the econosphere: what makes the economy really work, how to protect it, and maximize your...

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From the Library of Lee Bogdanoff

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The Econosphere


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The EconosphereWhat Makes the Economy Real ly

Work, How to Protect It , andMaximize Your Opportunity for

Financia l Prosperi ty

Craig Thomas


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Printed in the United States of AmericaFirst Printing November 2009

ISBN-10: 0-13-701998-XISBN-13: 978-0-13-701998-4

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Library of Congress Cataloging-in-Publication Data Thomas, Craig, 1969-The econosphere : what makes the economy really work, how to protect it, and

maximize your opportunity for financial prosperity/Craig Thomas.p. cm.

ISBN 978-0-13-701998-4 (hbk. : alk. paper) 1. Economics. 2. Economics–Sociological aspects. I. Title. HB171.T495 2010330–dc22

2009027932


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To Heidi, who has patiently endured the verbal monologue version of this book for

the past 19 years. I love you.


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Contents

Acknowledgments . . . . . . . . . . . . . . . . .xi

About the Author . . . . . . . . . . . . . . . .xiii

Preface . . . . . . . . . . . . . . . . . . . . . . . . . xv

Chapter 1 Born with a Loaf of Bread . . . . . . . . . . 1

How the World Prospers . . . . . . . . . . . . . . . . 1We All Share the Same Goal: Maximize Happiness. . . . . . . . . . . . . . . . . . . . 2Love and Protect Your Econosphere . . . . . . . 5The Marketplace Is Perfect: It Is Information That Is Imperfect . . . . . . . . 6You Live in the Econosphere . . . . . . . . . . . . 10Can You Be Green About Your Econosphere? . . . . . . . . . . . . . . . . . . . . . . . . 11The Econosphere’s Tough Love . . . . . . . . . . 15What Happens When We Try to Stop Change? Here’s Your (1952) Buick! . . . . . . . 17The Protection Racket . . . . . . . . . . . . . . . . . 19The Kinder, Gentler Econosphere. . . . . . . . 21

Chapter 2 Where Does the Economy Come From? . . . . . . . . . . . . . . . . . . . . 23

What Is a Job, Anyway? . . . . . . . . . . . . . . . . 25All Work and No Play Does Not Maximize Utility . . . . . . . . . . . . . . . . . . . . . . 28The Econosphere Is Merely and Mundanely the Sum of Its Parts. . . . . . . . . . 28


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Remember When China and India Were Polluting Their Econosphere? . . . . . . 31They Don’t Make Big Heavy Chandeliers Like They Used To. . . . . . . . . . 32

Chapter 3 A Lifetime of Opportunities . . . . . . . 37

1964: Bundles of Economic Potential and Joy . . . . . . . . . . . . . . . . . . . . . . 38

Place: The Product of Generations of Economic Incentives . . . . . . . . . . . .39The Occupation of Infants? Being Cute and Cuddly . . . . . . . . . . . .42

1970: A Little Bit Older, A Little Bit Wiser . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Of Cooties and Other Social Bugaboos . . . . . . . . . . . . . . . . . . . . . . .47

1980: Charlotte and Milton Sitting in a Tree, K-I-S-S-I-N-G. . . . . . . . . . . . . . . . . . 501982: Milt, Why Weren’t You in Class This Morning? . . . . . . . . . . . . . . . . . . . 511998: Charlotte the Yuppie and Milt the Townie. . . . . . . . . . . . . . . . . . . . . . . 532000: Tech-Wreck in Bigton; Renovation Boom in Pickleboro. . . . . . . . . . 562002: Home Again . . . . . . . . . . . . . . . . . . . . 58

It’s Not Just Candy and Flowers; There Is Math Involved . . . . . . . . . . .59

Chapter 4 Why’s My Piece of the Pie Smaller Than His? The Gift of Inequality . . . 63

We’re All Utility Maximizers; Just Some Are Better at It Than Others . . . . . . . . . . . . 65It’s Not a Zero-Sum Game . . . . . . . . . . . . . . 66What Are the Sources of Dissimilar Wealth? . . . . . . . . . . . . . . . . . . . . 70

viii CONTENTS


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How to Consider Inherited Wealth . .71Earned Wealth . . . . . . . . . . . . . . . . . . .74Those Either Not So Hungry or Not So Talented . . . . . . . . . . . . . . . . . .76

Perfect Market, Imperfect Information. . . . 77What to Do About Inequality. . . . . . . . . . . . 81If Not Taxes, Then What?. . . . . . . . . . . . . . . 88Barring Incremental Policy, What Can the Individual Do? . . . . . . . . . . . . . . . . . . . . 91Make the Econosphere Work for You!. . . . . 92

Chapter 5 The Firm as a Coalition . . . . . . . . . . . 95

Slave to the Corporate Machine. . . . . . . . . . 96A Firm Is Serendipity . . . . . . . . . . . . . . . . . . 98My Job Is Nothing Like Woodstock. . . . . . 101You Are a Specialist! . . . . . . . . . . . . . . . . . . 104But How Should We as a Society Look at a Firm? . . . . . . . . . . . . . . . . . . . . . . . . . . 105

Sparkle and Fade . . . . . . . . . . . . . . . .110

Chapter 6 Stupid Policy Tricks . . . . . . . . . . . . . 113

Why So Cynical? . . . . . . . . . . . . . . . . . . . . . 114Protector of Property Rights . . . . . . . . . . . 117The Government Is Nelson . . . . . . . . . . . . 120Stimulus. . . . . . . . . . . . . . . . . . . . . . . . . . . . 123I Am the Sun God! . . . . . . . . . . . . . . . . . . . 126Council of Wise Men . . . . . . . . . . . . . . . . . 127Redistribution: In Search of “Fairness” . . . 131Barriers to Trade and Prosperity . . . . . . . . 134

Chapter 7 Ten Ways to Maximize Wealth and Happiness for Yourself and Everyone Else . . . . . . . . . . . . . . . . . . 139

1. Know That It All Comes from You. . . . . 140

CONTENTS ix


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2. Love Your Environment; Be a Price Hugger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1423. See No Thieves . . . . . . . . . . . . . . . . . . . . 1454. Live Without Borders . . . . . . . . . . . . . . . 1465. Many Brains Working on Small Problems Beat Few Brains Working on Big Problems . . . . . . . . . . . . . . . . . . . . . 1486. Solve Your Information Problem . . . . . . 1507. Preach the Word . . . . . . . . . . . . . . . . . . . 1528. Have a Healthy Fear of Your Public Servants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1549. Rise Above the Fads . . . . . . . . . . . . . . . . 15610. Spend Your Lone Raw Material Wisely . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

Index . . . . . . . . . . . . . . . . . . . . . . . . . 161

x CONTENTS


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Acknowledgments

I would like to acknowledge the contributions of Ger-ald and Leanne Sindell of Thought Leaders Internationalin helping make this book a reality. I would also like toacknowledge those people who have over the years grantedme more than enough rope with which to hang myself: PaulGetman, Mark Zandi, Ray Torto, Bill Wheaton, and JoeAzrack.


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About the Author

Craig Thomas has worked as an economist in the pri-vate sector for the past fifteen years. Specializing inregional, macro, and real estate economics, Mr. Thomashas held the posts of senior economist and director at Citi-group, CB Richard Ellis/Torto Wheaton Research, andEconomy.com. Over the years, Mr. Thomas has modeledand analyzed markets and asset classes around the globeand has presented his work throughout Europe, Asia, andNorth America.

Prior to this, Mr. Thomas completed his graduate andundergraduate studies at the University of Maine, Orono.While there he studied and gained degrees in economics,with concentrations in agriculture and resource economics,and business.

While writing this book, Mr. Thomas split his timebetween Manhattan and Nahant, Massachusetts.


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Preface

When the economy is not giving us the messages thatwe want to hear, we tend to think of it as broken, unfair, andmaybe even a little malicious. Someone ought to step inand fix it or adjust it, just like the government has tried todo now and again. But if the economy is actually a self-sustaining social ecosystem, the same way our physicalecosystem is, perhaps it is better-suited to take care ofitself, and our tinkering with it might disrupt instead ofhelp it.

In The Econosphere, you finally will understand thelaws that govern our financial world—the everyday worldof work and play; planning, saving, and investing; and theeconomic considerations for everything that comprises ourdaily lives. This is a world that is a most fundamental aspectof everything that we are, and we need to understand itclearly to make intelligent choices. Here, I show you that weare living, breathing, and working within the self-regulating,holistic Econosphere whether we know it or not.

You will understand why others’ wealth neither hurtsnor benefits you. You will understand what fairness is in aneconomic sense. And you will see clearly how to make themost of your time and labor.


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Born with a Loaf of Bread

How the World Prospers

My grandmother, the late Althea Thomas of Kunkle,Pennsylvania, had a saying, “Every baby is born with a loafof bread.” She would say this to comfort someone expectinga new addition to the family who was perhaps worryingabout family finances. I suppose the phrase would be theantidote to the less comforting, “One more mouth to feed.”I think it’s a nice saying; it’s soothing and optimistic. Oddly,it has stuck in my head from the first day that I heard itrepeated, and I have long wondered why that is. In fact,there is much more to that old adage than just kind, matriar-chal reassurance.

It is a wonderful saying because it is absolutely true.And if everyone could just understand that one fact, I thinkthe world would be such a happier, more serene and cer-tainly better managed place for all of us to live. The sayingactually goes to the heart of how it is that our economicworld can support its billions of inhabitants as well as itdoes. It can because new inhabitants bring with them thebasic raw materials to support themselves and those they

1

1


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2 THE ECONOSPHERE

care about throughout an entire lifetime—and in somecases, even produce far more than they ultimately need,which brings us to...

The First Law of the Econosphere

The Law of Growth:

Unless purposefully hindered, each new person bringsadditional wealth to the world.

We All Share the Same Goal:Maximize Happiness

I call the environment in which we live theEconosphere. It is the world created by and governing ofhuman decision making, and it is our home. It provides forus and nurtures us. It reacts to and informs our every inter-action and, if we understand it, allows us to optimize theuse of our life spans moment by moment. This environ-ment is not, however, one made of oxygen and hydrogen,oil and steel, high mountains and low plains. Rather, theEconosphere is our social environment, where we work,live, raise our families, and govern ourselves. We need tostart thinking about the economy as a holistic, natural sys-tem. Think for a moment about the biosphere, its makeupand its importance in sustaining life. Scientists study ourcomplex biosphere in incredible detail, employing all kindsof technologies to understand how it sustains us. Most of us


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CHAPTER 1 • BORN WITH A LOAF OF BREAD 3

generally accept that the biosphere provides the air webreathe and thus we need to care for it by not overwhelm-ing its capability to renew itself with harmful chemicalemissions, heat, and dust. It is the biological part of ourenvironment, and our environment needs to be protected.

What about our social environment? Should we makethe same efforts to study and protect our Econosphere? The answer is an emphatic yes! Unfortunately, many peoplesee the economy as simply the outcome of public policy, acollection of opaque statistics, or even a term that describeshow much money we are or are not making, saving, orinvesting. But we generally do not see the economy as anatural system that nurtures and sustains us.

Now, you might be asking what is so perfect and balanc-ing about the economy? Its fits and starts, enormous per-ceived inequities, and even its seemingly cruel nature give itthe reputation of being far from perfect. However, considerwhat it does for us. On a planet that is home to billions, theEconosphere signals to each of us what needs to be con-served by assigning a market price that is dear. In that samevein, if the price of something is high relative the cost to cre-ate it, the Econosphere signals us to put our efforts into sup-plying more of this thing. On the opposite end of spectrum, ifwe have too much of one thing, the Econosphere devalues itso that we consume more or produce less of it.

And there are rewards for good behavior; the more pro-ductive we are in producing what it is that our fellow inhab-itants crave, the more we are rewarded. If we producegreat value, we subsequently can consume things of great


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4 THE ECONOSPHERE

value or save our earnings to share with those whom welove. Moreover, like a great coach, the Econosphere moti-vates us through intense competition to be innovative. Themore we innovate, the more we are rewarded; but evenbetter, the more we innovate, the better off we all arebecause the products and services that we create for ourfellow people are ever superior to those that came before.This is what allows us to increase the quality of all our livesover time and allows this small world to make room for allthose on its surface.

To those who are inclined to see it, it is breathtakingchoreography on a global scale with billions of performers,each one in character, playing his or her unique role so thatthe entire ensemble shines. The Econosphere provides forus, yet it is also of us.

Where we do find areas of our social environment thatare tarnished and polluted, we also always see a visibleinterfering human hand. Where there is hunger, there istypically not a lack of food, but rather a closed border, acruel authoritarian regime, or a captive market not allowedto assign prices or incent production. Where there is poverty, we often find bigotry and artificial castes main-tained by brutal rule. Where we see inefficiency and waste,we typically find central planning, public ownership, andfavored status. Even in our recent financial crisis, com-plicit in the mistakes made by lenders, borrowers, andinvestors is the hand of the central-planner. In this case,public policy subsidizing the purchase of homes via taxbreaks and loose borrowing standards had their start in the


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Clinton Administration’s fixation on increasing the home-ownership rate and the Bush Administration’s willingnessto carry that torch with its promotion of an ownership soci-ety—apparently ownership at any cost!

Fortunately, like someone trying to stop the grass fromgrowing by stamping on it, efforts to rob us of our naturalsocial environment are usually short-lived, eventually fail-ing. Like plants sprouting through cracks in a sidewalk, theEconosphere finds ways to guide our lives even as somemight work to pave it all over. Similarly, you always find away to maximize your happiness, even within the confinesof those impediments that might be thrown up in yourpath—it’s just that maximum potential happiness is not ashigh when the Econosphere is not left to function unfet-tered.

Love and Protect Your Econosphere

If you understand the Econosphere, you can betterprotect it from harm, just as many seek to do with the bios-phere. And when you understand its natural laws, you aremuch more likely to thrive within it because an understand-ing of the laws of the Econosphere cannot help but give youan advantage over others who, sadly, might believe thattheir lot in life is done to them, not by them. Understand-ing the Econosphere’s functioning and rules can give youthe ability to concentrate on where you can add the mostvalue, improve your information so that you can makesuperior decisions, and to generally be at peace with a


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6 THE ECONOSPHERE

social environment that best serves your needs by beingallowed to function naturally.

When you don’t understand the forces at play in theworld you’re living in, anything and everything can be terri-fying. But when you have the tools to properly understandand translate information as it comes to you, whether it is inunderstanding the pros and cons of a candidate’s proposedpublic policy, why the job market functions as it does, whythe marketplace prices goods and services higher or lower,or even why you make the life and work decisions that youmake, there comes a peace of mind.

The Second Law of the Econosphere

The Law of Information:

In the Econosphere, no matter what the problem, betterinformation is always part of the solution.

The Marketplace Is Perfect: It IsInformation That Is Imperfect

It is not the functioning of the economy that createsadverse outcomes; rather it is poor or inadequate informa-tion and lack of understanding that causes you to make ill-advised and costly decisions.

If you manage to collect and decipher better informa-tion than is commonly available, there is a greater chancethat the Econosphere can work better for you. It’s not somuch that you need to discover unique facts, but rather


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that if you can take the same information that others havein front of them and understand it all at a much higherlevel, discarding the noise and making better use of yourunderstanding of the natural laws of the Econosphere, youcan thrive.

Even among professional economists, quite a few can-not sort through the day’s headlines and filter for them-selves those events that are relevant to the economy fromthose that are a distraction, and then make the decisionsthat benefit their lives and the lives of their loved ones. Ifyou don’t understand the Econosphere, there is a likeli-hood you will lurch from headline to headline, grabbinghold with both hands every upturn and downturn in thenews cycle. You will greet every statement with apprehen-sion and will have little basis to judge the quality of everypromise.

For instance, consider our recent economic problems,the roots of which took hold with the burst of speculativeinvesting in housing starting in 2004. (The roots go deeperthan that, specifically to the earlier-mentioned incentivescreated by public policy, but those are aside from the pointI want to make here.)

Is there anything wrong with a house per se? No, housesare good things. So, what was the problem? Investors (bothhomebuyers and major institutions that secured or investedin the underlying mortgages) over-estimated future houseprice gains. Lenders under-estimated the risk in lending tohouseholds for the purpose of purchasing over-valuedhomes. Builders built too many homes, expecting demand to


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8 THE ECONOSPHERE

remain elevated. The problem was not that the market read-ily allows for the construction and purchase of homes.Rather, we had an information problem. Investors ignoredhousing affordability as an indicator for home values;builders lost track of basic demographic certainties; banksforgot the number one rule of banking—never lend tosomeone who really needs the money!

So, we ended up with a mess that spread well beyondhousing to every facet of the global economy. And how dowe get out of a mess like this? Investors that made poorinvestments need to accept their losses. Banks need to fore-close upon bad loans. Builders need to stop buildinghouses.

What about all the emergency actions that were under-taken? Ultimately, the astounding array of new policies didnot stop any of the inevitable pain, but did cost U.S. taxpay-ers billions while likely prolonging and spreading our prob-lems. We can see now that by intermittently andunpredictably changing the rules of the game for businessesand households so that information became even moremuddled, these measures likely increased the risks inherentin our decision making.

Would it have been worse had these new policies notbeen put in place? No one can say with any certaintybecause the Econosphere does not allow for do-overs.However, given that the mess only got worse even after themeasures were put into place, we must conclude that thegoals of the policies were not fulfilled. And this is not ter-ribly surprising because none of these policies were done


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with any reverence to the natural functioning of theEconosphere. No matter how well intentioned they were,they never actually had a chance.

Along these same lines, we cannot help but wonderwhat if housing speculators and mortgage lenders (not tomention the FDIC, Federal Reserve, Congress, and who-ever else might also act as an anointed public overseer) hadbetter information before any of this had begun, it all couldhave been avoided. Better knowledge of and respect for thepowerful natural laws of the Econosphere would havesaved us a lot of time and headaches! We cannot improvethe Econosphere anymore than we can improve upon thelaws of physics, but we can improve information.

Just as in our physical environment, the rules and func-tioning of the economy are essentially constant, unaffectedby our day-to-day considerations about our work, leisure,saving, and consumption. It is always unique or superiorinformation that helps us make better decisions. And, evenour choices in politics are one way we express our under-standing of what harms or helps us within the Econo-sphere. In the same way that someone can avoid chemicalsthat harm the physical environment, you might also voteagainst a candidate who proposes policies that mightimpede the proper functioning of the economy by encour-aging or discouraging certain kinds of production or con-sumption, or in adversely changing the way that theeconomy distributes scarce resources.


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10 THE ECONOSPHERE

You Live in the Econosphere

Because economics is about making decisions, youmust see your economic condition as a collection ofactions—past and present—made by individuals toincrease each individual’s happiness. And you should notjust see this as simply a product of consumerism orgreed—many wonderful things make you happy that arenot related to stereotypes of mindless consumption for-its-own-sake. Happiness can be derived from providing foryour family, preserving free time to mentor young people,the pursuit of the arts, or the opportunity to engage incharitable activities. It’s all the same, as long as it bringsyou happiness. Every day you decide what makes youhappy, and you make decisions to achieve your goals withwhatever information you can gather. You do this everysecond of every day that you are awake. (You even shapeyour sleeping habits to maximize your happiness as well!)

You are born to live in your environment; both a physicalenvironment and a social environment. Your physical envi-ronment should be plainly obvious to you. It’s the sun towarm you, air to breath, food to sustain you. Your social envi-ronment is mostly invisible, and the parts you encounter canseem chaotic and not particularly interconnected. Until youknow what the rules are, it’s going to be difficult to contem-plate and enjoy the Econosphere. But whether you under-stand it or not, you are living in it. Just as you don’t need to bean environmentalist to breathe air or drink water, you don’tneed to be an economist to function within the Econosphereand work to maximize your happiness. It’s inborn.


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Can You Be Green About YourEconosphere?

There is a great deal of cultural emphasis today in being“green,” the belief that you are better off taking care to eatwholesome and nutritious food, minimize your negativeimpact on the physical environment you share with every-one, and generally become a better steward of thoseresources you use to sustain yourself. For instance, youmight choose to eat organic foods because you believe thatthe chemical applications found in the production of con-ventional agriculture contributes to unwanted chemicalrunoff into our aquifers or perhaps even the buildup ofsuch chemicals within your own body.

In choosing to be green, you use the information thatyou have in hand to make what you believe is the best deci-sion for our physical environment and for yourself. That isnot to say that you are correct, but each of us tries toemploy the best information that we have and that we cangather to make the right decisions. In the instance of avoid-ing pesticides, you have gathered enough information tocome to the conclusion that you can achieve the most hap-piness by buying and consuming organic food.

If you can see your choices regarding the physical envi-ronment that are intended to bring you happiness, you canthen expand this understanding to the less well-understoodrealm of your social environment—the Econosphere. Ofcourse, your decisions regarding your physical environmentare in the realm of the Econosphere, as well. However, how


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12 THE ECONOSPHERE

you choose to work and consume as part of our economycan be a bit harder to see and appreciate. How you chooseto use finite resources, whether clean water or your ownlife span, are economic decisions.

You automatically become more productive if you canreceive and react to the incentives and disincentives pro-vided within the Econosphere. If there is too much of onething, the price goes down, and thus supply reacts by cut-ting production. If we have too little of a thing (gasoline),the price rises, some of us step in with more supply, or evencreate alternatives to that good or service.

You are optimally productive if you can react to mar-ket pricing, dedicate yourself to a task, and trade thegoods and services you produce freely, seeking the bestvalue for your effort. The more productive you are, thegreater your collective wealth and well-being. Also, themore productive you are at work, the more opportunityyou have to be at leisure, another key ingredient to maxi-mizing happiness.

To these ends, you must receive signals from the econ-omy as to the value of goods and services that you can pro-duce to trade for others’ goods and services. It is essentialfor your own good that you develop an appreciation of howthe Econosphere works so that you see the information nec-essary for you to provide for yourself and your family andoptimize the value that you bring by employing all the abili-ties and possibilities that come in the course of your life. It isreally about understanding and appreciating the natural


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flow of this holistic system of interaction, so you can makegood decisions in work and play to receive the full valueimplicit in your very existence, and second, not do anythingto harm or impede the Econosphere’s natural functioning.You are the steward of your environments, both physical andsocial.

Which brings us to...

The Third Law of the Econosphere

The Law of Sustainability:

The Econosphere’s bounty comes from people and noth-ing else. The animating force of the Econosphere ishumanity.

Because the Econosphere is the result of our work andour choices, the basic building block of the Econosphere isthe human life span. Human energy is our basic raw mate-rial, not oil, gold, soil, or water. Sure, we do need a physicalspace to inhabit, but there is, nonetheless, no value creationor intrinsic worth without us. Thus, all economic worthradiates from the time we are afforded and those talentsthat we cultivate within each of us.

As an example, let’s see why the economy is about usand not some commodity like oil. Oil in the ground isabsolutely worthless. Oil without the combustion engine isworthless. Oil without people wanting transportation acrosslong distances or to heat their homes or to generate poweris worthless. It is only worth something if it is pumped tothe surface, transported, refined, and eventually consumed.


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14 THE ECONOSPHERE

That entire process is done with the consumption of humantime and talent. Moreover, the extent to which that processis possible and optimally performed depends on whetherinhabitants of the Econosphere are fully able to collaborateand trade with one another.

What the Econosphere does is create the signals, thatis, market prices that prompt some people to see the needfor oil and motivate them to find ways to extract, refine, andtrade that oil for money with which to purchase goods andservices to maximize happiness. The Econosphere providesthe basic flow of information, incentives, and disincentivesto guide each of our daily lives. Now, I use oil only as anexample. The same analysis can be used in the productionof bread, financial advice, music, or robots. None of the rawmaterials that go into the production of such goods andservices is worth anything without the essential ingredient:the human life span.

Let’s look at the natural process of our lives. First, mostpeople are born with the essential capacities to providetheir sustenance—though we should acknowledge that forthose who are oppressed within command economies or insocieties where bigotry bars some groups from education orcertain vocations, such people might never live up to theirpotential. Yet, even acknowledging that some in this worldare held back by the hand of another, it is never a questionof slicing up a pie made up of all the wealth and resourceson earth into ever smaller pieces to support increasinglymore people. Rather, the pie actually gets bigger with theaddition of each person. Every individual human being


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actually bakes his or her own piece of that incredible pie!Even better, whereas people are born with a body andintellect that sustains them, that ability is not fixed. It canbe enhanced, refined, and specialized to cause you tobecome ever-more differentiated and productive. We havewhat we are born with, and we also have everything that weinvest in ourselves or others invest in us throughout ourlives. We get better over time; the result of which is that weeventually produce more than we need. That excess allowsus to prepare for the possibility of being less productivelater in life and yet still maintain our standard of living. Isthis a great system, or what? Well, it doesn’t feel like that allthe time.

The Econosphere’s Tough Love

Consider some of the topical economic issues of ourtime, and how you might or might not view these issuesdepending on your understanding of the Econosphere andfrom where value really flows. Take for instance, the fear oftrade. At its core, there’s nothing alarming about trade,right? Someone somewhere makes something and is willingto trade it for something else made by someone living else-where. It sounds kind of nice in a sort of trade-bread-not-gunfire sort of way, doesn’t it?

Oh, but how we worry about it. It makes some of usache with fear; it makes others head to the street with signsand even bricks to throw through windows in protest. Howcan this simple exchange of talent and time generate such


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16 THE ECONOSPHERE

extreme passions? Why would you want to restrict the abil-ity to trade the product of one person’s toil for the productof another person’s toil, and why does it matter if theseexchanges take place over some distance?

The problem is that you do not live in the abstract.Exchanges of good and services, if you do not understandyour economy as a system preserving sustainability andprosperity, might look something akin to anarchy, andwithin that anarchy there is one person in one land provid-ing a good that could otherwise be produced domestically.Free trade can look a lot like theft: They’re stealing ourjobs! However, if you can see that if one region of the worldcan concentrate on those things that they do most effi-ciently, then another region can concentrate on what theydo best. The end result is more goods for all because every-one would operate as efficiently as possible.

Part of the problem comes from the fact that we do notthink as a region, or as a people. We are individuals; wethink as individuals and, understandably, we value continu-ity and predictability in our lives. We are happiness maxi-mizers within the Econosphere, and the happiness that wemaximize is our own. If one person builds his life and hishousehold around a particular vocation, community, or cul-ture that is in turn built around a particular industry that isadversely affected by shifting comparative advantagesaround the globe, then talk of optimal efficiency is of nocomfort at all! Free trade, certainly in the short term, hasthe potential to be upsetting, no question about it.


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To see the industry where your parents toiled success-fully now fail and whither or to watch the town where yougrew up crumble is a genuine loss that is hard to get over.So what is the answer? To some, it might seem that thesolution is to control trade flows to protect industries andways of life that might well disappear if forced to competewith every distant competitor. Protection always soundscomforting to some, particularly those directly and severelyaffected by the changes that do take place in the economyover time.

What Happens When We Try toStop Change? Here’s Your (1952)Buick!

Imagine if you could stop the forces of innovation bypreserving every industry that we have today; every regionmight remain unchanged, and every person might neverhave to face the stress of moving, retraining, or scrappingprevious expectations for life with new plans requiring thepursuit of a different field or even moving a household faraway from the familiar. Now think of a place that has triedto isolate its Econosphere from the rest of the world, likeNorth Korea or Cuba. Want to trade your car for a bicycle,or a 1952 Buick?

When you try to cut off all or part of your Econospherefrom the real, global Econosphere, it’s a little like trying tokeep a rainstorm from sweeping across your state. Not onlywill you still get wet, but you’re likely to catch a cold, too.


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Trying to drop out of the Econosphere slows productivity,and living standards start to go down. We would no longersee advances in technology, medicines, or the phenome-nally efficient services, like UPS and cell phones that wetake for granted. You could afford fewer things than youotherwise could, and you would invest less than you other-wise would. You would create less than you otherwise cre-ate, understand less than you otherwise understand, andyou would become less than you otherwise are.

Over the last few centuries, we have learned a lessonabout our relationship with the biosphere. We have seenthat attempting to impose mankind’s will over nature oftencreates unintended negative consequences that make us allworse off, rather than better off. For instance, we haveseen that the thoughtless damming of rivers can endangerfish and other wildlife, compromise the fertility of our land,or increase the risks that can come from extreme weather.We have learned that it is better to work in harmony withnature rather than to inflict our will wantonly upon it. Weknow that to ignore the contours of our physical worldleads to flood, famine, disease, and illness.

Slowly but surely, the “green” movement has made usaware of our individual impact on the biosphere and putpressure on public and corporate policy to better align andharmonize with its protection. Whereas most people wouldnot want the ascendancy of humans to somehow beimpinged upon, we have become more intelligent aboutmanaging the impact on the biosphere because we see thatit is in our best interest to respect what sustains us and that

18 THE ECONOSPHERE


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we cannot or should not control. We have even come tounderstand that our environment can provide some goodsand services better than we can, whether that is naturaltopography shaped by centuries of forces or wild ecosys-tems that provide us with, say, food in the case of ouroceans and rivers, or with a balance of plant and wildlifethat maintain balance and livable space, so we correctlyleave it up to nature.

You need to come to the same understanding when itcomes to the Econosphere. The Econosphere is best left toencourage people to produce those goods that they have anadvantage producing, as that production leads to maximumhappiness. For those who have less comparative advantagein a particular area, the Econosphere encourages them tofind other outputs for their talent. Although that might beharsh in the short term, and it often is, you cannot forgetthat you have two basic roles in the Econosphere: You cre-ate—and you consume—the work of others. Let’s take alook at how these two sides of your life in the Econosphereinteract.

The Protection Racket

Any tariff or barrier to trade that is erected to shelter anindustry that can’t compete is actually a subsidy for thatproducer and a tax on the consumer. Protect a T-shirtmaker in Tennessee (and all the other American T-shirtmakers) from those cheap T-shirt makers in Indonesia, andsuddenly every T-shirt in America is going to cost more.



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Same for cars and toasters and telephone answerers. Soprotecting one person, a business owner, or employee, byrestricting the natural functioning of the Econosphere,takes away from every person who needs to buy that pro-tected product because the price is going to go up.

But it gets worse. The impulse to try and fiddle with theincentives in the Econosphere (and go against its naturallaws) causes the Econosphere to run less efficiently. Beforelong, with less competition, we get less output per worker,less per set of raw materials, and less per unit of time. Onnet, we all lose. Within that accounting, it is the consumerthat gives up something to make the producer’s life easierand less prone to change or stress. But who is looking outfor the consumer? What did the consumer do to warranthaving to bear such a cost? And let’s not forget: We are allproducers and consumers. Even the subsidized producerfaces higher prices in the end result!

Over time, there are few one-for-one tradeoffs becauselost efficiency in one area of the Econosphere hurts theentire ecosystem. Moreover, because we each put our indi-vidual finite energy into the Econosphere, the output thatsprings forth from the economy depends on us. We are nottaking wealth from each other; all of us are the fountain fromwhich the value springs. It might look as if some of us getwealthy on the backs of others sometimes, but the underly-ing truth is often obscured by the passions of the moment.

Feel like it’s time for another law? You’re right!

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The Kinder, Gentler Econosphere

The Econosphere is a natural system that challenges usto improve via competition, but it never takes away fromour great shared wealth. What appears to be seizure arejust shifting relative surpluses and deficits that affect mar-ket prices and incentives. This is another important point.In the Econosphere, for one to win, it does not dictate thatanother loses. It is a natural system that challenges us toimprove via competition, but it never takes away in theaggregate.

It is clear that some people who do not fully grasp thisnatural system that sustains us might, in fact, believe thatthe untamed, wild Econosphere is a malevolent force rob-bing the weak or innocent. I believe that they are wrong. Iwould even go so far as to argue that the Econosphere isnot even a neutral system. Rather, our economy is a benev-olent system that rewards those who come to terms with itand learn to understand and live in harmony with it. I mightalso argue that the economy is forgiving in that it rarelytakes away from those who otherwise are not believers andwho see only anarchy in the workings of the Econosphere.


The Fourth Law of the Econosphere

The Law of Plenty:

The Econosphere never takes from one to give toanother.


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After all, you don’t have to believe in the wisdom of themarket to be governed by the economy’s system of incen-tive and disincentives. It governs us all, and while it is atrusted advisor and mentor to those who see Adam Smith’s“invisible hand” (where in a free market, an individual pur-suing his own self-interest tends to also promote the goodof his community as a whole) as a guide, others do not see ahand, but rather a cruel and random unseen force.

Even if personal outcomes from one person to anotherare at times similar, the personal experience and interpreta-tion can be quite different. Remember, we are all utilitymaximizers, and we equate utility with happiness. Seeingthe Econosphere for what it is and what it provides is cer-tainly happier and more comforting than fearing perceivedchaos. Without understanding the functioning of the econ-omy, you might see only the outcomes without ever under-standing the reason behind those outcomes, and that’s justnot any good at all.

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Where Does the Economy Come From?

Where the economy comes from is a question that isalmost never asked, and I guarantee you that if it wereposed, say, on Sunday mornings on the various political pol-icy TV shows, we would come away with many a YouTube-worthy answer! “The economy comes from naturalresources.” “The economy comes from good policy mak-ing.” “The economy comes from the middle class.” “Theeconomy comes from me, and if you vote for me, I will...!”Well, now that I think of it, and as silly as it might sound,that last answer is about the closest to the truth as are any ofthe above answers.

Here’s what you should do to think about the answer tothis question. Start with the whole economy, and then startsubtracting things until the economy no longer exists. Andthere you will find the source of the economy. Let’s give it atry. Let’s subtract, say, fancy pet shop gold fish from theeconomy. Okay, we still have an economy. Now, we’ll sub-tract ground paprika. The economy is still there. Howabout we get rid of boats? ...still there. The Internet? ...stillthere. Oil? ...still there. Sure, we now have a world wherewe have animal-drawn carts, we can’t cross oceans, our food

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24 THE ECONOSPHERE

is not particularly flavorful, and we don’t have inhabitantsfor our fish bowls, but the economy is still there.

Let’s break it all the way down to just five people andthe federal government; that’s still an economy. Now, sub-tract out the government; we still have five people barter-ing with one another. So does the economy come frompeople bartering with one another? Well, let’s get rid offour people. Now you have one person, and that personspends his or her days collecting food and firewood, makingclothing, working on shelter, and so on. All these things areproducts and services, all of which have differing relativevalue to our sole decision maker, and all of which are cre-ated or consumed based on individual preference. So, youknow what? It’s still an economy, albeit a particularly lonelysubsistence economy (kind of like Tom Hanks on thatisland during Castaway, but without the volleyball).

Okay, now let’s subtract our last person. Well, the foodis still there, but there’s no one to collect it. There’s no needfor shelter; there are no garments. In fact, there is no valuebecause there is no demand. So now, there is no economy.Thus, it would seem that all you need is a single person, justone single person using his time and ability to produce andconsume whatever is needed. It is the individual who is thesole fountain from which the economy springs forth. So, tothat end, for the politician who credits herself as being thearbiter of our economic well-being, it might be said thatshe is correct in the sense that just as with anyone, theeconomy does indeed spill forth from within her. The econ-omy comes from consumption of the human potential, both


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CHAPTER 2 • WHERE DOES THE ECONOMY COME FROM? 25

in the production of needed goods and services and in theenjoyment of time at leisure—and that even includes theactivities of politicians who appear on Sunday morningpolitical shows!

Now, I know what you are thinking: Fine, economicoutput comes out of each of us, but I’m not an example in atextbook and I am not Tom Hanks on a desert island; I am areal person, and I need a job! The economy that I careabout starts with my earning a paycheck!

What Is a Job, Anyway?

Many of us work at a job, and it might be the case that asfar as you are concerned, your economy comes from yourjob, and that’s what is important! That is perfectly under-standable. Still, if that job ever disappears, the basic under-standing of where jobs come from will be important to youindeed.

So, what is a job, and how did it get there? How was itcreated, and why do some persist and others disappear?Well, first off a job actually isn’t the key ingredient to eco-nomic bliss that it is made out to be; it is more or less anaccounting device used to describe an exchange. Theessence of a job is the exchange of one person’s time or tal-ent for the product of another’s time and talent. It is the per-son who is working the job that is the key ingredient; the jobis just a catchall description of the actions and the intentionsof the person performing the task and the individual or firmwho has retained that person to perform tasks.


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26 THE ECONOSPHERE

Most of us work in exchange for currency; we don’tbarter directly. But that’s just a matter of convenience. Wearen’t truly working for slips of paper, coins, or, in thesedays, electronic transfers of money into our bank accounts;we work for what those checks, bills, and coins can betraded for—the products of other people’s work. As to the“job,” in the most common application of the term, if a firm(a concept that we also do not tend to think about in a partic-ularly thoughtful way; but we will a little later in Chapter 5,“The Firm as a Coalition”) finds that it frequently needs thesame kinds of output day-in-day-out, it will likely be conven-ient for that firm to put someone on retainer who can pro-duce that output so that the firm does not have to start everyday trying to contract anew for someone to perform therequired task.

So, a firm creates an opening, generally with a concisedescription of what tasks will be performed, what skills ortraining are required, and what compensation will bereturned in exchange for the completion of said tasks. Thefirm then goes about the process of finding and hiring aperson who is willing and able to perform those tasks, and ifa deal is to be struck, that person must agree to use his orher time and ability in the production of that good or serv-ice all the while keeping in mind the personal costs that willbe incurred in the process and the value that will bederived from those goods and services eventually pur-chased with the compensation awarded. Geez, that’s a longdescription for something as simple as a job—I guess that’swhy we came up with a concise name for it!


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As long as the value of the compensation is of equal orgreater value as the costs to the individual in performingthese tasks—the costs can be measured as the value ofwhatever else the person would be doing if not at that job,and some allowance measuring exactly how unpleasant thejob may be, as people demand higher relative compensationfor a job they hate than a job they love—and as long asanother set of tasks does not emerge that provides a bettercost/benefit outcome, we have a deal, or in its most com-mon usage, we have a “job!” And, over time, the firm itselfwill go through the same type of thinking on its end. As longas it is getting what it believes to be a favorable cost/benefitoutcome, it will preserve that job in its present form andlocation and will seek to retain the person performing thatwork. On the other hand, if the opportunity to make a bet-ter deal emerges, the firm will likely take the opportunity tosubsequently change the tasks incumbent in the job,change the person performing the job, or both.

And, even though it is the individual who brings muchof the value produced in any job, we have set up our societyso that having a formal job is extremely convenient andoften times optimal. A job typically allows for some long-term planning on the part of the individual and more stabil-ity than if each day started with a search for opportunitiesto trade. Also, a job allows you to concentrate on what youdo best, leaving the other tasks inherent in producing a fullrange of products to other workers who are also specializingin what they do best. If you tried to produce all the thingsthat you consume, you would have far less to consume atthe end of the day than you currently have. And, if you tried


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28 THE ECONOSPHERE

to produce every aspect of the products that your employeror firm produces, your firm would likely produce far lessthan it does. It is optimal to specialize in what you are mostskilled at, which is another important part of why so manyof us have jobs—the job allows us to be as productive aspossible, and thus optimally compensated. But a job is noteverything!

All Work and No Play Does NotMaximize Utility

Let’s not forget we are utility maximizers; we are not ful-filled by working as much as humanly possible. In fact, weare fulfilled by working as little as possible while still produc-ing enough tradable goods and services so that we can pro-cure a reasonable amount of what we desire. At some point,your scarce leisure time is more valuable than the additionalitem that you can purchase through an additional hour ofwork, and it is at this point that we stop trading our valuabletime for the production of goods and services. It is within usall to make that judgment, which we are always innatelydoing, and that’s why our lives end up as some mixture ofwork and leisure. We each have our own unique mix of whatwe do to pay the bills and what we do so that we enjoy ourlives.

The Econosphere Is Merely andMundanely the Sum of Its Parts

Such is life; or, I should say, such is life for the individ-ual. But what of the whole? The intention in this chapter is


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to discuss where the economy comes from. Instead, thusfar, we have mostly discussed individuals and jobs; butthere is a reason for that.

Do you know how people like to use the phrase “morethan the sum of its parts” to describe things—particularlythings that they really like. They might say, the 2008Florida Rays team was more than the sum of its parts or,the Park Slope neighborhood in Brooklyn is more than thesum of its parts. It’s nice to think of something as transcen-dent of its basic building blocks. For instance, I love Patsy’spizza (a Manhattan staple), particularly with olives and pep-pers on top, and I would like to think that it is somehowmore than just flour, tomatoes, cheese, and such. Well, Ialso like the Econosphere because it provides me witheverything that I need. It is elegant, seemingly fragile, butclearly resilient as seen through the lens of time. It encour-ages you to produce those things that are scarce and thosethings that are held in high regard by your fellow inhabi-tants, and it dissuades you from producing those goods andservices that are already plentiful or not of value. But withall that said, although the 2008 Tampa Rays might haveplayed beyond what its payroll suggested was possible, andalthough Patsy’s pizza transcends its ingredients, I can tellyou with great certainty that the economy, for all its beautyand complexity, is simply the sum of its parts.

It is your production, plus my production, plus yourneighbors’ production plus my neighbors’ production, andso on. Add it all up, and that is the economy! When theeconomy is prosperous, we all produce goods and servicesof rising quality and quantity at an accelerating pace—


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30 THE ECONOSPHERE

interestingly, it is not enough to just retain equal qualityand a constant pace of production, as we tend to exhibit ris-ing productivity over time, which is why wealth has risenover time. It is the nature of the Econosphere to rewardinnovation, a key element of rising worker productivity.Correspondingly, when the economy becomes unbalancedand falls into recession, our aggregate rate of productivity isslowed or has stalled.

It all hinges on how productive we are. We are theessential source of output. This point is often lost along theway. Certainly, there are many factors that affect our pro-ductivity. Do you live in a place that encourages theexchange of time and talent for the production of otherpeople’s talent—that is, do you have a free market in whichto trade? Is there an infrastructure that allows transporta-tion of people, information, and intermediate and finishedgoods? Are there enough educational resources so that youcan enhance your abilities to produce more valuable goodsand services, or produce a higher output of goods and serv-ices?

These essential factors needed to create aggregatewealth are particularly important at times when we con-sider public policy to improve our economic outcomes.Public policy, if and when it is applied to matters of theeconomy, should be focused on making us more produc-tive. Too often, we focus on just about everything but theseimportant things! This is more true in some countries thanothers, and more so in some eras than in others. Take for


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instance two of the great economic stories of recentdecades: China and India.

Remember When China and IndiaWere Polluting Their Econosphere?

In recent decades, China and India have enjoyed explo-sive increases in the wealth of their expansive and populouscountries after many preceding decades of trying to imposetheir own economic systems of incentives, blocking the nat-ural system of incentives provided by the Econosphere.These nations suffered terrible poverty during their failedexperiments with collectivism—communism in China andsocialism in India. It was only when their policies changedand began to let their people live in harmony within theEconosphere that these nations began to live up to theirgreat potential (although it will take decades for the legacypoverty resulting from their previous, failed economic sys-tems to be fully expunged).

Assuming these countries continue along this journey,their size combined with their still large deficit with the restof the world as measured by worker productivity means thatthey can remain leaders in growth for many decades tocome—they’re still so far behind that their potential forimprovement is almost unlimited. Both of these populouscountries’ histories are stunning examples of what negativerepercussions can occur from attempting to eliminate mar-ket forces and erase the rules of the Econosphere. More-over, these countries’ rapid assents when market forces were


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32 THE ECONOSPHERE

invited back in are an equally impressive example of howrapid improvement can be achieved by simply choosing tolive in harmony with our social environment, allowing pricesto guide production, and entrusting each of us with the abil-ity to make decisions based on our own unique talents andpreferences.

In the examples of China and India, please note thatthere was no change in these nations’ endowments or mixof natural resources. There was no sudden discovery of oilor gold. The only thing that changed was that the individualwas empowered to guide his or her own economic contri-butions. In large part, the judgment of a select few was sub-stituted with the billions of micro decisions that wouldotherwise occur quite naturally. And it is typically the casethat billions of small decisions, which tend to be made withmuch more intimate, local knowledge and are made withina framework of personal relationships, tend to be muchmore informed and far less indiscriminate than relativelyfew, large, autocratic decisions; that is, thou shalt plant cornthis year! Such centralized edicts were emblematic ofChina in decades past, lending to frequent over-supply forsome commodities and severe shortages in others.

They Don’t Make Big HeavyChandeliers Like They Used To

Let me share a story about this notion of central plan-ning versus pure market-driven activity that I was taught inschool growing up. I have absolutely no idea if it is true, butI have no reason to believe that it is not and I would, at


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least, like to believe that a few of the things we are taught inschool have their roots in actual events. More importantthough, it is a vivid example of how the best-intentionedcentral planning can lead to a perverse outcome.

Supposedly, in Russia during the Soviet era, a factorywas commissioned to produce chandeliers. Now, in a mar-ket-driven system living in harmony with the overallEconosphere, a factory producing chandeliers would seekout potential buyers to better understand what sorts ofchandeliers are desired and what prices the market canbear. The factory would endeavor to create the optimal mixof chandeliers and produce them as efficiently as possibleto maximize the returns for the owners of the factory. In thecase of our Soviet-era chandelier factory, the workers in thefactory were, as are we all, utility maximizers, and set out tomaximize their returns—they can tinker with our economicand political systems, but we are hardwired to maximizeutility; no state can change that. There were no marketprices to influence their output. Rather, the central plan-ners decided to pay the factory bonuses based on theweight of its output. It was thought that would be a fairmeasurement of the overall productivity of the factory.

Thus, our clever utility-maximizing chandelier makerssaw their incentive and set to work in meeting their objec-tives. They produced massively heavy chandeliers that inall practicality could not be hung from any normal ceiling,and for which there was no demand whatsoever. The maxi-mum rewards came from producing the heaviest outputpossible, and that’s just what they did. The factory produced



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giant, useless, ill-conceived chandeliers. In this case, indi-viduals chose to maximize their utility by reacting to theincentives in front of them, and it was central planners whoprovided the wrong incentives.

As opposed to living in harmony within the Econo-sphere, the central planner tries to remove market-basedpricing and create a new system of incentives. This is roughlyequivalent to deciding that instead of placing a house in theproper location, taking into account local topography, youshould flatten the hills, fill in the lakes and impose your ownideas of where water should run and where the land shouldrise and fall. As is the case in both the development of landand in the stewardship of an economy, there can be disas-trous consequences to imposing your own will on what isotherwise an interdependent system of which you likely donot have a full understanding, thus increasing the likelihoodof negatively affecting many other variables within the sys-tem and individuals who are not present to articulate theirown preferences.

No matter what the powers that be might attempt to dofor us, or more accurately, do to us, we are still going to try tomaximize our happiness. We are born with a potential lifespan, which we can employ with whatever judgment andphysical ability to any task at hand. We can also augment ourabilities with education, training, and experience that canmake us increasingly more valuable in the production ofgoods and services. We desire to make our own situationsoptimal, fulfilling tasks in the maintenance of our house-holds, creating goods and services to trade for the products

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of others’ toil, and all the while retaining as much leisuretime as possible.

Our limited time drives us to be as productive as wecan be as we work, so we can get the maximum reward forour toil and thus the maximum time to enjoy activities thatare nonmarket-related, such as time with family andfriends. The incentives encourage us to strive to make thebest use of our time, our resources, and each other. It is avery slick and ingenious system.

Within that description, is there one core ingredientthat makes it all possible? Is it desire or judgment? Is iteducation or ability? Well, it is all those things, but thosethings emanate from one basic commodity: the individual.We are the essential raw material! Without people, every-thing else is worthless. And it is the sum of all our activitiesthat makes up the whole of the economy. The economycomes from us!

Each morning triggers in us that basic desire to betterourselves by producing goods and services that will be val-ued by our fellow man. We trade among ourselves the bestwe can so that we support ourselves and our families andstill retain as much leisure time to enjoy our personal pur-suits and the company of others. It is beautiful choreogra-phy indeed, performed on a global scale and evidenteverywhere one might look.

In fact, as I type these words this morning, I am watch-ing the sun come up over Hong Kong from my hotel win-dow. The harbor, once still and reflective of the moonlighthas now absolutely come to life with boats of every size and



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configuration zipping to and fro. Nature is providing ussun, warmth, water, and so on...and people are springingforth to create value with this day that they are given.

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A Lifetime of Opportunities

Life in the Econosphere might sound a bit antiseptic,given the stark terms in which it is described, I realize. Allthese inborn inclinations to maximize utility and issues ofinadequate information and insipient interference to thenatural ways of things might seem a bit, well, unnatural. Isuppose it is different from the usual analysis of how theworld works. Yet, you can be assured that all the unique andwonderful things that you run into through the course ofyour life do, in fact, fit into this framework.

The Econosphere does not necessarily inform you whatexactly to do; rather it informs the decision making that getsyou where you want to go. This explains the immense vari-ety of output and ideas that make this world such an inter-esting place in which to live. There is no perfect outcomeshared by all, other than the desire for maximum happiness(or utility). That can lead you to climb a mountain, work asa computer programmer, have ten kids, go to school, sleeplate, or become a monk, but everything that leads to thesedecisions are economic decisions, and they happen inaccordance with the rules of the Econosphere.

Does this seem farfetched? Well, let’s take a look at atypical life (or two), and try to understand what sorts of

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decisions and incentives guide us along. More important,we will try to see how these decisions are inevitably guidedby the rules of the Econosphere. Those rules apply to amid-level office manager and parent of two trying to find ahome to purchase, the same way it applies to an awkwardteenager trying to find a date for the dance. As different asthose experiences can be, at their core, they are more orless the same.

1964: Bundles of EconomicPotential and Joy

So, let’s start at the beginning. I hereby announce theblessed arrival of baby Milton Tiberius Dickens and babyCharlotte Margaret Rand. Each a cherished blessing totheir families I can assure you! There’s no telling what babyMilt and baby Charlotte might accomplish in their livesafter all! Imagine the things that they will see!

Well, we surely cannot imagine all the details and won-ders that they will experience, but we certainly do under-stand the timeless rules of the Econosphere within whichthey will operate, and as such, we can imagine the types ofdecisions and incentives they will undoubtedly face. In fact,it might be instructive to our exercise of understanding thefunctioning of the Econosphere and to better grasp ourown opportunities to think a bit about what lies ahead forMilt and Charlotte. We might see ourselves and our ownfamilies in their adventures and accomplishments. Andwouldn’t you know; Milt and Charlotte actually live just


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CHAPTER 3 • A LIFETIME OF OPPORTUNITIES 39

down the street from one another, which will make it easierto keep an eye on the both of them!

Place: The Product of Generations of EconomicIncentives

Milt and Charlotte both live in the Fox Run housingdevelopment right off from Plank Bridge Road in Pickle-boro. Forgive the odd name of the town. You see, some ofthe state’s largest cucumber farms were located right herenot more than about fifty or sixty years ago. They used toship pickles all around the country. The cucumber farmsand the pickling facilities are long gone now. (Well, in thehere and now, one of the pickle factories is a brew pub,cleverly named “Pickled Pub,” that also serves pizza bakedin an old-fashioned wood-fired oven and has bowls ofhomemade pickles right on the table, but it’s no longer apickle factory.) People around here think it is a shame thatthe industry is gone; it’s one of those industries where hard-working immigrants from Europe worked hard, raised fam-ilies, and built this country! And now it’s all gone; what ashame! Where are those kinds of jobs today?

Truthfully, the cucumbers were here because theimmigrants that settled in this area early in the 19th centurywere good produce farmers and came in search of fertileand affordable land. It just so happened that they alsobrought along with them a traditional knowledge of thecanning and pickling processes that were gained from gen-erations of storing produce over the winter. It was a bit byaccident that pickles became a primary export from this


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40 THE ECONOSPHERE

area; after people began growing produce here, andbecause the country’s economic system embraced entre-preneurship, loans could be procured, far-away marketsaccessed, and businesses built from little more than hardwork and determination. Upward mobility was hamperedby neither social caste nor restrictive laws here in theUnited States, at least not for these European immigrants,and as such, a pickle industry was built!

The industry was successful to the extent that the localchildren, perhaps for the first time in these families’ histo-ries, were afforded a good secondary education. This pro-duced doctors, engineers, architects, scientists, teachers,and lawyers among other vocations. Generations of chil-dren fanned out around the country with no limits to eithertheir own mobility or potential, with only their own utilitymaximization in mind. Many ended up in Bigton, a cityabout fifteen miles away that was growing quickly at thetime. It was growing quickly enough that the city soonspread into the surrounding farm land.

This increased the value of the land in Pickleboro andother nearby towns, enriching the farmers as they retiredand sold their land. But this also changed Pickleboro andmany neighboring farm communities into commutertowns. Not a bad thing, of course, but some of this develop-ment took place oddly fast, ill-thought-out perhaps, andspread eerily and unnaturally wide. Considering federaland state initiatives that led to vast road development andimplicit subsidization of the growing car culture and theindustrial complex that supported it, and also the increased


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subsidization of homeownership through lending pro-grams, this type of development, with hindsight, could havebeen expected.

Heck, if government is going to explicitly make it worthour while to shift to a bedroom community model with big-ger houses and lots and slightly longer commutes via pri-vate auto as the only initial downside, we as a nation willchoose to take advantage of it. Remember, we are all utilitymaximizers, and a large part of the information with whichwe can make decisions comes from market prices. Allthings held equal, if one good or service is made less expen-sive than a competing or substitute good, either naturally ordue to policy, we will choose the less expensive item.

But back to the suburbanization of Pickleboro, withmore kids seeking their fortunes in the cities, and withgreater ease of transportation making more fertile landaccessible in the South and West, there wasn’t much reasonfor the cucumber industry to stay put. Land prices in thearea were rising with the building of new communities, aswere real estate taxes, so it was a logical time to cash out.

It is said that time heals all wounds. Skipping forward adecade or so, during the last half of the 20th century, thetown that Milt and Charlotte were born into eventually tran-scended its role as the somewhat uninspiring bedroom com-munity that had its genesis in misguided policy, pushingfamilies off to the edges of metropolitan areas. Since then,things have filled in a bit, a more industrially diverse localeconomy has formed, and the majority of people do not evencommute downtown any longer—they mostly commute in


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42 THE ECONOSPHERE

and around the other suburban communities within thegreater metropolitan economy. So things have gotten a bitmore pleasant, particularly as the government incentivesthat had initially created some of these far-off suburbs havelost their value as land prices were bid up and the time costof commuting increased exponentially. Incentives are now abit more natural, for lack of a better word.

The Occupation of Infants? Being Cute andCuddly

So, back to Milt and Charlotte and their lives in FoxRun right off Plank Bridge Road in Pickleboro—at thepresent, our heroes are just babies, and as such, theiroptions are a bit narrow. Lack of language skills, limitedmobility, and little knowledge of basic hygiene protocol allleave Milt and Charlotte with few career or lifestylechoices. They’re essentially stuck where they are, and theirimmediate local economy is just what they have within theirown households.

For the time being, there are few products or servicesthat they can produce and with which they can trade. Theirbasic needs are straightforward enough; food, shelter, anddiaper services are the basics. Beyond this, there is a desirefor interesting toys with which to occupy themselves, andutilize to build more advanced and tradable skills. Finally,there is also a basic emotional attachment that Milt andCharlotte will seek out throughout their lives, as we aresocial creatures at our core—building relationships is per-haps our most important skill allowing us to specialize and


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trade for what we need throughout our lives. Thus, an incli-nation to create a social network has become encoded in usthrough the generations. And for now, that’s about every-thing that Milt and Charlotte are involved with.

It seems like a pretty basic list of needs. Moreover, theybarely take up any room given their small size and lack ofassets. That said, their list of what they can produce to pro-cure their needs is perhaps even more limited. In someways, given the lack of skills yet acquired, this is one of themore daunting times to get by in the Econosphere. Miltand Charlotte essentially have two things with which theycan trade. First off, they are cute and they have come torealize this as an asset. Gooing and gawing, cuddling, smil-ing for pictures, and such...clearly elicits favorable behaviortoward them. The more they play the part, the more atten-tion they receive and the better the quality of care that theycan acquire. At this age, cute pays the bills; so, it’s showtime.

There is, of course, another darker way to get what theywant, as well—let’s call it their nuclear option. Although notto be deployed at all times, Milt and Charlotte have foundthat they can bribe people into providing for them withnegative behavior—or more precisely, the promise to ceasenegative behavior. Screaming and kicking can be used toprocure items quickly, not because there is a demand forscreaming and kicking, but rather a demand for that behav-ior to stop. It is a bit of a mob-style tactic, but the badbehavior creates what is known as a negative externality. Itessentially exacts a cost from those affected by it.


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44 THE ECONOSPHERE

In the adult world, there are usually laws that protectpeople from negative externalities. For instance, there iszoning that seeks to protect landowners from undesirableactivities taking place on adjacent lots, there are noiserestrictions, restrictions on public smoking, restrictions ontelemarketers, laws against bribery, and so on. I’m not sayingthat these laws are the best way to handle such issues, butthey do exist.

Fortunately for Milt and Charlotte, there are no lawsagainst bad behavior on the part of babies within theirhomes or in the grocery store. As such, there is no protec-tion for the other members of the household. These house-hold members are incented to find ways to make the badbehavior stop, which often requires payment of some kindof bribe. Milt and Charlotte have found that with limitsthey can get what they want by creating a negative external-ity.

This is essentially the classic two-product economic sys-tem. You might be more familiar with the example of a gunsand butter economy, where a simple two-product economymaximizes its collective utility by producing some mixtureof those two outputs. The same is the case with Milt andCharlotte. Some mixture of being cute and being bad pro-cures them the highest value basket of goods and services,and thus their incentive is to find that optimal mix—smilefor the camera during the holidays, scream your lungs outin the checkout line at the grocery store, and get what youwant when you want it! That’s utility maximization at itsmost primal level!


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That’s the life of a baby; things get more complicatedthereafter, but in some ways they also become morestraightforward.

1970: A Little Bit Older, A Little BitWiser

Let’s skip a few years ahead; Milt and Charlotte are bothattending Pickle Meadows Elementary School, and thingshave changed a bit for them. They have acquired new skillsallowing for greater mobility and communication, but theystill remain dependent on their families for food, shelter,and transportation beyond a short radius. They also have anew product: a report card. Aside from being intermittentlycute and bad, their production is now monitored and scoredat school.

Interestingly, communities have created a pseudo mar-ket system in which children produce output, mostly in theform of reading and writing assignments and mathematicalcalculations, which they subsequently trade for what theyhope will be a high value. However, the interesting twist isthat the immediate rewards are not consumable goods orcurrency. Rather, output is traded for letter grades (Athrough F usually, skipping E for some odd reason). Theseletter grades are then returned home, and their qualitylargely dictates one’s treatment within the family. A’s arerewarded, perhaps with gifts or increased freedoms. F’s arepunished with restrictions such as fewer entertainmentoptions or less mobility. Even worse, a string of F’s generates


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46 THE ECONOSPHERE

punishment at school, including a complete disassociationfrom one’s social network of peers by either changes inone’s assigned classes or the complete removal from one’sage group.

In some ways it is almost more interesting to wonderabout the motivations of creating such a system than toponder the activities and motivations within the system.Certainly communities have long-run incentives to con-tinue to improve their functioning as a marketplace inwhich goods and services can be traded. The higher thequality of human capital that communities produce withintheir schools, the higher-valued will be its goods and serv-ices.

As to parents, the incentives are a bit more obtuse.Schools provide training for their children and baby-sittingservices, allowing parents to perform work aside from childrearing. Moreover, training provided in schools shouldallow the family unit to perform collectively at a higherlevel. Education also provides the possibility of childreneventually becoming independent, and also eventually pro-viding services to the parent in later years. Finally, one canfathom that a tendency to help one’s offspring to succeedleads to successful children, which in turn carry that sametendency as these children raise the next generation.

Regardless, Milt and Charlotte are stuck in school, forbetter or worse. A few generations ago, they might havebeen picking cucumbers most of the day. Today, however,they spend much of their day learning to be literate andcivil. They have long since differentiated between a dog


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and a cat. They know that cows live on farms. They’reroughly familiar with U.S. history involving the Pilgrimsand George Washington. They’re also dipping their toesinto mathematics by adding and subtracting small num-bers. Their most basic motivation is to master these topicsand return home with papers, assignments, and reportcards adorned with letter grades of A’s and B’s. If success-ful, these grades can be exchanged for ice cream,increased television time, video games, and more. It’s arefreshingly simple system, if only the other details ofschool life were as simple.

Of Cooties and Other Social Bugaboos

There are also the increasingly complex social interac-tions between Charlotte, Milt, and their peers. At thispoint, despite the proximity in which they live and theirsimilarity in age, interaction between Milt and Charlotte islimited. Recently, Milt has identified cooties on Charlotte.This has prompted Milt to steer clear of his cootie-afflictedpeer, except of course to remind Charlotte intermittently ofher cootie affliction. Charlotte, on the other hand, feels thisdiagnosis to be in error, and wishes nothing to do with thesource of the erroneous accusations.

Truthfully, much of the interaction between Charlotteand Milt has nothing to do with their relationship, butrather the relationships with their respective peers. BothMilt and Charlotte are beginning to form social networkswith which they will trade goods and services. For now,those services might be little more than recreational activities,


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48 THE ECONOSPHERE

access to backyard pools, and entrance into the best birth-day parties, but the actual act of aligning oneself accordingto one’s own self-interests is roughly the same as what Miltand Charlotte will be doing throughout their lives as utilitymaximizers.

In the case of Milt, this has broken down mostly intoathletic feats on the playground, picking on girls such asCharlotte, and acts of defiance to school rules. In the case ofCharlotte, she too is an athlete having mastered both thedouble-dutch jump rope technique and hopscotch. More-over, aside from this, her social interaction is a bit morenuanced than Milt’s thus far, because it encompasses popu-lar tastes in fashion and music, and interestingly enough,she is scoring points with friends for her indifferencetoward Milt and his cootie taunts.

Truthfully, throughout their schooling years, the ritualswill change, but the basic forces driving behavior willremain the same. They will basically break down into twocategories: scholastic and social. The measurement ofscholastic merit will remain the same throughout most ofMilt’s and Charlotte’s educations. The grades will denoteachievement; achievement will produce preferred results.Over time, these preferred results will change in nature. InPickle Meadows Elementary, it might entirely encompasstreats from one’s parents. Later on though, good grades willbe rewarded with entrance into desired, higher-achievingclasses, and in the end, higher grades will grant entranceinto a wider array of universities or influence employers togrant Milt or Charlotte a job of his or her choice or a higher


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starting salary. By which time, Milt and Charlotte will befamiliar in the process of producing work in return for areward, and also in the understanding that better perform-ance produces better rewards.

The social interactions and judgments do mature overtime however, chiefly as the desired outcomes change.And, I suppose we would be foolish to skip over these.After all, people are utility maximizers, and as we statedbefore, utility is roughly analogous to happiness. The workand reward system that prevails describes a case where out-put is created in exchange for currency. This is partiallyanalogous to happiness because money can be exchangedfor just about anything. Thus, if there is something outthere that can be purchased and will make you happy, thenthe possession of currency with which to procure suchitems should make you happier. Notwithstanding, money isnot a perfect proxy for happiness; I believe it was the Beat-les who pointed out rather deftly that “money can’t by melove.”

To dive into this topic and otherwise advance the storyof Milt and Charlotte, we should move on to their sharedcollege years—they both proudly entered State U. aftergraduation. Much happened at this time, and we must firsttouch upon Milt’s and Charlotte’s changed relationship, asthey both left high school as sweethearts, which influencedtheir decision to attend school together.


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50 THE ECONOSPHERE

1980: Charlotte and Milton Sittingin a Tree, K-I-S-S-I-N-G

You see, despite Milt’s previous assertions of Charlotte’scootie infestation, with time, not only did Charlotte forgetabout Milt’s youthful taunting, Milt too amended his think-ing on the subject. Instead, Charlotte’s and Milt’s familiaritywith each other having grown up in close proximity, com-bined with a number of shared friendships created a bondbetween the two teens. This, combined with their mutualrising interest in romantic relations, sealed the deal. Theybecame an item.

Now, as we are talking about the Econosphere and theforces within, we must note that their decision to date wasbased on individual desires to maximize individual utility.Part of this is biological in that they were physicallyattracted to one another, and as an economist, I have nodesire to go into the biological processes that, among otherthings, allow us to perpetuate our species. Let’s just leave itthat the desires incumbent in this process are inborn andare one of the many factors that prompt us to choose amate, or at least a boyfriend or girlfriend.

Beyond the biology and related emotions, however,there are still the usual incentives that have driven thesetwo, and all of us, since birth. In this case, the products thatMilt and Charlotte have to trade between each other arethose things that come with their companionship. Thesethings might be the act of frequently listening to the other’sideas and concerns, participation in shared interests or the


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interests of the other, sexual favors, the extension of socialstatus from the other, the receiving of gifts or experiencessuch as meals or entertainment, and off on the horizon forthese two, the possibility of eventually creating a prosper-ing household.

Enhancing the romantic attraction between the two,Milt had become a varsity athlete with a scholarship to StateU. He also worked a few days after school and on weekendsand subsequently had money to spend and a car with whichto provide mobility for the pair. Charlotte was a star in herown right in that she was active in student government, wasa good student, and a member of a socially active clique offriends. She shared an interest in school sports with Milt andwas also college bound. They each brought status, activities,and shared interests with which they freely traded betweeneach other so that each of their individual utility was maxi-mized as a result of their shared relationship. So much sothat they headed off to college together. A match made inheaven, right?

1982: Milt, Why Weren’t You inClass This Morning?

Well, maybe, but one year later, Milt’s interests havechanged a bit now that he has hit college, or perhaps thepair’s differences have become more evident in the newenvironment. The problems have a great deal to do withthe differing discount rates that Milt and Charlotte apply totheir future potential gains—a discount rate is essentiallythe rate at which someone discounts future utility relative


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52 THE ECONOSPHERE

to utility today. Would you rather have one dollar today, ortwo dollars tomorrow? If you apply a large discount rate ona dollar tomorrow, the answer might be that you want thatsingle dollar today. If you apply a small discount rate, youwould want to hold out for those two dollars tomorrow. Amore familiar and relevant question to our story may be, doyou want to study tonight to increase the chances of landinga good job four years from now, or would you rather go tothe kegger in the woods behind Alumni Hall?

Charlotte applies a much smaller discount rate on herfuture. It is important for her to not only gain the skills shewill need for a good career, but she is also interested in net-working and associating herself with those who will helpher to succeed in the years ahead. Milt, on the other hand,misses the job he had in high school and the money itafforded him, he is interested in his collegiate athleticcareer, but he is also interested in the active social life thatcollege offers—two interests that are for the most part,unfortunately, mutually exclusive.

Thus, we have a dilemma. Milt, based on the informa-tion in front of him and the high discount he applies tofuture success, finds himself a happy-go-lucky partier, whoalso rides the bench at his games and is supporting a C-average, 20 extra pounds, and a pretty good hangover mostdays. But, he is maximizing his utility based on his ownunique set of preferences and the information he has athand. At the least, he’s having a really good time.

Charlotte, on the other hand, is up early, doing well, activein organizations, and has avoided the added beer-weight.


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Her new friends don’t like Milt, and Milt thinks her friendsare nerds. This relationship is on the road to ruin; and mindyou, it is not because Milt is wrong or that Charlotte isright. Rather, their mutual interests have dissolved, andtheir utility is maximized by keeping the company of othersoutside of their fragile union. In fact, what was one of thepremier relationships in their high school ended with awhimper, as Milt simply opted not to return to State U.after his freshman year and went back to work full-time. Insum, Milt likes money in his pocket and the freedom tospend it; Charlotte is forgoing short-term gratification bypreparing for a future she hopes to acquire.

1998: Charlotte the Yuppie and Miltthe Townie

And wouldn’t you know, Charlotte is as good as herword. At thirty-four, she finds herself living with a formercolleague, Bernard, who began as an associate with her onan investment team at Bigton’s biggest investment bank.They have since each received advanced degrees and agood deal of success in their careers. A rented brownstonein Bigton, a luxury sedan, significant investment holdings,and upper-class friends with whom they share interest inmany fine things; whether it be food, wine, travel, art, andsuch. Charlotte, the girl who once was ostracized due to hercooties, is now a coveted attendee on the benefit circuit!Clearly, she is a utility maximizer who had better informa-tion than had her old beau Milt.


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54 THE ECONOSPHERE

Poor old Milt is, in fact, still stuck in Pickleboro. Hedoesn’t live far from the old Fox Run development in whichhe and Charlotte grew up. Poor guy; he was once a big manon campus, and now he’s just a townie. Since he left col-lege, he went back to work with the same contractor he hadworked for during high school. Over the years though, hehas acquired new skills and experience and about ten yearsago, he went out on his own. Helped by a resurgence ininvestment in residential and commercial real estate, hehas stayed busy.

He’s up early to work every day, but he’s also homepretty early, and his life in his hometown does afford himthe opportunity to maintain friendships with many of thepeople with whom he grew up, as well as remain close withhis family who are all still local. Speaking of social life,apparently there are women in Pickleboro who appreciatethe company of a guy who has his own business, his ownhouse, and a big truck. To date, he’s never been one to set-tle down, but he hasn’t been lonely. On most weekends,he’s usually out at Pickled Pub with friends, family, andwhomever he might be dating at the time.

Milt is a utility maximizer, just the same as Charlotte. Itdidn’t lead him where it led her, but that doesn’t mean thathis utility would be higher if he was with Charlotte in Big-ton. They each have their own preferences, their ownunique skills, and their own set of information, which isalways imperfect, but we do the best that we can with whatwe have.


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Imperfect information, in fact, is the chief factor thatkeeps us from maximizing our utility at any one time. Yougo to where you think you will find the greatest success andhappiness, given all the information that you have, but onoccasion, when you get there, you find that your treasuremap was either incomplete or just plain wrong.

Speaking of which, Charlotte’s and Bernie’s life hastaken some interesting twists of late, as both Charlotte andBernie have moved their careers more into the high-techarena. Bernie has been involved largely with the IPO andM&A processes involving high-tech startups and he hastaken significant positions in many of these firms. Charlottehas moved into the PR arena, geared toward the position-ing and marketing of new Internet commerce firms. Char-lotte and Bernie hope to enter the 21st century withfinancial independence!

There are a few downsides, however. Charlotte andBernie don’t see each other all that often. Each works late,and each travels frequently. Of late, it has occurred toCharlotte that she had expected to be married with a fewkids by now, and hopefully striking a balance betweenhome and work, sharing the load with a doting Bernie.Time gets away from you, however, particularly when therewards of concentrating one’s time and effort elsewhereare so high.


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2000: Tech-Wreck in Bigton;Renovation Boom in Pickleboro

Another issue on Charlotte’s mind is that Bernie haschanged a bit of late. He’s downright irritable at times andless accessible than he used to be, either out late at night ortraveling seemingly for the sake of traveling. Charlotteknows he’s just working hard; yet one tangible thing thathas changed rather noticeably is that he is less forthcomingabout his end of the financial picture. Charlotte is paidmostly through salary, whereas Bernie is paid mostly instock and a year-end bonus based on the fees that he gener-ates for the firm. Bernie is also mostly in charge of Char-lotte’s and his investments, many of which are speculativeand to date quite leveraged. He’s doing a great job, so Char-lotte believes. They’ve been doing great thus far anyway,with significant unrealized capital gains.

Back in Pickleboro and moving forward in time a bit,Milt still can’t believe that it’s the 21st century! He’s justexcited that the lights still turn on and that the worst predic-tions of mass systems failure didn’t happen; he’s not going toneed that home generator he bought, though he can proba-bly use it at work and recoup the cost. That said, his stereodoesn’t work anymore, and he suspects the 2000 bug hassomething to do with it; it had a digital tuner after all.Regardless, life moves along.

These last several months, the newspaper at the end ofMilt’s driveway each day has been focusing on the tech-wreck. Milt’s a bit mesmerized. A few of his clients have

56 THE ECONOSPHERE


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been affected, but to tell you the truth, to Milt, falling stockprices on the Nasdaq feels a world away from Pickleboro.Low interest rates and enthusiasm for housing as an invest-ment has kept things moving along for him! Let the fancypeople in Bigton worry about their Internet stocks!

Little does Milt realize that one of those fancy people,his old friend Charlotte, has lost her job. Looking around,she can’t understand how she could find herself in this situ-ation. She had planned everything so carefully. But that’snot the worst of it. Bernie and the finances he controlledhave taken a serious turn for the worse. His job is gone, asare their investments. Bernie is clearly in shock and clearlynot handling these losses in stride. He blames Charlotte; heclaims he would be happy in a life as a carefree bachelor inthe Caribbean by now if it weren’t for his having to supportCharlotte over all these years. He drinks, he smells, he’s notthe man she thought he was.

They can’t pay the rent on the townhouse. Their savingsand income are gone. They can’t even make the car pay-ment. Had their information been better, had stocks alwaysappreciated as they had believed, had the high-tech nichesthat they both pursued proven less volatile, they would befine. Had their expected income stream been more conser-vative, they would not have found themselves so over-extended. Had they not concentrated so much on theircareers, perhaps their relationship would have maturedenough to better allow them to be of more support to eachother now that they face their first taste of adversity.



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It is too late for what-ifs now. Too much has been lost;and too little is shared between them. Bernie heads outwest to become a ski bum. Charlotte slinks back home tolive with her parents. Neither expects to ever rekindle theircareers.

Compounding things, life at Charlotte’s parent’s homeis as humiliating as she feared. All that work and nothing toshow for it, that is except for several new wrinkles on herface and a handful of outstanding loan balances. The skillsand attributes that she is in possession of are no longerworth as much in the marketplace as they once were. Herutility has waned; she has little confidence that she hasgood information on how to succeed going forward. Thatsaid, she is and always will be a utility maximizer, and eachday, she naturally takes what information is available to heralong with the skills and aptitude that she has, and applies itin such a way that she makes the best of her situation.

2002: Home Again

One day, this process led her to offer to take out thegarbage for her father as a show of gratitude for his hospi-tality. Wouldn’t you know that Milt happened to be drivingby on his way to visit his folks down the street just as Char-lotte was lugging out the garbage can. Milt, of course, tookthe opportunity to stop and get a few jabs in at Charlotte,because he does believe that Charlotte treated him a bitshabbily in the waning days of their prior relationship. Thatsaid, Milt is a content person and figures that he is likely toderive more pleasure from rekindling an old friendship

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than exacting some comeuppance. And he chooses to inviteCharlotte to Pickled Pub this Friday to dine with him andhis friends and family.

Mind you, Milt and Charlotte left one another whentheir utility was no longer maximized by being together.Charlotte’s path to higher utility, she believed, was bestderived by study and networking. Milt, on the other hand,derived his highest utility from partying and eventuallyheading home to work. Times change though, and althoughMilt appears to have the upper hand now, he also finds him-self without a consistent partner with which to share experi-ences, and both he and Charlotte are conscious of theirgrowing desire to start a family.

It’s Not Just Candy and Flowers; There Is MathInvolved

Now this sounds all quaint and nice, fit for a movie onthe Hallmark channel, but there are exacting calculationstaking place subconsciously behind the scenes that makethis a little more than just candy and flowers. For instance,Charlotte’s high pay in years past meant that her time atwork was far more valuable than her calculation of the util-ity that she would receive by working less and procreating.Now, however, with the crumbling of her industry, her timeat work is worth far less, thus tipping the scales so that therelative utility derived by breeding outweighs her other cur-rent choices.

As for Milt, the marginal costs of taking on a wife andchild are relatively small. His housing costs are fixed, andthere is plenty of room for a family in his home with little



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additional expense. By his calculation, his income will not beinterrupted with the addition of a wife and child, and the costof the additional mouth to feed may well be offset by Milt’ssavings by not hanging out at Pickled Pub most nights of theweek. The math has turned in favor of Charlotte and Miltrekindling their relationship; and as you might expect givenwhat we know of the ways of the Econosphere and utilitymaximization, wedding bells soon follow!

A happy ending? Well, it is hard to say. What we do knowis that Milt and Charlotte will continue to be utility maximiz-ers. Their lives will continue to be a mix of work time andleisure time. Moreover, they will always utilize the informa-tion that they have to make decisions about the direction oftheir lives, and we do know that the quality of their outcomeswill be mostly reliant on their individual skills and the qualityof their information.

For our purposes here, I don’t think we need to gothrough this couples’ ongoing years in great detail. But Iwill share with you this; Milt and Charlotte do stay togetherand raise a nice family. There are ups and downs; similar tothe ups and downs that they have already faced. Forinstance, Charlotte’s years at the investment bank and as aPR executive were not as worthless as she believed in 2001.As they grew their family, Charlotte took on a partnershiprole in Milt’s business, greatly improving its financial situa-tion and expanding the company’s marketshare so that itgrew to have several crews out working for the firm simulta-neously. Moreover, when Charlotte got Milt’s business inorder, she hung out her own shingle and helped other peo-ples’ businesses for a nice fee, and this time, she was careful

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to not be too dependent on just one industry as she wasprior to the high-tech bust.

Moreover, Charlotte paid Milt back for his kindness inthe wake of the tech bust when their business was badlybruised during the housing bust several years later. Heradditional income and the empathy that came along withtheir relationship’s maturity made the experience much lesspainful than it otherwise would have been for Milt.

Even Bernie eventually got himself together. Afterdecompressing and becoming a bit more emotionally well-rounded after a few stress-free years of being a ski instruc-tor, Bernie’s investment banking career was rekindled inthe economic recovery, and although his chosen industrywould face additional volatility in the subsequent recession,he was better protected the next time around as his hard-earned experience caused him to make better decisions bynot becoming so over-leveraged and undiversified. Thistime around, his information was greatly improved.

Milt, Charlotte, Bernie, you, and I make decisionseveryday, many of which have nothing to do with career,money, or investments. Yet they are all still economic deci-sions. The economy springs forth from our own life span.As such, any decision relating to the consumption of one’slife is an economic decision. To smile for the camera or tothrow a fit in the grocery store; to study or party; to marryor remain single; to be an investment banker or a ski bum;to order a salad or a pizza; these are all economic decisionsmade according to the Econosphere’s rules with the infor-mation at hand and always to maximize utility. It is just that



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simple. Should you find a new job, move to a new city, orhave a baby? That depends on your preferences, the associ-ated costs and benefits, your skills and abilities, and theinformation that you have in front of you. The first two vari-ables are largely fixed; the latter two items can be improvedupon. And that is where the individual can concentrate toimprove one’s outcome.

We are always trying to better ourselves and our situa-tion. Oftentimes that might mean keeping up with ourpeers, which is, conveniently, the next topic on our agenda.

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Why’s My Piece of the Pie SmallerThan His? The Gift of Inequality

In the Econosphere, inequality is the source of our dis-content—also our ambition.

Now we get to the meat of it. We must dive into thesource of our great discontent. Why is it that the Smithshave it all? They’re paid more. They have more stuff. Theirhouse is larger, their car is better, their fingers are foreverpruney from the long hours spent in their saltwater lap pool(and they don’t even swim laps in it; the lazy bums just floataround at one end!). Surely, an injustice has been perpe-trated upon us.

Give us back our share! There has been a terriblewrong! The Smiths don’t deserve it, I can tell you thatmuch. That’s our lap pool, not theirs.

It sounds petty, almost ridiculous, to make this argu-ment. Each of us is out there every day witnessing inequal-ity to such an extent that we have largely come to termswith much of it. But we will likely never be at peace with it.And that might be a good thing, considering that it isinequality—the possibility of putting in effort and betteringyourself without having to carry everyone else along onyour back—that is the primary fuel of the Econosphere.

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Depending on the circumstance, we can chalk it up togreater risk taking or higher intelligence, dumb luck, oraccess to better education. The Smiths might have simplyinherited their ample and lush piles of lucre. The luckydogs! However, all of us see inequality, and we likely put ajudgment value on who deserves wealth and who does not.

For instance, folks, if I can generalize, tend to like peo-ple who create tangible, useful goods and services, and donot begrudge the sources of these innovations their money.You might conclude that Ray Kroc or Steve Jobs deserve(d)everything they earn(ed)—and, of course, if you have madeit this far into the book, you may be feeling the same way.But how do you feel about CEO pay in general? How aboutthe pay of politicians or lawyers? What do you think aboutinherited wealth? Do you see Steve Jobs and Paris Hilton asequally deserving of their respective fortunes?

First, deserve is a value-loaded term, so let’s drop thatimmediately. You might have your favorite glitterati amongthe so-called “beautiful people” and your not so favorite, butwe can nonetheless point to respective sources of wealthand say, “Here’s why, and here is where it came from” and ifit was generated within the rules of society (that is, notagainst the law), then it is no one’s right to say who deserveswhat. Rather, we should step back and see where wealth—or more broadly, utility—comes from, and then, use thatknowledge to maximize utility for ourselves. This is, after all,the thrust of our philosophy. We must learn to see moreclearly and appreciate the functioning of our economy, andsubsequently use this heightened sensitivity of the economy’s


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CHAPTER 4 • WHY’S MY PIECE OF THE PIE SMALLER THAN HIS? 65

incentives to better direct our own actions, leading us tobecome more productive and better rewarded for ourefforts.

Through this chapter, we explore the origins of wealthand our incentives to acquire it. We examine why somepeople seemingly fail or fall behind in the acquisition ofwealth and why others might succeed. We also look at thefunction of the state in both perpetuating and minimizinginequality across the economy, and we note the necessaryunderlying framework of a plausible state effort to mini-mize inequality—if the state were to deem this a desirablegoal. Most of all, throughout the chapter, I want to rein-force the notion that one person’s wealth does not necessar-ily come at the expense of another. One person can earn sixfigures per year, while another might bring home five, butthe raw materials that make this possible are not shared anddistributed among us, but rather are unique to us and havemuch of their base in each individual human life span andthe inborn abilities that are within each of us.

We’re All Utility Maximizers; JustSome Are Better at It Than Others

Wealth is what we tend to point to as an apparent meas-ure of success, but that isn’t what we as humans aim to max-imize. Humans are utility maximizers. Utility is a somewhatopaque economics term, but we can think of it as anotherterm for happiness or pleasure. We each want to maximizeour happiness. For some, that might be lying on a beach


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and eating beans and rice, for another that can mean help-ing others in need, and for still others, it can mean man-sions, lobster, and a yacht. All are perfectly fine. Money is apretty good proxy for utility, but that is only because it canbe traded for many necessary and desirable goods and serv-ices. Stored money can even provide us years on the beachif we want to go that route at some point in time. Money isa store of value and is an accounting of the worth of accruedlabor. It’s the value of what we produce and trade with therest of our fellow humans. As such, money often does pro-vide a convenient measure of the utility that we derive.Most human’s lives are based around trading with others,and money is the medium that makes this process quickand convenient.

As to your own utility, the good news is that you’realready working to maximize it. Utility maximization is justlike breathing. You’re born with it.

And, of course, the bad news is that you have only afinite number of people to blame that you don’t have moreto show for your time and energy. The real determiner ofthe marginal improvement or decay in your situation isonly you—you can’t even blame CEOs, lawyers, or ParisHilton.

It’s Not a Zero-Sum Game

Inequality is actually a good thing. For those who havenot stopped to ponder our economic incentives, this prem-ise can be a bit of a kick in the teeth, but it’s necessary to get


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it out there. Folks who see the world as a competitiononly—a zero-sum game (an interaction in which one partic-ipant’s gains result only from another’s equivalent losses)—will point out that there have to be winners and losers. Thenotion that our economy distills down to a zero-sum, win-ner-take-all competition is entirely untrue. There is plentyof room for winners and more winners. If you look around,for instance, you see mostly winners. Okay, some cynicsmight see only losers, but I see winners.

Think about the things that keep you up at night. Whatif I lose my job? What if I can’t afford my mortgage? Whowould want me? How can I compete with those hungrykids coming out of school? How can I compete with peoplewho have more experience? How can I compete againstpeople with more money and a more prestigious educa-tion? There’s only one job and 10,000 applicants!

This is the kind of anxiety that, in my experience, canabsolutely possess you. It’s not all bad, mind you, because itfocuses you a bit more to apply yourself, but for folks whoruin their health and happiness worrying about such things,I might suggest a little travel. Actually, you don’t even haveto leave the area you live in. Just take a drive around or bet-ter yet, take a walk in a city and look up at the office build-ings. What you see are thousands of lit office windows; onthe street level there are thousands of retail establishmentsoperating and surrounding those are thousands of occupiedresidential units. Each and every day, billions of workers areat some task somewhere, returning home each night, mostto their own home or apartment, where their household,


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whatever its shape or size, exists without starvation or evic-tion.

This is the story of the vast majority of people out there.Who says there is no such thing as a win-win scenario! Yes,there are homeless and poor. In major downtowns, thereare beggars on every corner. But the vast majority of folksare out there doing what they do, and getting by! Andregarding many of these panhandlers, I pass many of thesame urban corners each day, and I am often amazed attheir longevity. I’m not saying that there are not better waysfor them to spend their time, but I have to hand it to themon their dedication to their vocation of panhandling—someare far better at getting to the “job” on time than manyother supposedly upstanding citizens I know.

Back to all those occupied places of business. What dopeople do in all those offices? Where does the money comefrom? The answer to what these folks are doing is almostirrelevant. Who cares what they are doing? Understandonly that they are trading their leisure time for productivetime, generating income with which they will purchase theequivalent value of goods, services, and savings in return.All these folks are out there attempting to be as productiveas possible while maximizing their own utility. All are moti-vated within their own realm of knowledge, using the infor-mation at their disposal and deciding on how much of theirleisure time should be spent in market activity to maximizetheir happiness. That is what’s going on out there.

So, in this context, where does the zero-sum notioncome in? When we try to balance the equation, or slice the


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“pie” into pieces, how does your win diminish the size of thepiece of pie for someone else? Surely, there must be a vari-able in an equation somewhere in some textbook that saysthat an additional unit of income to Mr. and Mrs. Smithmeans one less dollar that can go to everyone else. And guesswhat? If it exists, that textbook is not worth the paper it isprinted on.

As discussed in Chapter 2, “Where Does the EconomyCome From?” the Econosphere’s size is not fixed. Theo-retically, its potential size might be fixed at any one particu-lar time, but we’re never anywhere near its potential, atleast as far as I can imagine. We’re capable of so muchmore, as evidenced in part by our long-increasing produc-tivity and wealth—we don’t seem to be anywhere near apoint of diminishing marginal returns. Moreover, our nag-ging information problem, that problem when we don’tknow everything that we need to know to make preciselythe right decisions and direct our energy to the most pro-ductive tasks, is far from being solved. Imperfect informa-tion is the primary source of our not realizing our maximumpotential aggregate output. I know at least a dozen peoplewho have exceedingly bad information problems, and in myestimation, are operating at less than their potential—hopefully they don’t read this, because I haven’t had theheart to give them my assessment. Regardless, my mainpoint is that the economy is not a fixed-sized pie to bedivided up.

As to the information problem, a large part of manypeoples’ information woes is that they do not understand or


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even see the Econosphere in which they toil and cannotfathom how they create value in the marketplace or directthemselves to maximize utility. Although knowledge of theEconosphere cannot precisely foretell when a company’sbooks might be cooked or whether one house is a betterpurchase than another, it does allow an individual a frame-work with which to evaluate what information is available tomake the best possible assessment of the options at hand.

What Are the Sources of DissimilarWealth?

Think in terms of the individual when imagining aggre-gate output or wealth or happiness or whatever the overar-ching metric that you prefer. The size of the Econosphereis based on individual decisions that are made, as alluded toin previous chapters, at the most micro of levels.

Just because your neighbor is sitting in that lap pool, itdoesn’t have a thing to do with the absence of your own lappool. In fact, the Smiths could have a lap pool, a Jacuzzi, anda steam shower—perhaps even an outdoor convectionoven—it would be absolutely no skin off your back! Wishthem well, and figure out a way to be more productive.

Moreover, there is nothing that says that Mr. and Mrs.Smith are any happier than the person who sells them theirnewspaper in the morning, or even the guy on the cornerwho asks for Mr. Smith’s spare change every morning.There are only individual decisions, made with the avail-able information and according to unique preferences and


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ability. Be happy for the Smiths, and quit scowling at themover the fence; they might actually invite you over for a bar-beque some time if you’re nice.

I suppose that just making nice to the Smiths will notentirely sooth your anxiety stemming from their good for-tune, however. So let’s take a closer look at how the Smithsmight have done it. What we’ll discover is that there are notthat many disparate ways that one can gain wealth.

How to Consider Inherited Wealth

I think the most contentious of the ways that one canbecome wealthy is by just being born. Nothing ticks-offpeople more so than when someone else gets a head starton amassing wealth. It’s not fair, right? Well, although Imight be jealous of such folks, I still can’t quite point andsay that anything is particularly unfair about being borninto money.

After all, what is inherited wealth? Inherited wealth isnothing but stored labor from a previous generation.Grandpa Larry worked all his life, spent frugally, investedsmartly, and died with a nice nest egg. And maybe you werelucky enough to be bequeathed a piece of it. What is thematter with that? Why would anyone begrudge you a pieceof Grandpa Larry’s hard work? As it turns out, GrandpaLarry traded more leisure for work than he apparentlyneeded to. So, he didn’t live long enough to spend it. SillyLarry. Maybe he should have spent more time at the beach!

Still, Larry might not have been all that silly. After all,Larry didn’t know how long he was going to live, so maybe


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he erred on the side of caution. He probably slept betterwhile he was alive because of the nest egg that he built up.There could also be another reason why he worked toomuch, saved too much, and didn’t stop to smell the rosesmore often; he just might have wanted to hand somethingdown to you, the apple of his eye.

You inherited some of Larry’s leftover labor. And,believe it or not, it is a matter of public policy that there issomething wrong with that. The existence of gift and estatetaxes are explicitly because the state wants to take some ofLarry’s leftover labor to redistribute it to other people—people who Larry didn’t even know or maybe even like! Theintellectual justification for the inheritance tax is thatincome earned and amassed over life must have come at theexpense of someone else—a notion that flies in the face ofwhat I would consider basic economic theory and certainlycontradicts the basic edicts of this book.

Interestingly, the state’s tradition of taxing dividends,interest, and capital gains actually creates an incentive forthose amassing wealth to become less productive as theybecome more wealthy—there is already a diminishingreturn (a concept that we explore shortly) from each addi-tional dollar saved, but taxing savings and investments at ahigh rate only compounds this natural effect. As to Larry,he must not have gotten the message that the nest egg hewas working to leave behind would be viewed with suchderision and held up as something ill-gotten on the part ofhis benefactors; he could have spent his golden years con-suming more and producing less had he known. Of course,


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Larry lying on the beach, as opposed to toiling at work,decreases society’s overall aggregated wealth, but who am Ito question the wise men and women who formulate taxpolicy?

But what truly gets people when it comes to peers thatget their money the old-fashioned way, by inheriting it, isthat they are given an unfair head start! This is, in my mind,one of the most interesting claims about the apparent neg-ative affects of inherited wealth.

I can share with you one thing from my book of experi-ences (and we’ll follow with the theoretical explanationthereafter), there is no better way to make a kid less pro-ductive than by giving him or her money. I’ve known a fairnumber of people who have inherited considerable money,and a good number of folks who have not. Let me tell you,there’s a difference. Anyone can be a screw-up! But to be atruly special and notable screw-up, it takes money!

You might conclude that I have found myself amid anunusually dim-witted group of heirs and heiresses. How-ever, my experience is not unusual; it’s just a basic rule ofeconomics. It’s called the law of diminishing marginalreturns. That is to say that each additional dollar brings lessadditional happiness than the one that preceded it. As such,a person is willing to trade fewer additional hours of leisurefor each additional dollar than the one that preceded it.

For folks who already have lots of dollars (that is, manypossessions and significant savings and investments),chances are that they will be willing to trade less leisure forproductive time working in the marketplace than the person


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who has far fewer dollars in the bank. Thus, if we canreturn to the notion of the rich kid with the unfair advan-tage, although that kid may be having a ball, he is likely toput less effort into market activity than he puts into theannual snowboarding trip in Tibet or into becoming a bet-ter tennis player. These kids are happy, but their inheritedwealth might just end up making them less of a producer ofmarginal wealth than they would have been otherwise.

People shouldn’t fear rich kids. Feel free to envy themif you want, but do note that their lucky circumstance hasput them at a significant disadvantage when competingagainst someone with a relatively smaller stash of cash andthus a greater incentive to work hard and succeed. Whenyou consider who you might be out there in the world com-peting with, you should plan on raising your game to holdyour own with the talented and hungry kids!

Earned Wealth

No one should worry, per se, about the talented andhungry. They should, however, be prepared to witnessthese people make the most gains in terms of their produc-tivity. As such, they are likely to make the most progress interms of wage and salary growth. And there are good rea-sons for this.

First, note that I am prefacing “hungry” with “tal-ented.” Talent is of great value in the marketplace. After all,no one needs to be terribly competitive with or jealous ofthe inept and hungry. In fact, the former condition is likelyto be a contributing factor to the latter.


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Talent here suggests abilities that are appreciated byothers, and this appreciation is what allows a person totrade time-producing goods and services that are valued tothe extent that other market participants are willing totrade a tangible amount of their own labor and stored laborin exchange for that output. The greater the talent, weassume, the higher valued is the output.

In a simplistic example, LeBron James has earned farmore money (other people’s stored labor) playing basketballthan I have. This is a result of his talent, which in turn allowshim to trade time playing basketball for an inordinateamount of other peoples’ stored labor. Meanwhile, I havemade absolutely no money playing basketball, because noone is willing to trade their own time and abilities to watchme play. It’s sad but true. I’m forced to play for free, with onlymy own enjoyment as a reward—basketball has to be leisuretime for me; while it is productive time in the marketplace forMr. James.

If you couple the ability to produce highly valued goodsand services with the hungry moniker, it suggests that mar-ginal returns are near their maximum for each additionalunit of leisure time traded. You should also note that hun-gry is as important a variable in this exchange as is talent. Atalented person, having already amassed considerablewealth, might well choose to, say, retire early or switch toan occupation that is more enjoyable, but less monetarilyrewarding. For instance, how many bed and breakfasts areactually the highest market use of the innkeepers’ timeand abilities? Same with tearooms, antique stores, and art


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galleries. The world is a far, far better place for having allthese things, I just always wonder whether many of themwould exist if the proprietors were motivated by a concernabout where their next meal would come from.

Talent and hunger are key determinants to whateveryou might harvest from working and trading in the market-place. They are the will and the way to wealth. Ironically,folks who are talented and hungry are not likely to be onthe radar screens of those worried about inequality, due tothe hungry part. After they have traded enough of their tal-ent to be noticeably wealthy, they are likely to be some-where on the way to moving from hungry to stuffed. Goingback to our neighbors, the Smiths, they’re not hungry, andthus, they may no longer be in possession of the drive thatgot them where they are. Nonetheless, it still might driveyou nuts to watch them float around in that pool all day.

Those Either Not So Hungry or Not So Talented

So what about the rest of us who are not among theextremely talented and hungry? That’s just the way that itgoes? There are the rich, the ambitious and talented, andthen the rest of us? I suppose there is a reason why ournews is full of celebrities and the incredibly wealthy. At thevery least, the rest of us want to know what it’s like to bethem.

Does the possibility of becoming like them drive othersto strive to improve their own lot in life? Yes, the cults ofimitation that surround these folks seem to make that case.The free-market economy is all about striving for that brass


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ring, and assuming that striving improves our ability andskill in providing goods or services to the market economyfor which participants are willing to trade significant laborof their own is what creates wealth to begin with. Now, itmight not be the case that kids imitating LeBron James,Justin Timberlake, or even Steve Jobs are actually leadingto real gains in wealth. In fact, in some cases, you mightconclude that it has worked against them; but that’s not anindictment on the system. Rather, it is illustrative of aninformation problem—the free-trading marketplace ofgoods, services, and ideas is nearly flawless; unfortunately,the quality of our information is highly imperfect, affectingour ability to be as productive as we might be.

Perfect Market, ImperfectInformation

In the Econosphere, not everyone becomes fabulouslyrich, even if they want it really, really badly and work dayand night to achieve it. That might be the case for a fewreasons.

The first problem is typically an information problem.The information bugaboo is at the core of both micro eco-nomic problems, such as bankruptcies and personal dis-tress, and also major macro economic events, such asrecessions and market crashes. You see, markets are per-fect, but information is imperfect.

If the kid who wants to be LeBron James knew that hewill never come close to reaching that goal, and that the


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time and effort put into that task along with the opportunitycosts of not pursuing other opportunities would all go unre-warded, unless that kid derived a tremendous amount ofutility from being a poor, obscure playground basketballplayer, he would never pursue that goal. If an investor knewthat the stock she just purchased was about to decline, thepurchase would never be made. If a widget manufacturerknew that the bottom was going to fall out of the widgetmarket, it would have never produced so many unsoldwidgets.

We, as utility maximizers, always have the best of inten-tions in mind, and we are always attempting to maximize ourhappiness and well-being, but sometimes we do the wrongthings because we have poor information. Heck, peoplejump off of bridges because they think that their utility max-imizing option is to no longer exist. Either they were right,or they had a serious information problem!

That problem, the information problem, has unilater-ally undone many a dream to achieve some goal. For now,it is just a fact of life. I would argue that information isgetting better all the time, particularly with the advance-ment of information technology, modern database prac-tices, and statistical techniques. Moreover, becausethrough trade and exchange we are increasingly bringingthe world together as a single marketplace, there is moreand better information to be harvested and used for self-betterment and profit. So, in a real sense, our rising pro-ductivity is, in part, thanks to efforts to solve theinformation problem. Is it solved? Well, considering the


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market volatility still evident every day, I would say thatwe’re not even close!

Aside from the information problem, what else mightkeep an individual from Warren Buffet status? A big part ofit might be that it’s just not in the individual. I have nevermet a person who was not gifted in some way. But individ-ual gifts are not equally valued in the marketplace, I’msorry to say.

I went to high school with a guy who could juggle really,really well. We called him Jugglin’ Jim. He could juggle justabout anything: balls, hoops, bean bags, you name it. Some-times, he would tell you to throw in something additional;whatever you had in your hand. So he would be juggling,say, beanbags, and he would say, “Throw Jugglin’ Jim thatcalculator”—yes, Jugglin’ Jim would refer to himself in thethird person. So, you would throw it to him, and he wouldjuggle the calculator along with the beanbags. What do youthink of that? He eventually became a birthday partyclown. As far as I know, he is the happiest guy around, andhis utility is perfectly maximized by being a juggling birth-day party clown. He clearly is acting, given the informationand abilities at his disposal, to maximize his utility. How-ever, he will not be lounging in his own saltwater lap poollike the Smiths, nor is he likely to amass inheritable riches,as did Grandpa Larry. He’s just a juggling clown...and thatpays about $400 per event, last I heard. He’s a happy, jug-gling, moderate-income clown.

A clown, music shop worker, seamstress, waitress,draftsman, machine operator, accountant, train conductor,


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lawyer, movie star, or senator: Is there any real difference tothe motivations and principals as to why people end updoing what they’re doing? Not at all. At any given moment,each person is exercising the best possibility amid a limitedselection of options open to that individual at any momentgiven imperfect information, available capital, and what-ever abilities he has to better himself.

For some of us, that means juggling. For another, thatcould mean running a multibillion-dollar global corpora-tion. There is no knock against either occupation. But don’texpect each to be rewarded by the market equally.Depending on the circumstance, the market might valuethe output of one higher than the other.

Over time, however, there is greater opportunity toadvance one’s cause. At any given time, there might be onlya handful of practical options to pursue in a given day.Across a month or a year, however, increasingly moreoptions become variable. If Jugglin’ Jim does want tochange his lot in life, in a year’s time, he might make acareer change. In a few years’ time, he can acquire trainingin a different field. In five years’ time, people might stopcalling him Jugglin’ Jim; he might be just Jim, Mr. Talbot,or even “Sir.”

Understanding where value is created in the Econo-sphere, and that acquiring wealth is a matter of trading yourleisure time for time spent in the market producing goodsand services and trading them for equally valued goods andservices produced by others goes a long way in understand-ing that we are not in a zero-sum game. Identifying and


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developing highly valued skills and improving your infor-mation problem helps to improve your lot in the Econo-sphere.

What to Do About Inequality

Oh, but how we worry about that juggling clown!Around the time that I am writing this, the U.S. electoratejust swept into office a whole gaggle of lawmakers who ranlargely on the principle that it is government’s job to correctthe inequitable treatment suffered by my friend Jugglin’Jim. If that new gaggle of lawmakers reach their stated goal,we’re going to take income away from the previously men-tioned CEOs, lawyers, movie stars, and others who makehigher than average income and give that money to Jim—or, I should say, we’re going to take more money from theCEO and his ilk than we currently do and provide addi-tional services and preferential treatment to folks in Jim’sincome bracket. The assumption being that somehow, thedisparity between the relative awards garnered by the CEOand Jim represent a victimization, for lack of a better term.In this, we return to the concept of the zero-sum gamewhere society, as maintained by government, is capable ofproducing only so much wealth. Thus, greater wealth forone means less wealth for another. Thus, we have a prob-lem to solve. And that problem is chiefly solved through taxpolicy aimed at income redistribution.

Now, talk of income redistribution and things of thatnature, sounds particularly pointed, biased, and provoca-tive as it comes off the lips or appears on one’s screen as


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one types. To those schooled in free-market economics, itis an ugly phrase. For those schooled in populist senti-ment, it sounds about right, although the term “incomeredistribution” is often softened and hidden behindphraseology referring to the “squeezing of the middleclass,” “leveling the playing field,” or “fairness.” In fact,income redistribution is written into a good portion of therevenue gathering and fiscal expenditures of all levels ofgovernment. And it is typically supported by those whobenefit from it, and tolerated by those who do not,because it is seen as a small price to pay for maintainingthe status quo.

We get more specifically into various government poli-cies in Chapter 6, “Stupid Policy Tricks,” but in this chapter,as long as we are acknowledging income and wealthinequality and the role that it takes in our process of maxi-mizing utility, we might at least look briefly as to the rolethat government might play either minimizing or perpetu-ating the inequality. It’s funny to think that in many ways, itmight actually be government’s primary function to perpet-uate income disparities. I suppose in a real way, the rule oflaw is all about perpetuating various levels of wealth. WhenI think about the rule of law, the first things I visualize arepolice cars cruising neighborhoods looking for those whomight be involved in property crimes: burglarizing houses,stealing cars, and looting stores. Beyond that, I picture thepolice also in place largely to thwart violent crimes such asmuggings, kidnapping, home invasions, and the like. I knowthe police do many more things than that, but I do tend tothink of the police as mostly protecting citizens from other


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citizens who would like to forcibly reallocate wealth underthe cover of darkness or at the end of a gun barrel.

Given that it would likely be a more productive endeavorto rob someone who has more stuff or money than does one-self, I suppose that robbery is a primal form of wealth redis-tribution. And because one of the primary services ofgovernment is the writing and enforcing of the rule of law, Iwould have to conclude that one of the primary functions ofgovernment is to perpetuate economic inequality. Jugglin’Jim might well end up in jail if he attempts to kidnap and ran-som Grandpa Larry.

Thus, Jim kept on juggling and Grandpa Larry passedon his wealth to his heirs. In the same vein, you might justwalk across the Smith’s backyard and haul them out of thatsaltwater lap pool and declare it your own, but you likelychoose not to, and if I am right about that, I would guessthat Mr. Smith is either a lot bigger than you, owns a gun, oryou have grown up with a healthy respect for the law.

In this sense, we must conclude that government doeshelp the cause of the wealthy. Furthermore, our usuallysmoothly operating central banking apparatus and, thus far,its good track record in managing our currency is a benefitto all of us operating in the marketplace. We all benefitfrom the knowledge that we can trade labor for currency,and turn around and buy goods and services of equal valuewith that currency. That is a good thing. However, given themassive and well-paying occupations that have flourishedwithin our increasingly complex financial markets, wealso cannot help but wonder whether the beneficial fiscal


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situation created and maintained by our government doesnot benefit some more than others. Yes, Jugglin’ Jim doesbenefit from his ability to trade juggling for cash, but thosewho speculate in the Treasury market might, on average,benefit more so than Jim. And those folks involved in arbi-trage of Treasury options are also likely to be well educatedin sophisticated financial techniques and, well, advancededucation tends to be more available to those with wealth.

You probably can see where I’m going here. It wouldseem that not only do we have the police out there makingsure that citizens are not reallocating wealth on their own atthe end of a gun barrel, we are also creating a complex anddynamic economic system that seems more easilyexploitable by those who have managed to acquire the skillsand knowledge to understand these complex tasks.

In return, it has perhaps become economically expedi-ent for those who have found success in acquiring wealth(the rich) to accept moderately punitive treatment in the taxcode. It is oft argued that those who benefit most from oureconomic system should also pay more to maintain it. It’sessentially fiscal tithing, with the IRS acting as a large,watchful, and insistent church usher in charge of passing theplate down the pews. It is tempting to leave it at that. Acommon phrase used around tax time by those who paytaxes is that there are no sure things except death and taxes.It’s a bit of harmless gallows humor offered up by those whotrade their leisure time for productive time in the marketplace, and then are compelled to relinquish a share of thegains derived from that process. Tax revenues are used to


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provide basic government services and fund some of thepreviously mentioned programs aimed at redistributingwealth. And that’s okay with most people, but we should becareful to not be overly glib about the subject of taxes as anefficient method of decreasing income inequality.

First, to say that paying taxes is okay with everyone is abit too easy. Yes, our tax code does do a pretty good job ofkeeping track of taxable income and vacuuming up thatportion that is due to the government. However, to say thatthis process is not disrupting to the allocation of economiceffort is to ignore the great effort made by many people toavoid paying taxes.

It comes in so many forms so frequently that you barelynotice it any longer. It is the contractor who prefers to getpaid in cash. It’s the waiter or waitress who declares only ashare of his or her tips. It’s the side of business that nevergets acknowledged on a person’s tax return. And it is theleaps and mental contortions made in claiming question-able deductions. It’s the wealthy household which, by virtueof their large savings, has financial advisors who are paid todevise methods to exploit the tax code. It is also the hedgefund manager, who by virtue of his financial support for thecampaigns of elected officials, retains favorable treatmentof the ways in which he compensates himself.

We’re all friends here, so let’s be perfectly honest.There is a multibillion-dollar industry built around taxpreparation and advice. Money does not flow to this indus-try because it’s nice to have a buddy help you with fillingout the form! These folks, from the basic tax preparer to the


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accountant to the highest priced tax lawyer, can help theirclients pay less in taxes than they otherwise would if theyjust went through the typical paces of filling out the formand sending in the check. It is an entire industry, creatingwealth in its own right, mind you, dedicated entirely todirecting activity away from participating in the govern-ment’s income redistribution initiatives.

Now, this process is not as bad as it sounds. From thevantage of our discussion of economic incentives and howpersonal decisions play a vital role in acquiring wealth, thefact that we see a massive and effective effort in resistingthe taking of acquired wealth is confirmation that individu-als are active participants in their own financial processes.It is also a confirmation of the working of the Econosphere.Individuals in possession of a life span, natural abilities, andlearned skills have the opportunity to trade their time inexchange for other peoples’ skills and output. In this case,taxpayers need to find ways to retain more of their earnings,and there are those who are skilled or interested inresearching how that can be done.

With the creation of a tax code, we find an entire indus-try born in its wake aiming to profit from its exploitation.There is nothing random about this. Participants whounderstand their incentives to trade time for reward or tokeep more of their earnings find a way to trade, each skill-fully maximizing his or her utility. Knowledge of the Econo-sphere makes you more efficient in exploiting thissystem—understanding how wealth is created and avoidingthe anxiety and poor decision making that plagues those whocannot see the forest for the trees.


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Now, as to the merits of this system that so many are art-fully exploiting, there are many economists who make theargument that a large government sector is preferable,because average citizens are not fully deft enough to prop-erly manage their financial and economic lives. That is to say,it is best for government to either directly allocate wealth orto create programs, such as the home mortgage tax deduc-tion, 401k accounts, and the taxation of vices to better com-municate to the masses what activities are socially preferableand personally responsible. For instance, just using the pre-viously mentioned programs, public tax policy is explicitlyrewarding those citizens who have borrowed money for thepurchase of a home, are saving for their retirement, and whodo not smoke or drink alcohol. Or you can turn that aroundand accurately describe said policies as punishing the tax-payer who is a renter, not saving for retirement, and enjoysdrinking and smoking.

Such a description sounds novel, almost tongue-in-cheek, mostly because these programs are not marketed inthe political arena as such. However, that does not makethe preceding descriptions inaccurate. And, as mentionedpreviously, we do have a large wing of our economicthinkers advocating such policies. Moreover, wouldn’t youknow, these same economists are often gainfully employedin the creation and application of said policies. And no, ifyou were wondering, not all economists are involved inpublic policy; a good number of them are involved in theprivate sector helping to minimize risks and maximizereturns for themselves and their employers—we are not allon the public dole.


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But as to public policy, it is amusing to think that evensocialist-leaning economists—economists who are skepticalof the market economy’s capability to equitably distributeresources or correct imbalances and return itself to an opti-mal level of employment and output—act to maximizetheir own individual wealth, in this case by creating theo-ries and programs that will in turn provide full employmentfor them and their colleagues! In this sense, their existenceis almost refreshing in the context of the points that wemake in this chapter. Despite the economic distortions andcontorted incentives created by their policies, their actionsconfirm the basic premise of our thesis of wealth cre-ation—even socialist economists act to maximize their ownutility. Admittedly though, their actions do make it moredifficult for the rest of us to create and accumulate our ownwealth. In that sense, we can put them in the same box asthe armed robbers skulking in the darkness previouslymentioned in this chapter; they make themselves wealthierat the expense of their victims.

If Not Taxes, Then What?

In our discussion about income inequality, we shouldacknowledge that if the public sector does deem it to besomething we as a society should hope to minimize, then let’sat least advise how that might best be accomplished, otherthan just taking more money away from renters and smokersand implicitly giving it to homeowners and teetotalers.

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Well, it’s a pretty simple fact that policy does not createwealth, or happiness for that matter. People create wealthby giving up leisure time for productive time. At theextreme, if you have lots of government policy, but no peo-ple, there is no wealth creation. If you have lots of peopleand no government policy, you still will create wealth—wecan argue whether there is more wealth or less in theabsence of policy some other time.

If people are the key to creating wealth, what can gov-ernment do to help the individual create wealth for him-self? The individual takes what ability and information thathe has along with physical and financial capital, which isless so at the discretion of the individual in many cases, andapplies those things to be as productive as possible whentrading leisure time for productive time. So, more or less,there’s time and then there is the productivity. So, if policyis going to help the individual maximize utility, it either hasto create more time or more productivity. Assuming wedon’t want the government mandating a minimum work-week for us all, we should look at productivity. Aside fromthe things that government already does, like provide therule of law, roads on which to travel, and other niceties, pol-icy might best be pointed toward increasing the ingredientsof productivity: ability and information. Government couldalso provide financial and physical capital, but that wouldbe an implicit redistribution of income and, perhaps moreimportant, there is not necessarily anyone with the skill andprescience to decide who gets what and when. So it’s bestto steer clear of this hornet’s nest entirely, allowing the



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billions of market participants to value competing uses forfinancial and physical capital.

Other than what we’re born with, a good bit of the abil-ity that we enter the workforce with comes from our formaleducation. Better education should allow us to employ aneven larger quiver of useful abilities. The more skilled andknowledgeable you are, the more productive you will be.Moreover, the more skills, the more options one will havein selecting occupations with which to maximize utility. IfJugglin’ Jim could both juggle and build houses, he mightstill choose to be a juggling clown, but if his priorities orviews were to change, he could change jobs as well. More-over, if cyclical demand for clowns turned downward, hecould stay employed by pounding nails, and if demand forhousing were to dry up, he could pick up the beanbags andred nose anew.

And then, there is information. Information is a valu-able and powerful commodity, indeed. As for the UnitedStates, there is no economy in the world that has as muchand as good public data on the economy, demographics,financial markets, and much more. Publicly available eco-nomic and financial data creates tremendous transparencyfor those who know how to apply it. But, how many peopleactually use it, or know how to use it? Greater tutoring as towhat public information resources are available and how todecipher it would help businesses and individuals makebetter decisions. Moreover, while the United States has thebest information available, that doesn’t mean that it couldn’tbe better.

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Any government policy that helps augment ability orimprove information will, by definition, increase wealth, allother things held equal. And because such public servicesare offered for free and with revenue that is collected fromincome taxes, then such policy is a moderate wealth trans-ference, paid for mostly by the rich and by corporations andused by everyone, and thus a mild force in decreasingincome inequality. If increased in scope and quality, itwould be a roundabout way to transfer productivity, asopposed to just stored labor, from the wealthy to the poor.

However, just try to run for office on a platform ofincreasing the amount of data made available through theBureau of Economic Analysis or the Census Bureau! Goodluck with that!

Barring Incremental Policy, WhatCan the Individual Do?

You can’t hold your breath hoping for truly meaningfulpolicy to decrease inequality to your benefit, particularly ifyou don’t want these policies to end up decreasing aggre-gate wealth. Taking money from one person and giving it toanother, which is the thrust of an income redistributionprogram, is good news for one, bad news for another, anddecreases the incentive for either party to actually work.

Thus, income redistribution programs cause the aggre-gate wealth within the Econosphere to contract. That’s notnecessarily an immediate bad thing for the person on thereceiving end of the wealth transfer. However, at the



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extreme, it has shown to eventually lead to fewer opportu-nities for individuals to trade their products and services forother useful products and services.

Moreover, you can’t change government policy imme-diately, and unless you are a particularly persuasive agentfor change, it would be a tough order regardless of the timeframe. Also, let’s get this notion about evicting the Smithsforcibly from their pool out of our heads. It’s just not neigh-borly. Nor can you simply go out and get a Grandpa Larrywho will be nice enough to die and give you money on thespot. So, let’s not worry about that either. You might have arich, older relative, but I doubt you’re rooting for them topass away so that you can cash in on her stored labor.

Actually, the only way to increase your wealth is to con-trol the two things that you control every day: your produc-tivity and the hours you work. You can spend more or lesstime working each day, and that is mostly dictated by therelative rewards of work and leisure. The question you askyourself is, “Will I get more reward from working an addi-tional hour or relaxing?” That’s a decision you make everyday without even knowing that you’re doing it, so why startworrying about it now? You’ve got it covered.

Make the Econosphere Work for You!

Ultimately, your ability to make money or make moremoney comes down to productivity. That is the key to

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increasing your utility! The more productive you are, themore value your labor will hold when you trade it in themarket for the output yielded from others’ labor. Productiv-ity, to the extent that it can be affected by the individual,relies on human capital (that is, ability and information).Essentially, human capital covers, “What can you do?”Information covers exactly what you should be doing,where, and for how much. The broader concept of produc-tivity also covers things like the financial and physical capi-tal available at the firm. You can do nothing to augmentthese things in the near term. However, better informationtells you where these vital raw materials exist and allows youto decide to work at the firm that provides the best oppor-tunity for high productivity and high rewards.

If you’re really interested in getting a saltwater lap poollike the Smiths or if you’re Jugglin’ Jim and sick of the birth-day party circuit, and you’re thus far stymied in your effortsin getting ahead, there are two things you can do: Augmentability and improve information. Maybe greater information,for instance, will give Jugglin’ Jim access to higher payingjuggling jobs—corporate juggling team-building workshops,perhaps! As to ability, although I would guess that that is a bitmore difficult to change in the near term, certainly greaterinformation about what sorts of skills are needed in theEconosphere, and then the acquisition of those skills, is aprime way to increase wealth and utility.

Just don’t count on this effort decreasing inequality.Nor should you want it to. Just because you are getting



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ahead, it doesn’t necessarily come at the expense of some-one else.

Inequality is the fuel in the economy’s tank. The abilityto get ahead without having to bring everyone else alongwith you is the basic engine of a free-market economy. It isthe impetus of economic output itself. Moreover, today’sinequality is simply the current outcome of generations ofdecisions about work and leisure. And, although there is lit-tle you can do about all the decisions that have been madebefore your own time, you can at least realize how the sys-tem works and start making the right decisions with regardto acquiring and deploying ability and productive effort.And, as mentioned at the beginning of this chapter, thegood news is that you’re already doing it. Now though, asyou at least acknowledge that you are doing it yourself andwhy, you can apply a bit more thought to it and concentrateon doing a better job of it, and a large part of that is under-standing how the Econosphere works and how to operatewithin it. If you get that part right, and your aim is to be likethe Smith’s, there is no reason to believe that that saltwaterpool is beyond your grasp.

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The Firm as a Coalition

Thus far, we have established that the economyemanates from each of us. The ultimate renewableresource is people. We are essentially trading portions ofour own life span in exchange for others’ products and serv-ices. We do this by portioning out our lives between time atleisure and time at work. During that time at work, we pro-duce goods and services that we believe will be valuable toothers so that we can trade them for the largest basket ofgoods and services that we can. The more productive weare, the less leisure time we might need to sacrifice tomaintain or establish the quality of life that we desire. Ourultimate desire is to maximize our own utility, that is, happi-ness.

Moreover, as we do this, we add to the overall size ofthe Econosphere—we increase aggregate wealth. It is notsimply an effort of getting your slice of the pie. You bakeyour own slice. Your success is not necessarily someoneelse’s loss. If everyone succeeds, we are all better off. Andthe best way to help all of this along is to live in harmonywith our social environment, the Econosphere.

We must allow the Econosphere to portion outresources to the highest uses and indicate relative surpluses

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and deficits via natural market pricing. In the same way thatwe have learned that we cannot force our will upon our nat-ural physical landscape for fear of unintended conse-quences, we cannot force our will on our socialenvironment. We must allow capital to flow just as we allowrivers to flow. We must allow the migration of physicalresources and labor in the same way that we must allow ani-mals to migrate. We should revere our social landscape, notmow it down as past generations did to our physical land-scape when they tore down mountains and filled in valleys.

But although I hope these themes will resonate with allof us, and although the soaring themes can be inspiring, wemust keep both feet grounded in the reality of our situa-tion. Let’s face it; when the alarm rings in the morning, youdo not leap out of bed with the thought to create a basket ofgoods and services that you hope to trade with other peoplefor all the things you need. There is no happy global open-air market where we all go with our basket of goodies tobarter for our fondest desires—I’ll trade you a poem andtwo handcrafted bowls for two roasted chickens and a Toy-ota Camry. No, when the alarm goes off, we’re not off tofind our special place in the universe; most of us are headedoff to work!

Slave to the Corporate Machine

Work likely looks and sounds nothing like what we havedescribed. There might be a desk, or a spot on the floorwhere you stand, and you do not dream of optimal output.


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CHAPTER 5 • THE FIRM AS A COALITION 97

Rather, you have a piece of a task that you must complete foryour employer to put together a whole line of products andservices. You might be so far away from those final productsthat the ultimate output can seem completely removed fromwhatever it is that you do each day. You don’t go off and tradeyour output with others. Instead, you likely get a check forthe hours you put in, or a salary, or fees, or tips. And it is agrind. (There’s a reason why they have to pay you just to showup, after all! If it were fun, you’d probably do it for free!) Youshow up, do what you were hired for, and then go home.

You eventually get paid and then you subsequently paythe mortgage or the electric bill or pay down your creditcards, and so on. So what does any of the soaring rhetoric inthis book have to do with the reality of life? Where is thisEconosphere? After all, most of us are just slaves to the cor-porate machine!

I suppose the “corporate machine” is an issue we need todiscuss. Even when we step back to see that the money thatwe work for is simply a store of value allowing us to be moreefficient in our exchange of goods and services with others,the role of the firm in this process still might seem like anunnatural presence. In a simpler world, each of us wouldtrade a simple product, say, a basket of carrots or a cord ofwood, for other simple products and services. Such a worldwould be a simpler one to understand; that’s for sure. Still, ifwe were all vegetable farmers, firewood choppers, poets,basket weavers, fishmongers, and bakers, who among uswould provide us with our cars, mutual funds, air transporta-tion, pharmaceuticals, or fiber optics? Those things are morethan a one-person job!


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Thus, when a project calls for more than one mind,more than one strong back, significant physical assets, andongoing access to investment capital, we naturally form acoalition, or by another term, a firm. As we try to under-stand what a firm is, it does not help that corporations havebecome one of the most demonized concepts in our popu-lar culture. For the sake of better interpreting your own lifewithin the Econosphere, try not to think of a firm as a per-manent, faceless, hierarchical machine enriching the own-ers of capital at the expense of labor—I think that’s a closerepresentation of how the popular press and many policymakers describe large businesses. Rather, think of the firmmore as a “happening,” and not a perpetual entity. Particu-larly in today’s service-oriented economy where much ofour production is borne from human creativity as opposedto the extraction and movement of raw materials, firmsfunction more as a serendipitous coalition of willing indi-viduals, than as the cold, unchanging, uncaring institutionsof our popular mythology.

A Firm Is Serendipity

Could it be that firms have more in common with thelegendary Woodstock Music Festival of 1969 than the cari-cature of the monolithic industrial empires that are so oftenportrayed as villainous? They do, but I should put oneadjective in that description; successful firms have a lot incommon with Woodstock. Great, iconic companies likeHonda, Google, or Apple, the best restaurant in town, abrilliant stage production, or a successful local retailer arefabulous mixtures of a great idea and superior execution.


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First, it takes the great idea. Then, hopefully, lendersand investors recognize it as such and add their capital;managers properly interpret the concept and make it real;talented workers buy-in and add their sweat and talent day-in-day-out; and customers see the final product and love itsuch that they become loyal patrons and spread the word toothers. Subsequently, for a brief time, maybe a year, maybeten years, there is a great coalition that makes all thoseemployed in the venture as productive as they can be bygiving clients exactly what they want and then some. It’s afestival; a magical moment when all the pieces fit just right.

It usually doesn’t last forever. Workers mature andmove on, tastes change, ownership needs to monetize theirinvestments as they age and their needs change. Maybe thecompany sells, maybe it drifts too much, or maybe con-sumer tastes change. In a process called “creative destruc-tion” coined by the transcendent economist JosephSchumpeter, new products, services, and technologiesimprove upon their predecessors such that they destroy theprevailing market for and value of older, now inferior prod-ucts, thus always forcing innovation and improvement. Andsuch great innovations are often serendipitous happenings,bringing together just the right mix of financial capital,physical capital, and human capital, no matter where theymight be found around the globe such that a product orservice is produced that adds significant benefit to the livesof consumers, even if it comes at the expense of yesterday’soutstanding company.


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Polaroid was once a happening; Atari was once a hap-pening; Snapple was once a happening! In the same waythat someone thought of having a concert in a farm field inupstate New York, and it was the right choice of performersand the right moment and hundreds of thousands of peopleshowed up, and all involved created a legendary experi-ence—a great coalition of human capital, physical capital,and financial capital can coalesce to create greatness! Is aWoodstock that much different than Apple releasing theiPhone and people lining up around the block in city aftercity to just be a part of it? Moreover, is it evil that theiPhone destroyed the value of some other competingphones that it transcended? Hardly. Society as a whole ismade better by innovation driven by consumer demand. Isit a painful process that requires us to all work harder as notto become obsolete? Well, considering that we trade timeat leisure for time at work with the hope of yielding thehighest value possible, the answer is an emphatic “yes”;innovation is incredibly stressful requiring us to workharder than we otherwise would like. But that’s a bit of themagic of the Econosphere.

By naturally routing capital to its highest uses, thisholistic system does not reward one individual at theexpense of another; rather, it seeks to make the whole runas efficiently as possible. This process means that we asindividuals are rewarded to the extent that we contribute. Ifwe contribute to the production of goods and services thatare experiencing relative declining value as demand wanes,then we ourselves will be motivated to produce differentkinds of outputs that are more highly valued by society, thus


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increasing the overall value of the output produced withinthe Econosphere. In real life, that likely means changingjobs to find better opportunities at another firm or on yourown—maybe you go out and start a firm that will be betterthan the one you just left!

Often times, perhaps sadly, that process of you and oth-ers leaving the firm might well be the death knell for thatfirm. For a moment, maybe several years, there was a greatcollaboration producing a great product; then another firmfigures out how to do it better or cheaper; and then the col-laboration begins to break down. Capital leaves for betterreturns elsewhere; workers sense stagnation and look forother opportunities. And that might be it for the firm, andas it withers, it makes way for the rising competition. Thefirm is dead! Long live the firm!

My Job Is Nothing Like Woodstock

Still, when it is 6:30 a.m. and you need to get your buttout of bed, travel forty minutes on two busses, and open upthe cell phone accessory kiosk that you have to man by 8a.m., this all might sound like a big load of crap, for lack ofa more descriptive term. So, let’s talk about why you do it.

Several generations ago, you might not have foundyourself in such a predicament. Although the Econosphere’slaws are forever unchanging, its nature drives us to changeour situation through innovation. And, the innovation thathas taken place in recent centuries has clearly required us toall work more cohesively and collaborate. It was not all that


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long ago that the majority of workers in the now-developedworld were farmers, and in many cases, subsistence farmers.That is to say that a household owned or rented a plot ofland, and their major occupation was producing goods andservices for themselves. They grew and tended much oftheir food. They tended animals that provided eggs, milk,and meat, not to mention transportation and labor. Theygrew vegetables that could be canned and consumedthroughout the year. They built and maintained their ownshelter. And yes, there was trading with others as well. Ahousehold could buy, say, a plow, or a stove, certainly clothfor the creation of clothing, but work was much more imme-diate in that you actually did eat what you produced, andyou went hungry when things at work didn’t go all that well.

So why did this change? An argument could be made, Isuppose, that life on the farm beats life at the cell phoneaccessory kiosk via the 439 bus that picks you up, give ortake 30 minutes, at 7 a.m. at the corner of York and Main.Just imagine, you could be feeding chickens and have a hatand suspenders, and eat nothing but fresh produce all daylong!

I would counter that, come February, when you arelooking at another delicious meal of jarred tomatoes andsalt pork, your warm stool at the kiosk and lunch at the foodcourt with its copious specialties and ingredients hailingfrom around the world might sound darn good. Look at itfrom the subsistence farmer’s point of view. Ask the guywho tries to keep his drafty shack warm in the middle ofwinter with whatever firewood he can stockpile, “How


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would you like to sit here on this nice stool and sell this stuffto people who walk by, and for lunch you can have a niceplate of kung pao chicken costing less than what you willget paid for just an hour’s worth of work?” I’m guessinghe’d like the sound of that, though you would have todescribe to him exactly what is kung pao chicken—he’sbeen eating primarily jarred tomatoes and salt park forquite awhile.

You see, there is no way that our subsistence farmer, onhis own, would be able to design and manufacture cellphone accessories, not to mention compile all the ingredi-ents necessary to make kung pao chicken. At some point,our subsistence farmer was lured off the farm and into a jobwhere he could specialize so that he could be more produc-tive. As opposed to trying to supply everything he and hisfamily needs, some of which he was good at producing, andmany things he was not all that good at, he found that hecould work a job and produce just one or a few things andearn the money necessary to purchase goods from otherpeople similarly specializing. If he made only, say, carriagewheels, he could buy flour from the miller, meat from thebutcher, clothes from a clothing store, rent an apartmentfrom a landlord, and so on...and have a larger basket ofgoods for his household to consume. He might even getweekends off! Well, our former farmer is no different fromyou.

Heck, you could try to produce everything you con-sume. You could grow your own vegetables, have a fewchickens, make your own clothes, build your house, create


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your own entertainment, and make your own wine. AndI’m willing to bet that one or more of these things you mayjust do as a hobby, but what the vast majority of us find isthat we are more productive when we specialize, thusallowing us the resources to actually have a bit of leisuretime during which time we can, say, garden in our back-yards or on a balcony just for the joy of it.

You Are a Specialist!

So how do we specialize? We specialize by collaborat-ing with the creators of great ideas, suppliers of financialcapital, managers who see the process through, and fellowworkers who all specialize in their chosen fields. If youthink you’re a great pharmaceuticals salesperson, forinstance, you don’t go and try to manufacture pharmaceuti-cals! After all, you don’t know how to manufacture pharma-ceuticals! You go find a job at the best pharmaceuticalcompany that you can! You find the one with the best ideas,the most research capital, the finest manufacturingprocesses, and the best branding. You align yourself withthe people who make the best product as possible. Whatyou do is join a firm!

It is a great thing when you think about it. Of course,hopefully you are a good pharmaceutical salesperson; oth-erwise, the great people at the best firms will not want toalign themselves with you; they will find someone better! Iknow that sounds cold, but this dynamic only makes youeither improve your sales techniques or find another spe-cialty. Otherwise, you will be working at a not-so-good firm,


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pushing inferior products and likely not being as productiveas you would otherwise care to be. That’s the tough love ofthe Econosphere. The Econosphere provides the incen-tives to push people and resources to their highest uses; youjust need to keep your eyes and mind open so that you canread and accept the signs. Goods are not the only thingsthat are assigned a price; even your time on this earth isassigned a market price. It’s your chore to find the industry,firm, and occupation that maximizes that price (keeping inmind also the relative costs incurred in one job versusanother, of course—you might take lower pay at the phoneaccessory kiosk than for the manure shoveling job).

But How Should We as a SocietyLook at a Firm?

We should look at a job at a firm as our opportunity tospecialize and be productive. We should see firms asserendipitous intersections of ideas, capital, and labor. Whenwe find a good thing, we should enjoy it and work hard tokeep it a good thing. And when it is no longer good, we lookaround to find a better opportunity. Such is life in theEconosphere. It sounds straightforward enough, I think,from the point of view of the individual. After all, all thevalue in the Econosphere comes from the individual duringhis or her lifetime. The economy springs forth from you; youmake decisions for yourself; the individual’s point of view isthe key vantage from where decisions are made.


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Why do we as a society seem to care so much aboutfirm-level events, as if the firm were the single unit of out-put as opposed to the hives of individual effort that they are?There are so many mixed messages. We love our jobs, welove our brands, but we sometimes seem to be at war withthe owners and management of firms, particularly whenthere are changes or job losses. Why would the U.S. govern-ment want to bail out GM or Bank of America as if they hada vested interest in the brands? Why would we choose tolook more highly on some companies than others? And pro-tect some from foreign competition and let others out in thewind to twist? Moreover, why is there such a negative con-notation applied to “big business”? Heck, we don’t even like“corporate farms”—those nice people who grow and raisemost of our food. Firms are wonderful, amazing things, andjust about everything we have in terms of goods, services,and technology is the product of these serendipitous coali-tions. It’s odd that we seem to dislike those at the helm ofour most successful firms—after all, small businesses do notgraduate to big businesses without being good at what theydo.

So where is the love? Maybe there’s too much love!Maybe all the incessant, highly addictive branding and mar-keting makes us love our favorite brands and firms somuch, we think we own them. You might love Budweiserso much that you were incensed that someone was sellingyour favorite beer to some foreign conglomerate calledInBev! Perhaps you and your fellow longneck drinkersthought that you could and should stop this theft of yourbrand from the evil foreign conglomerate! But you couldn’t.


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You as a drinker of Budweiser can choose to drink Bud-weiser or not, but you don’t have any say in managementwhatsoever. Budweiser was a public company and manage-ment works for the shareholders. If a majority of sharehold-ers want to sell, then sell they will!

Maybe that sounds sad, but it is fair. It is investors whoput their capital at risk in the venture. I’m sure they appre-ciate you the customer, but their investment is expected tomake returns for the investor, and has little to do with yourown feelings of ownership. Of course no company canafford to tick off their customers; otherwise, they will notremain a going concern for the future, but that is the newowners’ problem, now isn’t it?

Remember, a firm is a happening. Founding principalswant to make a great idea a reality. Investors look for greatideas in which to invest. Workers gravitate toward well-conceived, well-capitalized companies where they can max-imize their productivity, and consumers are the ultimatebeneficiaries of an inspired product and service. But whenan investor needs his or her money back, that may be it forthe company as we know it. Really none of the parties aremarried to each other forever. Management could leave,important workers could leave, or the founding principalscan cash out. Even Ben and Jerry eventually sold out toUnilever! And in the case of those U.S. automakers whohave recently run aground, it was the customers who hadhad enough and split.

So how do we explain it when, say, the governmentsteps in to support one firm and condemn another? It is


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hard to explain. Does the government sometimes love afirm so much that it is willing to put taxpayer dollars at riskto support it? Probably not. More often than not, it seemsthat government steps up to support firms to retain or cre-ate jobs among their specific constituents. Thus, they inter-vene on behalf of workers, which does seem oddconsidering who actually owns a firm. Workers don’t ownthe company, and they can come and go as they please. Theworkers typically get paid for services rendered, and thusthey have little at risk other than their personal investmentsin their particular community—housing, schools, relation-ships, and such. In some cases, the death of a firm doesgreatly impact the financial health of a community and thevalue of its assets.

Considering that, I think we could very well concludethat government may intercede in corporate affairs not onbehalf of anyone directly involved in the enterprise. Rather,those times when government involves itself is likely indefense of the value of the physical assets owned and usedby workers of the firm, not to mention the tax revenues thatspring from these enterprises. One does not necessarilysave, say, GM because people love GM cars or policy makersfeel bad for the ownership. Rather, policy makers want tokeep voters in their homes and keep the physical towns,buildings, and businesses viable to retain votes and supporttax revenues.

That’s the difficult thing when it comes to brick-and-mortar assets. They cannot be moved in most cases, so asthe Econosphere shifts resources from industry to industry

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and location to location, and the people follow the changingeconomic winds, the physical assets are at least temporarilyleft empty and nonrevenue-generating. And, if you thinkabout it, governors, representatives, and senators are a lotlike buildings. Their constituents may cross state lines intheir ongoing effort to maximize their happiness, but thesenator cannot change the geographic confines of his or herjurisdiction. If firms fail and are not replaced, politicianscan become relics in the same way as do empty storefrontsand abandoned buildings.

What does warm the heart a bit in this otherwiseunhappy tale, however, is that it shows that policy makersare real flesh and blood people, just like us. They are utilitymaximizers, and they do what they think is best to supporttheir own situation!

All that said, I would say that policy makers seeking tosupport failing institutions are barking up the wrong tree. Itis better to foster innovation than to protect a crumblingpast. Entrepreneurship and high-quality labor are whatkeep some states perpetually ahead of others. Hanging onto a cherished firm that has seen better days is, in manyways, self-defeating. As we know, firms are serendipitoushappenings that often come with a limited life span. Thereis no point in clinging too tightly too them; otherwise, one isimpeding on the process of creative destruction and theEconosphere’s role in helping capital find its highest use.

You might argue that if a policy maker were to, instead,support those initiatives that made their state particularlyfriendly to entrepreneurs and investors, that supported the



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kinds of education that produced talented and creativeworkers, and generally set the table for firms to emerge,flourish, and fade over time according to changing tastesand technology, that might be the way to maintain residentsand high asset values. That kind of understanding requiresan appreciation for the Econosphere, how it works, how itfinds the highest uses for resources, and how it works tohelp us all maximize our own happiness. Propping up adying firm, in comparison, is certainly unproductive, if not abit morbid. There is a reason why we bury our dead.

Sparkle and Fade

Firms are our own creation. They are relationships thatwe create based on our own selfish interests. We all want tomaximize happiness. Many of us do this either by creating afirm, investing in a firm, or working in a firm. Certainly, thefirm cannot exist for much of a duration if it does not pro-duce products and services that people are willing to tradefor. So even consumers are a part of the equation, thoughthey hold no equity per se. We might hope that these rela-tionships last a lifetime, but we should not expect them to,nor should we be too offended when they do not. They aremoments in time in our long ascendency toward greatersophistication.

For instance, technology does not stand still. Somefirms are flexible and aggressive enough to keep up withnew technologies, but they are the exception. Many firmsexplode onto the scene with a great initial product or serv-ice but are subsequently trampled in the stampede of others

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hoping to improve upon that first foray. You might haveloved your classic Atari 2600 4 Switch Woodgrain System,but its displacement by the Nintendo NES 101 Top Loaderwas part of maximizing our utility with better technologies.Imagine if policy makers tried to save Atari in the same wayas they intermittently try to save Chrysler or GM. It wouldhave been foolish to do so in the case of Atari; otherwise,we would likely still be playing Space Invaders; one won-ders if we are guaranteeing suboptimal cars in the future bytrying to save failing car manufacturers from the competi-tion today.

Brands are great. Firms are great. But people are whatmatters. It is the human life span that creates value. Sure,great brands and the firms that own them are a big part ofharvesting that value. But when those brands are no longergreat, they play a much smaller role in adding to aggregatewealth. We should not worship firms or brands as perma-nent deities; rather we should view them as great accom-plishments in human cooperation and entrepreneurship,and realize that often when these firms fail, it means thatothers are succeeding.

A firm is a moment in time; the Econosphere is forever.We need to feel more passionately about the Econospherethan we do about any particular firm, whether we love it orhate it. The firm exists because the Econosphere providedthe incentives to bring ideas and capital and labor alltogether. The firm exists because of the Econosphere, andit cannot exist without it. Remember, the Econosphere isour social environment, and if our environment wants to



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impose extinction on something, such as the dinosaurs orAIG, we should not question it. Remember what happenedin Jurassic Park? Or how about Frankenstein, for that matter?

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Stupid Policy Tricks

I guess we need to hit upon the two-ton elephant in theroom at this point; we should spend some time discussinggovernment and its role in all of this. So far, we talked aboutthis wonderful social biosphere, our economy, and how itguides our lives by providing incentives, often via marketprices, that aid us in making the best possible decisionswith the information and abilities that we have. But whatthe heck does all that have to do with, say, former TreasurySecretary Hank Paulson and Fed Chairman Ben Bernankeappearing on television with apocalyptic warnings thatunless a bank bailout is passed before the end of the week,the economy as we know it will cease to function? Wheredoes a panicked, wild-eyed Treasury Secretary speakingwith the full authority of the United States government fitinto this otherwise somewhat hippyish view of the Econo-sphere as a perfect system bigger than any one man’s con-cerns? Tragically, it doesn’t fit very well, but we can’t denyits presence. So, let’s talk about it.

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Why So Cynical?

The government is an interesting entity. Before we dis-sect it, I do think we need to admit to ourselves that itexists. Government exists! Governments exist all over theworld and have existed throughout history. Society almostalways creates a government. So, citizens must see it as anecessity, and a good thing to have. Otherwise, they wouldneither create a government nor support one.

Now, what is government good for? In other words,what was government created to achieve? Today, that is acomplicated question. Government permeates nearly everyfacet of our lives in one way or another. It taxes, it regulates,it judges, it coaxes, it lectures, it distributes, it redistributes,it attacks, it defends, it catches us when we fall, and it pullsus down when we stand. There is, seemingly, no end to itscharter. It is the solution to every problem, and when itssolutions inevitably create their own unintended problems,it is the solution to those problems, as well. Yet, it exists,and it must exist for a purpose.

Does that sound cynical? I think it might, and I apolo-gize.

Let me explain my mindset today, and perhaps why I aminfected with a fit of cynicism. Yesterday, I was a passengeron the Acela Express train between New York and Washing-ton. I am a big fan of the Acela because it is so much morepleasant and convenient than flying between the majorcities along the East Coast. From DC to New York toBoston, the Acela has become the preferred mode of travel


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for many business people and policy makers. And yes, I haveeven shared a car with Vice President Joe Biden during hisfamous commutes between Wilmington and WashingtonDC.

One of the interesting things about the Acela is thatmany groups of travelers sit and work around the tables inthe cars, and you cannot help but hear their conversations(unless you are in the quiet car). It’s a bit like a bar withoutthe loud music. If you listen, you can hear all that you needto know about the Mid-Atlantic economy and culture.

A few years back, I distinctly remember listening to arelatively young guy; I think he said he was a recent medicalschool graduate, yammering on rather loudly about the sev-eral hedge funds that he had founded and was running, andthe several Russian models and tennis pros that he was dat-ing. It was at that moment that I knew the bull market wasin trouble! Wayward medical doctors who serial-date Rus-sian “models” should not be managing money at the farthestreaches of the risk curve.

The topics discussed on the Acela are always changingdepending on what is hot in the economy. Over the years, ithas gone from dot-coms to home flipping to hedge fundsand structured products to biotech and recently on to theharvesting of federal bailout and stimulus money. And it wasyesterday’s overheard discussions that did turn me a bit cyn-ical. I am writing this chapter amid the ramping up andadministration of several emergency programs, TARP,TALF, PPIP, the stimulus bill, the omnibus spending bill,and God knows what else. And there was only one topic of


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conversation on the Acela yesterday. The topic du jour wasprepping for meetings with government bureaucrats inhopes of getting a piece of the billions of dollars that Wash-ington is planning to push out into the economy. Just in myarea of the car, I overheard constituents of firms in alterna-tive energy, medical research, and a very large, well-thought-of international nonprofit for whom I have now lostmuch respect based on the discussions among the schemingposse that they were sending to the capitol that day.

Perhaps the only person riding the train who did not fitthat mold was a chubby, kind of shiny, 30-something stafferwho was on his cell phone discussing to whom “he andTim” were planning on doling out money—the denomina-tions were in tens of millions of dollars, as you might imag-ine. He was very pleased with himself, and all I could thinkabout was the fact that that money represented time andenergy that could have been spent elsewhere by those whocreated that value, but was instead diverted to the whims ofthis gentleman and his colleagues. Those people who cre-ated the value that that money represents had no say whenthat money was taken through taxes or borrowed on theirbehalf, nor do they have a say in how it is spent. However,the pudgy, shiny man-boy seemed to have a rather large say.People need to create value to procure funds to spend andsave; the government need only take money through theforce of law to get what it wants, and there is no necessityfor or presumption of value creation on the part of thesetakers whatsoever.


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Needless to say, I got off that train not feeling verygood about the state of public policy. Believe it or not, itwas, in fact, a great treat to be back in the New York sub-way upon my return. Although many of the problems thatthese programs seek to fix have their beginnings in NewYork, when I looked around that subway car, I didn’t seeanyone brushing up their PowerPoint presentations inhopes of getting a cut of someone else’s hard-earned wages;I just saw individuals on their way to and from creatinggoods and services that are appreciated by their fellow peo-ple, and people looking forward to getting home andspending time with their family and friends. There were farfewer professional panderers, near as I could tell.

Protector of Property Rights

I hope that little diversion helps explain the somewhatcynical tone of this chapter thus far. It is just that by spend-ing several hours in transit with people whose sole purposeis to ask for someone else’s money, which was taken fromthat someone else or borrowed on behalf of that someoneelse by an entity with a self-proclaimed right to take or bor-row what it wishes, gives one a sense that something ratherlarge is polluting our beautiful Econosphere. And yet, as wasstated: Government exists. It has almost always existedthrough history; it is created by people, is supported andmaintained by people, and thus must be a beneficial thing.And through all the diversions and transgressions that wefind on government’s to-do list, there is one special, centralpurpose that it is here to fulfill. There is only one thing that


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government has a true mandate to accomplish, and that is toprotect property rights.

If you boil down government to its marrow, it is there tomake sure that someone does not stroll across your lawn,conk you on the head, and claim your property as his orhers. Certainly, you can say, I don’t need government to dothat. I can take care of my own stuff! Or at least, I can hiresomeone to take care of it. And yes, you could. But, ifeveryone were to hire their own security force to protecttheir own property rights, it would be certain that differingideas of property rights would flourish simultaneously andcreate ongoing conflict, such as in, say, Somalia,Afghanistan, or in the Godfather movies. Thus, developedsocieties all eventually see the value of just one set of prop-erty rights and agree on one unified body to maintain thatcode of law, and that, my friends, is your government!

Now, you may say, “My government does a lot morethan that.” You might point out that your government setsemission standards for autos. Yes, but I can counter thatthose emission standards are there to protect the quality ofthe air that is breathed as a public good shared among usall. The government is protecting your access to clean air; itis protecting your property rights. You might point out thatyour government sets safety standards for food. Well, yes,but those standards keep companies from taking your lifevia harmful ingredients or poor quality; and as we knowfrom our study of the Econosphere, your life is your mostvaluable property. You might point out that your govern-ment sets education standards. Well, in that case, it might


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be a stretch, but you might conclude that someone with ahigh school diploma is less likely to crawl through your win-dow at night and steal your television set, or is less likely tocause damage to public property, which costs everyoneboth in terms of loss of use of that property and in payingthe cost of fixing the damage. What of our expensivenational defense? Well, that keeps foreign aggressors fromcoming in and taking all our stuff. You see, this is what gov-ernment does. It upholds laws that detail what is theft andwhat is not.

All the high-minded rhetoric boils down to that basicfact. This is government’s useful purpose. As you go outthere into the Econosphere to create value and supportyourself and your family, the government is there to makesure that you can keep the rewards of your labor.

Unfortunately, the government often tries to do morethan just that. And generally, I might add, that as its well-intended or otherwise-intended programs stray away fromthis central purpose of protecting property rights, theseprograms become difficult to pass or maintain support for.There is a reason why legislation favoring, say, more favor-able treatment of unions—at the expense of nonunionworkers, investors, or consumers—or transfers of wealthfrom one group to another are not very successful in thelong run. They have nothing to do with protecting property;they have more to do with the redistribution of property.Subsequently, there is a hint of theft in the policies thatcause some to rightfully rail against them. Moreover, suchpolicies run against the nature on the Econosphere itself.These public efforts on our behalf make us not only run less


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efficiently, but also ultimately lead to all kinds of unin-tended consequences.

For instance, government bans on the production orimportation of some good can create black markets for thebanned item. Those involved in these informal marketsoperate outside the bounds of accepted law or codes of con-duct such that these shadowy elements are more likely tocommit crimes and abuses against one’s property and one’sperson. There are many times that society stops to ponderwhat is worse, the banned item or the resulting crime thatcan occur as a consequence of said item finding its way tomarket via criminal elements.

The Government Is Nelson

Now, it is not my intention to simply dwell on theseissues of governing. First and foremost, I want to give youthe ability to see the government as a player within theEconosphere. But how does one grasp the many tentaclesof people, buildings, equipment, statutes, statues, and so onthat are spread through every corner of society and in allplaces around the world?

Thankfully, government is made up of individuals whoare its workforce, and we can always understand their moti-vations, just as we can understand our own. Each of theseindividuals is a utility maximizer, encouraged and nurturedwithin the Econosphere. Every government official is agovernment official because he or she believes, taking intoconsideration his or her abilities and the information at


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hand, that a government vocation will maximize his or herown happiness. Even when our elected officials use theirpreferred lexicon of “public servant” to describe their post,they are still utility maximizers, just like everyone else.They are there for purely selfish reasons; and there is noth-ing wrong with that—some for love of power, some for loveof helping people, but they are all there based on their ownpersonal agendas.

As a consequence, elected officials and their staff can beexpected to do the same sorts of things that all of us do tokeep our positions and get ahead. In the case of our publicservants, this may mean working at funneling as many gov-ernment resources to the benefit of those who support,fund, and vote in favor of them. That makes perfect sense.Also, public servants need to be mindful of their post-government careers, which often entail utilizing their famil-iarity with those in government to represent privateinterests. They often go on to be hired as lobbyists, boardmembers, consultants, and the like.

Given the vast amount of money collected and spent bygovernments, an ability to act as a bridge between privateconcerns and public coffers is a valuable thing indeed, suchthat the rewards can be great. Moreover, these types ofactions, vocations, and strategies all fit well within theEconosphere’s system. People try to find where they can bemost productive so that they can maximize utility, procur-ing what they need while also preserving free time forenjoyable pursuits. Life as an influential public servant with


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a subsequent well-paid stint in the private sector makesexceedingly good sense.

However, our point here is not to ponder the individualpursuits of politicians, I want you to consider government asa whole. A government is similar to a firm, the motivations ofwhich we have already discussed. However, it’s not quite theserendipitous, temporary moment that is a great firm. Firmscan go out of business rather easily if they fall out of favorwith their customers. In the case of governments, it’s quiterare that one will actually go out of business, save for theoccasional coup. Sure, elections can switch out the individu-als in office and the party in charge, but the government asan entity will remain. Not only will the government remain,but also its power to legislate, prosecute, tax, consume, andacquire is almost permanently intact. A firm is a temporaryentity, but government is more or less forever.

In particular, its revenue sources are permanent. In alldeveloped countries, it is illegal to refuse to pay your taxes.Thus you are a permanent client and a captive contributor.In that sense, the government is kind of like the big bully onthe playground who can demand lunch money from thesmaller kids. Moreover, after that lunch money is procured,it can be dispensed in any way the bully wants. Governmentacts as an individual with a limitless credit card or a limitlesssupply of nerds to shakedown, spending where it wants, con-suming what it wants. As such, I like to think of governmentas just one really big person; kind of like a big bully whoknows how to get what it wants. In this sense, I like to pic-ture government as a giant version of Nelson from the Simp-sons.


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That really fits for me. I don’t think government is evil;and on the Simpsons, Nelson has definitely shown hissofter side and at times has almost been a sympathetic char-acter. That said, if Nelson wants Millhouse’s lunch money,Millhouse is going to have to cough it up. This power makesNelson his own man. He feeds his own wants, follows hisown path regardless if that path might trample upon some-one else. Yes, government is just a big, giant, loveable yetintimidating version of Nelson. And as an aside, you don’twant to make an enemy of Nelson. It’s generally safer to dowhat he says.

Stimulus

Now, our friend Nelson, that is, the government, doestry to help us from time to time by “fixing” the Econo-sphere when we don’t like the message that the Econo-sphere is telling us. Often times this comes in the form ofcountercyclical programs during recessions, or in anothername, “stimulus.” There is fiscal policy, controlled by theelected branches of government, and also monetary policy,which is handled by the less political (usually) FederalReserve Bank. The Fed is perpetually conducting counter-cyclical policies via its open market committee (FOMC),either trying to tamp down growth that is above potential,or ramp up weak growth, all under the two-pronged man-date to foster price stability and full employment. They typ-ically do this by targeting short-term interest rates bypulling money in and out of the banking system...essentially


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affecting the price and amount of capital available for bor-rowing. More recently, the Fed has expanded its range ofactions to include...well, anything and everything. The Fed-eral Reserve’s balance sheet has now become a repositoryof all manner of financial instruments taken as reserves tobring greater liquidity amid an ongoing financial crisis. Asof the writing of this book, it is uncertain whether thisunusual strategy will prove transitory or a new permanentmodel for conducting monetary policy.

The Fed, at its best, is independent from the executiveand legislative branches of the government, taking adetached, bookish demeanor. This waxes and wanesdepending on the era and who is in charge, and, manypoliticians and a few Fed Chairmen have shown by theiractions that they were never true believers in the traditionalnonpolitical role of the office. For instance, the Fed underWilliam Miller during the Carter Administration acted asan arm of the Executive branch to very bad effects. Chair-man Greenspan testified before Congress during the Bush(George W.) Administration regarding political matterssuch as tax cuts, and more recently, Chairman Bernankehas worked in lock-step tandem with the Treasury in thelatter days of the Bush Administration, and with the Trea-sury under President Obama. On the other extreme, Chair-man Volcker, who brought what I might call an “I’ll See Youin Hell!” style of monetary policy, completely sank theeconomy and the reelection hopes of President Carter forthe purpose of restoring price stability. Volcker is nowlooked upon, and rightly so, as a near-mythic Fed Chairmanwho was completely impenetrable to political influence.


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The nice thing about monetary policy, from the point ofview of one who loves the Econosphere, is that it is some-what indiscriminate, not particularly singling anyone outfor favorable or unfavorable treatment. Moreover, if theFed primarily looks after price stability, that is, defendingthe currency as a store of value, then that is a win for all ofus. We typically store our saved earnings in either our cur-rency or assets denominated in our currency. If the Fed isthere primarily to make sure that that currency is a goodand safe store of our hard earned wealth, that helps every-one and makes the Econosphere more efficient. So that’s agood thing.

Aside from this, monetary policy is generally lookedupon as the most effective way to manage the cyclicality ofthe economy. On that front, however, I’m not all that sure.The Fed clearly has not ended the existence of businesscycles; booms and busts are still with us. Moreover, there issomewhat specious reasoning when it comes to “proving”the effectiveness of monetary policy. When the economybooms, the Fed increases interest rates, and then when theeconomy wanes, the Fed will decreases interest rates, andit goes on like this. Many economists look at that and seecausality where the economy is speeding up and slowingdown at the behest of the monetary policy. I would like tothink that I am a pretty good theorist and econometrician,and, well, I’m just not that convinced.

Think about it. The economy booms, the Fedincreases interest rates, then the bubble bursts, and theeconomy decelerates or contracts. Did raising interest


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rates cause the economy to decelerate, or was monetarypolicy just along for the ride and absolutely ineffective inslowing the economy before the inevitable economicimbalance gave way? Similarly, when the economy is inrecession, the Fed always lowers interest rates. Duringthis period when rates are low, the economy otherwisedoes its thing and repairs what imbalances had developed,and inevitably begins to grow again. The Fed’s lowerinterest rates are invariably given credit for the rebound.But I just don’t see how one can assign causality. This isjust policy along for the ride. I’m sorry, but I give all thecredit to the Econosphere!

I Am the Sun God!

How do I know this? Well, I know this because I am theSun God! That’s right; kneel before me, for I control thesun! Every morning, I wake before the sun comes up. ThenI make a cup of coffee, face the window, I utter the magicsun summoning phrases, and do the sun summoning dance.Inevitably, the sun does rise. You see! I control the sun.Bow down before me!

Seriously, if you are willing to believe that the FederalReserve has the power to avoid or end recessions, youshould also be willing to believe that I control the sun. Youcan see a correlation between monetary policy and thebusiness cycle, in the same way that you can see a correla-tion between my sun ceremony and the rising of the sun. Ifyou are also willing to assume causality and conclude that


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monetary policy exacts control over the business cycle,using that same reasoning, you must also conclude that myceremony causes the sun to rise. Are you willing to do that?

All that said, I don’t see any harm in monetary policyper se, as long as interest rates are set with an eye for infla-tion risks. Moreover, and I think this is perhaps a very bigpoint, there are millions of people who do not believe, aswe do, in the Econosphere and its capacity to steer incen-tives so that we can provide for ourselves. For these non-believing folks, it is comforting to believe that the economyis controlled by wise, old central bankers in gray suits thatmeet in a big marble building in Washington DC. They areessentially modern-day priests of the temple, but instead ofsacrificing animals, they are setting interest rates. I wouldmuch rather that people believe in themselves and in thefunction of our self-correcting, self-directing Econosphere,but if old guys in gray suits talking in tongues about interestrates make people feel better, than who am I to try to wreckthat relationship?

Council of Wise Men

Aside from monetary policy, even more fun, and disturb-ing, is fiscal policy. What is fiscal policy? Fiscal policy iselected officials spending great gobs of your money to fix theeconomy on your behalf. This person has a little too muchmoney; this one doesn’t have enough; so we’ll take somefrom this one and give it to that one. This industry doesn’thave enough capital, so we’ll take some from this one and


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give it to that one. And whammo, the economy is fixed; therecession is over!

There are a few prevailing theories about fiscal policy.Much of it is built upon the writings of John MaynardKeynes, an economist who seems to go in and out of fashiondepending on how the economy is performing. When theeconomy is faltering, and calls for policymakers to do some-thing are loudly voiced, Keynes is inevitably exhumed. Tosummarize the relevant Keynesian points, Keynes did notbelieve that the economy naturally reverts back to full-employment. He believed that the economy could poten-tially, if not probably, arrive at a sustained pace of growthwell below optimal levels. As such, it takes a council of wisemen to redistribute capital in a manner that is more suitableto achieving peak performance in the economy. Left leaningparties around the world tend to fall into the Keynesiancamp, as these parties primarily seek to comprise that coun-cil of wise men. However, these days, even right-wingers areapt to call for “fiscal stimulus” in conjunction with loosemonetary policy during crisis, creating essentially an unholymish-mash of diametrically opposed economic theories thatlikely have both Keynes and Milton Friedman spinning intheir respective graves. Those who founded the schools ofthought supporting either fiscal stimulus or monetary stimu-lus were not close bedfellows whatsoever; such that, order-ing up both in the same breath is the intellectual equivalentof sauntering up to a bar and ordering a gin and milk.

Regardless of the theoretical problems, it is often justthe details of the policies themselves that create all sorts of


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havoc. Remember, government is like a big giant Nelson—that is, a big, maybe well-intentioned, perhaps starved forlove, but often misinformed bully. Anything it does will cre-ate a large effect based purely on its size and reach alone,and one must expect reverberations throughout the system.You are essentially introducing an alien force into theEconosphere that is not wholly governed by the Econo-sphere’s natural laws. As a result, there will be ramifica-tions; if it helps to picture a scenario, you might recall themovie Invasion of the Body Snatchers. In the 1978 versionwith Donald Sutherland and Leonard Nimoy, the worldended up relatively orderly as the soul-destroying alienssapped the individuality out of every man, woman, andchild. The movie ended there, but given what we knowabout the body snatchers and the rules of the Econosphere,I would predict a resulting lack of innovation that wouldhave eventually led to a declining standard of living for thealien invaders, not to mention extreme boredom.

Beyond the broad problems of fiscal intrusion is that itis not a generalized intrusion, as typically is monetary pol-icy. It often targets particular important voting groups, or atleast certain demographics that are thought in need of stim-ulating to get the economy going. In that case, think of thevarious tax redemptions or stimulus payments that havetaken place over the last decade. The government sendslow- and median-income families a check in the mail; andthe hope is that these checks will unlock a torrent of eco-nomic activity. Instead, usually, it just sets off a round of billpaying and television purchasing that roughly equals theface value of all the checks. It is nothing but a transfer of


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money from one group (or one generation in the case offederal borrowing) to another. Where is the value-add inthat? Don’t bother looking for it; it’s just not there. And asyou might recall, the only way to create wealth is to addvalue; it is a mystery to me why it has become a politicalconsensus that shifting money from one group to another isa means to create wealth.

Here’s another one of my absolute favorite pieces of fis-cal stimulus. Remember the Jobs and Growth Tax ReliefReconciliation Act of 2003? Of course you don’t! Let merefresh your memory; it was George W. Bush’s stimuluspackage for the recession following 9/11. Actually, therewas a lot of good stuff in that one, including decreases inseveral tax rates that have lasted thus far, though the futuredoes not look bright for these measures given our risingfederal debt burden. Nevertheless, why I bring this act upis that it had a great piece of silly stimulus within. It allowedfor temporary accelerated depreciation and increasedexpensing of capital investments. Sounds good, right? Theidea is that by making the accounting rules temporarilymore favorable, capital equipment orders would rise andthat would create jobs and “jump start” the economy.

Well, it worked, sort of. Capital equipment ordersresponded. But is that a job creator? Consider what capitalequipment does before you rush to answer that one. Com-puters, machines, manufacturing robots, and the like areexplicitly a substitute for labor. Capital investment allowslabor to become more productive through the use of tech-nology, thus in the near-term, these items actually reduce


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the need for additional labor. This piece of stimulus actuallysweetened the incentives to reduce the labor components inthe production process, and will forever be a big part ofwhat history remembers as “the Jobless Recovery.” Cer-tainly it was not this act alone that caused the jobless recov-ery; ongoing outsourcing to China and India also played arole there, and the advancements in information technologythat would have taken place regardless of the act; butnonetheless, if you want someone to hire people in largenumbers quickly, you don’t make it explicitly less expensiveto go out and buy labor-saving equipment!

Redistribution: In Search of“Fairness”

Most fiscal policy intends to redistribute capital to strikea balance that will either re-accelerate the economy, or atleast make a poorly performing economy more palatable forkey supporters. This redistribution takes place in all sorts ofways, person to person, industry to industry, generation togeneration. Even the relatively benign loosening of mone-tary policy explicitly shifts interest payments away fromsavers in favor of lower costs to borrowers. There is no freelunch, as economists are fond of saying! In the case of pol-icy, which is not a direct component of wealth creation, ifyou favor one, you take away from another.

Sometimes, the scenarios become almost bizarre.Take, for instance, the recent bailouts of certain banks andthe U.S. automakers. If customers, lenders, or investorspull capital out of an institution because of their poor



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management, the U.S. government then acts to nullify thatpenalty by putting money back into said institution. In thecase of the automakers, car buyers choose not to buy a cer-tain brand of car, and the federal government turns aroundand puts taxpayer money into said automaker to make upfor the lack of sales. Now, there are details in all thesethings that make these moves more explainable. Somewhatdubious arguments about institutions being too big to fail,systemic risk, and extenuating circumstances outside of acarmakers control are made. Nonetheless, the Econo-sphere will relentlessly shift capital to its highest uses tomake the entire populace as a whole as productive as possi-ble. Fiscal policy that redistributes that capital is the equiv-alent of trying to reverse the course of a river. It’s costly, notparticularly useful, and in most instances, highly unlikely tobe successful.

More frequently, there are simply programs designed tomove money from one demographic to another. Often, thisis punitive to savers and investors, and favors people whoconsume much of their income. On one hand, these folkscan use some extra money during tough times, as they haveno real cushion should their income stream stop or shrink.Established programs such as unemployment insurance areexcellent platforms for such efforts to keep income flowing.They are broadly supported because everyone pays into thepot of capital.

Other programs are less palatable: programs that taketax dollars to mitigate home foreclosures, changes in the taxcodes to subsidize some and not others, and so on. For

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instance, I’ve always wondered why the tax code rewardspeople for having children or people who take out largemortgages. Doesn’t the government like childless renters? Iguess not. Moreover, because children use public services,shouldn’t parents pay more in taxes? I don’t have anythingagainst parents with mortgages, I’m just pointing out theobvious inequity.

These items are baked into the tax code on an ongoingbasis, but during times such as these, there are typicallysweeteners that pass additional savings onto the favoredtaxpayers. If you are a winner in these events, you’re happy.If you are a loser, you are not. But that is almost beside thepoint. The question is, how do these efforts improve theeconomy? In so much as they redistribute what theEconosphere has already distributed, they run the risk ofmaking the economy operate less efficiently, not more effi-ciently. And that is the key! The economy must run moreefficiently for a recession to eventually turn into a recovery.

One thing that has always struck me as a bit odd, espe-cially seeing that I am an economist, I’ve never been quitesure why it has become a consensus that it is better to givemoney to people who will spend it than to let it stay withpeople who will save it. I realize there are input/outputtables and other such devices, and perhaps somewhere,sometime someone has calculated multipliers that claimthat consumer spending holds greater value than consumersaving. But does anyone believe that? Particularly now thatwe are trying to recapitalize banks and free-up capital forlending, how in the world is it better to take money from



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savers and give it to spenders? Some ideas are so silly thatthe only way they persist is by becoming such accepteddogma that no one dares question them. My suggestion toyou would be to question anything and everything aboutpublic policy intended to improve the Econosphere. If youwant to improve balance within the Econosphere, do whatyou can to restore it to its unfettered natural state. More-over, the market is perfect; it is information that is imper-fect. If you want to improve the results of the market, youmust improve information. Constantly changing the rulesto shift capital to favored industries and demographicsactually obscures information.

Barriers to Trade and Prosperity

The other large piece of policy that is often debatedduring tough times is trade policy. The Econosphere lovestrade, in that we all trade our time and talents with others’time and talent in our pursuit of maximum happiness. TheEconosphere cares nothing about national borders. We allhave time and talent, and it should all be used to the bene-fit of everyone regardless of nationality.

However, some hold different views, and for under-standable reasons. Trade can rob a person or a town of itsmajor vocations, and that is devastating. The Econosphereperpetuates such difficult outcomes because these outcomesimprove everyone’s lives as a whole, but that improvementon an individual basis might be miniscule in comparison withthe personal and absolute losses of, say, a manufacturingworker or a manufacturing town that has seen its major

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employer disappear. Problems are also exaggerated whennations have different profiles. Although it is true thatnations that are different from one another benefit the mostfrom trading with one another, as each provides differentkinds of goods and services. In the case of an exporting coun-try that allows polluting industries or low wages, a companyfollowing the rules in the United States would rightly pointout that it is hard to compete.

This is a good point. But let me give you another way tolook at it. We here in the United States chose to live undercertain rules. Many of the developing countries that wetrade with choose to live under a different set of rules, oftenbecause their concerns are more primal, such as just feed-ing everyone. There is little you can do about foreign laborand environmental standards save for refusing to consumeproducts and goods that are sourced from areas where youdo not support prevailing environmental and labor laws.That’s fair enough, and I think those types of selective con-sumption decisions are appropriate.

But also consider this; think of a country that subsidizesthe production of goods that they trade with others or acountry that is willing to tolerate relatively worse labor con-ditions or looser environmental rules. They are actuallywilling to help subsidize another country’s consumption!Why would they do that? There are a few common reasons,such as reaching full employment, but I would argue thatnone of the reasons make any sense whatsoever in the long-run. They rob themselves of the value that they are creatingand may endure harsher conditions that yield themselves



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less utility. But in the meantime, before they come to theirsenses, it is a bonanza for consumers in the importing coun-try! It’s not very smart policy on their part, but if it meansthat you can drive a cheaper car or buy a less-expensive gar-den hose, well, you can make the judgment whether youwant those things or not.

Still, changing trade flows more often than not happenoutside of policy decisions. Even without subsidization orother political maneuvering, relative advantages betweendifferent nations shift over time. And sometimes, industriesappear in one nation, and disappear in another. This is a nat-ural part of the Econosphere and involves individuals choos-ing to do the things that allow them to be most productive.In the end, as long as these shifts in occupations and indus-tries are allowed to happen, the Econosphere is most pro-ductive and operating as smoothly as possible—efforts tostop this natural process can allow for pressure to build suchthat it can yield quick and violent shifts when the pressuregets too great, such as what we saw in the economic and sub-sequent political collapse of the Soviet Union. But asidefrom the most dramatic extremes, just the action of protect-ing one industry not only robs us of a bit of our collectiveproductivity, it also explicitly takes a little away from every-one and gives it to the protected domestic players. That maybe politically palatable, but let’s be clear about what is hap-pening. The government is taking a bit from a lot of peopleand injecting that capital to help a small number of people.Why does the government like those few people more thanthey like those who are net losers in this arrangement?

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With this in mind, my broader point in the case of stim-ulus is relatively plain. In the case of trying to jump start aneconomy, there is no apparent benefit, quite the contrary,of either robbing consumers of their preferred sources ofgoods or of transferring wealth from the many for the ben-efit of the few.



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Ten Ways to Maximize Wealthand Happiness for Yourself

and Everyone Else

We are a part of an immense, sustainable social ecosys-tem that provides us all the incentives we need to best uti-lize our single, important raw material: Our own inbornpotential and ability. We deplete this raw material over thecourse of our lives for the betterment of ourselves andthose for whom we care, during which time we produce thegoods and services that better all mankind. In the same waythat our physical environment provides food, air, water,warmth, and more for an array of living organisms so that itis a self-sustaining system, our social ecosystem, our econ-omy, is the mostly invisible counterpart to the physical envi-ronment providing the incentives that we need tosuccessfully interact with one another and prosper.

Mankind has wrought great harm onto our physicalenvironment over the centuries. And now that we are, per-haps, a bit more enlightened as to our effect on the naturalbalance of things, we aim to repair those problems that wehave created and avoid making those same mistakes in thefuture. The Econosphere is in much the same shape as the

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physical environment, but we have yet to become fullyenlightened as to the ramifications of our actions. Becausethis social environment is more difficult to see and monitor,and because we have not yet trained ourselves entirely tofeel, appreciate, and accept its role in our lives, we have notyet had our environmental epiphany as it pertains to oureconomy—our Econosphere. There is an Earth Day, butthere is no Economy Day!

But like any new movement, progress starts with a stepand builds upon itself with each additional step. If we keeptaking those steps, we will eventually look back and see justhow far we have come. Below are ten markers along the per-sonal journey I hope that you will take to first, maximize yourown utility so that we all benefit from your time and talent,and second, bring awareness and stewardship of the Econo-sphere up to the standards that we now apply to our physicalenvironment. Eventually, we will not only help ourselves,but also knock down the man-made impediments that keepso many people around the world living in poverty, notreaching the full potential innate in their only important rawmaterial, their own humanity.

1. Know That It All Comes from You

For goodness sake, stand up and know that everythingyou are and everything you create comes from you! Thebelief that one’s wealth and well-being is somehow ladledout to each of us by the powers-that-be is a sad thing indeed.We see ourselves as net-consumers, adrift on the sea with-out oars, or like a pack of rats fighting for every morsel. We


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CHAPTER 7 • TEN WAYS TO MAXIMIZE WEALTH AND HAPPINESS 141

treat ourselves like we don’t deserve what we gather for our-selves and our family. And it is absolutely preposterous thatwe do so.

Everything is borne from the individual. Wealth is gen-erated by the harnessing of our own human lives and abili-ties. We are the ultimate renewable resource. Nothing hasany value without us. Oil is not valuable in the ground. Goldhas no intrinsic value. Land has no value. It is when weextract, transport, refine, harvest, and utilize these resourcesthat they hold any value whatsoever. It is the sweat of ourbrow and creativity of our ideas that create value and wealth.It’s not doled out to us. It springs forth from us like oil from awell. If you think back to the rhetoric of elections past, youmight remember one candidate or another promising whathe or she would provide for the voters, when all the time, it isthe people who provide everything! It is the people who cre-ate the value that will be taxed to pay the salary of the electedofficial! The wealth flows in the opposite direction of what isimplied.

Now, with this knowledge, there also comes someresponsibility. You have a basic ability to create value, andthat is what will sustain you your entire life. But it is up toyou to make the best of it. If you want to improve your lotin life, it often requires the aggressive pursuit of educationand training. It might also require flexibility, creativity, andmobility. Say, if one profession becomes relatively less valu-able or a city loses its chief industry, it is implicit upon theindividual to find other ways to add value and producegoods and services that are valuable to others, which might


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mean a change of vocation or a change of location. That’syour responsibility to figure that out.

Your goal is to maximize your own happiness. Youmight wish that you could spend your entire life on thebeach sipping margaritas. However, supply is finite, andnothing is free. You need to keep on your toes so that youcan trade for all the things that you need and desire whilealso saving time for the pursuits that you value, such as timewith family and friends. To do that, you need to follow theEconosphere’s signals and find those places and industrieswhere you can maximize your potential and thus maximizeyour own happiness.

The good news is that you’re already doing this; it isinborn within you. Even better news, fully embracing thisimpulse will mean that you will not only be taking charge ofyour own situation, you also will become aware that you arethe source of your own well-being, and subsequently youwill not be ashamed of your success when you achieve yourgoals, and you will not be lost for direction during thosetimes when success is scarce.

2. Love Your Environment; Be aPrice Hugger

I am sure that you are familiar with the term tree hug-ger. It refers to people who love their environment so muchthat they want to protect it. They love it so much they hugit, and I suppose a tree is about the easiest thing in natureto get one’s arms around. It also conjures up the images that


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we have all seen of people protecting forests by attachingthemselves in some way to the trees that someone is seek-ing to cut down.

It is a nice image, to see someone who cares so muchfor something that they will drop everything, and evenpotentially put their own well-being at risk to protect whatthey love. Well, I am hoping that you will start looking atour economy as something that you want to love and pro-tect. The Econosphere is what sustains you and providesyou the signals and incentives that you need to create thegoods and services that are most needed and desired, bothlocally and around the globe. It does this primarily throughmarket prices.

Things that are scarce and highly desirable are assignedhigh prices; things that are plentiful and not as highly appre-ciated are assigned low prices. As we look around to findthose things that we can produce and trade to sustain our-selves and our families, it is these prices that help us see whatis most needed and where we should concentrate our timeand abilities. Consequently, market prices are vitally impor-tant to all our well-being! If we didn’t have them, we wouldn’tknow where to concentrate our time. We might spend ourlives producing things of little or no value to our fellow man.As a result, I tend to think of the Econosphere equivalent ofbeing a tree hugger as being a price hugger. We should lovemarket pricing in the same way that an environmentalistloves a tree. Without trees, we would not have shade, oxygen,building materials, and so on. Without prices, we would havenothing to guide our productive lives! Please, please be aprice hugger!


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Today, being a price hugger is as important as it hasever been. There are ongoing efforts to artificially set,change, and obscure prices in our Econosphere, and theseefforts will make us less prosperous. There are public poli-cies put in place to make fuel cheaper, raise pay for certainoccupations, subsidize certain industries, create tariffs toincrease prices, and provide more goods through publicprograms so that individuals are never aware of the actualprice of what they are consuming! These policies are a thickhaze obscuring our vision and muddling our incentives.Someone in power is assuming that he or she knows thetrue “value” of something more so than does our Econo-sphere. Policymakers might believe that a few people canbetter value items than can billions of people making bil-lions of individual judgments. Similar arrogance at one timeled people to blow up mountains, clear-cut forests, divertrivers, and try to remake our physical environment intosomething closer to their own personal vision of utopia. Welearned hard lessons as a result of this type of willfulness,and we are reaping the same bad harvest by trying to reas-sign market prices to better fit someone’s personal sense ofvalue.

If I can impress upon you just one thing, it would be tolearn to love market pricing. Market prices tell you some-thing that no other indicator can. It tells you what the worldneeds and where you can do the most good! There is almostnothing else in the world more important than that onething. Without it, we are lost. Please be a price hugger!


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3. See No Thieves

Begin to embrace that value springs forth from youand every individual, and that the prices that you andeveryone else receives in return for your efforts reflects therelative supply of and demand for the goods and servicesthat you produce and trade. Clumsily dancing on a streetcorner might yield a cup full of spare change. Inventing anew high-tech surgical tool that can save many lives yieldsa more handsome take. Most of us produce things thatgenerally fall somewhere in the middle of that range ofvalues.

The point is, if the Econosphere is allowed to functionas it should, people will be rewarded based on the valuethat they create and bring to others’ lives. This is a trulywonderful, fair, democratic, existential thing. We should beinspired by and aspire to the heights of those who are trulyproductive in their occupation, yielding great value fromtheir lives. We should not, however, allow ourselves tobecome paralyzed with jealousy; something that is notentirely easy to do. We can find this calm place where weare not vengeful toward those who are successful byremembering this one central point: All value springs forthfrom the individual. Your wealth comes from you; what youhave does not come at the expense of another. An unfet-tered Econosphere is never a zero-sum game.

Now sure, you might point out that some people inherittheir wealth, and I would counter: So what? Inheritedwealth is nothing more than stored labor from a previousgeneration. It is a wonderful thing if someone can produce


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so much value to give future generations additional com-fort. There is no theft in this either. The creators of thewealth are perfectly within their rights to pass on theirstored labor. The incentive to provide for future genera-tions keeps us productive late in life when some might havealready created enough to live comfortably through the bal-ance of their own life spans. Grandpa could have lain on thebeach during his last twenty-five years on this earth; wasn’tit a wonderful thing for the world that he didn’t? Instead,he chose to remain productive.

Choose to aspire, but not envy. Just because someonehas wealth, does not mean that he or she has acquired it bytaking it from someone else. As a society we have lawsagainst theft. It is not theft to create valuable goods andservices that the world craves; at least it is not consideredtheft yet!

4. Live Without Borders

Look around; do you see any natural borders that mancannot or should not cross? I see no barrier that has not beenovercome by hard work and the innovation of mankind. Yet,when I look at maps, I see nothing but artificial lines—barri-ers drawn by who knows who, who knows when, for whoknows what purpose!

These lines have horrible consequences! On one sideof a border, you may find plenty, prosperity, and freedom.On the other side, you will find poverty, conflict, and hope-lessness. These lines have no natural meaning, but the


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differences in conditions on either side of these lines havegreat meaning. In almost every case that I know of, on theside of prosperity, we find the Econosphere flourishing,setting prices, allocating resources, and incenting workers.On the other side, we find corruption, strife, castes, centralplanning, and public monopoly. We do not find a systemwhere the market sets prices, we do not find individualswith the freedom to acquire skills and choose their ownvocations, and we do not see the ability for the individualto own or acquire wealth. This is what these artificial linescreate.

The Econosphere cares nothing for those lines; itknows only that it works best where left to operate accord-ing to its natural laws, and that it will operate far less equi-tably where the few and powerful try to supplant itsinfluence. In this vein, and like the Econosphere, I mightsuggest that all of us live paying as little attention to theselines as possible.

Certainly, love your country and honor it. Moreover,work to affect change where people are suppressed ortreated unfairly. However, outside of these imperatives,trade freely with the other inhabitants of the Econosphere,in which we are all fellow citizens. It is through thisexchange of time and talent that we all can support our-selves, prosper, and maximize utility. Turning away fromthat exchange does both a disservice to you, in that youdeprive yourself of potential trading partners and the fullvariety of goods and services available to you, but you alsopartially deprive others of their means to earn a living andsupport themselves in a manner that reflects their potential.


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Any artificial line drawn across a map that restricts the freetrade among fellow citizens of the Econosphere is the socialequivalent of a locked gate, fortification, or dam restrictingfreedom of movement itself.

If you are to experience all that can be experienced inthis world, you must trade with all corners of this world. Ifwe hope to increase our own living standards and everyoneelse’s as well, we must allow all people to be as productiveas they possibly can be.

See no borders. Trade freely and prosper, and subse-quently those who trade freely with you will also prosper.

5. Many Brains Working on SmallProblems Beat Few Brains Workingon Big Problems

In every life there are many, many challenges. TheEconosphere is a self-sustaining natural system, but it is notnirvana and we are certainly not free from problems. TheEconosphere is a system for the equitable distribution ofscarce resources. But those resources are still scarce! More-over, consumer demand over anything but the shortest timehorizon is essentially limitless, so there is a lot of demandthat goes unfulfilled given our finite resources.

Moreover, we have our information problems. Themarket is perfect; information is imperfect, and as such, weall make mistakes. It is these sorts of mistakes, made on agrand scale, that cause volatility in the economy, such aswhen we have speculative bubbles and subsequent recession.


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And so we naturally want to avoid these problems. We don’tlike to see people lose their homes. We don’t like to seepeople lose their jobs. We don’t like to see people live inpoverty. So we want to do something.

The one thing that I want to put across is that no oneperson, or one group of like-minded people, knows theanswer to every problem. But maybe, if we can put all ourheads to work, and each of us work on those problems thatwe know best, we can make this world a much more pleas-ant place.

With that in mind, I believe that we should all vigor-ously question attempts made by one person, or a few peo-ple, to solve our biggest issues. This is the folly of centralplanning. No one person, or council of wise men, can knoweverything. Can one small group of people who do notknow you personally have any idea what car you shoulddrive, or how you should spend, save, and invest yourmoney? Moreover, how can one group of generalists knowhow the banking system should work, know how to doleout healthcare, pick and choose what goods should enterour markets, and have an educated opinion on how youshould raise your kids, what you should eat, and how youshould best spend your time? That is asking too much ofanyone! And for anyone who might think that they are upto that task, I believe that he or she may think too highly ofhis or her own abilities.

Rather, look for micro decisions made on a micro scaleto solve our greatest problems. Some might say that mostpeople are not savvy enough to make such decisions ontheir own, but I would argue that no one is savvier about


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how to spend his or her own life span than the individualwho knows his or her situation the most intimately. Timeand again, we may be told that the individual needs help,but just think of the billions of people who manage lives,families, and businesses all on their own each and everyday.

Just as an example, we are told that people cannot man-age their own financial obligations. Yet, every time interestrates decline, millions of people make the individual effortto refinance their debt. That takes savvy, and yet, these ordi-nary folks who are deemed not worthy to manage their ownaffairs make sure it gets done quickly and efficiently.

Just like everyone else, I don’t have all the answers, nordo you. But when the call is raised for someone to come andsolve our biggest challenges, I would argue and hope to con-vince you to not look for a wise man to solve your woes, lookto yourself and everyone else to make the tough decisions inthose personal areas where each of us are the only real expert.Many heads are better than one. And many heads, each work-ing to solve those problems that they are closest to, are betterthan a few heads trying to solve problems with which theyhave no intimate knowledge or expertise. This is a centraltenet of the Econosphere, and if followed, would certainlylead us away from some of the foolish decisions that we havemade in the past and may well make again in the future.

6. Solve Your Information Problem

So with that in mind, if we are to be the ultimate decisionmaker within our realm of knowledge, if we want to makethe best decisions possible so that we yield the best market


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outcome, we need to solve our own information problem.The absolute best thing that you can do for the world is to bethe most knowledgeable, trained, and skilled person that youcan possibly be. You are in charge of you and yours, so weneed you to be successful! If you achieve this, and everyoneelse does the same, our aggregate wealth and well-being willrise sharply and relentlessly. It is that simple.

As such for your sake and everyone else’s sake, makethe most of the education available to you. Seek out addi-tional education and training. Never stop learning. Readand stay up on topics. Just think of the pain and loss that wecould have saved ourselves had more mortgage borrowersduring the recent housing boom been better aware of theterms of their contacts, the likely trajectory of home prices,the fact that home values can actually fall, and had a realis-tic grasp of their future income stream. This knowledgewould have not only made the recession less deep, it alsowould have eliminated it entirely. Moreover, what if mort-gage-backed securities investors had taken more time tounderstand what it was that they were buying? Theywouldn’t have been left with empty investments and mas-sive losses.

These sorts of information problems are at the basis ofall our economic problems. For policy makers, if they wantto make the economy run smoother, they could and shouldfind ways to improve access to and the quality of education—even if that includes a significant increase in private educa-tional facilities. Just think what could have been avoided hadeveryone taken a personal finance course in high school!Moreover, there should be a serious attempt to make markets


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more transparent through the creation of better, clearer dataand analysis.

Our problems are solvable. First, they need to besolved on a micro basis, empowering the individual. Sec-ond, they need to be made with the best possible informa-tion available. If you want to improve the outcome of yourdecisions, improve your information!

7. Preach the Word

Now, I must ask your help to further the mission that Ihave taken on by writing this book. Now that you...

Know about the Econosphere...Know that you are the source of the value created inthis world...Are comfortable with the way that market prices andtrade help guide us and allow us to support our-selves...Know that what other’s have, they have created andnot taken...And know that it is our information problem thatplagues us, and that each individual must strive to getbetter information so that all peoples’ lots in life canbe improved...

...I ask you to spread the word.

Spread the word not because I want you to, but becausethe more people that understand, the better chance wehave in saving, maintaining, and restoring the natural state


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of the Econosphere. The more people that understand theEconosphere, the more price huggers we will have, and theless likely they will be to support oppressive regimes thathold themselves high as the source of our prosperity or whowant to suppress the Econosphere in favor of their own sys-tem of distributing resources.

I sometimes stand back and marvel at what the envi-ronmental movement has accomplished over the last fewdecades. The idea of associating oneself with being “green”and concerned with the natural environment is near uni-versal now. Imagine what could be accomplished if wecould do the same with awareness of the Econosphere. Wewould drastically reduce poverty and oppression and givehope to those who do not realize that value flows fromwithin them, and that the human life span is the primaryraw material that they will use to support themselvesthroughout their lives as they attempt to maximize theirutility, that is, happiness.

At the very least, do it for yourself. The more peoplewho are out there with a keen eye on adding value and pro-ducing the goods and services that are demanded, the morelikely you will be in finding good value in trading your timeand talent. There could be a tremendous amount of pent-up demand unleashed throughout the globe if only theEconosphere were allowed to flow freely and guide its citi-zens to become more productive with their lives.


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8. Have a Healthy Fear of YourPublic Servants

And for those who might claim that you don’t have todo it yourself, that, perhaps, you might be a victim, or youdeserve better, and for those who promise that they candeliver to you what you want in exchange for your support,be very, very skeptical.

I certainly do not want to send you into your backyardto start building a bunker, or send you off into the woods tobecome a survivalist. However, I do think it behooves us allto always be skeptical of government efforts to extend theirreach into the Econosphere. As we discussed in Chapter 6,“Stupid Policy Tricks,” because the government as an insti-tution sits outside of the rules of the Econosphere, it tendsto behave differently than do firms and individuals. Individ-uals might go broke and starve if they cannot find a produc-tive way of living; firms can go belly-up if their goods orservices are unwanted; but the government will always havethe right to tax, and is thus highly unlikely to go out of busi-ness. This “immortality” for lack of a better word changesits incentives.

Don’t get me wrong, support your government andhonor its role in maintaining the rule of law and defendingproperty rights. This role is conducive to building the kindwell-function countries that now flourish throughout theworld. However, also know that all value and all wealthspring forth from the individual, not from the publicbureaucracy. As such, when someone in a public office


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promises that he has a way to increase wealth by tinkeringwith the Econosphere or by adjusting incentives, know thatthis is simply a transfer of wealth away from one person toanother. And know that the Econosphere is the system thathelps us best direct capital and resources. It seems far-fetched to believe that one person or one group of like-minded people are better adept at directing the flow ofcapital and the allocation of resources than the collectivewisdom of billions, each working in their own areas ofexpertise!

What is the primary incentive of the public bureau-cracy? Among the most compelling, I believe, is to increaseits importance by increasing its sphere of influence. This isdone by grabbing additional tasks and responsibilities, andby also increasing its budget to reflect these new roles. Thelarger the budget, the greater the responsibility, the morenecessary and influential the bureaucracy and its leadershipbecome. Absolutely none of this has anything to do withmaximizing your utility.

Don’t dislike your government. Certainly, be a proudsupporter of democracy and of all the wonderful things thatit has brought to the world. But at the same time, be proudof your role as an individual who creates wealth to supportyourself and your family. Know that your incentives are dif-ferent from the incentives that drive a bureaucracy. Knowthat the bureaucracy wants to grow. When it does expandits reach into allocating resources and directing investment,not only does it cause the Econosphere to function ineffi-ciently such that it decreases aggregate wealth, it becomeshard to push back into a smaller, less intrusive role.



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Anytime someone in an elected office claims that he orshe can do a better job of running the economy than canour own natural Econosphere, be very skeptical.

9. Rise Above the Fads

As with hemlines and the color of kitchen appliances,the opinions of economic pundits and political figures waxand wane with every cycle. Rise above it! The laws of theEconosphere are fixed. No matter if we are in a recessionor whether we are in an economic boom, you will always bea utility maximizer, and the Econosphere will always beallocating resources to its highest use. Market prices, whichtake into account all the information that is publicly avail-able, will always be the best indicator of relative value.

This never changes. Sure, we may not like the marketoutcome. We may mourn a firm that disappears, a regionthat is sharply impacted by a secular downturn, or the lossof our own wealth. However, these occurrences are theresult of imperfect information, not an imperfect Econo-sphere. If we need to fix the problem, we need to improvethe information.

Retooling our economy at times of crisis is often akin tosaying, we need fix nature: Let’s put the ocean over here;we need to repeal the law of gravity; let’s put wild elephantsin Canada; and we need more komodo dragons in Brazil! Asif that would fix our problems! We would just end up with alot of dead elephants and komodo dragons.

156 THE ECONOSPHERE


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We can no more improve the Econosphere than we canimprove upon the laws of nature. But what we can do isconcentrate on operating as efficiently as possible withinour social environment. We need to allow prices to freelyadjust, allow trade to flow unfettered, allow for excesses tobe reduced and deficits to be replenished. Each personneeds to see that he is the source of his own wealth and findthose things that he can provide that will yield a high valueso that he can maximize his own happiness.

It is never the case that capitalism was okay for thisdecade, but now socialism is the way to go, that is untilcommunism makes more sense, and then after that maybewe’ll dabble in feudalism, and maybe then a little anarchy.We have one natural system. It does not matter what youcall it, who approves or how fashionable it is. We can allowit to guide us, or we can try to extinguish it; one of theseoptions leads to the best possible outcome, the other isquixotic and inevitably leads us down a path towardpoverty, corruption, and inequity.

10. Spend Your Lone Raw MaterialWisely

All this brings us back to you, the individual. You areborn with your own loaf of bread. How big that loaf isdepends on whatever abilities you have, the degree towhich you can augment that ability with education andtraining, and the degree to which we as a society allow the



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Econosphere to provide incentives so that you can maxi-mize your potential.

You have one goal and one goal alone: to maximize util-ity (that is, happiness). What makes you happy is unique toyou, but it will typically comprise some portion of your timespent at work, producing goods and services to be traded sothat you can attain the goods and services that you desire,and the rest of your time spent at leisure, pursuing activitiesthat are not necessarily of any value to the market place,but are valuable to you. Within this framework, you mayend up being a workaholic bachelor with a sports car, a fire-fighting husband and father of three, an actress and inter-national jet setter, a small business owner, or a Red Crossworker in Africa helping those who are in great need. It isall up to you.

It is your life, and your life is your chief raw material. Itis yours to spend, and you are the best expert in decidinghow to spend it. No one else can do this job better thanyou—not the government, not the council of wise men,not the pundits, not a Hollywood celebrity, not even aneconomist—you are the expert. Embrace the job! Knowthat the guidance that you need is provided by our freeeconomy and its market prices. Know that you are thesource of your wealth. Know that to make the best deci-sions, you need the best information possible.

Protect the Econosphere from those who want toimpair it. Seek out the education and training that you needso that your time is as valuable as it possibly can be. Realizethat your purpose on this earth is not to work the hardest

158 THE ECONOSPHERE


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but to maximize your own happiness. Stop and smell theroses when you want to; concentrate on producing some-thing of value when you need that additional wealth.

Be as happy as you can be, and live unapologetically—the economy comes from within you. You create your ownvalue; it is yours to spend how you wish.



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161

INDEX

A–B

Atari, 100, 111

babies, place inEconosphere, 42-45

bailout programs, 131balancing nature of

Econosphere, 3-5Bank of America, 106Ben and Jerry’s, 107Bernanke, Ben, 113, 124Biden, Joe, 115borders, 146-148Budweiser, 106Bush, George W., 124,

130businesses. See firms

C–D

career choices, 51-55Carter, Jimmy, 124central planning

dangers of, 148-150

versus market-drivenactivity, case studies

China, 31-32Russian chandelier

factory, 32-34chandelier factory case

study, 32-34children, place in

Econosphere, 45-47China, change to

market-driven economy,31-32

Chrysler, 111companies. See firmscorporate machine,

misconception of, 97-98corporations. See firmscreative destruction, 99

E

earned wealth, sources ofhunger (drive), 74-77talent, 74-77

economic condition, ascollection of actions, 10


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162 INDEX

economycentral planning versus

market-driven activity,case studies

China, 31-32Russian chandelier

factory, 32-34economic condition as

collection of actions, 10economic decisions and

incentives throughoutlifetime, 37-41

career choices, 51-55as children, 45-47as infants, 42-45peer relationships,

47-51personal choices,

56-59subconscious

calculations, 59-62firms

characteristics ofsuccessful firms,98-101

as coalitions, 95-98, 105-112

government effortsto support failinginstitutions, 108-110

misconception of“corporatemachine,” 96-98

as serendipitousintersections ofideas, capital andlabor, 98-101

free trade, 15-17“green” behavior, 11-15as holistic, natural

system, 2-5, 21-22individuals as foundation

of economy, 23-25, 34-36, 140-142

interplay betweenwork and leisure,28

productivity, 28-31role of jobs, 25-28

inequality, 63-94jobs, specialization,

101-105productivity, importance

of, 28-31


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INDEX 163

protecting, 5-6, 17-20understanding natural

laws of, 6-9Econosphere, definition

of, 2education, importance of,

151

F

fads, rising above, 156-157

Federal Reserve Bank, 123, 126

firmscharacteristics of

successful firms, 98-101

as coalitions, 95-98, 105-112

government efforts tosupport failinginstitutions, 108-110

misconception of“corporate machine,”96-98

as serendipitousintersections of ideas,capital and labor, 98-101

fiscal policy, 127-131free trade, 15-17Friedman, Milton, 128

G

GM, 106, 111government policies

efforts to support failinginstitutions, 108-110

failings of, 114-117fiscal policy, 127-131government as bully,

120-123maintaining healthy

skepticism of publicservants, 154-156

monetary policy, 123-127overview, 113public information

resources, 88-91redistribution of wealth,

131-134role as protector of

property rights, 117-120

tax code, 81-88trade policy, 134-137

“green” behavior, 11-15Greenspan, Alan, 124growth, law of, 2


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164 INDEX

H

happiness, common goalof maximizing, 2-5, 10,21-22. See alsomaximizing utility

Hilton, Paris, 64hunger (drive), 74-77

I

imperfect information,77-79

InBev, 106incentives, inequality,

66-70income redistribution

plans, 131-134failure of, 81-88, 91

India, change to market-driven economy,31-32

individualseconomic decisions and

incentives throughoutlifetime, 37-41

career choices, 51-55as children, 45-47as infants, 42-45

peer relationships,47-51

personal choices, 56-59

subconsciouscalculations, 59-62

as foundation ofeconomy, 23-25, 34-36,140-142

interplay betweenwork and leisure,28

jobs, 25-28productivity, 28-31

jobsdefinition of, 25-28specialization,

101-105productivity, 28-31

inequalitychanging

improvedinformationresources, 88-91

productivity, 91-94as economic incentive,

66-70


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INDEX 165

and government policypublic information

resources, 88-91tax system, 81-88

misconception ofeconomy as zero-sumgame, 66-70

overview, 63-65sources of dissimilar

wealth, 70-71imperfect

information, 77-79inherited wealth,

71-74marketplace value,

79-81talent, 74-77

and utility maximization, 65-66

infants, place inEconosphere, 42-45

informationimperfect information,

77-79importance of, 6-9law of, 6public information

resources, 88-91

solving informationproblem, 150-152

inherited wealth, 71-74,145

interest rates, FederalReserve policy, 125-127

J–K

James, LeBron, 75jobs

definition of, 25-28specialization, 101-105

Jobs and Growth TaxRelief ReconciliationAct of 2003, 130

Jobs, Steve, 64

Keynes, John Maynard,128

Kroc, Ray, 64

L

laws of Econospherelaw of growth, 2law of information, 6law of plenty, 21law of sustainability, 13


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166 INDEX

leisure time, 28living without borders,

146-148

M–N

market pricing, benefitsof, 142-144

market-driven activity,case studiesChina, 31-32Russian chandelier

factory, 32-34marketplace value, 79-81maximizing utility

appreciating marketpricing, 142-144

appreciating that wealthdoes not come atexpense of others, 145-146

economic decisions andincentives throughoutlifetime, 37-41


47-51

personal choices, 56-59

subconsciouscalculations, 59-62

inequality, 65-66interplay between work

and leisure, 28knowing that it all comes

from you, 140-142living without borders,



overview, 139-140rising above fads,

156-157solving information

problem, 150-152solving problems with

micro decisions onmicro scale, 148-150

spending raw materialwisely, 157-159

spreading informationabout Econosphere,152-153

Miller, William, 124monetary policy, 123-127


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INDEX 167

O–P

Obama, Barack, 124ownership society, 5

Paulson, Hank, 113peer relationships, 47-51people. See individualspersonal choices, place in

Econosphere, 56-59plenty, law of, 21Polaroid, 100policies. See government

policiesprice hugging, 142-144prices, market pricing,

142-144productivity

importance to economy,28-31

power to increasewealth, 91-94

property rights, role ofgovernment to protect, 117-120

protecting Econosphere,5-6

protectionism, 17-20

public policiesefforts to support failing

institutions, 108-110failings of, 114-117fiscal policy, 127-131government as bully,



monetary policy, 123-127overview, 113public information

resources, 88-91redistribution of wealth,

131-134role as protector of

property rights, 117-120

tax code, 81-88trade policy, 134-137

Q–R–S

redistribution of wealth, 131-134

rising above fads, 156-157Russian chandelier

factory case study, 32-34


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168 INDEX

Schumpeter, Joseph, 99Smith, Adam, 22Snapple, 100social interactions and

judgments, 47-51specialization, 101-105spending raw material

wisely, 157-159spreading information

about Econosphere,152-153

stimulus plansfiscal policy, 127-131monetary policy, 123-127

suburbanization, 40-42sustainability, law of, 13

T

talent, 74-77tax system, 81-88Thomas, Althea, 1trade

barriers to, 134-137free trade, 15-17protectionism, 17-20trade policies, 134-137

U–V

U.S. housing crisis, causesof, 7

Unilever, acquisition ofBen and Jerry’s, 107

utility, maximizingappreciating market

pricing, 142-144appreciating that wealth

does not come atexpense of others, 145-146

economic decisions andincentives throughoutlifetime, 37-41


47-51personal choices,

56-59subconscious

calculations, 59-62inequality, 65-66interplay between work

and leisure, 28


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INDEX 169

knowing that it all comesfrom you, 140-142

living without borders, 146-148

maintaining healthyskepticism of publicservants, 154-156

overview, 139-140rising above fads, 156-

157solving information

problem, 150-152solving problems with

micro decisions onmicro scale, 148-150

spending raw materialwisely, 157-159

spreading informationabout Econosphere,152-153

Volcker, Paul, 124

W–Z

wealthappreciating that wealth

does not come atexpense of others, 145-146

inequalitychanging, 88-94as economic

incentive, 66-70and government

policy, 81-91hunger (drive),

74-77misconception of

economy as zero-sum game, 66-70

overview, 63-65sources of dissimilar

wealth, 70-81and utility

maximization,65-66

redistribution of, 131-134

zero-sum game,misconception ofeconomy as, 66-70


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