It's A Sick Society That Sees Frugality As A Threat, But Not Social Inequality

When I was in my late teens and early twenties, I was a lot more left-leaning than I am now. This was true even when I was at the capitalist bastion of B-school.

I could not bring myself to take a single elective in Marketing because I believed it was an evil profession. My classmates tried to assure me that Marketing only performed the benign function of determining people's needs and ensuring that they were met. I was convinced it was all about determining people's insecurities and exploiting them to create demand, which could then be satisfied by producing goods and services at the highest price the newly-created market would bear. I also detested the definition of "market" as including only those who could afford to pay.

Wants or needs? And can everyone afford what they want?
("The Toy Shop Window" by Timoleon Marie Lobrichon)

I often dreamt of a world where people would go to a shop and see plainly-packaged products labelled simply "soap", "toothpaste", etc. My observations were deemed amusing. My B-school classmates went on, almost without exception, to become captains of industry. I too followed, just at a more modest level in the corporate hierarchy. We all benefited from the existing world order.

Today, we're hearing it reported, entirely without irony, that the world is in danger of going into a deep recession because people are only buying essentials!

If that isn't an indictment of our society, I don't know what is. It's a bad thing when people only buy what they need? This is as jaw-dropping as banks classifying people who pay off their credit card outstandings in time as "bad customers" (true story).

We've been selling ourselves the narrative that growth at all costs is necessary for prosperity, and so staying out of recession is in itself a virtue. We've completely ignored increasing inequality as long as growth has continued in terms of aggregate numbers.

Now, elites hopefully understand that inequality threatens them too. The fact that Boris Johnson, who is as elite as they come, could find himself close to death, has no doubt shocked the entire cohort at the top of the pyramid. (At a human level, I'm glad he's out of danger now, but maybe it was a good thing someone from the elite did go through a scare in a high-profile manner.)

When we rebuild society after this pandemic (and there will be pandemics in future too, so going back to the way things were is not an option), we should pursue growth in a more equal fashion. Do what the profession of Marketing professes to do - determine the needs of *all* people (and satisfy them), not just the wants of those who can afford to pay for things. Better yet, ensure that everyone *can* afford to pay for the things they need. Then we can still have a multi-trillion dollar world economy, but not one that produces non-essentials for anyone who can afford to pay, but essentials for everyone.

If you don't like the word Socialism, let's call it something else. Rebranding is a capitalist skill, after all.

Sterling Values Sold For Thirty Pieces

The news of Mahatma Gandhi's spinning wheel (charkha) being sold for 110,000 pounds at a Shropshire auction should not shock us. It is a sign of the times we live in. We are capable of putting a price tag on simplicity itself if it appeals to people, because clearly, there's a market for it.

The author of a literally homespun revolution is now a hot collector's item

It reminds me of that other anti-capitalist icon who has become the ultimate chic consumerist commodity - Che Guevara. He has done so much for capitalists since he died, since his face adorns millions of t-shirts sold around the world.

A most revolutionary idea in fashion

When Open Source software began to be known to the average IT person around the year 2000, many people were puzzled by the phenomenon. "How can anyone make money from it?" was the question. I wrote two articles ("Open Source-onomics" and "The Capitalist View of Open Source") to address these misconceptions.

There was a time when a movie's popularity used to be measured by how many weeks it ran in the theatres. No longer. Today, the measurement of popularity is money. In recent personal experience, I was saddened to see that most on-line news and reader commentary about a movie I liked (Krrish 3) was about how much money it had been able to gross (and how quickly) rather than how good it was.

As a society, we seem to be at that classic stage where we know "the price of everything and the value of nothing".

A Label for the Rest of Us

Every revolution needs a handy slogan, whether it's "No Taxation Without Representation" or "Liberté, Egalité, Fraternité". The latest revolution, born of the economic crisis hitting the world, seems to be centred around the notion of "99%" to distinguish the rest of us from the "1%" to describe our oppressors. Now that we have our slogan, the 1% had better start shaking in their boots. The revolution is on.

The slogan of the Occupy Wall Street protesters was "We are the 99%". Now the respected Nobel Prize-winning economist Joseph Stiglitz has further fuelled the collective ire in a hard-hitting article by identifying "the 1%" as the cause of all of America's troubles.

This in a country so scared of socialism that a presidential candidate got into trouble for wanting to "spread the wealth around". One could argue that the irrational fear of socialism is what has landed Americans in this mess where 99% of the population is worse off than before, and 1% is far better off. I think it's the misunderstanding of the term "free market". It isn't about laissez-faire, it's about keeping markets truly competitive. I don't believe it was capitalism that has brought the US and the rest of the world to this pass. I think it's crony capitalism as perfectly described in Stiglitz's article, which is a horse of a different colour.

Somewhere, the ghosts of both Karl Marx and Adam Smith are laughing.

Is the War on Greed as misdirected as the War on Terror?

George W Bush had a response to the September 11 terrorist attacks on the US. He declared a "War on Terror". We all know how well that's going.

I'm not advocating that the US should have done nothing in response to the September 11 attacks. I'm saying that when you suspend clear thinking and honest debate in favour of blind belief and misguided loyalty, you get the totally misdirected Iraq war rather than the focus on Afghanistan (the home base), Pakistan (the training ground) and Saudi Arabia (the financier) that the response should have comprised. A proper response would have been messy and complicated, to be sure. It would have involved embarrassing investigations into two nominal US "allies" and brought out into the open the obvious failures in US foreign policy over the years. I believe that the longstanding US policy of cozying up to dictators instead of strengthening ties with democracies led ultimately and inexorably to 9/11. Yet nobody who knew better could talk sense to President Bush, because those who weren't with him were against him, remember? The world is in a fine mess thanks to expediency and moral certainty, combined with a knee-jerk reaction to crises.

Are we in danger now of reacting to the recent financial crisis with similarly misdirected populism? Australian Prime Minister Kevin Rudd today essentially announced a "War on Greed", by attacking the excessive pay packets of corporate executives as one of the negative aspects of what he called "extreme capitalism". And sure, he's got a point, a very valid point. But he's also in danger of being way off the mark, to the detriment of all of us.

Attacking excessive remuneration appeals to everyone (everyone, that is, except those in the top levels of the corporate world). Last year, Macquarie Bank's CEO Alan Moss took home 33 million big ones. This year, Macquarie caused quite a few jitters among investors. CEOs take home the big bucks, and when their enterprises threaten to fall over, governments have to rush in and prop them up with taxpayers' money, because the economy will suffer otherwise. It's like the fat cats have a gun to everyone's head.

So attacking executive remuneration understandably attracts animal howls of approval from the gallery. (Mind you, many of those in the gallery don't even pay taxes! They've nothing at stake, and it's probably just petty jealousy at work.)

Let me make my position clear. I'm a taxpayer, and my money is being used in these bailouts, so I have a legitimate right to voice my opinion about the way the system is run. But perhaps surprisingly, I'm against placing limits on executive remuneration. It indicates a mercantile mindset that believes in rationing out scarce resources. What we need is a capitalistic mindset that recognises wealth to be potentially limitless. The capitalist worldview recognises the need for appropriate systems that incentivise us to apply our ingenuity and industry to continue to create wealth out of nothing, exactly as we have been doing since we left our caves thousands of years ago.

Having said that, there are clearly limits to executive compensation that exist, not absolute dollar limits, but limits that are dictated by the ability of the enterprise in question to pay those salaries and bonuses. If an enterprise pays its top executive $466 million and then collapses, then in hindsight, it clearly couldn't afford the payout.

Many people may miss a crucial portion of Rudd's statement: "Regulators should set higher capital requirements for financial firms with executive remuneration packages that reward short-term returns or excessive risk-taking." (emphasis mine) I agree with the way Rudd is proposing to tackle the problem, which is to impose higher standards of capital adequacy on firms that show short-termism or risky behaviour in pursuit of profits, but there is a deeper aspect to the problem, which I'll come to in a moment.

I do believe that one of the fundamental things wrong with the brand of capitalism practised today (apart from its hostility to competition) is that it rewards companies for showing short-term profits. It encourages CEOs (who serve relatively short tenures) to under-invest in the future and show unnatural returns in the short term, then depart with huge payouts as a reward for such stellar performance. Every new CEO announces that things have been left in very bad shape by their predecessor (true), and then proceeds to write off huge losses at the start of their tenure. Not only does this clear the decks of all past losses, it also takes the share price to a comfortably low level, so that the new CEO can demonstrate impressive share price gains from this low point. Repeat ad nauseam. The enterprise and its shareholders bear the brunt of this short-term and self-serving behaviour. The technical term for this is "agency risk". The goals of the agent (the management) are not aligned with the goals of the principal (the shareholders).

To my mind, the problem of "extreme capitalism" (as Rudd would call it) is the tendency to reward short-termism. So it's not executive salaries per se. If a way can be found to link executive remuneration to an enterprise's long-term performance, then by all means, shower your executives with gold. For example, go ahead and give your CEOs generous stock options, but ensure that they vest only after 5 years or later. That'll make them more careful about the long-term effects of their decisions.

So I've no real argument with Rudd's proposal, as far as that goes.

Is this the root of the problem, though? Perhaps there's really no agency risk here! Perhaps the agents' goals are in fact perfectly aligned with their principals' goals.

We need to look within ourselves as shareholders. What kind of shareholders are we? Are we true investors, who buy stock and hold on to it, wanting a share of the profits of the enterprise in the form of dividends? Or are we just speculators, who buy shares in the hope that we can sell them at a higher price? Speculators don't care what happens to an enterprise after they sell their shares.

I think short-term performance benchmarks rule the market because the market is dominated by speculators.

If we want enterprises to be healthy, we need to encourage long-term behaviour from all concerned. The goals of the principals (the shareholders) must themselves be aligned with the long-term health of the enterprise rather than its short-term performance. Then the goals of the agents (the management) of these enterprises will automatically be tuned to the long term.

Executive remuneration is the Iraq of the War on Greed. It's an expedient target, but likely to prove a costly diversion. The real problem is more messy to target. It's short-termism, and we're all guilty of it as speculative shareholders. To quote Walt Kelly, we have met the enemy, and he is us.

Testing Times for the Clever Country

I guess not many people knew that bank deposits in Australia have hitherto not been guaranteed, until the government announced that they would now be. The other marvel, of course, is that when a guarantee exists, it will probably not be resorted to. The government's statement is purely to shore up confidence in the financial system and prevent a run on the banks.

Of course, there's the fine print. The Australian government will only guarantee deposits in Australian-incorporated banks, so we could still see a run on foreign-owned banks like Citi and HSBC. Still, it's a much-needed affirmation from the government, and will do much to keep the financial system on its feet.

I guess we're entering a phase when the "Australian model" is going to be put to the test like never before. Prime Minister Kevin Rudd has said he doesn't consider the budget surplus as something to defend in its own right. He's willing to use up the surplus if that's what it takes to stimulate the economy and prevent a deep recession.

Quotable quote: "How long have you all heard me say it is good to have a surplus ... as a buffer for the future? Well, the future is here."

The biggest fears now are a slowdown in growth and a rise in unemployment. The Reserve Bank has done its bit to stimulate growth by slashing interest rates by a full percent, something normally unheard of. The upside of having had high interest rates in the recent past is that there's sufficient leeway to move rates down, a luxury that the US doesn't have. If the PM and his Treasurer Wayne Swan play their cards right by operating the right fiscal levers (and they can spend a fair bit without running up a budget deficit, unlike the US government, which has dug itself into a deeper deficit hole), they can keep the Australian miracle going, and in the process, ensure their own places in history.

It's a difficult time in world history and no time to be partisan, but if Australia comes out of this crisis in better shape than other nations, it will be a powerful lesson in the benefits of good economic governance. I.e., avoid a budget deficit at all costs and tweak interest rates constantly to encourage growth without provoking inflation higher than 2-3%. (And let me add my Liquidism mantra like a broken record: maintain high levels of market liquidity through aggressive antitrust if need be. A thousand blades of grass will weather a storm better than a few oak trees.)

The Australian financial sector has also been prudently regulated and the "toxic assets" of other economies haven't been ingested to any significant degree here. To some extent, this hides the problem of oligopolistic conditions in the market. I wonder if we will have to wait for a different crisis before we learn that lesson...

My Economic Philosophy - 8 (Beyond Socialism and Capitalism)

(This is the eighth of n pieces on my emerging economic philosophy called Liquidism.)

I came across this hilarious illustration today:

While funny, it's also sad that both systems have come to represent a zero-sum game in the eyes of many people, a belief that one person's gain must always result in another person's loss. I don't believe this is true. I believe that wealth is potentially infinite, and human civilisation is constantly improving the incentive systems that cause us to apply our ingenuity and industry to increase our collective wealth, with everybody being better off as a result. I believe in the capitalist ideal based on competition and liquid markets (not the cronyism and oligopolistic markets that pass for capitalism nowadays). At the risk of appearing trite, I can sum up my economic philosophy with another illustration:

It could be argued that what I call Liquidism is just "capitalism done right", but it does involve some non-intuitive aspects. I arrived at this economic philosophy in stages, and it's the fortuitous result of many coincidental experiences in my life.

My journey began when I realised that "freedom" could mean two very different things, and that one kind of freedom is higher than the other. A freedom that cannot be taken away is superior to a freedom without restrictions. I thank the Free Software / Open Source software communities for sensitising me to this difference.

Then I discovered the beauty of Ayn Rand's philosophy (and its limitations). Ayn Rand opened my eyes to the fact that capitalism was not just an economic system but a political philosophy grounded in the notion of individual freedom. The economic aspects of capitalism flow out of the political philosophy.

With that insight, I tried to derive (from first principles) an economic system from a philosophy of freedom, but using the higher of the two kinds of freedom I talked about earlier. In essence, I was trying to redefine a "free market". In the process, I realised that a truly free market had to be a guaranteeably liquid market, not a market without controls. That meant that there was a legitimate role for government (in the absence of any self-correcting behaviour on the part of the market) to step in and enforce liquidity whenever required. In other words, antitrust is not an enemy of the capitalist system (as libertarians make it out to be), but its saviour. That's where Ayn Rand is wrong.

From there, it was only a short step to realising that Liquidism is the next logical step in prudent economic policy, taking the "Australian model" of prudent fiscal policy (avoiding budget deficits) and prudent monetary policy (keeping inflation low through alert interest rate manipulation) to its natural conclusion by ensuring high market liquidity as well. I have been privileged to be part of the Australian economy for over a decade now, and I marvel at the simple yet effective way in which the Australian government and central bank have together kept the economy consistently booming in the face of worldwide boom-bust cycles. The Australian model has many aspects of a welfare state, but that welfare state operates within the discipline of a balanced budget. Australia has shown the world how to reconcile capitalism and socialism. However, many segments of even the advanced Australian economy are held to ransom by oligopolies.

It's unfortunate that nowhere on earth can an example be found of the perfect economic system. Worse, very few people have shown an interest in getting there. Until now.

I have finally seen the vindication of my philosophy in the market failures of 2008, and I realised (as did an eminent economist and old classmate of mine), that capitalism has to be saved from the capitalists. In a truly liquid market, the effect of a single player (or even a few players) has no perceptible impact on the market as a whole, so bailouts using taxpayers' money are never required. But in our imperfect world, large players always act to preserve their oligopoly, by making it harder for themselves to fail (governments are forced to prop them up using taxpayer's money in the larger interests of market stability, making a mockery of the free market in the process) and by erecting scale barriers to newer entrants. I'm sure the downsides of having extremely large players in the market has become apparent to others as well. We just need to join the dots and go where the logic leads us, i.e., to a guaranteeably liquid market, where no player can ever become large enough to unduly influence the market.

However, entrusting the role of market "liquefier" to governments is fraught with danger. Governments are corruptible, as we all know. The timidity of competition watchdogs in our economies is testament to the power of incumbent market players to protect their interests. Governments and legislative bodies are influenced more by market incumbents than by companies yet to be formed. Therefore, liquidity-seeking behaviour needs to be driven into the DNA of the basic unit of capitalism itself - the corporation. Corporations need to have an "amoeba gene" that causes them to grow and split ad infinitum, rather than grow and merge. This is the only way that the market can inherently (i.e., without external intervention) be prevented from consolidating into an oligopoly or monopoly. Such a solution would satisfy Ayn Rand as well. In this context, it must be pointed out that divestitures do not reduce shareholder wealth. On the contrary, new wealth can be released when diseconomies of scale are eliminated and competitive energies are unleashed. The few examples we have of corporate breakups (such as AT&T in 1984) bear out this optimism.

I think it's time the world innovated a new kind of corporation that contributes to market liquidity instead of opposing it. This may need to be defined and enshrined in law, just as the notions of "joint stock company" and "limited liability" were previously formalised through acts of legislative bodies. The capitalist system can then be relied on to generate wealth in a sustainable way, without needing constant government oversight and intervention, and without suffering the periodic system-wide collapses it is prone to in its current suboptimal form.

My concept of Liquidism has been a gradual awakening rather than an epiphany. I still read semi-informed (yet heated) debates in many forums about the merits of different ideologies and varied reasons for our recent financial crises. Although I don't want to sound overconfident, I'm increasingly convinced that I have found the answer to these questions. I think Liquidism is the key to future financial stability and world prosperity.

My Economic Philosophy - 7 (The Place of a Welfare State in a Capitalist Economy)

(This is the seventh of n pieces on my emerging economic philosophy called Liquidism.)

The Welfare State has always been synonymous with Socialism and generally viewed as incompatible with Capitalism. This belief has polarised opinion along rather simplistic lines, between those who favour government support for the needy, and those who believe that all economic decisions should be made by "market forces" (a term that implicitly excludes the government). And then there are the pragmatists who believe in a mixture of the two, unencumbered by any ideology.

I have evolved a different view, and my philosophy not only provides an ideological basis for the pragmatic approach but also lays down clear guidelines for how big the Welfare State can be.

I have written about what is known as the "Australian model". From a social perspective, the Australian model is a wonder of the modern age because it manages to reconcile a capitalist economy with elements of a Welfare State, such as state-subsidised healthcare and social security. From a purely economic perspective too, the Australian model is a wonder because it has managed to deliver 17 straight years of growth while the rest of the world reconciled itself to the "inevitability" of periodic recessions.

What's the secret?

The economic model is no big secret. It lies in responsible government spending that yields a (growing) budget surplus and thereby refrains from provoking the inflation that unfailingly follows deficit financing. As a bonus, the budget surplus delivers flexibility in investing for the future (the Future Fund) and acts as a cushion against economic shocks. The secret also lies in an alert central bank that promptly raises interest rates as inflation rises and lowers them when the economy slows. These two levers of the economy, when prudently applied, maintain conditions of low inflation, low unemployment and uninterrupted growth.

Of course, the Australian economy could do with even greater efficiency, and this can only occur when the oligopolies in its various markets are broken, but that is not the topic of this post.

Returning to the social perspective, how does Australia manage to be a successful capitalist economy while also supporting aspects of a Welfare State? Even if it works (as it clearly does), isn't there at least a theoretical contradiction between the two?

My answer is no, there's no contradiction, because the perceived dichotomy between a Welfare State and a capitalist economy is false.

It leads back to the fundamental definition of "freedom". If freedom is taken to mean the untrammelled freedom of individuals to act, only constrained by the rights of other individuals and with no "controls" by external authorities, then every act of government (as a player in the market) is seen as a violation of freedom. The model of a "free market" by this definition of freedom is a laissez-faire system where government does not interfere with the functioning of the market, either as a regulator or as a bulk consumer.

If, however, freedom is seen as something that must be guaranteed never to be taken away, then some controls are inevitable. The model of a "free market" by this definition of freedom is a liquid market with a large number of buyers and sellers, where no single buyer or seller (or a small group of them) can significantly influence prices or the stability of the market as a whole. Actions by government violate no principles as long as the market stays liquid.

And this explains the seeming paradox of a Welfare State within a capitalist society. By itself, government action in a market is neither good nor evil. The crucial question is whether such action breaks one of what I would call the three pillars of the economy (a balanced budget, the right level of money supply and healthy levels of competition in the market).

The Welfare State is an example of government spending. Is this a legitimate activity in a market economy? In a democracy, government is an agent of the people in a legal sense, and so government spending on behalf of the people is really no different from individuals spending their own money. The various mechanisms of democracy ensure that the agency of government spends the money of its principal (the people) in a way that serves the interests of the principal. I believe that government spending in a functioning democracy is legitimate, as long as it does not lead to a budget deficit.

(One could argue that government spending that leads to a deficit budget is also legitimate because in a democracy, it reflects the will of the people. I disagree, because deficit budgets in effect borrow from the future. They are inflationary, and they rob our descendents of wealth. Our children, grandchildren and unborn descendants do not have a vote, even in a democracy. We have no right to rob them of their wealth without their consent. And so government spending has legitimacy only as long as the budget stays balanced.)

The constant demand by "free-market" advocates to privatise social security seems pointless to me. I can't see any economic reasoning behind it, merely an ideological one stemming from the dubious definition of freedom as an absence of external controls.

So how large should the Welfare State be? As large as the budget allows. The government is a consumer on behalf of the people, and like any consumer, should live within its means. "Free-market" advocates tend to criticise "big government", but to my mind, the problem is not "big government" but "irresponsible government". I say, if the government has the revenue to sustain a large Welfare State without running into deficit, then go for your life! There are no absolute limits (in dollar terms) to the size of a Welfare State. The only limit is the size of the budget.

So in my opinion, there is no contradiction between a capitalist economy and a Welfare State. Those who start off with an inferior definition of freedom ("no controls on individual freedom") exhibit a knee-jerk opposition to any action by government, which seems a bit silly to me. To those who define freedom as something that cannot be taken away, it is obvious that there are clear-cut principles that determine what governments can and cannot do. As long as the Welfare State abides by those principles, its proponents need not be apologetic or defensive about its existence.

We can have our cake and eat it too.

US bailout bad, Australian bailout good

I've been a vocal critic of the Fed's bailout of Bear Stearns, Fannie Mae, Freddie Mac and Lehmann Bros. And so I should be expected to similarly disapprove of the Australian government's recent bailout of players in the non-bank lending market.

Ah, but there is a difference. More than one difference, as a matter of fact.

The US bailout was primarily aimed at preventing a market collapse, which is a symptom of a larger problem - a highly illiquid, oligopolistic market. The Australian bailout of second-tier lenders, in contrast, is aimed at preventing the collapse of competition in the market. There is no fear of a market collapse in Australia. There has just been a tightening of credit, which hurts smaller players more than it does the larger ones.

The US bailout shores up market leaders in an oligopolistic market. The Australian bailout shores up second-tier players in a market that threatens to become oligopolistic if they go under.

The US bailout props up entire companies, regardless of their dodgy asset base. The sub-par quality of these assets stems from the subprime crisis that originated in that country. The Australian bailout is more discriminating. The government is making $4 billion available to buy up not dodgy securities but AAA-rated (secured) mortgages from second-tier lenders. These assets are Australia-based with no links to the US subprime market.

The US bailout deepens the government's budget deficit. The Australian bailout still leaves the budget in surplus.

The US has lost the plot where competition is concerned. Their "free market" is about as free as Sukarno's "guided democracy" was a democracy. In contrast, it appears that the adults are still in charge of Australia.

So there is a world of difference between the US model of capitalism and the Australian one after all, and I'm not just waving the Australian flag because I'm a citizen. The leaders Down Under just seem to have a fundamentally more sensible approach to the economy than those at the helm of "the greatest country in the world" - keep markets competitive, don't run up budget deficits, invest taxpayers' money in sound assets.

Labor keeps my vote.

My Economic Philosophy - 6 (The Next Innovation after the Corporation)

(This is the sixth of n pieces on my emerging economic philosophy called Liquidism.)

It may not be obvious to many (and in fact may actively be denied by some!) that the great prosperity enjoyed by enormous masses of people in the world today has come about thanks to some ingenious inventions in the area of finance as much as in the areas of science and technology. What Science discovers and Technology invents, Business produces for the mass market, and Finance funds that production. The Industrial Revolution could not have had the impact it did without a corresponding Financial/Legal Revolution.

My personal choice for the most important financial/legal innovation of the past five hundred years would be the joint stock company with the added clause of limited liability.

This is the innovation which allowed the mass of humankind to participate in and guide the exploitation of ideas, not only directly (by funding them), but also indirectly (by favouring some over others). By limiting the liability (the risk) of investors to the amount they invest (and preventing creditors from pursuing them for the debts of the corporation), the limited liability company encouraged shareholding on a scale never seen before.

This set in motion a virtuous circle of truly gargantuan proportions. A large mass of investors funded the practical applications of theoretical innovation. In turn, the corporate vehicles that converted ideas into tangible goods and services made their investors richer. Wealth began to flow to society on a scale unparalleled in history, and the mill has never stopped churning since.

In terms of an actual date in history, perhaps 1855 could be considered the official turning point. This was when the Limited Liability Company finally became the accepted norm in Britain thanks to an act of parliament.

The LLC has served the world well, but the world may be discovering the limitations to its usefulness. The world economy today is dominated by limited liability companies, but what use is a system that suffers major upheavals every few years? Capitalism may have created enormous wealth over the past two centuries, but all that seems to register nowadays is the wealth that is wiped out in a single day of a stock market crash.

I have written in the past (1, 2, 3, 4, 5) about my economic philosophy of Liquidism, and how a liquid market can be relatively immune to systemic collapse even if individual players in the market fail.

The problem with ensuring liquidity is that enforcing it is hard in practice. Ensuring liquidity goes against the grain of the capitalist system as it is currently structured. Calls for the break-up of monopolies and oligopolies are wrongly depicted as "leftist", whereas a high level of competition is in fact the capitalist ideal. This inherent contradiction is summed up in the book "Saving Capitalism from the Capitalists". I've elaborated on this earlier.

Today's firms are geared for individual growth, whether organic or through mergers and acquisitions. Firms are not at all well suited for divestiture or corporate break-ups, which can facilitate market growth with its associated liquidity advantages. We need both types of growth, going hand in hand, to achieve wealth creation without the dangerous instability that seems to accompany the concentration of wealth among a few very large firms.

Are there any mechanisms available to achieve that?

In today's world, a new kind of company is becoming common - the company designed not for independent existence, but purely as a takeover target. Venture capitalists often fund startups whose sole business plan is to be taken over by a larger company at an attractive price. This is the way the startup repays its investors.

Why can we not consider the opposite (the business division that is designed to be spun off as an independent company)? Shareholders in the original company are automatically offered a stock split, with ownership in the newly formed company. As more and more units are spun off, the original shareholders' holdings become more diversified. And as the child entities begin to thrive and grow in their respective niches, the wealth of the shareholders begins to grow as well.

The constant creation of new companies increases the liquidity of the markets in which they operate, reducing systemic risk. From time to time, a governmental competition watchdog (suitably renamed to reflect its systemic risk mitigation role) provides a friendly nudge to encourage some divestitures (if antitrust is an ugly word to some), but in general, the spin-offs are internally driven.

In this newer world, continuous amoeba-like phases of organic growth and splitting are seen as the best way to grow shareholders' wealth.

What we need, therefore, is the next major financial innovation. We need a built-in mechanism within a corporation that will propel it to seek out wealth through a combination of growth and divestiture, rather than through growth and merger.

Arguments based on economies of scale have often been made in favour of mergers, but having worked in small companies as well as large ones, I can testify (anecdotally) to the extreme diseconomies of scale that are exhibited by large companies as well. Large companies in an oligopolistic market charge their customers more than they should and pay their shareholders less than they should. The difference is lost through sheer inefficiency. On balance, I think shareholders are served better by smaller and more diversified players.

I wrote before about injecting "amoeba DNA" into the modern corporation, so that it naturally supports market liquidity instead of opposing it. I believe that is the next financial innovation that needs to happen, perhaps with some legislative support to push the world in that direction.

In sum, capitalism has served us well so far, but we have lately stumbled upon some of the limits to its wealth-creating potential. The reasons have to do with market liquidity as a whole, which individual firms are not designed to address. Newer firms must be built in smaller and more agile units that can be readily started, shut down, combined or (more importantly) spun off from larger ones. That will take the capitalist system to the next higher plane of its existence.

Human civilisation has evolved in sophistication to the point where sustainability should now be built into its powerful wealth creation vehicle.

Saving Capitalism from the Capitalists

(The title of this post refers to a book written by an old classmate of mine, but more on that later)

They've done it again! After Bear Stearns, Fannie Mae and Freddie Mac, the Fed has bailed out the American Insurance Group (AIG) by effectively nationalising it. Bravo!

Once again, the ugly principle of modern capitalism has been revealed - "Privatise profits and socialise losses". No wonder the common man (or woman) thinks of capitalism as a system that helps the rich exploit the rest of society to get even richer.

This is no way to run a market economy! If we must let corporations succeed, we must also let corporations fail. Why must taxpayers' money be used to bail out failing companies?

The answer, we are told, is that "a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance".

Oh, yes? And pray to what do we owe this "market fragility"? (Uncomfortable silence from the government, the Federal Reserve and captains of industry)

I don't want to see a systemic collapse any more than the next person, but propping up failing companies isn't the right way to prevent that. It just postpones the inevitable. The next threat will be bigger and more dangerous. I want to see a situation where the collapse of individual firms does not trigger a systemic crisis.

How can we achieve this happy state where individual firms are incapable of taking the market down with them?

Let me provide my prescription to prevent the kind of financial instability we are witnessing today -- a liquid market.

A liquid market is one where no single buyer or seller (or even a small group of them) is big enough to move prices. All buyers and all sellers in the market are essentially price-takers. Consequently, the arrival or departure of any (or a small group) of them at any time will cause scarcely a ripple in the market as a whole.

Here is where I differ in philosophy from libertarian and other proponents of laissez-faire capitalism. Unlike them, I don't believe that a complete absence of government interference is the answer. Yes, in general, I'm against government regulation and intervention, - with one significant exception. I like the kind of government regulation that keeps markets liquid. I'm a strong proponent of -- brace yourselves for the A-word -- Antitrust.

Antitrust is the preventative instrument that governments must wield to ensure that no single player in the market can "add to the market's fragility" by its failure. Indeed, the sign of a healthy market should be the sheer number of companies failing (and being created) all the time.

Government regulators today work to contain risk at the level of the individual firm. While they study the industry as a whole, the sole instrument by which they control risk in the market is capital adequacy as applied to individual firms. They prescribe minimum levels of capital to be maintained by financial institutions to provide for their obligations in the event of failure. But this kind of regulation is very low-level. I call this "micro-regulation" along the lines of micro-economics, because it applies to individual firms. While micro-regulation is required, what we also need is "macro-regulation" (like macro-economics), which applies at the level of the economy as a whole. What is the use of adequate capitalisation at the level of the institution if the market is itself going to be fragile? How can we ensure that the market itself is adequately de-risked? The answer - liquidity.

A country's prudential regulation watchdog must act in concert with the country's competition watchdog to ensure that the micro- and macro- indicators of market health are maintained at adequate levels. We must stop thinking of competition watchdogs as populist agencies that do nothing more than ensure a fair deal to consumers. Their role is much more important than that.

The prudential regulation watchdog will operate based on triggers that correspond to capital adequacy levels. If the level is breached, the agency will swoop down on the offending institution and ensure restitution to required levels. (They already have the power to do this in most advanced economies, and many of them are quite proactive.) The competition watchdog will operate based on triggers like the Herfindahl-Hirschman Index (HHI), a measure of the degree of competition in a given market segment. They must similarly have the power to swoop down on markets where the index is breached, and effect restitution through any means necessary, including a break-up of the largest players. (In practice though, competition watchdogs tend to be rather weak-kneed, perhaps because the role they play is perceived as populist rather than economically critical. Anti-competitive action is viewed as economically disruptive, rather than as economically corrective, and both business and the investing public express annoyance at such activity. How often do we hear of corporate break-ups, or even of mergers that are blocked?)

Forcible break-ups of large players must not be considered a punishment for being successful, as they are often portrayed. Rather, they are in the interests of all players - shareholders, customers, deposit-holders, policy-holders and employees. When the US Justice Department broke up AT&T into 7 "Baby Bells" in 1984, that did not cause its shareholders any long-term loss. On the contrary, within a decade, each of the Baby Bells had grown to be larger than the original Ma Bell. [Of course, economic sense went out of the window later, and the Baby Bells obtained permission to merge and stifle competition once more.] The lesson is that shareholder wealth can grow through break-ups, and so they are not something to be feared, but to be welcomed. Indeed, a break-up may be the best way to help investors realise value once the original corporate vehicle's market capitalisation plateaus.

"Amoeba DNA"

But aren't corporate break-ups costly and a waste of everyone's time and energy? Well, as the eXtreme Programming folk over in the IT world like to say, "If something is hard, do it often." We need to inject "amoeba DNA" into corporations, so to speak, so that when they reach a certain size relative to their market, they are ready to split (or be split). In this way, there is always a large number of players in a market, providing diversity of investment opportunity, and there is a Darwinian system that rewards only the most efficient, so every dollar invested is used to maximum advantage. As a side-benefit, the market is immune to the failure of a few players, because no player is big enough to influence the market as a whole.

This is my economic philosophy. I call it Liquidism, and I have explained it here, here, here and here.

What does the title of this post mean? This is the title of a book (read a synopsis here) by an old B-school classmate of mine, Raghuram Rajan, who went on to become Chief Economist of the IMF. The book's main insight is that competition is the lifeblood of capitalism, but capitalists hate it. More precisely, incumbent players in a market will always try and manipulate government to protect them from failure and prevent newer competitors from entering their market. It is the duty of government to resist the pressures exerted by these petty capitalists and act in the larger interests of capitalism itself (i.e., a liquid market). I'm gratified to see that an eminent economist like Rajan makes pretty much the same arguments as myself (an amateur student of economics) - that markets must be liquid, competition maintained at high levels, and that governments must be prepared to let businesses fail even if it means employees are thrown out of work.

The book does not offer much comfort to employees facing the loss of their jobs due to downsizing or business failure, but there is a powerful argument that should appeal to them all the same. I would argue that job losses are inevitable in a dynamic economy, but what causes them to hurt is the lack of liquidity in the market. If no single firm is large in comparison to the market, then the constant loss of jobs as firms disappear will be mere drops in the ocean, and people will find other jobs almost as soon as they lose their old ones. The pain will be so diffused it will hardly be perceived. Far from being traumatic, the loss of one's job will be nothing more than an annoyance lasting a couple of days, maybe even an exciting opportunity to improve one's prospects.

Is anyone listening? Or must the world go through a lot more pain (and a lot more waste) before we learn to apply capitalistic principles rigorously and keep the engines of the economy humming?

India, Inc. should sell off its loss-making Kashmir division

If you were the CEO of a multi-trillion dollar enterprise and you had a division that was making losses for years, diverting resources from more profitable divisions, creating bad press for the organisation and contributing to poor employee morale, what would you do?

India, Inc. is an enterprise in exactly that situation. For sixty years since Independence, Kashmir (or more correctly, the Kashmir province of the Indian state of Jammu & Kashmir) has been a black hole consuming endless resources in terms of both money and human life and providing no tangible benefits in return. It's ironic that India, the back-office of the world, which is selling the business benefits of outsourcing to a host of global corporations, has failed to apply the same hard-nosed business principles when it comes to its own affairs. Have the CEO (the PM), his management team (the cabinet) and the board (members of parliament) been managing the enterprise in the best possible way to further the interests of their shareholders (the Indian people)?

This is a case fit for a business school discussion. What should the management do with this chronically loss-making division?

I don't believe the Kashmir question has ever been phrased in business terms before, which is why it has so far been a taboo subject that "patriots" have been expected never to question.

At long last, a section of the intelligentsia has begun to think the unthinkable and voice their thoughts in print. Vir Sanghvi, Jug Suraiya and Swaminathan S Aiyar are 3 prominent columnists who have written up some very eloguent arguments about "letting Kashmir go". I particularly like Vir Sanghvi's article. The well-known activist and author Arundhati Roy (who wrote "The God of Small Things") summed up the collective national fatigue with Kashmir by saying "India needs aazaadi (freedom) from Kashmir as much as - if not more than - Kashmir needs aazaadi from India."

And it's not just a flight of fancy by some elites sitting in their ivory towers. The response to this idea from the general population has been dramatic. A recent poll conducted in 9 Indian cities showed that fully 30% of the country's (urban) population agrees with the idea of letting Kashmir go. So much for an unthinkable idea! I'm sure as time goes on, the idea will gain more supporters. After all, the debate has just begun, and there is already so much pent-up support.

Imagine the benefits that can ensue when a loss-making activity is stopped and funds are immediately available for profit-generating ones instead. India badly needs investment in infrastructure, especially in transport, power and communications. Investment in infrastructure is a multiplier in economic terms. It accelerates economic growth. China has shown the world that growth rates in excess of 10% a year are sustainable. India needs to aim for such a target, and throw every spare resource into achieving that target. The prize is the potential status of being not just the world's largest democracy (already achieved), not just the world's most populous country (projected to happen by 2050), but being nothing less than the world's biggest economy! With a population potentially greater than China's and with more favourable demographics, this is not a pipe-dream. But it requires vision, planning and investment to get there. Worthless diversions like Kashmir are an unaffordable luxury to a country with a far greater tryst with destiny. Kashmir is a needless drain on India's precious resources.

But the idea is still a wrenching one. I grew up in India and the image of the Indian map in my mind is the (untrue) official Indian one with an undivided Kashmir shown as fully Indian territory. That became the "look" of India to me and, I'm sure, to hundreds of millions of Indians. I could almost see a person standing with their left arm around Bangla Desh and face turned westwards. Foreign publications that showed a truer map with the actual line of control as the border were rubber-stamped with the bristly phrase "The external boundaries of India as depicted are neither correct nor authentic", or something of that sort. Yes, the Indian map without Jammu and Kashmir looks admittedly ghastly. It looks like India has been beheaded. That would be my initial, emotional response. A map with Kashmir alone gone would look like India has (literally) lost face. But I can swallow that and look beyond it.

When you analyse and break them down, I guess the only reasons against a sell-off would be national security, logistical complexity, national pride and what I'd call "sunk costs".

The "sunk costs" argument is the easiest to debunk. Essentially, this is saying, "India has spent so much money and sacrificed so many lives to retain Kashmir. If we give up Kashmir now, it will be a waste of all that money and all those brave soldiers would have died in vain." The argument against it is simple: "We should stop throwing good money after bad, and we will prevent even more soldiers from dying unnecessarily by putting a stop to this pointless exercise." After all, the Kashmir situation doesn't look like it is going to turn the corner anytime soon. Why put up with this haemorrhage in good money and good men indefinitely?

National pride is a trickier issue. There's no rationalism here, so it's hard to argue with someone with a strong opinion. However, the issue can be reframed in a number of ways.

1. The prosperity of India is far, far more important than the retention of Kashmir. Our national pride should be in our socio-economic achievements, in bringing prosperity and egalitarianism to an already democratic society. Kashmir is tiny compared to the current and potential achievements of India.
2. Kashmir is needlessly giving India a bad name. We are being equated with a colonial power. We, who struggled to get the British out of India! We, who sympathise with Tibet to the extent that the Dalai Lama and his followers have enjoyed political asylum in India since 1959. We, who are overwhelmingly opposed to the American war in Iraq. How can we now behave the same way as a colonial oppressor and stay on in a place where we're clearly not wanted?
3. Even the Soviet Union allowed its republics to secede. Where is the shame in letting a recalcitrant province go its own way?

I don't know how convincing these arguments will be, but as I said before, the debate has just begun, and there will be more and better arguments.

That leaves national security and logistics.

The national security argument can cut both ways. What I call the "domino theory" held by many hardliners says that giving up Kashmir today will require India to give up other territories tomorrow. I'm not convinced, and I think this is just paranoia. Secessionist movements in other parts of the country have been tamed without territorial concessions, and it must be remembered that none of them has been a festering wound like Kashmir. [We will create more festering wounds unless we move quickly to redress the legitimate grievances of victims upon victims of communal violence in our country.] The point is, the Kashmir situation has probably deteriorated beyond the point where a solution can be found within the framework of the Indian union.

On the other hand, consider the fact that Kashmir has always been the single most important irritant between India and Pakistan, responsible for every single armed conflict between the two countries (except the 1971 war). There has been no progress on a South Asian free trade zone thanks to the antagonism between its two biggest countries. A huge economic bonanza awaits the region once the Kashmir issue gets settled. When the economies of the region get inextricably intertwined, war becomes an increasingly distant possibility. Strategically, there is in fact a strong national security argument in favour of letting Kashmir go.

Finally, the tricky issue of logistics. We remember the horrors of Partition in 1947. The last thing we need is another massacre with the body count running into the millions. India needs to float the idea of a coming "velvet divorce" gently and years in advance. It will allow people to make their plans and execute them without panic. There's also the messy issue of compensation for hundreds of thousands of Indians who have been forced out of Kashmir by the threat of violence. That's actually a tractable problem. Displaced Kashmiris within India can be generously compensated with a fraction of India's budget for Kashmir for a single year.

I know I'm advocating that India should let Kashmir go, but my guess is that most Kashmiris, faced with a stark choice, will vote with their feet and wind up in India anyway. India is the biggest engine for economic growth this side of the Himalayas. The Kashmiris' options are unfortunately quite limited, and uniformly unsatisfactory. They can either create an independent landlocked state for themselves with no resources and no industry and be an instant basket case, or be absorbed into a troubled Pakistan with its sputtering economy, perilous law-and-order situation (which puts it on a collision course with the US over terrorism) and very uncertain prospects overall. As an independent country, they will probably be humiliatingly dependent on India anyway, and the terms they receive will be far less generous. They're probably best off where they are (a much-pampered province within India), but I (just like an increasingly large number of Indians) am now skeptical whether the status quo is in the best interests of India.

If the Kashmiris finally get what they have been agitating for, it could turn out to be their worst nightmare, and India's lasting relief.

My Economic Philosophy - 5 (The Greater Freedom, redux)

It looks like the debate about which is the greater freedom (a freedom without restrictions or a freedom that cannot be taken away) is taking place again in the context of blog netiquette.

The incident that triggered this latest debate concerns technology persona Kathy Sierra. (I owe a personal debt of gratitude to Kathy for her excellent book "Head First Servlets and JSP" that helped me achieve my Sun Certified Web Component Developer for J2EE certification. I have also read and enjoyed her other books "Head First Java", "Head First EJB" and "Head First Design Patterns").

A few people left disturbingly graphic insults and death threats on her blogsite, and the pattern of intimidation continued, with similar comments appearing on other blogsites, until she began to fear for her own life. The freedom of speech exercised by those who made the death threats resulted in a very real loss of freedom for Kathy, who felt compelled to cancel a speaking engagement and stay at home out of fear. My heart goes out to Kathy. I hope she recovers from the trauma soon and continues to contribute to technology and the world in general.

I guess this incident mirrors how a laissez-faire market can result in some players losing their freedom through the aggressive actions of others, even though those others may technically be playing within the rules.

Following the Kathy Sierra incident, Tim O'Reilly proposed a blogger's code of conduct, which I think is a good thing. One of the proposals in it concerns banning anonymous comments.

I have been a bit laissez-faire about comments so far, but (inspired by Tim's guidelines) I will ban anonymous comments on both my blogs from now on, and delete uncivil ones (but not comments that merely disagree with my views), in order to be consistent with my philosophy of the greater freedom. Because these are related concepts, after all.

According to a news report, Tim said the guidelines were not about censorship.

"That is one of the mistakes a lot of people make — believing that uncensored speech is the most free, when in fact, managed civil dialogue is actually the freer speech," he said. "Free speech is enhanced by civility."

Amen to that.

Protectionism's insidious appeal to decency

I had a minor argument with an Aussie colleague at work today. We were discussing no-frills brands in supermarkets such as Woolworths' Home Brand and Franklins' (what else) No Frills. I'm all for these brands, by the way, because they give me commodity functionality at a lower price than traditionally branded products.

My colleague stiffened visibly. "I don't buy these brands because I believe in supporting Australian producers," he said, and there was an undertone of reproach in his voice. I should have bitten my tongue, I guess, but I couldn't help expressing my preference for Free Trade. That got me embroiled in an argument with another Aussie co-worker who also believed in supporting Australian producers.

I was a bit saddened by the exchange because these are people I like and respect very much. They're decent blokes, and if they've been conned by the protectionist argument, then it sadly means that protectionism is a tax on decent and patriotic people, just as lotteries are a tax on people who are bad at maths.

So what I understand from this is that it doesn't matter how inefficient and uncompetitive I am as a producer. All I have to do is wrap myself in the national flag, and patriotic people can be counted on to bail me out. Their well-meaning patriotism becomes its own punishment. And they don't seem to realise that their support of products on non-economic grounds does the country a disservice by taking away the incentive to improve efficiency and competitiveness. Over time, the country loses its ability to compete in the world market. Protectionism always hurts those it is meant to protect.

I remember a similar situation in India, where I spent the first thirty years of my life. There was a popular nationalistic slogan that I saw everywhere as I was growing up - "Be Indian, Buy Indian." (Not that it was possible to buy foreign goods, heh. The import tariff on foreign-made electronic goods, for example, was 400%! A pox on Indira Gandhi and her mean-minded, wealth-destroying mindset!)

The only cars available in India for many years were the Ambassador, the Premier Padmini and the Standard Herald. These were based on European designs of the fifties. The Ambassador was based on a British design, while the Padmini was based on a Fiat model. I don't know what the Standard Herald was based on. The interesting thing was that these models never changed over 40 years! Indian car manufacturers didn't even bother to try the old Detroit trick of "innovating" larger tail fins. They just kept making the same models year after year and sold them at exorbitant prices. Only rich people could afford cars in those days. And the cars were gas-guzzlers to boot.

Finally, in the late eighties and early nineties, the Indian economy began to liberalise. Indian companies began to tie up with foreign manufacturers to bring out newer models. Within 15 years, the landscape was transformed. Today, the old models are nowhere in sight on Indian roads, except as taxis (for some reason, taxis are still stuck in nowhere-land). All private cars are now based on modern designs and international brands. What's more, many of the models are affordable by middle-class people. They're also more fuel-efficient.

I feel anger whenever I think of this and similar stories. These car manufacturers took the Indian consumer for a ride for four decades because they were shielded from competition and never felt the need to innovate and compete. They remained stuck in the fifties while the rest of the world passed them by. It was only when the Indian economy was opened up did change happen.

So what did being Indian and buying Indian achieve? Limited choice, stagnant designs, ugly, gas-guzzling monstrosities and high prices. All these problems magically disappeared when the economy opened up and competition appeared (which ties this back to my earlier piece on Liquidism).

Why should we buy a product just because it is Australian-owned or Australian-operated? What is the message we are sending to these people? That it doesn't matter how uncompetitive they are, they can still have our money?

As an obvious aside, I wasn't "Made in Australia" myself, but a free-ish market in labour was responsible for my migrating to this country under Australia's Skilled Migration Program and adding my talents (meagre as they may be) to the Australian pool. At a visceral level, I cannot agree with the "Buy Australian" sentiment, because it would have kept me out. In fact, I find that sentiment personally offensive.

My Economic Philosophy - 4 (Liquidism as "Extreme Economics")

(This is the fourth of n pieces on my emerging economic philosophy called Liquidism.)

In spite of its seemingly revolutionary approach, Liquidism isn't really a radical departure from current "best practice" in economics. The three schools of macroeconomic thought I referred to in my third post on this topic do not really contradict each other, either.

Those who assert that governments must not run deficit budgets are in fact agreeing with those who claim that inflation needs to be kept in the vicinity of 2-3%. Government budget deficits are known to be inflationary, so balanced or surplus budgets greatly assist central banks in their task of controlling inflation through the manipulation of interest rates.

Similarly, those who believe that the most important parameter is low unemployment, and therefore clamour for growth-oriented economic policies are not disagreeing with the other two schools of thought. Growth occurs best in an environment of stable and low inflation. Witness the example of Australia, the clever country (not the lucky country, by the way, because Australia's prosperity is the result of smart management, not undeserved good luck). Australia has enjoyed an unprecedented 15 years of nonstop growth, while the rest of the world has seen periods of both growth and recession. Unsurprisingly, during this period, the Australian federal government budget has been largely balanced or in surplus, and inflation has been vigilantly maintained in the 2-3% range by an alert and active central bank.

So we seem to have stumbled upon the magic formula that reconciles seemingly different schools of macroeconomic thought. Keep inflation low by constantly tweaking interest rates, avoid contributing to inflation by running budget deficits, and you will achieve steady growth that will keep unemployment low.

Liquidism only carries this argument one step further, because all the above techniques, impressive though their results may be, do not succeed in driving inefficiency out of the system. Inefficiency, in the terminology of modern software development, is a "smell" that suggests that something is wrong somewhere.

Lest anyone think that I'm a blind devotee of The Australian Way, take a look at the Australian banking sector. It's an oligopoly, with only four major banks. I have a unique inside view into the functioning of these organisations, having worked in two of them. I will not jeopardise my current employment by going into specifics, but most activities in these organisations are highly wasteful, compared to similar activities in organisations in more competitive industries. And yet the big four banks remain highly profitable! If organisations can show huge profits year after year while being extremely inefficient and wasteful (as is obvious to an insider), it's a "smell". Something is rotten in the system, and it's not a problem with the banks themselves. Their inefficiency is a symptom, not the problem. The problem is with the competitive environment. Less competition, less efficiency. Wealth is vanishing from the system, being eaten by the friction of inefficiency between its wheels. In the case of the banks, customers are picking up the tab and paying more than they should, while shareholders are earning less than they should.

What do we do? Let's take a leaf from the software development industry, specifically, a recent methodology called "Extreme Programming", called XP for short. The father of XP, Kent Beck, explains the technique in these words:

"When I first articulated XP, I had the mental image of knobs on a control board. Each was a practice that from experience I knew worked well. I would turn all the knobs up to 10 and see what happened. I was a little surprised to find that the whole package of practices was stable, predictable, and flexible."

We now know that certain economic practices work well. Keeping inflation low is one of them. We also know that competitive (liquid) markets are efficient, while oligopolistic or monopolistic (illiquid) markets are inefficient. How do we, in Kent Beck's words, turn all the knobs representing good macroeconomic practice up to 10?

1. Turn the fiscal knob up to 10 (manage spending and income to avoid a deficit budget at all costs)
2. Turn the monetary knob up to 10 (actively manage money supply through the interest rate vehicle and keep inflation within 2-3%)
3. Turn the market efficiency knob up to 10 (aggressively enforce antitrust and keep markets liquid)

I believe that Liquidism represents the "complete" macroeconomic philosophy, with its inclusion of the final leg in the triad of macroeconomic policy.

It's not a rejection of current economic thought, but merely the next necessary step in our thinking.

It's "Extreme Economics", if you will. And if the vaunted results of Extreme Programming are anything to go by, it could be wildly successful.

My Economic Philosophy - 3 (Les droits inaliénables)

(This is the third of n pieces on my emerging economic philosophy called Liquidism.)

Pardon my French, but if we're going to talk about two distinct definitions of freedom, and the first is called laissez-faire (a freedom without restrictions), what do we call the second (a freedom that cannot be taken away)? Droits inaliénables (inalienable rights)? Quite a mouthful, so I'll tell you what. We'll call it Liquidism.

Why? Because as any student of economics knows, the system where no individual player has the power to force any other player to act against their will is called Pure Competition. A market that demonstrates Pure Competition is said to be liquid. Oligopolistic and Monopolistic markets are highly illiquid.

Want a system where players' rights can never be taken away? You're basically asking for Pure Competition. Is that too idealistic?

Look at the Free Software/Open Source ecosystem. The GNU General Public License (GPL) guarantees a freedom that cannot be taken away. Most other licenses (BSD, MIT, X11, Apache, etc.) represent freedom without restrictions. Which is the more successful in practice? About 68% of all software projects on SourceForge (the world's largest repository of Free/Open Source software) have adopted the GNU GPL, which shows that most Free/Open Source software developers seem to believe that a freedom that cannot be taken away is in fact the greater freedom.

I think this latter view of freedom is an idea whose time has come. Economists of every shade have been brandishing their single favourite economic parameter. Some claim that a balanced government budget is the holy grail, with government controlling both spending and taxation to achieve this goal. Others claim that inflation must always be contained within 2-3%, with the central bank flicking interest rates up or down to keep inflation in its place. Yet others claim that full employment is the state to be aspired to, with all economic parameters primed to encourage constant growth.

So let me throw my hat in the ring. I want a free market, and I don't mean a laissez-faire free market. I mean a free market whose freedom cannot be taken away. And that means an activist government unafraid to wield a powerful instrument - Antitrust.

Liquidism's distinguishing feature is a highly competitive market, maintained if necessary, by aggressive antitrust enforcement on a hair-trigger.

I know it sounds radical, and it conjures up a vision that may be deeply disturbing to some.
See an emerging monopoly or oligopoly? Break 'em up!
Receive a merger proposal between major players? Deny permission.
Detect a pricing cartel? Throw the bosses in jail and ban them from holding similar office in future.

It may seem like a wild-eyed, revolutionary and ultimately impractical idea, but is it? In the fourth piece on Liquidism, I will argue that this is merely the next evolutionary step in modern macroeconomic thought.

My Economic Philosophy - 2 (The Limits to Rand)

(This is the second of n pieces on my emerging economic philosophy called Liquidism.)

I was a latecomer to the philosophy of Ayn Rand. I completely missed reading her novels in college, when everybody else seemed to have their noses stuck between the pages of "The Fountainhead" or "Atlas Shrugged".

Then one day, when I was almost 40, I stumbled upon the website "www.capitalism.org", and the ideas I read there almost blew me away. This site is dedicated to spreading the philosophy of Ayn Rand, Objectivism, which Rand believed was the capitalist ideal.

I was gobsmacked as I read the material on this site because I had till that point always thought of Capitalism as an economic system, as something to do with money and who controlled it. Wrong, it turned out. Capitalism is a political philosophy, and the economic system that is often confused with it springs naturally out of this philosophy.

And what is this political philosophy?

In two words, individual freedom. That's the core value of Ayn Rand's capitalist ideal. At this level, she doesn't talk about money. She does talk about "wealth", but wealth at this level means much more than just money. It is the sum total of all the kinds of satisfaction that one can derive.

There's more.

Reason is the source of all "wealth", and everyone is entitled to the wealth generated by the exercise of their reason. The only thing one may not do is restrict the freedom of others. The initiation of force is prohibited, and one may only acquire the wealth of another by one of these means - willing gifts by the other, through persuasion (not coercion), or through trade. Of these, trade is the best. Coercion and deception are taboo.

To say that I liked this philosophy would be an understatement. It resonated deeply within me. It struck me as the fairest of all possible systems. I even wrote an article defending the Capitalistic credentials of Free/Open Source Software called "The Capitalist View of Open Source", demonstrating the software model's scrupulous adherence to the principles of Ayn Rand.

But even at the height of my admiration for Rand, I was never completely in agreement with her.

She claimed animals had no rights, and I beg to disagree. I in fact expected her to extend her philosophy to include any living creature, not just humans.

She stoutly upheld the right to life as a fundamental right of every human being right from their birth, that no one had the right to take, but instead of expressing honest ambivalence about abortion, she glibly claimed that foetuses were not human and therefore had no such right. The mother, according to her, had the "right" to abort her foetus and this freedom could not be denied. I found this sophistry a little intellectually dishonest. Abortion is a tricky subject and I'm not sure there are any "right" answers. At what point exactly does a foetus with no rights turn into a new-born baby with full rights? For Rand to proclaim one viewpoint with an air of moral certainty didn't do much for her credibility in my eyes.

And then there was the ultimate "What was she thinking?" moment. When I read about Ayn Rand's essay "America's Persecuted Minority - Big Business", I knew that she had either lost her marbles or been coopted by that persecuted minority into advocating their cause.

So I remained stuck with an intellectual model that was almost perfect, but not quite. Until I read the other article, the one that posed the question about the two types of freedom.

My Economic Philosophy - 1 (The Definition of Freedom)

(This is the first of n pieces on my emerging economic philosophy called Liquidism.)

I won't lay claim to the following piece of wisdom - I remember reading someone's article (dashed if I can remember who it was!) where he asked a most profound question:

"Which is the greater freedom? A freedom without restrictions, or a freedom that cannot be taken away?"

He was asking this in the context of a big argument among advocates of Free Software and Open Source. Though Free Software/Open Source software is "free" (and I mean freedom, not price), there are actually two very different kinds of freedom implied by the term, and the two major categories of software licences tend to reflect this dichotomy. One set of licenses grants users full rights to do anything at all that they want with the software. The other set allows them to do anything except make proprietary enhancements to it. That's because such a right will give a one-way benefit to those making the proprietary enhancements and always place the users and developers of the original, free version at a disadvantage.

[I won't discuss the software issue in greater detail because this is not a technical blog, but I can't help citing another brilliant document at this point. This one is a highly technical software critique, by the way, which may go over the heads of even techies (I had to read it a few times to understand it), but the best thing it did for me was introduce me to the phrase "usefully contrary trade-offs" (See the section titled "The API Fallacy").]

The two definitions of freedom we talked about make usefully contrary trade-offs in what they offer to recipients of such freedom, but my eyes didn't open until I read the question posed in this way.

A freedom without restrictions is a laissez-faire system. Anything goes, as long as fundamental rights are not violated. One side-effect of giving freedom to all players is that, through entirely legal means, some players will ultimately end up with much more power than others. Then those others will find that they have very little freedom, after all. They are left with only their fundamental rights, but without much economic freedom, they must pretty much agree to any conditions imposed on them, "of their own free will".

Contrast this with a situation where basic economic freedom is guaranteed to all, so that no one can be forced to do anything against their will. This goes beyond fundamental rights, by the way. Obviously, to protect such freedom, restrictions must be placed on all players to prevent an aggrandisement of power such as what would happen under a purely laissez-faire system. So some freedom is being denied to all, in order to preserve a minimum of freedom for all. By way of example, most countries have a Restrictive Trade Practices Act or the equivalent, which limits what market players can do, in a bid to protect the freedom of others.

That's the crux of the issue. Both systems claim to value freedom, but they are talking about subtly different concepts. One is a freedom without restrictions (with the risk of that freedom being taken away by other players through entirely legal means). The other is a freedom that cannot be taken away under any circumstances (with some consequent restrictions being placed at all times on what players can do).

We will return to this dichotomy again and again, because understanding the philosophy of Liquidism requires an understanding of these two usefully contrary trade-offs. Before you read further, think for a moment about the difference. Which do you think is the greater freedom?