not so fast. The Internet lowers communication costs, that’s for sure. But that means it lowers transaction costs within organizations as well as across organizations. The internal memo might disappear, but only because it is replaced by the internal e-mail message.

It just doesn’t follow that lower communication costs lead to smaller companies. In fact, Mr. Coase himself said that ”changes like the telephone and telegraphy, which tend to reduce the cost of organizing spatially, will tend to increase the size of the firm.””

– from here with my emphasis added

I’ve read some of the original Coase papers over the years and the idea of reduced transaction costs have been at the heart of the MWT Model.  I like this idea that a key capability required in a low transaction cost world is likely to be the ability to work effectively with, and generate value from, low transaction costs within organisations and also across organisations.  To me this is the whole point of how management is changing / needs to change.

I also like that this is still an interesting idea to me.  It’s a calling of sorts and something I tend to think about even when I don’t have to. It gives me energy and purpose.


We should probably all read “The Capitalist and the Entrepreneur” by Peter G. Klein

I owe some of my interest in organisations to a guy called Peter G. Klein.

Over 10 years ago, when I first decided that there was going to be a shift in the skills required to be an effective manager in an environment of cross-organisation coordination and open information, and when I was developing the initial ideas around ManageWithoutThem, it was in part driven from something Klein had written.

Specifically, I was skimming through an article call ‘0530 New Institutional Economics’ that Klein had written for some sort of encyclopaedia of economics. (It’s still available here)

The article opened my eyes to the possibility of a deep understanding of organisations and the fundamentals of why they exist. Something told me that this was the fundamental economics of the firm and that the ‘managed organisation’ (in the sense that piles and piles of management books that I was reading at the time assumed) was an anomaly.

I’ve since learnt some more of the political dynamic that keeps organised managed; but I still believe the ideas introduced in the original NIE article by Peter G. Klein are the fundamentals.

I even found myself, when often disagreeing with something a manager had said, saying ‘you don’t have a valid theory of the firm’ – until I realised how completely ridiculous I was starting to sound…. 🙂

Though I never actually finished reading the article. To be honest I went on a 10 year tangent. But with the release of Klein’s new collection of writings I’ve decided I’m going read every word. I’d also recommend managers do the same.

Links to purchase and download for free are available on the blog: Why Klein’s Book Is an Event to Celebrate

Des Moore on Central Banks


First, contrary to popular interpretations, the blame for the panic cannot primarily be placed on irresponsible bankers: they responded rationally to the subsidy for credit created by central bankers.

But what’s this in the very next paragraph?!?!:
Second, Prime Minister Kevin Rudd is clearly wrong in attributing the crisis to policies that reflect the neo-liberal views of free marketeers. Few if any supporters of free-market policies believe there should be no regulation of monetary conditions. (emphasis added)
Both from The Age.

Thought of the day

Mainstream economics is not the cause of the current financial crisis – rather, the cause of the current financial crisis and the cause of mainstream economics being mainstream are the same.

(article to follow)

Comical Economics

If you want to understand economics, the current state of the finance industry, and some of the corruption caused by bizarre inflationary money systems, it’s worth reading How an Economy Grows and Why It Doesn’t.

It’s a comic – which is kinda cool – and it was published in 1985 – which makes the parallels with the current financial [industry] meltdown kinda eerie.  (Even the web site is old!  It proudly declares ‘best viewed in Netscape’!)

The comic was written by Irwin Schiff, who is the father of Peter Schiff.  Peter Schiff has been getting a lot of airtime at the moment as the (a) ‘Dr. Doom’ who predicted the crisis.  He actually thinks things are going to get worse (for America) as the situation turns into a currency crisis (for America).

(On a side note – I like how America seems to be calling for a ‘unified approach’ to dealing with the global financial crisis.  Well of course they are!  If you are going to inflate your money supply you need every other country to do the same thing so that your country isn’t disadvantaged relative to other countries!  Sheesh!)

I’m only up to page 70 of the comic (so may words, man!) – but it appears that’s also where the world is up too, or a least the public reporting of it.  So I’m excited about reading what happens next!

Interestingly, while Peter Schiff is doing well his father Irwin, who developed the comic, appears to be currently in jail.  He is some sort of tax denier who doesn’t only dislike tax but thinks it’s ‘voluntary’ – and has argued as such in court.

From what I’ve read his argument is wishful thinking – he seems to be finding the word ‘voluntary’ in various documents relating to the American federal tax system and reading into it that people don’t have to pay if they don’t want to.  But I think what these documents are actually saying is that the tax system relies on voluntary compliance with the law as opposed to knocking on millions of doors and asking for tax (i.e. mandatory compliance).

Sure, if everybody stopped paying tax then the IRS wouldn’t have the resources to move to ‘mandatory’ compliance – but that doesn’t mean everybody wouldn’t be breaking the law.  However, that wouldn’t mean everybody would be prosecuted either – it would mean a revolution, maybe blood would be spilt.  I don’t want blood – let’s just continue to pay our taxes and complain.

Sorry Irwin – I could have saved you 12 years.  That said – I like your style and agree there is something a little fishy (ah, get it?  Fishy! – read the comic) about paying people so they can buy votes.  But, as I said, always pay your taxes.  If a mugger with a knife wants your wallet you give it to them right?

What would a healthy banker say about the the economic crisis?

After my last few vague ramblings on the economy I wanted to hear what somebody who actually knew what they were talking about thought.

I found the ideal candidate: John Allison, former CEO of BT&T Bank (which hasn’t gone broke), speaking for the Ayn Rand Institute.  Now don’t get me wrong, the folks at the Ayn Rand Institute can be a bunch of crazy mofos!  But this guy was facinating and makes a lot of sense.

It’s a dense presentation (as in, there is a lot of content squeased into it) so follow the related slides and pause it often – as I did.


The talk and accomanying slides can be found here.

The financial system vs. financial institutions


… what struck me most was Geithner’s repeated conflation of our “financial system” and our “institutions”. Mr. Geither’s unspoken assumption is the fixing our financial system implies ensuring that incumbent troubled financial institutions are “strong”. But that’s not right. Our financial system is composed, in part, of financial institutions, but it is supposed to be larger and more robust than any specific firm. Three years ago, Mr. Geithner would have readily conceded that financial institutions are supposed to come and go, rise and fall, succeed and fail as a matter of market discipline, and that our system is made stronger by that flow of creation and destruction than it would be if some state-manged cadre of crucial banks were at its core. Of course, we all knew three years ago that some institutions had become “too big/complex/interlinked to fail”, but we viewed that as unfortunate, and would have foreseen that if any of those banks got badly into trouble, the goverment would be forced to intervene and resolve the bank at some taxpayer cost, as it had in the case of earlier TBTF banks. Three years ago, no one would have suggested that the strength of our financial system and the strength of Citibank are inseparable.

– from Interfluidity

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