The Keynesian Abenomics is Raising Prices in Japan

Posted by PITHOCRATES - April 14th, 2014

Week in Review

Money is a temporary storage of value.  We created money to make trade easier.  We once bartered.  We looked for people to trade with.  But trying to find someone with something you wanted (say, a bottle of wine) that wanted what you had (say olive oil) could take a lot of time.  Time that could be better spent making wine or olive oil.  So the longer it took to search to find someone to trade with the more it cost in lost wine and olive oil production.  Which is why we call this looking for people to trade goods with ‘search costs’.

Money changed that.  Winemakers could sell their wine for money.  And take that money to the supermarket and buy olive oil.  And the olive oil maker could do likewise.  Greatly increasing the efficiency of the market.  There is a very important point here.  Money facilitated trade between people who created value.  Creating something of value is key.  Because if people were just given money without producing anything of value they couldn’t trade that money for anything.  For if people didn’t create things of value to buy what good was that money?

Today, thanks to Keynesian economics, governments everywhere believe they can create economic activity with money.  And use their monetary powers to try and manipulate things in the economy to favor them.  And one of their favorite things to do is to devalue their money.  Make it worth less.  So governments that borrow a lot of money can repay that money later with devalued money.  Money that is worth less.  So they are in effect paying back less than they borrowed.  And governments love doing that.  Of course, people who loan money are none too keen with this.  Because they are getting less back than they loaned out originally.  And there is another reason why governments love to devalue their money.  Especially if they have a large export economy.

Before anyone can buy from another country they have to exchange their money first.  And the more money they get in exchange the more they can buy from the exporting country.  This is the same reason why you can enjoy a five-star vacation in a tropical resort in some foreign country for about $25.  I’m exaggerating here but the point is that if you vacation in a country with a very devalued currency your money will buy a lot there.  But the problem with making your exports cheap by devaluing your currency is that it has a down side.  For a country to buy imports they, too, first have to exchange their currency.  And when they exchange it for a much stronger currency it takes a lot more of it to buy those imports.  Which is why when you devalue your currency you raise prices.  Because it takes more of a devalued currency to buy things that a stronger currency can buy.  Something the good people in Japan are currently experiencing under Abenomics (see Japan Risks Public Souring on Abenomics as Prices Surge by Toru Fujioka and Masahiro Hidaka posted 4/14/2014 on Bloomberg).

Prime Minister Shinzo Abe’s bid to vault Japan out of 15 years of deflation risks losing public support by spurring too much inflation too quickly as companies add extra price increases to this month’s sales-tax bump.

Businesses from Suntory Beverage and Food Ltd. to beef bowl chain Yoshinoya Holdings Co. have raised costs more than the 3 percentage point levy increase. This month’s inflation rate could be 3.5 percent, the fastest since 1982, according to Yoshiki Shinke, the most accurate forecaster of Japan’s economy for two years running in data compiled by Bloomberg…

“Households are already seeing their real incomes eroding and it will get worse with faster inflation,” said Taro Saito, director of economic research at NLI Research Institute, who says he’s seen prices of Chinese food and coffee rising more than the sales levy. “Consumer spending will weaken and a rebound in the economy will lack strength, putting Abe in a difficult position…”

Abe’s attack on deflation — spearheaded by unprecedented easing by the central bank — has helped weaken the yen by 23 percent against the dollar over the past year and a half, boosting the cost of imported goods and energy for Japanese companies.

Japan is an island nation with few raw materials.  They have to import a lot.  Including much of their energy.  Especially since shutting down their nuclear reactors.  Japan has a lot of manufacturing.  But that manufacturing needs raw materials.  And energy.  Which are more costly with a devalued yen.  Increasing their costs.  Which they, of course, have to pay for when they sell their products.  So their higher costs increase the prices their customers pay.  Leaving the people of Japan with less money to buy their other household goods that are also rising in price.  Which is why economies with high rates of inflation go into recession.  As the recession will correct those high prices.  With, of course, deflation.

Keynesians all think they can manipulate the market place to their favor by playing with monetary policy.  But they are losing sight of a fundamental concept in a free market economy.  Money doesn’t have value.  It only holds value temporarily.  It’s the things the factories produce that have value.  And whenever you make it more difficult (i.e., raise their costs by devaluing the currency) for them to create value they will create less value.  And the economy as a whole will suffer.


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From Commodity Money to Representative Money to Fiat Money

Posted by PITHOCRATES - April 8th, 2014

History 101

(Originally published November 8th, 2011)

The Drawbacks to Using Pigs as Money Include they’re not Portable, Divisible, Durable or Uniform

They say we use every part of the pig but the oink.  So pigs are pretty valuable animals.  And we have used them as money.  Because they’re valuable.  People were willing to accept a pig in trade for something of value of theirs.  Because they knew they could always trade that pig to someone else later.  Because we use every part of the pig but the oink.  Which makes them pretty valuable.

Of course, there are drawbacks to using pigs as money.  For one they’re not that portable.  They’re not that easy to take to the market.  And they’re big.  Hold a lot of value.  So what do you do when something is worth more than one pig but not quite worth two?  Well, pigs aren’t readily divisible.  Unless you slaughter them.  But then you’d have to hurry up and trade the parts before they spoil because they’re not going to stay fresh long.  For pig parts aren’t very durable.

Suppose you have two pigs.  And someone has something you want and they will trade two pigs for it.  But there’s only one problem.  One pig is big and healthy.  The other is old and sickly.  And half the weight of the healthy one.  This trader was willing to take two pigs in trade.  But clearly the two pigs you have are unequal in value.  They’re not uniform.  And not quite what this trader had in mind when he said he’d take two pigs in trade.

Our Paper Currency Evolved from the Certificates we Carried for our Gold and Silver we Kept Locked Up

Rats are more uniform.  They’re more portable.  And they’re smaller.  It would be easier to price things in units of rats rather than pigs.  They would solve all the problems of using pigs as money.  Except one.  Rats are germ-infested parasites that no one wants.  And they breed like rabbits.  You never have only one rat.  Man has spent most of history trying to get rid of these vile disease carriers.  So no one would trade anything of value for rats.  Because these little plague generators were overrunning cities everywhere.  So rats were many things.  But one thing they weren’t was scarce.

Eventually we settled on a commodity that addresses all the shortcomings of pigs and rats.  As well as other commodities.  Gold and silver.  These precious metals were portable.  Durable.  They didn’t spoil and held their value for a long time.  You could make coins in different denominations.  So they were easily divisible.  Unlike a pig.  They were uniform.  Unlike pigs.  Finally, you had to dig gold and silver out of the ground.  After digging a lot of holes trying to find gold and silver deposits.  Which made it costly to bring new gold and silver to market.  Keeping gold and silver scarce.  And valuable.  Unlike rats.

But gold and silver were heavy metals.  Carrying large amounts was exhausting.  And dangerous.  A chest of gold and silver was tempting to thieves.  As you couldn’t hide it easily.  Soon we left our gold and silver locked up somewhere.  And carried certificates instead that were exchangeable for that gold and silver.  And these became our paper currency.

Governments Everywhere left the Gold Standard in the 20th Century so they could Print Fiat Money

The use of certificates like this is typically what people mean by gold standard.  Money in circulation represents the value of the underlying gold or silver.  And can be exchanged for that gold or silver.  Which meant that governments couldn’t just print money.  Like they do today.  Because the value was in the gold and silver.  Not the paper that represented the gold and silver.  And the only way to create money was to dig it out of the ground, process it and bring it to market.  Which is a lot harder to do than printing paper money.  So governments everywhere left the gold standard in the 20th century in favor of fiat money.  So they could print money.  Create it out of nothing.  And spend it.  With no restraints of responsible governing whatsoever.


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Hard Money versus Paper Money

Posted by PITHOCRATES - March 17th, 2014

Economics 101

(Originally published April 1st, 2013)

Money would have No Value if People with Talent didn’t Create things of Value

Money is a temporary storage of wealth.  We created it because of the high search costs of the barter system.  It took a lot of time for two people to find each other who each had what the other wanted.  And we started trading things to have things we couldn’t make efficiently for ourselves.  Someone may have been a superb potter but was a horrible farmer.  So, instead, the potter did what he did best.  And traded the pottery he made for the things he wanted that he was not good at making.  Or growing.  Before that we were self-sufficient.  Whatever you wanted you had to provide it yourself.

As we go back in time we learn why money is a temporary storage of wealth.  For it was the final piece in a growing and prosperous economy.  And at the beginning it was people with talent, each creating something of value.  Something of value that they could trade for something else of value.  It’s the creative talent of people that has value.  And we see that value in the goods and/or services they make or provide.  Money temporarily held that value.  So we could carry it with us easier to go to market to trade with other talented and creative people.  Who may not have wanted what we made or did.  But would gladly take our money.

So we took our goods to market.  People that wanted them traded for them.  They traded money for our goods.  Then we took that money and traded for what we wanted elsewhere in the market.  Trade grew.  With some people becoming professional traders.  By trading money for goods from distant lands.  Then trading these goods for money at the local market.  People who didn’t spend time creating anything.  But bought and sold the creative talent of others.  Who were able to do that because of money.  The creative talent came first.  Then the goods.  And then the money.  For money is a temporary storage of wealth.  Which has no value if no one is making anything of value.  Because if you can’t buy anything what good is having money?

There were no more Gold Certificates in Circulation than there was Gold in the Vault to Exchange them For

These early traders used a variety of things for money.  Pigs, tobacco, grain, oil, etc.  What we call commodity money.  Which was valuable by itself.  As people consumed these commodities.  Which is what gave them the ability to store value.  But because we could consume these they did not make the best money.  Also, they weren’t that portable.  And not easy to make change with.  Which is why we turned to specie.  Such as gold and silver.  Hard money.  It was durable.  Portable.  Divisible.  Fungible.  For example, all Spanish dollars were the same while all pigs weren’t.  One pig could weigh 30 pounds more than another.  So pigs weren’t fungible.  Or durable.  Portable.  And, though divisible, making change wasn’t easy.

So in time traders big and small turned to specie as the medium of exchange.  For all the reasons noted above.  If you worked hard to produce fine pottery you trusted in specie.  You would accept specie for your pottery goods.  Because you knew this hard money would hold its value.  And you could use it in the future to buy what you wanted.  No matter how long that may be.  Why?  Because the money supply remained relatively constant.  As it took a lot of work and great expense to mine and refine ore to make specie out of it.  So there was little inflation when using hard money.  Which meant if you saved for a rainy day that hard money would be there for you.

Gold and silver could be heavy to carry around.  Anyone struggling under the weight of their specie were targets for thieves.  Who wanted that money.  Without creating anything of value to bring to market.  So we found a way to improve a little on using gold and silver.  By locking our gold and silver in a vault.  And carrying around receipts for our gold and silver to use as money.  These gold certificates were promises to pay in gold.  People could continue to use them as money.  Or they could take these receipts back to the vault and exchange them for the gold inside.  These gold certificates were as good as gold.  And there were no more gold certificates in circulation than there was gold in the vault to exchange them for.

Governments Today use nothing but Paper Money because it gives them Privilege, Wealth and Power

Some saw advantages of expanding the money supply with paper currency.  Money that isn’t backed by gold or any other asset.  Money easy to print.  And easy to borrow.  Allowing rich people to borrow large sums of money to buy more assets.  And get richer.  Giving them more power.  And if you were the one printing and loaning that money it gave you great wealth and power.  So having a bank charter was a way to wealth and power.  You could make it easy for those who can help you to borrow money.  While making it difficult for those who oppose you to borrow money.  So there were those in business and in government that liked un-backed paper money.  Because a select few could borrow it cheaply and get rich and powerful.

While some liked these banks and that paper money there were others who bitterly opposed them.  Some who didn’t like to see so much power in so few hands.  And the hard money people.  Who wanted a money that held its value.  The common people.  People who couldn’t borrow large sums of cheap money.  But people who had to get by on less as the inflation from printing all those paper dollars raised prices.  Leaving them with less purchasing power.  Making it harder for them to get by.  Often having to turn to the hated banks to borrow money.  Again and again.  Such that the interest on their loans consumed even more of their limited funds.  Making life more tenuous.  And more bitter between the classes.  The rich who benefited from the cheap paper money.  And the common people who paid the price of all that inflation.

Rich people, on the other hand, loved that inflation.  It helped them make money.  When they bought something at a lower price and sold it at a higher price they made a lot of money.  The greater the inflation the greater the selling price.  And the more profit.  Also, the money they owed was easier to pay off with money that was worth less than when they borrowed it.  Allowing rich people to get even richer.  While the common people saw only higher prices.  And the value of their meager savings lose value.  So this cheap paper money fostered great class warfare.  The hard money people hated the paper money people.  Debtors hated creditors.  The middling classes hated the large landowners, merchants, manufacturers and, of course, the bankers.  And those who had talent to create things hated those who just made money with money.  The greater the inflation the greater the divide between the people.  And the greater wealth and power that select few acquired.  This is what paper money gave you.  Privilege.  Which is why most governments today use nothing but paper money.


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Byzantine Empire, Bosporus, Silk Road, Dutch East India Company, English East India Company, Tea Act and Opium Wars

Posted by PITHOCRATES - March 11th, 2014

History 101

(Originally published May 15th, 2012)

To encourage Risk Takers to Travel Halfway around the World Mercantile States granted Monopoly Charters

The modern world began because Europeans had a penchant for silk and spices.  Something they enjoyed during Roman times.  When the Romans ruled the world.  And the Mediterranean Sea was nothing more than a Roman lake.  But when the empire stopped conquering new lands and sending the spoils of war home they had to turn to other means to pay for the cost of empire.  Taxes.  To pay for the Roman government and their public spending.  And the Roman legions.  This excessive government spending led to the fall of the western half of the empire.  But the eastern half lived on for another 1,000 years or so.  Why?  Because the capital of the Byzantine Empire was Constantinople.  On the Bosporus.  Trade crossroads of the world.

This city was so rich everybody wanted to conquer it.  So they could have all those riches.  For everything that came along the Silk Road from China crossed into Europe at the Bosporus.  Soon Muslims fought Christians in the Holy lands.  Then more Christians came.  The Crusaders.  Those who didn’t die went back to Europe with some of those Chinese luxuries.  Spices.  Silk.  Porcelain.  Etc.  Sparking a renewed interest in these finer things in Europe.  Especially the spices.  For European cooking was horribly bland at the time.  The Ottoman Turks eventually took Constantinople.  Renamed it Istanbul.  And controlled that lucrative trade.  Making those much sought after Asian goods rather expensive in Europe.  Which they had no choice but to pay.  Because if you wanted those luxuries you had to go through Istanbul.  Until the Portuguese sailed around Africa and found a direct route to those cherished goods, that is.

It was the Commercial Revolution.  A new age of international trade.  A trade even more profitable than what the Ottoman Turks controlled.  Because big ocean-going vessels can carry more cargo than anything coming over land on the Silk Road.  And these new European maritime powers wanted that wealth.  And the power it would provide.  To encourage risk takers to get into those wooden ships and travel halfway around the world they granted monopoly charters.  The Dutch East India Company (VOC) was one of the largest.  And one of the wealthiest.  But this was not your typical company.  The VOC established overseas colonies.  It waged war.  Established treaties.  Even coined its own money.  Because of this thousands of VOC ships stuffed full of valuable cargoes sailed to Antwerp and Amsterdam, making the Dutch very wealthy.  And powerful.

The Tea Act allowed the Company to Ship their Tea Directly to America and exempted them from any Duties

Of course the Dutch weren’t the only ones doing this.  They had competition.  Portugal.  Spain.  France.  And England.  Who would bump into each other numerous times fighting for control of this trade.  And those colonies.  The English and the Dutch would fight 4 wars.  Which is how Dutch-founded Manhattan became part of the British Empire and, subsequently, one of America’s greatest cities.  The English East India Company gave the VOC a run for its money.  Parliament even passed legislation to give the English a monopoly on all trade with their American colonies.  The Navigation Acts.  Which stated that all trade to and from America had to be on English ships.  And all trade had to go through an English port.  Where the ships were unloaded and the cargoes inspected.  And taxed.  Then they could reload their cargoes and continue on their journey.  All tenets of mercantilism.  This kept the lower-priced Dutch goods out of America.  And prevented the Americans from selling to the Dutch directly for higher prices.  So it shut down the Dutch from all American trade (except for a prosperous black market). And brought in some lucrative tax revenue for England.  While extending shipping times and increasing prices for the Americans.  Which they were not happy about in the least.

The English East India Company (the Company) was similar in structure to the VOC.  And soon made the Indian subcontinent a wholly owned subsidiary of the Company.  But it wasn’t cheap.  Waging war was costly.  As was managing those conquered territories (something the Romans had also learned).  Then a famine in Bengal in 1770 claimed about one-third of the local population.  Making laborers more scarce.  And more expensive.  All at a time when the sales of their imported goods were falling in Europe.  There were warehouses full of unsold Chinese tea that they couldn’t sell.  Making for a bad time for the Company.

Higher costs and lower sales spelled trouble.  And that’s what the Company had a lot of.  Trouble.  So the Company turned to Parliament for help.  And Parliament helped.  By allowing the Company to ship their tea directly to America without having to unload it in a British port.  Or pay a duty on that tea.  Which would greatly reduce their costs.  And allow them to sell it in America cheaper than they did before.  So Parliament passed the Tea Act in 1773.  Making life better for all involved.  But the Tea Act left in place another tax in the previous Townshend Acts.  Which was a bigger problem than getting cheaper tea (which they could get on the black market from the Dutch).  These taxes on the British subjects in America were unconstitutional.  Because there were no Americans sitting in Parliament.  This was taxation without representation.  A much bigger issue than cheap tea.  So they threw that first ‘cheap’ tea into Boston Harbor.  The Boston Tea Party being a major step towards war with the mother country.  And American independence.

Britain became the Lone Superpower after Abandoning their Protectionist Mercantile Policies and Adopting Free Trade

The American Revolutionary War was not the only headache the British got from their mercantile policies.  Part of those policies required maintaining a positive balance of trade.  So there was always a net inflow of bullion into the mother country.  That’s why raw materials shipped into Britain from America.  And finished goods shipped out to America.  Finished goods are more valuable than raw materials.  So the Americans had to make up for this balance of trade in bullion.  Resulting in a net inflow of bullion into the mother country.  Very simple.  As long as you can manufacture higher valued goods that other people want to buy.

And this is the problem they ran into with the Chinese.  For though the British wanted those Chinese spices, silk and porcelain the Chinese didn’t want anything the British manufactured.  Which meant Britain had to pay for those luxuries with bullion.  Including all that Chinese tea they craved.  Which resulted in a net outflow of bullion to the Chinese.  The British fixed this problem by finding the one thing that the Chinese people wanted.  Indian opium.  Grown in Bengal.  Of course, this turned a lot of Chinese into opium addicts.  The addiction problem was so bad that the Chinese banned opium.  But the British were able to smuggle it in.  They sold so much of it that they used the proceeds to buy their tea.  Thus reversing the bullion flow.

Not the finest hour in the British Empire.  The Chinese and the British would go on to fight a couple of wars over this opium trade.  The Opium Wars.  Which the British did all right in.  Even gaining Hong Kong in the bargain.  They didn’t build any long-lasting love with the Chinese people.  But Hong Kong turned out pretty nice under the British.  Especially after they abandoned their protectionist mercantile policies and adopted free trade.  Which made the British the lone superpower for about a century as they modernized the world by leading the way in the Industrial Revolution.  And the Chinese in Hong Kong were very happy indeed to be there when the communists took over the mainland.  And caused a famine or two.  For they lived comfortably.  In a state founded on mercantilism.  That achieved its greatest prosperity during the free trade of capitalism that followed Britain’s mercantile ways.


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Posted by PITHOCRATES - March 4th, 2014

History 101

Ukraine is a Nation with Farmland so Fertile it earned the Moniker the ‘Breadbasket of Europe’

All roads may have led to Rome.  But all rivers led to Byzantium.  The city Constantine the Great of the Roman Empire turned into Constantinople.  Modern day Istanbul.  The great city on the Bosporus.  One-time trade crossroads of the world.  Where East met West.  And Europe met Asia.  Where goods from the Far East traveling on the Silk Road passed through on their way to Europe.  And where grain grown in the fertile river valleys of Eastern Europe passed through to feed the great empires.

Rivers created civilizations.  For they provided fertile farmland in their valleys.  And the rivers provided avenues for trade.  Which is why our great cities first appeared on rivers.  Like Kiev.  The Ukrainian capital.  On the Dnieper River.  Which flows from Smolensk through Russia, Belarus and Ukraine.  Emptying into the Black Sea.  Along with the Danube.  The Don.  And via a short portage from the Don, trade flowed to the Black Sea on the Volga, too.  (But the waters flowed into the Caspian Sea.)  And across the Black Sea lay Constantinople.  One-time trade crossroads of the world.

Ukraine is a nation with a lot of fertile farmland.  It is so fertile that it earned the moniker the ‘breadbasket of Europe’.  Making Ukraine some very valuable real estate.  Because of their grain production.  And the access the Dnieper River provided.  Opening trade between Scandinavia and the Byzantine Empire in Constantinople.  Providing Ukraine with a lot of north-south movement via the Dnieper.  As well as a lot of east-west movement via land between the Germanic tribes to the west.  And the Turkic people to the east.

To improve Relations with the Rus’ the Byzantine Patriarch converted the Rus’ and the Slavs to Christianity

Kiev was a crossroads.  Varangians (i.e., Vikings) moved south from Scandinavia.  The Greeks from Byzantine moved north.  As they did they bumped into the indigenous Slavs.  And the Khazars (one of those Turkic people).  Kiev was geographically in the Khazar Empire.  But the Varangians ruled Kiev.  As it was on their trade route with the Greeks in Constantinople.  It was the Varangians who ruled Kiev during the Golden Age (11th to early 12th centuries).  Which saw the rise of Kievan Rus’.  Which in time and much change gave us modern day Russia.

As the Rus’ expanded south they encroached on Khazar territory.  The Khazars allied with the Byzantine Empire and fought against the Persians and Arabs.  Who wanted that rich crossroads.  Constantinople.  As did the Rus’.  So there were all kinds of war with all kinds of people.  Which wasn’t good for trade.  So the Byzantines established a division of their empire on the Crimean peninsula on the northern shore of the Black Sea.  Near the mouth of the Dnieper.  The Theme of Cherson.  To ward off those raids by the Rus’.  And to protect the grain coming to Constantinople from the breadbasket of Europe.  The Theme of Cherson became the center of Black Sea commerce.

But to improve relations with the Rus’ the Byzantine Patriarch Photius sent emissaries to convert the Rus’ and the Slavs to Christianity.  In 863 brothers Cyril and Methodius headed north.  They could speak the Slavonic language.  Which was then only a spoken language.  They created an alphabet for them.  The Glagolitic alphabet.  Which became the Cyrillic alphabet.  And gave them a written language.  Translated scripture so they could read it.  And extended the Greek culture of the Byzantine Empire to these lands.  As well as Orthodox Christianity.  Which is why today many of the lands radiating out from the rivers flowing to the Black Sea are Orthodox Christian (Russian Orthodox, Ukrainian Orthodox, Serbian Orthodox, etc.).

Russian Migration into Ukraine helped make her less Ukrainian and more Russian

Kiev was one of the largest cities in the world.  Then came the invasions.  First from the Asian steppes to the east.  The Pechenegs in 968.  And then the Mongols in 1240.  Who completely destroyed Kiev.  Then the Lithuanians from the north (1320s).  Then the Crimean Tatars sacked and burned Kiev (1482).  Then Kiev passed to Poland (1569).  Then the Russians took it over.  In the 18th and 19th centuries the city was full of Russian soldiers.  And ecclesiastical authorities.  From the Russian Orthodox Church.  Making the Ukrainian people more Russian.  Some Ukrainians tried to change that in the 1840s but Russia put a stop to that.

The Russian Empire kept pushing south.  For they wanted a warm-water port.  Which they could have on the Black Sea.  All they had to do was fight through the Ukrainians.  Which they did.  By this time the Muslim Ottoman Turks had long conquered the Christian Byzantine Empire.  Which left the Ottomans open to Russian aggression once the Russians took Ukraine.  Of course, if the Russians conquered the Ottoman Empire that would give Russia open access to the Mediterranean Sea.  Where they could threaten the British Empire holdings.  Also, the Russians could free their fellow Orthodox Christians from Muslim rule.

This aggression exploded into one of the bloodiest wars in history.  The Crimean War (October 1853 – February 1856).  Much like the American Civil War the technology was well ahead of the tactics.  The Russian Empire took on the French Empire, the British Empire, the Ottoman Empire and the Kingdom of Sardinia.  Russia lost.  And she lost what she most coveted.  That warm-water port.  But that didn’t last for long.  Changes elsewhere allowed Russia to reject portions of the peace treaty that ended that war.  And built a navy she operated out of the Black Sea port of Sevastopol (first founded in 1783 by Rear Admiral Thomas Mackenzie then fortified by Catherine the Great in 1784).  On the Crimea peninsula.  And the Russians have been there ever since.

But the beating the Russians took led Tsar Alexander II to free the serfs.  And try to advance the backward Russia to be more like the advanced nations that had beaten her.  But it was too late.  For this marked the beginning of the end for Tsarist Russia.  The war left her in great debt.  So much debt that Russia sold Alaska to the United States.  While creating social unrest that would eventually lead to the October Revolution.  And the Soviet Union.  All the while Russian migration into Ukraine continued.  Making Ukraine less Ukrainian and more Russian.  With the Russian language taking over in Kiev and other large Ukrainian cities.  Pushing the Ukrainian language and culture to the country.  Leading to a divided Ukraine.  Under the boot of the Soviet regime.  Until the collapse of the Soviet Union.  When Ukraine finally got her independence.  Which Russian president and former KGB officer of the Soviet Union, Vladimir Putin, is now currently taking away.


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The Russian Empire

Posted by PITHOCRATES - February 11th, 2014

History 101

The Europeans built Larger Ships and used Advanced Navigational Skills to sail from Europe to the Far East

The Anatolian peninsula (roughly the area of modern day Turkey) has long been a trade crossroads.  It’s where the Black Sea (and the rivers into Europe and Russia) met the Mediterranean Sea.  It’s where Europe met Asia.  Where East met West.  All important long-distant trade traveled through the Anatolian peninsula.  Right through the Bosporus.  The straits between East and West.

The Greeks, the Persians, the Romans and the Ottoman Turks all coveted this region.  When the Western Roman Empire fell the great Italian city-states rose.  They dominated the Mediterranean.  And the trade through the Bosporus.  Where the Silk Road for centuries brought riches from the Far East into Europe.  The Italian merchant banks controlled that trade.  Until the Eastern Roman Empire (the Byzantine Empire) fell to the Ottoman Turks.  Which, lucky for the Europeans, happened at the time of the Renaissance.  Bringing an end to the Middle Ages.  And ushering in the modern era.

It started in Italy.  And then spread into Europe.  A rebirth (hence Renaissance) of all that Greek learning.  Which shifted the trading center from the eastern Mediterranean to Europe.  Where the Europeans built larger ships and used advanced navigational skills to sail from Europe to the Far East.  Bypassing the Silk Road.  And the Ottoman Turks in the Anatolian peninsula.  Making the Europeans the new rich traders.  Knowledge and wealth created more ships for trade.  And advanced armies and navies.  Making the Europeans the masters of the world.

Peter the Great pulled Russia out of the Middle Ages by making it more European

While the Mediterranean and European nations were ushering in the modern world not all of Asia followed them.  Russia in particular remained in the Middle Ages.  A vast land full of disparate peoples.  Not a unique and singular Russian people.  Until Ivan the Terrible came along.  The Grand Prince of Moscow from 1533 to 1547.  Then Tsar of All the Russians.  Ivan the Terrible united Russia by conquering it.  But at a cost.  Continuous wars killed a lot of Russian people.  Which left a lot of farmland fallow.  Giving Russia a chronic problem they would have for centuries.  The struggle to feed themselves.

Tsar Peter the Great (1682 – 1725) modernized Russia.  To be a more modern country like those in Europe.  He even went to Europe incognito to learn as much as he could about advanced European ways.  And had Europeans help him pull Russia out of the Middle Ages.  He made his army to be like European armies.  Learned about shipbuilding.  And built a Russian navy.  Which was a problem as the only access to the sea Russia had was the Arctic Ocean via the White Sea.  Which meant, of course, war and conquest.  He fought the Swedes for access to the Baltic Sea.  And he fought the Ottoman Turks for access to the Black Sea.

The disparate people of Russia were not all that happy with his ideas or the money he spent.  So he brutally suppressed any discontent.  Peter built his navy.  And a new capital on the Baltic Sea.  Saint Petersburg.  A European cultural center.  And the Imperial capital of Russia.  He also attacked the Ottoman Empire.  And lost.  Losing his Black Sea ports.  But Russia would return to fight the Ottoman Turks.  Under Catherine the Great.

The Bolsheviks killed Tsar Nicholas and his Family and ushered in the Oppressive Soviet Union

Catherine the Great ruled during Russia’s Golden Age.  Continuing the work started by Peter the Great to modernize Russia.  Making Russia a great European power.  Through military conquest.  And diplomacy.  She was even an international mediator.  And established the League of Armed Neutrality to protect neutral shipping from British attacks during the American Revolutionary War.

Catherine pushed Russia’s borders out largely at the expense of the Ottoman Empire.  And the Polish–Lithuanian Commonwealth.  These conquests cost, though.  And she turned to the nobility to pay for them.  In return she supported the nobility.  But the wealth she got form the nobility came from the serfs (basically slave laborers) working their land.  Which took a lot of work to pay for her conquests.  Leading to a peasant uprising or two.  But serfdom would continue in Russia.  Tsar Alexander I advanced the status of Russia with his defeat of Napoleon.  They even called him the Savior of Europe.  But serfdom remained as the Industrial Revolution took off in Europe.  Halting the modernization of Russia.

Tsar Alexander II emancipated the serfs in 1861.  Ending the landed aristocracy’s monopoly of power.  Serfs left their lands.  And moved into the cities.  Selling their labor.  Industrializing Russia.  Still, their freedom favored the landed aristocracy.  Who were compensated for their serfs’ freedom with a tax paid by the freed serfs.  Which little improved the life of the freed serfs.  And did little to ease the revolutionary fervor long simmering in the Russian people.  Especially those outside the nobility.

When Tsar Nicholas II entered Russia into World War I things did not go well for Russia.  Military losses, food shortages, fuel shortages, inflation and striking factory workers made the nation ripe for revolution.  Tsar Nicholas went off to command the Russian Army personally.  Leaving his wife Alexandra to run the country in his absence.  Who turned to Grigori Rasputin for help.  Which didn’t help quell the revolutionary fervor simmering in the Russian people.  They didn’t like Rasputin.  Or the Tsar.  And made Tsar Nicholas the last emperor of the Russian Empire.  Which the Bolsheviks made permanent.  By killing Nicholas and his entire family.  Which ultimately ushered in the Soviet Union.  One of the most oppressive regimes of all time.


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Bretton Woods System, Quasi Gold Standard, Inflation, Savings, Nixon Shock and Monetizing the Debt

Posted by PITHOCRATES - February 4th, 2014

History 101

(Originally published 2/5/2013)

The Bretton Woods System was a quasi Gold Standard where the U.S. Dollar replaced Gold

Government grew in the Sixties.  LBJ’s Great Society increased government spending.  Adding it on top of spending for the Vietnam War.  The Apollo Moon Program.  As well as the Cold War.  The government was spending a lot of money.  More money than it had.  So they started increasing the money supply (i.e., printing money).  But when they did they unleashed inflation.  Which devalued the dollar.  And eroded savings.  Also, because the U.S. was still on a quasi gold standard this also created a problem with their trade partners.

At the time the United States was still in the Bretton Woods System.  Along with her trade partners.  These nations adopted the U.S. dollar as the world’s reserve currency to facilitate international trade.  Which kept trade fair.  By preventing anyone from devaluing their currency to give them an unfair trade advantage.  They would adjust their monetary policy to maintain a fixed exchange rate with the U.S. dollar.  While the U.S. coupled the U.S. dollar to gold at $35/ounce.  Which created a quasi gold standard.  Where the U.S. dollar replaced gold.

So the U.S. had a problem when they started printing money.  They were devaluing the dollar.  So those nations holding it as a reserve currency decided to hold gold instead.  And exchanged their dollars for gold at $35/ounce.  Causing a great outflow of gold from the U.S.  Giving the U.S. a choice.  Either become responsible and stop printing money.  Or decouple the dollar from gold.  And no longer exchange gold for dollars.  President Nixon chose the latter.  And on August 15, 1971, he surprised the world.  Without any warning he decoupled the dollar from gold.  It was a shock.  So much so they call it the Nixon Shock.

To earn a Real 2% Return the Interest Rate would have to be 2% plus the Loss due to Inflation

Once they removed gold from the equation there was nothing stopping them from printing money.  The already growing money supply (M2) grew at a greater rate after the Nixon Shock (see M2 Money Stock).  The rate of increase (i.e., the inflation rate) declined for a brief period around 1973.  Then resumed its sharp rate of growth around 1975.  Which you can see in the following chart.  Where the increasing graph represents the rising level of M2.

M2 versus Retirement Savings

Also plotted on this graph is the effect of this growth in the money supply on retirement savings.  In 1966 the U.S. was still on a quasi gold standard.  So assume the money supply equaled the gold on deposit in 1966.  And as they increased the money supply over the years the amount of gold on deposit remained the same.  So if we divide M2 in 1966 by M2 in each year following 1966 we get a declining percentage.  M2 in 1966 was only 96% of M2 in 1967.  M2 in 1966 was only 88% of M2 in 1968.  And so on.  Now if we start off with a retirement savings of $750,000 in 1966 we can see the effect of inflation has by multiplying that declining percentage by $750,000.  When we do we get the declining graph in the above chart.  To offset this decline in the value of retirement savings due to inflation requires those savings to earn a very high interest rate.

Interest Rate - Real plus Inflation

This chart starts in 1967 as we’re looking at year-to-year growth in M2.  Inflation eroded 4.07% of savings between 1966 and 1967.   So to earn a real 2% return the interest rate would have to be 2% plus the loss due to inflation (4.07%).  Or a nominal interest rate of 6.07%.  The year-to-year loss in 1968 was 8.68%.  So the nominal interest rate for a 2% real return would be 10.68% (2% + 8.68%).  And so on as summarized in the above chart.  Because we’re discussing year-to-year changes on retirement savings we can consider these long-term nominal interest rates.

Just as Inflation can erode someone’s Retirement Savings it can erode the National Debt

To see how this drives interest rates we can overlay some average monthly interest rates for 6 Month CDs (see Historical CD Interest Rate).  Which are often a part of someone’s retirement nest egg.  The advantage of a CD is that they are short-term.  So as interest rates rise they can roll over these short-term instruments and enjoy the rising rates.  Of course that advantage is also a disadvantage.  For if rates fall they will roll over into a lower rate.  Short-term interest rates tend to be volatile.  Rising and falling in response to anything that affects the supply and demand of money.  Such as the rate of growth of the money supply.  As we can see in the following chart.

Interest Rate - Real plus Inflation and 6 Month CD

The average monthly interest rates for 6 Month CDs tracked the long-term nominal interest rates.  As the inflationary component of the nominal interest rate soared in 1968 and 1969 the short-term rate trended up.  When the long-term rate fell in 1970 the short-term rate peaked and fell in the following year.  After the Nixon Shock long-term rates increased in 1971.  And soared in 1972 and 1973.  The short-term rate trended up during these years.  And peaked when the long-term rate fell.  The short term rate trended down in 1974 and 1975 as the long-term rate fell.  It bottomed out in 1977 in the second year of soaring long-term rates.  Where it then trended up at a steeper rate all the way through 1980.  Sending short-term rates even higher than long-term rates.  As the risk on short-term savings can exceed that on long-term savings.  Due to the volatility of short-term interest rates and wild swings in the inflation rate.  Things that smooth out over longer periods of time.

Governments like inflationary monetary policies.  For it lets them spend more money.  But it also erodes savings.  Which they like, too.  Especially when those savings are invested in the sovereign debt of the government.  For just as inflation can erode someone’s retirement savings it can erode the national debt.  What we call monetizing the debt.  For as you expand the money supply you depreciate the dollar.  Making dollars worth less.  And when the national debt is made up of depreciated dollars it’s easier to pay it off.  But it’s a dangerous game to play.  For if they do monetize the debt it will be very difficult to sell new government debt.  For investors will demand interest rates with an even larger inflationary component to protect them from further irresponsible monetary policies.  Greatly increasing the interest payment on the debt.  Forcing spending cuts elsewhere in the budget as those interest payments consume an ever larger chunk of the total budget.  Which governments are incapable of doing.  Because they love spending too much.


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Trade, Colonization, South Africa and Apartheid

Posted by PITHOCRATES - December 10th, 2013

History 101

Alexander Spread the Advanced Greek Civilization from the Mediterranean to the Indus River Valley

The first civilizations grew up on the great rivers.  The Nile.  The Tigris and Euphrates.  The Indus.  And the Yangtze.  For the river was the source of life.  The flooding of its banks produced the rich black earth that gave us farming.  They helped us irrigate land further from the banks.  And they allowed the spread of civilizations.  For these rivers provided our first means of transporting people and cargo.  Allowing food and goods to travel between settlements.  This cross-pollination of settlements of different people and resources flowered into the great civilizations of the world.

The Chinese civilizations along the Yangtze grew in isolation from the rest of the world due to the geography at first.  Then, later, by choice.  The other three great civilizations came into contact with each other.  The Egyptians on the Nile spread east and made contact with the Sumerians of the Tigris and Euphrates.  Who were in contact with the Harappan of the Indus River valley.  These civilizations traded with each other.  And fought with each other.  As their civilizations flourished they attracted the attention of envious neighbors.  Who wanted what they had.  And conquered them.

Wars pushed boundaries back and forth.  Civilizations rose and fell.  One of the last great empires of the ancient world, the Persian Empire, bumped into a new rising power.  Athens.  Which was conquered by a Greek-trained king from the north in Macedonia.  Whose son, Alexander, went on to conquer the known world.  Spreading the advanced Greek civilization from the Mediterranean world to the Indus River valley.  Creating a Greek-speaking world steeped in science and philosophy.  Creating a greater Hellenistic civilization out of the lands Alexander conquered.  The shared Greek culture allowing an explosion of trade and commerce.

In Time the English and the Dutch would Bump Heads in South Africa

The Romans adopted Greek knowledge and used it for great engineering projects.  Roads, aqueducts, ships, weapons of war, etc.  Soon the Roman Empire displaced the Hellenistic civilization and spread even further.  Ironically, it was the cost of empire that began the fall of the Roman Empire.  High taxes to fund a huge army on the frontier and to pay for a massive bureaucratic state.  Including welfare programs.  The empire first collapsed in the West.  It lasted another 1,000 years in the East as the Byzantine Empire.  With its capital in Constantinople (modern day Istanbul, Turkey).  Named by the Roman Empire Constantine the Great.  Who helped turned the Roman Empire Christian.

Constantinople was the center of the world.  It was where East met West.  Where Europe met Asia.  All trade from the East went through Constantinople on its way to the West.  For the Silk Road passed through Constantinople.  Making it a very rich city.  As it controlled trade.  After the fall of the Western Roman Empire the great Italian city-states rose.  Venice, Milan, Florence, Genoa, Pisa, Siena, Lucca and Cremona.  With their merchant banking they controlled the Mediterranean trade.  Until the Muslims conquered Constantinople.  Which is when the center of economic power moved north to Europe.  Thanks to advances in navigation that allowed ships to sail around Africa to the East.  Bypassing the Muslim-held Constantinople.

It was the Age of Discovery.  And the great European powers discovered new lands full of valuable resources.  The Portuguese and the Spanish lead the way.  And were soon followed by the Dutch.  And the English.  These nations established colonies around the world.  And, in time, the English and the Dutch would bump heads in South Africa.  Where they discovered gold.  Leading to a century of conflict between the British Empire and the Dutch settlers.  Known as Boers.  During the Napoleonic Wars the British defeated the Boers in Cape Colony in 1806.  And officially took possession of the colony in 1814.  Then it was Britain’s turn to send settlers to the region.  As a prosperous colony at the southern tip of Africa would come in handy for the empire that controlled the trade routes with the most powerful navy in the world.

Mandela Languished in Jail in part because of his Being a Communist

The Boers resented British rule.  And they didn’t like their abolishing slavery.  So they moved north.  Establishing two Boer independent republics.  The discovery of diamonds and more gold would make the region the richest and most powerful in southern Africa.  There was only one problem.  They didn’t have the manpower.  Or an industrial base.  Which led to another wave of immigration.  Mostly from Britain.  Which soon outnumbered the Boers.  Tensions led to the two Boer Wars.  The second one being the longest, costliest and bloodiest war the British fought in the century following the Napoleonic Wars.  With the British ultimately winning the African territories from the Boers in 1902.

The contested areas were all absorbed into the British Empire in 1910 as the Union of South Africa.  And became independent of the British Empire in 1931.  As the foreign powers fought over the African lands they pushed aside the native blacks.  And segregated them.  In 1948 the National Party rose to power.  And began to make segregation law.  The official beginning of apartheid.  Where the whites lived in a first-world nation (which they built with their capital along with black labor).  While the blacks lived in third-world conditions.  The African National Congress (ANC) fought apartheid.  Which was good.  But the ANC was a communist organization during the height of the Cold War.  Which did not make it a friend of the Western World.  Nor was Nelson Mandela.  Who was a communist.  Mandela co-founded the militant wing of the ANC in 1961.  Umkhonto we Sizwe (MK).  Which planned a campaign of sabotage against the apartheid government.  Landing Mandela in jail for 27 years.

Mandela languished in jail in part because of his being a communist.  For they didn’t want what happened in Southern Rhodesia to happen in South Africa.  Alignment with the Soviet Union.  And bloody civil war.  This is what they feared if the ANC/MK rose to power under the charismatic Mandela.  Civil war in South Africa fueled by the Soviet Union to aid in their war with the West.  As it turned out, though, Mandela was more like Abraham Lincoln when he emerged from jail.  Who told his generals that once the American Civil War was over there was to be no reprisals or retaliation against the South.  For once the war was over they would move on together as Americans.  Both North and South.  Which made the peace that followed much easier on the South.  Allowing the nation to heal her wounds more quickly than if there had been a period of bloody purges and reprisals.  And this is the gift Mandela gave to South Africa.  Allowing the nation to move forward after apartheid without bloody purges or reprisals.  Which is why South Africa went on to become one of the BRICS (Brazil, Russia, India, China and South Africa) economies.  While another former member of the British Empire in Africa, Southern Rhodesia (today’s Zimbabwe), suffers corruption, poverty, human rights abuses and one of the lowest life expectancy in the world.  Because Mandela spoke of peace and reconciliation when released from prison.  Not vengeance.  Like they did in Zimbabwe.


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Alphabet and Writing

Posted by PITHOCRATES - November 27th, 2013

Technology 101

(Originally published November 23rd, 2011)

The Necessary Information to Survive in Prehistory was Minimal and did not Require a Written Language

Hunters and gatherers had little need for language.  For they did little in life but hunt, gather, eat, sleep and propagate the species.  Much like wildlife today.  Such as feral cats.  Abandoned house cats.  Who mate and produce more feral cats.  And these animals are survivors.  They hunt.  Gather food from human garbage.  Eat.  Sleep.  And reproduce.  If you ever had any in your neighborhood you know that they can be very loud, too.  Making a variety of sounds.  Meows, cries, growls and hisses.  Not an advanced language.  But sufficient to survive.  And enough to keep you from trying to pick one up.

Early man was similar to feral cats.  They had a limited language.  That allowed them to survive.  And make modest advances.  They made tools out of stone.  Used fire.  Made clothes from animal hides.  Even left art on the walls of caves.  Far more than any wild animal ever did.  But they didn’t do much more.  If they did it was probably nothing to write about.  Because they didn’t.  Write about it.  Either because they had no written language.  Or because they were a modest people.

History starts with written language.  Before that we have only archaeology.  And best guesses.  But based on the archaeology they weren’t doing much.  Other than surviving.  And in these prehistory times life was pretty simple.  See above.  The necessary information to survive was minimal.  Eat.  And don’t die.  It wasn’t necessary to write that down.  So they didn’t.  Memory was more than sufficient.  And it was like that for millions of years.

The Phoenician Alphabet was the Basis for the Greek and Latin Alphabets

But then the simple became complex.  There were food surpluses that allowed a division of labor that led to trade.  And a burgeoning economy.  Which required a more sophisticated way of communicating.  And a system of maintaining records of economic exchanges.  For memory and talking just wasn’t good enough anymore.

In the 4th millennium BC, in Mesopotamia, this began with clay tokens to represent an economic commodity.  And the first system of accounting was simply counting and storing these tokens.  But as the division of labor produced an ever more complex economy, the number of tokens used became too great.  So they represented the economic commodity with a symbol scratched in a clay tablet.  Instead of counting tokens they read these tablets.  We call this writing cuneiform.   Which was later used to write down the spoken Sumerian language.

Over time we developed alphabets.  We represented the sounds of the words we spoke with letters.  The Phoenician alphabet being one of the first alphabets.  Used by one of the greatest traders and merchants of all time.  The Phoenicians.  Which spread this language around.  Giving rise to Canaanite and Aramaic.  Aramaic giving rise to Arabic and Hebrew.  Incidentally, all languages without vowels.  But the granddaddy of all alphabets was Greek.  Which added vowels.  And formed the basis for Latin.  As well as all other western languages.

We Know about the Glory of Greece and the Grandeur of Rome because they Wrote about It

Athens was the cradle of modern civilization.  The Athenian empire grew because it was based on a complex trade economy.  Ditto for the Roman Empire.  At the height of their power the civilized world spoke their languages.  Conducted their trade in Latin or Greek.  Wrote their laws in Latin or Greek.  Conducted their diplomacy in Latin or Greek.  Why?  Because they could.  Their alphabets and their written language allowed them to manage the complex.

And they wrote.  A lot.  We know so much about Greece and Rome because we can read what they wrote.  And we can build on the glory that was Greece.  And the grandeur that was Rome.  Because we, too, have complex trade economies.  Giving us comforts in life that not even the Greeks or Romans could have dreamt about.


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Division of Labor

Posted by PITHOCRATES - November 4th, 2013

Economics 101

(Originally published October 24th, 2011)

The Division of Labor gives us our Houses, Food, Cars, Televisions, Smartphones, Laptops and the Internet

We can’t do everything ourselves.  It’s not efficient.  And most times not even possible.  We don’t build our own houses.  Grow our own food.  Build our own cars.  Manufacture our own high-definition televisions.  Smartphones.  Laptops.  And we don’t build our own Internet.  No.  Instead, people everywhere across the economy specialize in one thing (i.e., work for a living).  And together these specialists fit into the big economic picture.  Which gives us our houses, food, cars, televisions, smartphones, laptops and the Internet.

It started with the most basic division of labor.  Prehistoric women raised their young.  While prehistoric man hunted.  Which was necessary for the propagation of the species.  And us.  For if they all hunted and no one nursed the young the young would have died.  And with them the species of man.  For there was no formula back then.

The next great leap forward on the civilization timeline was the indispensible plough.  The prime mover of civilization.  With the food problem managed, famines were more the exception than the rule.  And with fewer people needed to produce a food surplus, people could do other things.  And they did.

The Division of Labor let us Create Surpluses in Food, Ploughs, Shoes, Tools, Harnesses, Etc.

The division of labor gave rise to artisans.  The first skilled trades.  Made possible by a food surplus.  As other people grew the food the artisans made the tools and crafts the farmers used.  They specialized in plough making and designed and built better and better ploughs.  Lots of them.  Shoemakers made shoes.  Lots of them.  Metal workers made tools.  Lots of them.  Leatherworkers made harnesses.  Lots of them.  See the pattern?

The food surplus gave us surpluses in ploughs, shoes, tools, harnesses, etc.  The division of labor let us create these surpluses.  Specialists made continual improvements in their areas of specialization.  Producing better things.  And more of them.  Which led to another key to the advanced civilization.  Trade.

The shoemaker didn’t have to grow food.  He could trade shoes for food.  Ditto for the plough maker.  The metal worker.  The leatherworker.  And the farmers didn’t have to make any of these things because they could trade food for them.  So we became traders.  We created the market.  And traders took their goods and/or services to these markets to trade for other goods and/or services.  First by foot.  Then by animal.  Then by boat.  Then by train.  Then by truck.  Then by airplane.  Artisans (i.e., workers) traded their specialization for the product and/or services of another’s specialization.  Then.  And now.

The Division of Labor made the Complex Simple and our Lives Rather Comfortable and Fun

The division of labor gave rise to the artisan.  The skilled trade worker.  The middle class.  People who can specialize in one thing.  And trade that one thing for the other things he or she wants.  Whether it be a skilled blacksmith hammering out farming tools.  A tool and die maker working in a factory.  An accountant.  Or a software engineer.  We have a skill.  Our human capital.  And we trade that skill to get the other things we’re not skilled in.  The end result is a modern, bustling, free market economy.  An advanced civilization.  And a high standard of living.

All thanks to the division of labor.  Which made the complex simple.  And our lives rather comfortable.  And fun.  Unlike prehistoric man.  Who knew of no such things as iPhones.  Indoor flush toilets.  Movie theaters.  Or restaurants.  No, he didn’t do much other than survive.  Which was no easy thing.  But he did.  And for that we are grateful.


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