Posted by: graemebird | May 3, 2006

Do Galbraith And Ralston-Saul Have A Point?

MY FIRST POST EVER ON THIS BLOG. BROUGHT TO THE FRONT FOR PHILOMENA, SINCE WE HAD BEEN TALKING ABOUT RAULSTON SAUL. I MENTIONED THAT I APPRECIATED HIS ANALYSIS BUT FOUND HIM SHORT ON ANSWERS. WHEREAS WITH GALBRAITH I APPRECIATED HIS ANALYSIS AND FOUND HIM POINT BLANK WRONG ON ANSWERS. IN BOTH CASES YOU ARE MISSING OUT IF YOU ADOPT THE “ANTI-HALO EFFECT”

We want to get to the bottom of why economic liberty is so unpopular. Here is a bit of a fable in this direction cross-posted from Catallaxy:

POOTOWN AND AUSTRALIA CITY.

This is the “Audio Assassins” terminology. He was a radio comedian in Melbourne about 15 years ago. He was just terrific and one would suspect there is something wrong with the system if he is not a millionaire now. So what could be wrong with the system?

Could Galbraith and Ralston Saul be right? We will borrow the Audio Assassins terminology and set up two hypothetical worlds to see if we can suggest what might have gone wrong in order to make the Ralston Sauls and Gabraiths view of the world seem plausible.

In Pootown the most successful big businesses don’t need to pay their loans back. Not really anyway. The money supply growth is about 20% per year. And yet they can pull interest rates at 12%. With tax-deductibility on income tax rates of 75%, that makes their effective interest rate only about 4%.

In Australia city the supply of monetary base (there is no fiduciary money) expands just enough to account for greater holdings due to accumulating wealth. Therefore the nominal GDR* is static and prices fall all the time.

In Pootown the investment markets are highly unstable. The 20% monetary growth sometimes spills over into consumer price inflation, but otherwise it spills into speculative frenzies. The already wealthy can easily double their money under these circumstances. They can usually judge when its time to sell in accordance with the greater fool theory.

In Australia city indexes of investment markets are glacial in thier upward movement. Although individual shares can sometimes take a big jump. The Casino effect and the investments markets are oddly seperate.

In Pootown they have come up with a new ideology which cuts the evolution of society into three ages. No its not marxism or the words of John of Revelations. It is called “THE MARKETING CONCEPT’ and it was developed by General Electric.

And for a brief time the marketing people held plans of world domination. Since in Pootown the guys with guaranteed market share (as we have seen) could borrow money and did not need to pay it back the important thing about being in business was to have something approaching leading and dominant market share.

Dominant meaning in the top two in any local market. Hertz is bankable in Pootown. Avis is bankable in Pootown. But in any local market two is company, three is a crowd. The philosophy of marketing was meant to insure that you were either number 1 or two. Somehow return on total assets employed got left out of this formula.

In Australia city nothing could be so foolish and Quixotic as to attempt some One-Tel-Like project to gain market share. One of the three main gurus Buffet relied on to form his own ideas was Philip Fisher (The main one was Benjamin Graham, And the third most important one I believe was John Maynard Keynes funnily enough!!!!)

Fisher said that either a share was better then cash or it wasn’t. But in Pootown cash affords a very low barrier to jump over in order for a share to be better then it. Plus if you are a favoured son as we have seen you can borrow and you don’t really need to pay it back.

But in Australia city, cash is fantastic.

It comes in fiat sure. But it also comes in four different metals and in one or two other digitised commodities. And since the metals are issued privately the coins are of outstanding design and prettiness. Not just prettness but full on GORGEOUSNESS.

Like a bushel of hot-looking women, you want to rub them, and you don’t necessarily want to let them all go so that some other fella might do likewise.

Whereas the fiat gives you a lasting share of the GDP of Australia city all the currencies gain value without you having to go to the bank. Every damn coin that falls down the back of the couch.

So for a purchase of shares to be a viable alternative it has to be very bloody good. And in practice these purchases come when a young businessman has done everything he can to improve his business internally and his act is scalable.

Then he will borrow money and issue shares on that basis. The funds will be available in spades and Niagras, since people save so much in Australia city. And since people only give up their massive savings with some reticence to investments. They give it up all the time but the investment choices have to be surpassingly good. That is to say that the investment has to jump over a very high bar.

So back to the marketing concept. This deal could never take off in Australia city. Since cash is valuable you would be disinclined to throw it away trying to grab 1 or 2% market share off a competitor.

In Pootown profit margins are low. They brag about the benevolence of capitalism using this fact as evidence. And the favoured businessmen in Pootown join up in all these social activities like Kiwanis and Rotary and they all give to charity. And admittedly these outfits do a lot of good. But something stinks about it all.

While on paper its pretty clear that these invariably tall, invariably feeble-looking, invariably WHITE or “culturally white” businessmen are most benevolent folks…….. everyone feels in their heart that things are not quite right.

In Australia city the profit margins are very high. Since it is simply not worthwhile running your business for any other goal but to increase the revenue on total assets employed.

Not even to increase the total revenue. But to increase the percentage on total revenue almost regardless (but not quite) of the size of the business. Most Australia city businessmen are almost (but not quite) indifferent as to the total size of their business.

Should anyone imagine that this would not be the case resulting from tight money alone see my interim policy measures and you will see I’ve locked this sort of deal in.

But at the same time if some bloke has his business developed to the nth degree and his act is scalable, when he sees his chance he can expand out of nowhere and take over globally. Thereafter spending an eternity getting his act more and more internally efficient.

If Pootown could see through the vortex to the parallel universe that is Australia city the POOTOWNERS would marvel at the primitive nature of the business decisions made.

Since the Australia city businesses are usually small and they are individualist fiefdoms who concentrate on doing things right internally (as a rule) to an even greater extent then they concentrate on the customer. And they seem to not be that anxious to go out and grab custom that may well be grabbed.

The POOTOWNERS would look at the gross margins of the primarily small business outfits of the AUSTRALIA CITIZENS and pat themselves on the back for being less exploitive.

But in Australia city they know that a business that has 1 million in assets with a return on these assets of 40% ($400 000 total profit)is far more to be prized then a business with 16 million dollars worth of assets and a return on assets of only 10% ( $1,600,000 total profit)

This is the case because the scene is so competitive that a 10% margin can be whittled away SO FAST. Whereas a 40% margin brings the question from bankers and investors like a mantra from a hoard of drooling zombies……

“IS IT SCALABLE?”…… and the bankers will come to HIM and kiss HIS ass to get him to accept the funds if the answer is yes.

Now bear in mind in a world where businessmen choose return on total assets as their main business goal we should surely see that the interests of business and the interests of society more generally will be the same interests if the market is a free one.

But these conditions exist not in Pootown. In Pootown the managerial class of tall white guys……… (and only overseas chinese and Jews have the wherewithal to muscle and into this rigged market in this hypothetical and imaginery world that I made up entirely out of my own head for hypothetical and imaginery reasons hypothetically)………….

the managerial class of tall white guys don’t make very good margins. Whereas they see this as proof of the benevolence of capitalism its really proof THAT THE GARDENERS HAVE TAKEN OVER THE ESTATE.

Since they don’t have to pay their loans back (not really they don’t) and since if they disperse their retained earnings these earnings will be double taxed….. and since also any money they spend wastefully will be a tax deduction…….. well they will live high on the hog. They will vote eachother great pay increases. They will sit on eachothers boards pulling multiple six-figure salaries for a few hours work each a year…..

Still it must be said that neither POOTOWN or AUSTRALIA CITY represent things as they are or as they ever were. But the fact that things were like POOTOWN……..TO A DEGREE ……. helps to explain why folks early on in life took on certain predjudices that they may find now hard to quit and went down certain paths that they may now be loathe to turn back from.

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Responses

  1. Welcome to blogsville, ADONIS!! (last word altered by site deity to protect the small children.)

  2. Now Temptress. That’s not very nice. Not very ladylike. I’ll bet you’ve been saving that up for awhile. Good to see you made it here SO FAST.

  3. Ah Sacha! Already we see I have a better class of people here. A higher level of brainpower. Good stuff. Keep coming.

  4. putting the line

    [lessthan]!–more–[greaterthan]

    where [lessthan] is the less than symbol, but I can’t write it otherwise it will go all html on me.

  5. Graeme, there should be a ‘more’ option in your text editor.

    Good to see you out here.

  6. Yeah but you stand to make some money Nabakov. You stand to make some money if your posting is non-evasive and takes into account everything said so far on the thread. And if there is some precision as to what you are pretty sure about and what you are simply assuming.

    You see I want to get the protocol right here and the methodology. Becuase I’ve worked it out that if certain ways of doing things are followed that this blog format can morph into a cheap think-tank.

    So we would want to get the methodology SO DOWN and then you are able to harness so much brainpower that you can spin consultancy work and paid research off a humble blog.

    THE MOST EXPENSIVE BLOG. THE CHEAPEST RESEARCH INSTITUTE.

    That will be my motto.

  7. Anna Winter is obviously out of her depth when the conversation moves a little too far from abortion.
    Anna, hows the kid killing business going, girly? You ought to put up numbers on a mothly basis- kind of like a monthly flash GDP report.

  8. Oh Oh Oh.. No No. Don’t chase her away… She had to get that in because I was fighting her all the time to get my stuff in on Prodeo….

    Her swearing at me is either the censor dealing with being frustrated with me or a private joke.

    But I too am pretty nasty on later term abortions. But on the other hand insult anyone anyway you like. I just want to make clear that Anna knows she’s welcome back here.

  9. Aww, shucks, Comrade. Thanks, it means a lot.

    I will make every effort to pop in from time to time, when I’m not off killing babies.

  10. Right. He is at that. But I want to appeal to peoples gambling spirits and try and get them addicted to attempting to pull more money out then they put in.

    And we try to establish a certain procedure. A certain ‘group epistemology’ as it were that if they follow they should be able to keep playing for free or make some money back.

    But this is all a long way off.

  11. “I will make every effort to pop in from time to time, when I’m not off killing babies.”

    You can kill babies. Be the White Witch of Narnia and still be uncommonly sexy…… But not if they are your own. Because that’s somewhat unnatural and unfeminine.

    Better to kill other peoples babies and act regal.

  12. Heh. A regal, godless theologian.

    I always wanted to be the White Witch. That, or Cruella de Ville, making coats out of puppies.

  13. Maaaaaaaaaaaaaqaaaaaaayte.

    You don’t need Gravatars when you have my Gravitas.

  14. I’ll third the Fiorentino fan club.

  15. “THE MOST EXPENSIVE BLOG. THE CHEAPEST RESEARCH INSTITUTE.

    That will be my motto. ”

    GMB, I love it. Damn I should have thought of it first ’cause then I can resign my job and do something much more interesting. Ha!

    “And we try to establish a certain procedure. A certain ‘group epistemology’ as it were that if they follow they should be able to keep playing for free or make some money back.

    But this is all a long way off. ”

    I have a weird vision of a pokie machine being hooked up to a blog. The thing is, and I’m sure I’m not only speaking for myself, that people who contribute to blogs only keep on doing so if they get something out of it, and then they can get hooked (like I am). The payoff is intellectual/psychological.

    With effort, focus and good will, a blog could emulate a research institute. Eg, in the realm of neoliberal economics, catallaxy could be the seed of a blogging research institute, and on Andrew Leigh’s blog there was a good discussion on repayment of HECS recently. The biggest drawbacks to this are that text as a form of communication has disadvantages. But the thing about blogs is that they allow more ways of communicating, which is great – you can become aware of different ideas.

  16. Oh dear. BirdLab, who ever he is, poor tormented dear, resembles nothing so much as a 4 year old boy constantly yelling “poohead” at adults hoping to get a reaction. And they’re all just blithely laughing at the wee sod.

    Poor sad thingie. Haha.


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