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4-Jun-2006
An Experiment in Free Markets, from Barry Gitarts

I have been researching Somalia because it is a country currently with no government and might help in answering some of the political and economic theories thrown around for decades, but have been difficult to test. Below is an article I found that talks about the business environment in Somalia. It seems to have biases, but with so little reporting in the area, its a start.

These are pictures of Puntland, Somalia, I would have never imagined a place with no government to be so developed.

"Somali Businesses Stunted by Too-Free Enterprise"
By Ian Fisher
Mogadishu Journal

There are five competing airlines here; three phone companies, which
have some of the cheapest rates in the world; at least two pasta
factories; 45 private hospitals; 55 providers of electricity; 1,500
wholesalers for imported goods; and an infinite number of guys with
donkeys who will deliver 55 gallons of clean water to your house for
25 cents.

What Somalia does not have is a government, and in many ways, that
makes it the world's purest laboratory for capitalism. No one collects
taxes. Business is booming. Libertarians of the world, unite!

So it may come as a surprise that business people in Mogadishu, the
wrecked and lawless capital, are begging for a government. They would
love to be taxed and would gladly let politicians meddle at least a
bit in their affairs. "The thing is," Abdi Muhammad Sabria said, "it's
a lot better to pay a tax than to go through what we are going
through."

Last year Mr. Sabria and his partners opened a pasta factory here, and
at the moment they cannot make enough to meet demand. But they pay
$3,000 a month just for gunmen, including the one who sits with an
AK-47 across the factory's spotless concrete floor from the pasta
cutting machine. Because there is no port, they lose up to 10 percent
of their imported supplies on the beach. They had to dig their own
well. They generate their own power. "You have to provide everything
for yourself," Mr. Sabria said. "You have to collect the garbage on
your own street." Even this requires a payment to local toughs, who
often block private garbage trucks.

Established business people here are all too aware of the paradox they
face: what helps make their business so good -- freedom from
government -- is exactly what will kill their businesses in the long
run. It may be true that the government that is best governs least.
But at least it governs.

"Security is the doorstep for development," said Muhammad Ahmed
Hirabe, an economist collecting statistics on the business climate in
Mogadishu. His partner, Muhammad M. Sheik, added: "Lack of government
is not good for the economy and the whole business environment. That
is the bottom line."

And so businesses are among the key supporters of the peace conference
in the neighboring country of Djibouti, in which some 2,000 Somalis
are gathered to try yet again to establish a government. Businessmen
are backing various candidates for top posts, in ways that make other
Somalis nervous about the influence they may have on a new government.

But the business people argue that their success has irreversibly
altered the way government is viewed in Somalia. The unavoidable
reality is that business will shape whatever government is formed,
most likely by making it far smaller than its predecessor.

Business has been one of the few sources of stability in Somalia since
the military dictator Muhammad Siad Barre was overthrown in 1991 and
no one rose to replace him. In anarchy deepened by local warlords,
private interests swooped in to provide essentials like water,
telephones and electricity, though not in the most efficient ways.

The three telephone companies, for instance, operate entirely
independently of one another. Having access to all people with phones
means having three telephone lines -- one from each company. Drinkable
water is delivered mostly by donkey. Smuggling thrives, in everything
from guns to cigarettes to electronics. One of the major exports is
charcoal, to the Persian Gulf states. The trade has caused an
environmental disaster as well as battles between tree cutters and
herdsmen whose camels eat from the trees.

But the market's invisible hand has worked in remarkable ways:
competition is so fierce that international phone calls are just $1.50
a minute. The main market downtown is jammed with goods. And after Mr.
Sabria's factory opened last summer, a price war sharply cut the cost
of pasta, one of the staples in this former Italian colony.

The company started off selling high-quality pasta at about $8 for a
10-kilogram (22-pound) box. Then importers moved to undercut them,
selling a lower-grade pasta shipped in from Dubai at $5 a box. Not to
be outdone, Mr. Sabria's company introduced its own lower-grade line,
for about $4.60 a box. Now, three months later, he says he has wrested
the market back from the importers. "They are crying," Mr. Sabria said
with predatory glee. "We still hold them, and there is no way they can
get out."

It is striking that Somalia, unlike many parts of Africa, has achieved
this thriving business climate on its own, without the usual aid and
advice from rich nations. They have all but disengaged from Somalia
since the failure of the United Nations operation here in the early
1990's. Somalis have learned that they are pretty good at making
money.

"It's entrepreneurism that's doing it," said Ahmed Abdisalam Adan,
director of programs for Horn Afrik, Somalia's first independent radio
and television station, established last year. "It's who has more
creativity. It's who is willing to take risks. Before it was the
government. The government could make you rich one day and poor the
next."

Indeed, in General Siad Barre's heyday, the government controlled
nearly all commerce, from airlines to sugar factories to hotels. It
was consequently one of the most corrupt on the continent -- typical
of African governments, whose leaders often run publicly owned
industry into the ground as they siphon profits into private bank
accounts. If the Somali businessmen's smaller-is-better vision becomes
reality, it will be a radical departure.

In general, these businessmen say, government has a strong role to
play as a regulator of existing industries. For example, it might
force the telephone companies, to integrate their lines, or ban the
export of charcoal. But they argue that any new government should
focus on essentials like roads, education and health. "A lot of
services can be covered by the private people," said Abdul aziz H. A.
Sheikh, managing director of Somalia Telecommunications, one of the
three phone companies.

But the economist, Mr. Sheik, argues that a small government is an
impossibility, given the state of Somalia's public works nearly a
decade after the government fell. There are few roads, no central
power plants, no water and hardly any habitable public buildings. "If
it is very small, who is going to rehabilitate?" he asked. "The
private sector can't do that."

The private sector is clearly hard pressed. Mr. Adan, 40, who started
his radio and television company with two people who like him had fled
to Canada, said that at the outset his security guards had been forced
into firefights with the gunmen of a local warlord. The telephone
company chief, Mr. Sheikh, says thugs regularly prevent him from
digging trenches for phone cable.

Smaller entrepreneurs, too, find it difficult to work in chaos: Abdi
Muhidin, 23, who goes to the beach near the ruined downtown nearly
every day to dig flakes of gold from the volcanic rock there, can make
as much as $10 a day, a good wage here. But bandits often rob him.
"Yeah, it happens," he said, as he scraped the rock with a metal rod.
"What I would like to have is peace."

One of the eight gunmen guarding a reporter (at $200 a day) squatted
down and told Mr. Muhidin, "I don't want a government." Mr. Muhidin
did not bother to look up. "Yes," he told the gunman, "for you it's
better not to have one."

2-Jun-2006
Does Population Growth Threaten Living Standards, by Donald J. Boudreaux

To Editor of The Christian Science Monitor:

Jeffrey Shaffer asserts that growing population inevitably threatens to lower individual living standards ("Overcrowding at the gas pump," June 2). Baloney.

Are Americans today poorer than we were, say, in 1800? According to Mr. Shaffer's logic, we should be. Back then U.S. population was 5.2 million; today it's 57 times larger at nearly 300 million. And the world's population now is more than six times larger. Yet, of course, our standard of living - along with that of everyone living in open, market societies - is today inexpressibly higher. The reason is that free markets ensure that, for all that we consume, we produce even more.

Steve Ellison responds:

In a free market, the greater the population, the more customers there are, and the more business flourishes and creates wealth. Network effects in which services such as eBay become more valuable as more people use them have been well documented. I would argue that population shrinkage is a greater threat to living standards than population growth. The potential for worldwide population decline is a significant difference between the 21st century and the 20th, one that might plausibly hold investment returns below the 1,000,000%-plus of the previous century.

07-May-2006
"Success" defined, by Rip Mackenzie

While immersed in the "mentors" project I'd been developing with inventor Stan Mason (recently deceased -- not a good year for friends of mine managing to stick around), I was astounded by a simple discovery:

Everybody dreams of success, but few ever achieve it. Everybody dreams of success, but few even know what it is.

In searching for a proper working definition, I started with a reporter's best friend, the dictionary. In this case, the American Heritage Dictionary spelled out the following:

 SYLLABICATION: suc cess
     PRONUNCIATION:   sk-ss
     NOUN: 1. The achievement of something desired, planned, or attempted:
attributed their success in business to hard work. 2a. The gaining of fame or
prosperity: an artist spoiled by success. b. The extent of such gain. 3. One
that is successful: The plan was a success. 4. Obsolete A result or an outcome.

     ETYMOLOGY: Latin successus, from past participle of succdere, to succeed.
See succeed.

But that doesn't really cut it, does it? Nor did the literally hundreds of quotes culled from thousands of sources over the next two years. In the end, I settled on one source from the only entity that truly stood for the creation and accumulation of wealth rather than the historical precedent of stealing the same from one's neighbors, the United States of America. In essence, it defined it's entire lifestyle as "the pursuit of life, liberty and happiness" (happiness, I am told, was once written as property, but I'm not a stickler for details at this point). As the saying goes, indeed I could spend another week researching this, but I'm having too much fun (aka "happiness") to bother.

There is a caveat, however. A trump card that should have been added in to complete the above into the perfect definition and the epitome of the trader's philosophy. Success is the pursuit and attainment of life, liberty and happiness ... without interfering in the right of another to do the same.

28-Apr-2006
Let us count our stagflationary ways by Kevin Eilian

I think back to when free trade and a strong dollar were the hallmarks of none other than trader Bob Rubin who knew that you needed foreign price pressures (depending on proximity to potential GDP) to restrain emerging inflation...now look what we have...

  1. Nobody is talking about a strong dollar. If anything, we are trying to weaken it against China and others.
  2. The current "war" against the oil companies is a travesty. To hide the confiscation (i.e. massive change in incentives), they are talking about doing away with LIFO/FIFO accounting which serves to lower the "cost of goods sold" on the income statement- only problem, it would hit machinery companies, textile companies, drugs companies and others (not to mention that it would decrease the incentive to find new reserves). Does anyone ever talk about how increasing the cost (decreasing the incentives) of corporation benefit consumers in the long run?)
  3. Taking a wholesale whack on immigration as labor markets are tight and inflation emerging.
  4. Potshots at Wal-mart and other main bastions against inflation.
  5. The increased talk of our trade deficit, without mentioning that it is still (even with huge energy component) less than nominal GDP growth or even if a positive "deficit" is a desirable thing (Japan?).

All this talk is also crowding out the most meaningful of anti-inflation possibilities- a massive tax overhaul which raises the long term economic "speed limit." The war on terror, war on oil, war on immigration has now overtaken this possibility.  Unfortunately the administration went for social security first before tax reform but that's for another post...

Dennis Vako Begins With a Challenge:

The essence of any government is to rob, it is parasitic and antigrowth, in essence anti-life; if you reach any other conclusion on this please let me know.

23-March-2006
Allen Gillespie gets to the Truth of the Success of Free Markets.

The problems highlighted are common points in labor economic discussions, sticky wage demand (unwillingness of workers to accept less than their prior pay) and immobility (unwillingness of workers to move). Traditionally, the sticky wage problem has been solved by inflation, but immobility is always a problem. The answers, however, are not simple because the chip plant moves the currency and creates the need for additional jobs like longshoremen, translators, lawyers, and additional transportation people, however, the location of the jobs may not be ideal if you are in Norman. When governments interject themselves even more greatly into an already complex transaction via currency manipulations, tax break, etc. the real picture which is fuzzy at best becomes quit distorted.

The one thing that is never distorted, though it may be hidden for awhile, is Truth. The truth is that in many cultures view cunning as a virtue because it means you outwitted you opponent, where as Americans with our puritan roots work from a concept of fair play. This concept, I believe, has been economically successful because business depends on dual trust of parties to perform their obligations, the right to property, predictability, and the enforceability of contracts, which while they may seem to exist for a time overseas, have a long history of breaking down.

14-March-2006
How Products are Made, from Rich Bubb

This site has (albeit generic) process information about quite a few products; mostly a general index, but useful none-the-less.

A little text from the website:

"For example, you can find here descriptions of Air Bag, Air Conditioner, Artificial Snow, Automobile, Battery, Blue Jeans, Chewing Gum, Coin, Compact Disc, Credit Card, DVD Player, Fireworks, Hologram, Jet Engine, Laser Pointer, Liquid Crystal Display (LCD), Nuclear Submarine, Paint, Popcorn, Refrigerator, Telephone, Television, Temporary Tattoo, Vaccine, Vacuum Cleaner or Watch. "

Read this article by Victor Niederhoffer and Laurel Kenner, about the road of capitalism and prosperity from the pilgrims to McDonald's

11/15/2005
McDonald's, by Ming Vandenberg

McDonald's apparently is responsible for destruction of the rainforest due to cattle rearing, but all kinds of restaurants serve meat products, so I can't place blame on McDonald's alone for the whole unsustainable meat-eating culture.

However, the business model of McDonald's and the other fast-food chains (Burger King, Wendy's, Roy Rogers) enables the working class to eat out in a safe family environment. Also, in Singapore (I'm not sure if this happens in America) McDonald's employs those who really need jobs but might not find employment elsewhere (the very elderly, some slightly mentally retarded people, those without English skills).

Overall, I feel strongly that McDonald's is a wonderful institution.

7-March-2006
An Excerpt from Dr. Brett Steenbarger's upcoming book

What It Means to be Free:

Let us not forget what it means to be a trader. It means that I am free to own property: shares of a private company or contracts in a commodity. I can take delivery of my property and dispose of it as I wish, or I can trade it to others. My decisions are mine to make; I need not follow the dictates of those who would put other interests--those of gods, governments, or guns--above my own. If I lose, it is my loss. If I profit, the gain is mine.

Freedom means that I have a voice. If I like an investment, I can tout it in online bulletin boards and blogs. If I don't--like the way the government is managing the economy, I can vote my conscience, not only at the ballot box, but in the marketplace by investing or withdrawing my funds.

But freedom is even more than that. Freedom is the ability to make one's living by one's judgment, and not being limited to subsistence through the toil of his or her hands. Freedom is the ability of a single individual sitting right here, right now at a personal computer to write words that can be read years later, in faraway lands. Freedom is downloading reams of market data and conducting research that, just years ago, would have taken weeks to complete. Freedom is the ability to see who is bidding, offering, buying, and selling in global marketplaces. It is the unfettered opportunity to participate in the economic vigor of developing nations.

Without freedom, there is no trading. Trading is a celebration of economic and political freedom. Slaves are traded; they do not trade.

All this freedom, however, is for naught if we, ourselves, are not free. It is the deepest of ironies that we experience greater freedom--far broader potentials--than those who came before us. And yet, in our lives, in our abilities to master ourselves, we are no freer. Amidst opportunity, we remain partial: tethered to our conditioning.

What it means to be free is to be able to choose, to live with intention. The free life is one that we guide: a life lived with purpose, direction, and meaning.

Trading, like all the great performance activities, is an opportunity to cultivate the intentional life. It is a path to freedom.

Laurence Glazier responds:

I think of all this in terms of political rights. Most people regard political freedom as having the vote, but I view having the right to buy and sell shares in freely formed companies an equally important freedom. Freedoms are hard won and easily lost and I feel it a responsibility to vote at each election, always a moving event in England. Likewise I feel similarly geared to participate in the market, another freedom which is sorely under pressure and about which I received zero education at school (a manifestation of that pressure). What better example of democratic structure then a company with a board elected by shareholders? When I click Transmit on my workstation, along with all the other joys of trading, it is an expression of personal freedom.

22-Feb-2006
The Importance of Consumer Sovereignty, by Victor Niederhoffer

The Gravest Error

The one thing everyone should know about the economy that the economics courses and texts and  analysts and media don't teach is that the consumer is the king who determines which businesses prosper and fail in providing us with goods. The classic expression of this comes in the most successful retailers like Wal-Mart, Home Depot, Stew Leonard's and numerous others who offer an unconditional money back guarantee, or lowest price guarantee, no questions asked. The purveyors do this out of self-interest. They know that one dissatisfied customer can do more damage than the good that a thousand satisfied customers can provide. They also know that word-of-mouth accounts for an ever increasing percentage of consumer decision-making. Most of all, they know that everything has substitutes, especially something that's supposedly invaluable like water (see below), and that competition is extraordinarily intense for every product, with companies waiting in the wings to produce a better product at a lower price with greater ease of use for every product, regardless of what the economists measure in terms of elasticity of demand or what they say about the absence of perfect competition in the real world.

The Classic Sentiment

The best modern update of consumer sovereignty is from Ludwig von Mises's "Human Action

The captain of the ship is the consumer. Neither the entrepreneur nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses; he goes bankrupt and is thus removed from his imminent position at the helm. Other men who did better in satisfying the demand of the consumer replace him.

The consumers patronize those shops in which they can buy what they want at the cheapest price. Their buying and their abstention from buying decide who should run the plants and the farms. They make poor people rich and rich people poor. They determine precisely what should be produced, in what quality and in what quantities. They are merciless bosses, full of whims and fancies, changeable and unpredictable.

After reading a passage like that, first written in English in 1949, but probably first enunciated in the Vienna of his youth in the 1920s, one wants to jump out of the skin and shout, "How did he know?"

A Firing at Wal-Mart

A classic lesson in consumer sovereignty came when a clerk at Wal-Mart gave a customer a lecture on the evils of not working and using food stamps. The boss rightfully gave him a dressing down, and the clerk rightfully quit. The key is that any customer can destroy the reputation of a business by telling all his associates about the bad attitude at Wal-Mart and how they should take their business elsewhere. I am reminded of one of the first businesses I sold, Sirloin Stockade in Oklahoma and California. They managed to give a full steak dinner for $1.19 in small communities, and they aced the repeat business with giving away free soft ice cream to their customers. "The happy kids are the best advertisement in the world."

Water

Everyone needs eight glasses of water a day, and there are no substitutes. That's the fallacy that Paul Heyne takes apart in his chapters about everything having substitutes. Are you sure that you can't have coffee or tea or soda instead, or a tangerine or tomato? What if the price of water were to rise to 60 cents a cup? Might you take a shower rather than a bath?

Heyne beautifully gets to the core. Everyone faces scarcity. As you use more of your resources for one thing, you limit your ability to get other goods. Buying one good involves a sacrifice. As you purchase additional units of a good, the sacrifice or cost increases in terms of what you have to give up. This leads to a search for substitutes. When the benefits from the additional unit of a good exceeds the cost of the sacrifice plus the cost of search, a substitution is made. One of the main things that has increased competition in our society, and made substitutes even more prevalent than they were in the hay day of Heyne, Mises, and Smith is the reduced cost of search that is part and parcel of the Internet.

11/08/2005
Ben Franklin: America's Original Entrepreneur, by Ryan Carlson

As Ben Franklin is an inspiration for many of us, I think others might learn from and enjoy a recently published adaptation of his autobiography. The 250 page book is divided into 82 chapters and makes for easy reading with light commentary to help guide the reader. I'm one of many who've picked up the original autobiography but struggled with the 18th century language, so it's a treat to be able to breeze through this modern adaptation.

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