However, after a few decades of offshoring jobs for the sake of short term gains, the American industrial sector was characterized by a long period of relative inactivity. If people don’t work, they don’t experiment new things and therefore don’t generate new knowledge with which they can improve products and processes. The result of these industrial policies of cost cutting can now be felt when foreigners registered more patent inside the US that American citizens.

While American firms where comfortably cashing on previous investments in developing American technological skills, Asian countries where keeping up with the hard work until now, where they have overtaken the American firms. Let’s take the new and emerging Nanotechnology industry. Asian countries like Japan, Korea and China own a great deal of patents in this sector. Basically, what this means is that those regional advantages that can be associated with a lot of people being very competent in nanotechnology is not inside the US. That increasing return associated with people learning from each other and continuously improving their products and processes is situated in Asia.

What is really striking is not that Asia has overcome a clear advantage owned by the US. What is really striking is that the general sentiment in the US is really not focused on these important issues. If we believe social media such as Facebook, Youtube and Twitter, what really draws popular attention is celebrity gossip rather than important issues. The ship is sinking and no one even seems to be aware!

The reason is simple: corporations are not immediately punished by market laws when their actions have a perverse effect on the economy at an aggregate level. By aggregate level, I mean the sum of all economic sectors. By definition, corporations in a free market are not directly concerned by what happens in the economy as a whole. As long as there is a market for their goods and services, they can go on and not worry about the rest of the economy.

In BP’s case, a couple of million gallons of oil in the gulf of Mexico will have perverse effect on the economy at aggregate level: fishers and tourism are just two of of economic sectors that got damaged mostly. However, BP is not going to pay for that. Not unless international courts can 1) prove that BP acted irresponsibly and broke rules, 2) measure the cost of aggregate losses, and 3) compensate those who were harmed by BP.

About the first condition, i.e. proving that BP did something irresponsible, it is as hard as hell. It took years for courts to force tobacco companies to display something that has strong scientific background, so why would it be different with oil? Then, measuring aggregate loss is just another impossible task. Measuring the impact of the oil spill will take years of study and will require comparing after-spill data with pre-spill data while proving that the changes are linked to the oil spill. Finally, compensating the victims of the oil spill will not going to be enough especially in the case of people who have gone out of business because of the spill. How can we measure the compensation of someone who lived out of fishing for 20 years and that wasn’t able to do so because of the spill? And what about all those forms of life that have died because of the oil spill? They will hardly receive any form of compensation…

What all this means is that the economy is always in risk of being the victim of irresponsible corporations who will always get away with the losses that they inflict on other sectors of the industry. Maybe it’s time for Obama to nationalize oil. Doing so will mean that aggregate economic benefits are always going to be taken into account when drilling is concerned.

In the banking sector, things are quite different. Big banks own pretty much everything today. Yet, no one has though of putting a size limit on banks. One of the reasons why banks got away with imminent  bankruptcy due to unsound financial practices is because the US government did not have the choice to bail them, because they were “too big to fail”. Letting them sink would be the same as letting the economy sink, because … well … banks own everything! So what if there was a size limit on banks? Some kind of anti-trust law against their assets size?

Basically the idea is like: your so big that you could hurt the economy if you act irresponsibly? Well your not allowed. We don’t trust big bankers!

And those who are alive, must be careful to have the right set of skills so they can always offer something that is worth exchanging on the market. To some extent, there is no real need in helping others. In fact, helping others could be bad since it would create more competition on the market! Helping others can only be good when it bring some benefit to us. And here begins the issue of free market and ethics. In reality, ethics doesn’t really exist in capitalism. There aren’t any moral code of conduct or ethical constraints. There is one and only one kind of constrain: market needs. But what if market wants ethics?

Why would the market want more ethics? The law of supply and demand stipulates that something which is rare and for which there is high demand will have a high price. If one day, the invisible hands wakes up and asks for more ethics, then the law of supply and demand says that people will rush to offer more ethics.But now the question is: will those who offer ethics offer real ethics or some product or service that is disguised as ethics? If they offer fake ethics, the market’s response will be to reward those who will offer real ethics until all those who offer fake ethics run out of business!

And what will happen then? There won’t be any free market! All will have to be working hard at having high moral standards instead of competing against each other. That will be the death of the free market.

Isn’t that silly?

American Dream origin: a motivation tool

When I read Adam Smith’s major work “The Wealth of Nations”, I was struck by his view about slavery and the reason why it was a bad idea. According to the father of classical economics, slavery is bad because it incites slaves to produce for as little as possible since their compensation will never go higher than the modest food, clothes and shelter that are given to them to keep them alive. This is an excerpt from book 3 chapter 2:

But if great improvements are seldom to be expected from great proprietors, they are least of all to be expected when they employ slaves for their workmen. The experience of all ages and nations, I believe, demonstrates that the work done by slaves, though it appears to cost only their maintenance, is in the end the dearest of any. A person who can acquire no property, can have no other interest but to eat as much, and to labor as little as possible. Whatever work he does beyond what is sufficient to purchase his own maintenance can be squeezed out of him by violence only, and not by any interest of his own.

According to Smith, the main benefit behind capitalism as a economic system is to encourage all to be more productive by giving the right to own stuff. This is precisely where the American Dream comes from: the idea that by working hard enough, we can one day be proprietors and not have to work anymore!

But here lies a dilemma.

The American Dream is incompatible with capitalism

What happens when all workers are proprietors? One thing is sure and it is that Adam Smith didn’t really like the idea. Let’s take a look at book 1 chapter 8:

What are the common wages of labor, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labor.

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combination, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, a merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation.

When workers accumulate capital, their immediate need for money is lowered. As a result, they have a stronger position when negotiating for wages. This is precisely where the dilemma lies: from one hand, employers need to motivate workers by giving them a share of what they produce but on the other hand, they need to take that away from them so that workers will agree working for less.

What kills the American Dream

Earlier in this post, I talked about the disproportional growth of wages with productivity. Well, this is precisely in accordance with Smith’s view that workers should be deprived of their wealth so they would agree to work for less. When employers do not compensate workers for improvements in productivity, they are depriving them from achieving the American Dream. When speculators create bubbles on the stock market, they are taking people’s saving from them and thus killing their American Dream.

My biggest concern with this recession is that we will see a new wave of layoffs and plant closures and most probably another crash of the market. With money printing machines running at full spin, financial institutions have created a bubble out of capital that doesn’t cost them anything, i.e. near zero percent interest. While things might seem ok given the recent rise of stock markets, the real economy is suffering because of high unemployment. If people can’t buy anything because their unemployed, then it is a matter of time before another market crash happens.

It’s very sad, but it looks like the American economy is trapped in a vicious circle that will only stop when wages reach very low levels. The real problem with unemployment in the US isn’t really due to the fact that new technologies have emerged and that they are displacing previous needs in labor skills. Pretty much everything that used to be consumed on the planet is still consumed today. Therefore, it isn’t a lack of demand that is causing unemployment. It is off-shoring of jobs that used to take place in the US that is killing labor. And this is the result of wrong policies, or policies that were aligned with short-term objectives of the private sector. In other words, American policymakers did a poor job on preventing firms take harmful decisions for the country. In fact, they have helped those firms have their way even more easily.

Now, the situation is that US-based manufacturing is no longer competitive. A sector that used to be the most productive in the world is now incapable of facing competition coming from developing countries! In my opinion, there is no way jobs are coming back to the US. We will have to get used to the idea that unemployment will be around 10% for a while.

In the StartUp Visa Act, permanent residency is offered to those who will be able to create jobs (at least five) and attract/make $1 million in the first two years of the company. Of course, nobody is asked to invest their own money in the US.  They are asked to create jobs with money that American VCs are going to invest.

So the message that the senate is sending out there is that this means that there is more money than what the economy is capable of doing with. Of course the madness with which money printing has taken place in central bank could be the cause for this situation. But then again, why bringing people from the outside when unemployment is at 10%? Even worst, unemployment is between 7% and 10% in San Fransisco bay area, one the most innovative places on the planet. I am sure that plenty of people willing to start up a business can be find in that area. Some of them will have everything that it takes to run a business with success. So why this need to hiring entrepreneurs from aboard?

Well, the answer is very simple and it has something to do with the fact that foreigners are taking over American technology markets and that they are moving at a faster pace than the US in international markets. So it’s not that the US doesn’t know how to innovate, it’s more that the US forgot how to innovate better than others. Or we could say that others have learned to innovate better than the US. What ever the angle from which we look at it, the US is losing ground in the international innovation scene.

Basically, the idea with the StartUp Visa Act is to stop creative people from creating somewhere else than in the US. This is the USA’s strategy to stay competitive in global technology markets. The idea is to deprive other countries from the people that could make use of other people. This also appears to be a long term strategy if we consider the recent policies regarding state university endowments.

Even more frightening, if it is true that other economies are emerging, then it is more important for American firms to go out there and get international patents, so they can own global markets who are now more attractive because of the said emerging economies. But what we observe here is the complete opposite and we see that America’s international position is weakening.

Now, like if all this wasn’t enough, American state universities will see their budgets shrink for around $3 billion. This is added to another $3 billion that was removed from budget last year. In other words, US administration is expecting a miracle since it is hoping that cutting costs will actually lead to more productivity from scientists. Now, taking into account that knowledge is created and transferred to firms from universities, investing less in universities will most likely lead to worse results in terms of innovation. Therefore, the only logical explanation to US administration’s cut in university endowment could come from it’s intention to offshore eve more of it’s innovative capabilities. Maybe the idea is to fight it’s own lack of innovation by bringing-in innovators from outside the country.

Dude, where is your American dream?

My heart broke when I read about American public opinion shifting towards pessimism when i comes to getting rich. Seven Americans out of ten believe it is harder to get rich. Compared to 1999, there are eight times more people that have lost faith in the American dream.

One thing is sure: American aren’t trying their best to have better financial situation. If you doubt this, take a quick look at the best selling books on Amazon.com. Most of them are going to be either about self help, personal finance, investment, entrepreneurship and career or business management. In other words, if there is anything on American mind, it is money for sure.

So how come, despite all their effort, Americans just came to the conclusion that the American dream is no attainable? My opinion is that plain economic reality has hit most Americans in the face. By economic reality, I’m not talking about the current recession. What I mean by economic reality is the fact that there just seems to be less money in the hands of average Americans and that they start being aware of it.

Low income plus high debt is killing everybody

When asked about the biggest obstacle to getting rich, more than half believe it due to low income. Of course, the cost of living never diminishes. Again, we can’t really blame Americans for their misfortune by saying that they don’t work hard enough. If you are skeptical about this, take a look at productivity growth vs wage growth for the last 15 years. It is obvious that wages haven’t grown as much as productivity does. In fact, Americans have been penalized for their good productivity by seeing their jobs being shifted aboard for less competitive salaries.

Basically, the only thing we can blame Americans for is to not work for the same wage Chinese or Indians work for. But then, if Americans decided to work for the same low wages as in Asian countries, how many of them would be able to buy new plasma TVs, iPhones, laptops, iPad, etc? The answer is they won’t be able in the long run. Of course, they can always do their spending on credit. But sooner or later, when incomes decrease and that expenses stay steady or increase, something bad is going to happen. And this is exactly what happened with the current economic crisis that started with a credit (mortgage) crisis. With decreasing income, Americans will have to learn frugality which means that they will have to find a way to explain to their kids that they won’t be able to have the next iPad.

My opinion is that American dream is attainable if there is balance between productivity and wage growth. If this issue gets fixed, then people will see an increase in their income, people will rely less on credit and might believe that they will, one day, get rich.

Corporations aren't evil on their own.

People often wonder why corporations turn into anti-social entities that end-up doing more harm than good to the customers. My view is that all corporation end up acting in accordance to shareholder interests which can be in conflict with public interest. This is the tyranny of shareholders on a social level.

The concept of tyranny of shareholders initially expressed the contradiction between what is good for a corporation and what is good for the shareholders. For example, laying off talented employees could be bad for the corporation but good for the shareholders who will increase profits.

In this post, I call the tyranny of shareholders the contradiction between shareholder interests and society’s interests. Indeed sometimes, something can be good for shareholders but bad for society as a whole. For example, offshoring  research and development activities could be good for shareholder who will again increase profits but bad for a society because it loses innovative capabilities.

My view is that society must protect itself from powerful agents who could have conflicting interests with the public. In other words, governments should prevent big players from performing things that will end up harming society under the justification that it’s in the shareholders right to make a profit.