In the three maps above: Note the congruency between economic freedom and personal wealth. Let’s find the connection.
I post this on December 1, 2009: Exactly 25 years ago today I went into business for myself. This analysis is a thank you to an economic system that works.
This is a two week post because it’s long and covers a lot of ground. I will use the December 15th post to respond to comments.
Prelude: My purpose in writing about Work the System methodology is not to convince you to see things my way. It’s to illustrate another way of navigating life. In my writing, what I conclude about places, things and people is of secondary importance. I use these real-life scenarios only to illustrate what is of primary importance: a simple and mechanical life-perspective that can enormously improve your existence in the areas of money, freedom and personal peace. This perspective is a different way of getting through the day, moment-to-moment; a “systems mindset” that anyone can immediately and permanently internalize. What is it? It’s the visceral certainty that life is not an unpredictable, swirling sea of sights, sounds, people and events, but instead a collection of logical independent systems, 99.9% of which work just fine. From this vision, everything changes. So don’t get overly caught up with my opinions and conclusions! Instead, focus on the systems mindset thread that leads me to these opinions and conclusions.
Setting things up. I’m going to spend most of this post setting up my hypothesis. Then I’ll draw conclusions at the end, all the while explaining the systems mindset perspective. Note that it’s not my job to please all my readers. I can’t apply the systems mindset to economics or government without coming to some real-world opinions. As I beat-to-death in my book, Work the System, the “systems mindset” is divorced from religion, politics and those things which must be taken on faith. It’s simple mechanics. But because of this particular topic, I can’t avoid testing political sensibilities and so I expect robust reader-flak in the comments section. That’s fine, but before unleashing understand that my positions are mechanical observations, not ideological read-off-the-menu talking points. If my conclusions don’t agree with your conclusions, that doesn’t make either of us fools. If you dispute my points, I challenge you to come back at me in the systems mindset context, rather than the run-of-the-mill ideological rant. I’ll remind you of this at the end of the post.
Individual systems. Per the systems mindset, we’ll focus on individual systems and how they mechanically interact with each other, rather than general pronouncements of belief. (Most people get so-so results in life by haphazardly applying their general, amorphous beliefs to their physical surroundings. My approach is the reverse. I discuss how a careful moment-to-moment observation of one’s physical surroundings will result in new and powerful “in-the-gut” beliefs, beliefs that change behavior to address actual reality, so one can quickly start getting what one wants out of life.) Here, as I discuss macroeconomics and geopolitics in simple terms, I will focus on the following separate system entities: the government system, the private sector economic system and individual “people” systems.
Comparative Economies. Let’s use the United States as an example of a free market economy. (Is the U.S. the “best” example of economic freedom? Probably not. Try Hong Kong, Singapore, Australia, Ireland and New Zealand.) Per Wikipedia, a free market is “a market without economic intervention and regulation by government.” Capitalistic, this economic system is dominated by the “private sector,” with citizens able to earn and keep profits according to their own success. Also, production is mostly owned by individuals rather than the government. The opposite economy is a redistribution-of-wealth, planned or “command-and-control” economy, “in which the central government makes all decisions on the production and consumption of goods and services.” Any profits are, one way or the other, channeled to the state. The state also owns production including control and sale of natural resources. North Korea is my example. The private sector in North Korea is tiny with much of it operating underground, circumventing the dominant state-controlled economic system. Lovely.
The capitalist free market economic system typically exists within a democracy of one type or another. A democracy has non-ideological leadership that holds freedom of the individual (“the ultimate minority”) as the first priority. The planned economic system resides within a socialistic or totalitarian state which is a product of far-left or far-right leadership. Citizens have limited freedoms as the state itself reigns supreme (despite the state’s endless proclamations to the contrary).
There is also the “mixed” economy in which governments “intervene,” but for our systems mindset analysis let’s go with the polar-opposite nations of the U.S. and North Korea, understanding that most other nation-states fall somewhere between the two in market intervention, taxes, personal freedoms, opportunity, etc.
I’m using the United States and North Korea as examples because they differ dramatically in how they are managed and (consequently) how much prosperity is available to their populations. Most economies today are free market economies but in addition to North Korea, strictly planned economies still exist, for example, in Cuba, Libya, Iran, Saudi Arabia and Burma. These are not destination-resort hot-spots. The 80’s and 90’s saw the demise of a number of planned economies including the Soviet Union and, to some degree, part of the “old” China.
In systems mindset terminology, a nation’s economy is a “primary system.” Yes, each economic system interacts with other economic systems, but each is self-contained enough to be considered its own individual self-contained entity.
Here are pertinent Work the System tenets that apply to the discussion of any system:
- Life is not complicated. The world is an assemblage of distinct systems, not a seething uncoordinated mass of sights, sounds, people and events
- A system has a single primary purpose. It’s why it exists
- The simplest explanation is usually the correct explanation. Also, the simplest solution is usually the correct solution
- “Purpose” and “efficiency” are of root importance in any system
- In order to remain at peak effectiveness as the environment changes, an efficient system must continually make internal adjustments. An inefficient system adjusts infrequently and/or at the behest of one or more unrelated outside interlopers
- An efficient system will become inefficient if preyed upon by another system
- In most cases it’s best to tweak an inefficient system into efficiency rather than to altogether discard it in order to start over from scratch
Following are some systems mindset distinctions between socialistic and capitalistic economies. I’m keeping this simple, mechanical and non-theoretical (perhaps to the chagrin of some of you blue-blood economists and high finance whiz-bangs).
The purpose of any country’s economic system is to “distribute goods and services.” However, government system purpose varies dramatically from one country to the next. In the United States, per founding documentation, an important part of government’s role is to protect and manage the capitalistic private sector economic system so it can operate freely. Brilliantly conceived and designed, these documents also provide protection from the government’s own encroachment. Contrast this with North Korea where government directs all aspects of the socialized economy. It has “nationalized” the private sector. It owns it. Under the guise of “terrific equal outcome for all,” the economic primary system of North Korea – and really, the population itself – exists at the pleasure of the government primary system. North Korea is noted for massive starvation, “re-education” camps, spastic and contentious interactions with other nation-states and intense personal regulation of life. (Imagine government departments entitled “Propaganda and Agitation Department” or the “Culture and Arts Department of the Central Committee of the KWP.” One’s first thought is not, “Gee. I bet this works out swell for the people!”)
Efficiency. Here’s the crux of any systems mindset analysis: A primary system will be efficient if it can adapt to changing circumstances by making unobstructed small, frequent and fast adjustments that promote the overall purpose. The United States, UK, Austrailia, Switzerland, Sweden, etc. have free market economies in which a vast range and number of internal adjustments are made spontaneously via a myriad of sub-systems as buyers and sellers constantly make decisions per their individual desires and capabilities. Some systems are more efficient than others for one reason or another; Some are managed better than others and so on. Things move quickly and there’s lots of competition so, in-the-moment, goods and services survive if they are of value and they fail if they are not of value.
Since there is economic reward for success and punishment for failure, people have incentive and so there is much energy expended to get things right. It’s an efficient flow and the economy as a whole sings as citizens work hard in order to succeed while at the same time enjoy enormous individual freedom and high standards of living.
This is important: The capitalistic systems/processes of the private sector are self-cleansing. Inefficiency simply doesn’t survive. An inefficient system or process quickly heals itself or just as quickly disappears.
This sounds backwards and over-simplistic but here’s the best way to look at this purging process: Removing inefficiency at a sub-system level means the primary system becomes more efficient.
Yes, there are winners and losers. But the great thing is that in a liquid, lots-of-opportunity economic system, the loser of today can be tomorrow’s winner.
So, in North Korea the government makes economic decisions from outside the economic system, decisions that are based on the needs and desires of the government system itself. The North Korean economy is terrible because the government system does two things wrong: First, it drains capital from the economic system using it as a source of funding. Second, inefficiency in internal systems is tolerated because there is little incentive for anyone “on the ground” to make those systems more efficient. Workers plod through the day without producing more than what is absolutely necessary because there is no reward for doing more than that. Management operates in the same way. The economy stinks. There is little freedom. Life is a struggle. And here’s the bottom-line regarding the inefficiency of a state controlled economy (and for that matter, of many governments and large Bureaucracies): There is minimum cleansing action within the system processes. Inefficiency dominates because there is little or no punishment for inefficiency or reward for efficiency.
This has to be said and it’s a good time to say it: Unless the government seizes control of the production apparatus, the government system’s revenue for operation comes 100% from private sector system production and profits. It’s never the other way around (although government spokespeople will try like Hell to make it seem that way). If the private sector is brought to its knees, the entire country – including the government – will be on its knees too…. and typically this is the point where nationalization of production apparatus occurs.
Again, high system efficiency for any primary system is the result of a multitude of spontaneous, small “system improvements” made within the system itself – for the benefit of that system – not the result of an outside controlling mechanism which has limited interest in promoting internal productivity (as well as non-related motives that do nothing but drain capital from the system).
Haranguing on salient points in my usual way, remember that in a given country there is an economic primary system and there is a government primary system. In a democratic capitalist society the two are more or less separate. In a socialist society they are combined.
Documentation. If you’ve read my book, Work the System: The Simple Mechanics of Making More and Working Less, you know how I feel about documentation: To achieve a high degree of efficiency in a given system, documentation is mandatory. To illustrate, the success of the United States in providing maximum freedom and opportunity to citizenry is ultimately the result of founding documentation put together way back in the late 1700’s. In contrast, the documentation of a socialist state like North Korea is ephemeral, morphing dramatically at leadership’s whim – and often within the context of the latest military coup. This is it: Solid documentation equals calm efficiency while bad or non-existent documentation equals chaos. Boring but true.
Brief Kudos for rich people in capitalistic societies. They don’t sit around their mansions counting gold coins. They invest in businesses, luxury goods, travel, etc. Money is not static; It flows from these people on down the line. Their investing and spending produces jobs. I’ve been on both sides of the equation and this I know for sure: Discouraging wealthy people from investing and hiring through excessive taxation and over-regulation is a bad thing. So, here, I gently and respectfully correct my socialist friends: In a capitalist society, wealthy people are not the enemy.
(Are your ideological emotions beginning to surge? If so, back off and remember that my analysis is based on dispassionate mechanics and is not being recited word-for-word off some left or right wing menu.Remember that I look at the world as a collection of systems, any one of which is efficient, inefficient or somewhere in between. And I work hard to see the world as it is – both the seamy and the pristine – and not the way I think it should be.)
The government primary system: Supporting or fighting the economic system? In an individual country, government and private sector systems are separate, combined, in support of each other, in conflict with each other or somewhere in the middle, and in this distinction the waters get muddied. But this is certain: A free-market capitalist democracy can slide into some degree of command-and-control socialism when the government system becomes too powerful, impinging on the private sector economic system, making parts of it wards of the state. But the good news is that it goes the other way too, with dozens of new capitalist democracies springing out of socialism/totalitarianism over the last thirty years, most recently in Eastern Europe and South America. Economically, Russia and China have also shifted in this direction (although they certainly can’t be called democracies). Economic and personal freedom is the strong trend. See graph below.
Freedom in the World
(Graph via Wikipeda per Freedom House)
Interestingly though, in the United States, as government attempts to assume command-and-control over large swaths of the private sector (the short list includes auto manufacturing, banking, chunks of Wall Street, health care and most recently mass transit), the slippage toward socialism is in contrast to the rest of the world’s steady move toward capitalism and economic freedom.
Capitalistic or socialistic, most all economic failures trace back to government interference in the marketplace: It’s the encroachment of one system upon another. In the U.S financial world, have there been greedy CEO’s and wrongdoing in the private sector? Yes, of course – that’s nothing new – but by far the largest cause of inefficiency has been by government system’s over-reach into regulation, taxation and general manipulation which has directly or indirectly made market systems everywhere inefficient and unpredictable and open to abuse from within and from without. And when this happens, investors and business owners get leery, less apt to spend and hire (see my post, Deflation, Inflation and the The Beast I Won’t Buy.)
And, back to the corruption issue: Corruption within democratic states pales in comparison to the hyper-corruption of command-and-control socialistic states.
Should governments regulate while providing services such as education, road construction and maintenance, and safety-net health care? Yes, of course! Let’s be pragmatic here. We need governmental management of courts, law enforcement, national security, infrastructure and a host of other services that can only be realistically provided by government entities. But it’s a matter of degree: Minimize it and keep it out of my face.
Economic System Management in the real world. From a systems mindset, non-ideological perspective, this is a simple thing. Natural systems manage themselves (the tree in the forest, for example). Complex human-built systems must be managed both for efficiency and to insure that system-purpose is continually fulfilled.
Can this be argued? Especially now, The United States economy is being overseen by professional politicians who have little management experience in the private sector and who – in the current administration – endeavor to replace the “old” system with a new system in which, interestingly, the government would manage as many facets of everyday life as possible. Whoa.
Check this out:
(Map per American Enterprise Institute)
Here I wallow further into the swamp with my prediction for the United States: Because of ever-worsening government and economic system dysfunction caused by leadership’s lack of management experience, little understanding of fundamental economics, lack of empathy for the private sector and attempts to shift the underlying purpose of our governmental systems, Democrats will lose majorities in both houses of Congress in the elections of 2010. Then, in 2012, Barack Obama will be voted out in favor of an efficient executive who has private sector expertise and who has solid belief in the traditional purposes of our primary systems of government and economy. This individual won’t be a senator. He or she will be a state governor – someone who has had serious executive/managing experience.
The new leadership approach will be to “tweak” existing systems, not overwhelm or replace them.
And while I’m making the fur fly (despite my repeated assertions that my conclusions are based on systems thinking), here’s my take on a couple of timely issues in the United States:
- Health care reform: If the current system is working fine for 85% of the population – and is one of the best health-delivery systems in the world – from a systems perspective does it make sense to turn it upside down? No. It has its inefficiencies but it’s a system that’s working well the great majority of the time. I say tweak it. The tweaks? Since cost is the problem, increase effiency and therefore lower cost by removing encroaching government system restrictions such as mandated benefits, allow packaging of plans for businesses, do tort reform and bottom line, allow competition in order to perfect insurance products and to reduce their price…for example (and this is huge): Last week , our insurance agent requested bids for 2010 coverage for our 30 employees. She received bids from just five Oregon insurace companies because we can’t cross state lines to get coverage. The new insurance company we selected will raise prices 3.5% over what we paid last year. What if our agent could have received bids from insurance companies in all 50 states? Wow! What would the prices have been then? Get government out of the health care system, not in it deeper. (It’s interesting that when government causes a problem it will then offer more of itself as the solution to the problem it originally created. Arrgh.) For those who are uninsurable because of serious congenital problems, the governemnt would handle it. Regarding the new streamlined approach, keep your systems thinking hat on and realize this: The system tweaking will be easy, fast and no cost because it will be more about dropping restrictions than about devising a huge, cumbersome and awesomely inefficient bureaucratic system (per 2,000+ page legislative bills that lawmakers don’t have time to read). These simple moves, with appropirate regulatory oversight, would go a long, long way to quickly fixing things.
- Cap and Trade: Of course we must be good stewards of the earth. Everyone agrees on that. But creating an enormous burden of taxes and regulation – by using scare tactics – will ultimately backfire with the majority of the population. And, are “more taxes and regulation” the default solution to everything? Anyway, first prove without a doubt that global warming is man-made before yet again hammering away at the private sector system. (As an aside, there is mounting evidence that the global warming scare may go down in history in the same category as the Salem Witch Trials). In any context, there is nothing more burdensome than a pointless, unnecessary system and this may be the ultimate example of that.
The beautiful thing about a democratic free market economic country (or about a well assembled large corporation) is that when things aren’t going so well, the system itself via excellent founding documentation, allows change not just within the mechanism, but at the very top levels of management.
And North Korea’s socialized, command-and-control economic and government systems? There will be no fundamental management change coming from within because the existing government system won’t allow it. The country is and will continue to be an inefficient mess that is operated for the benefit of the government rather than the people. Only internal revolution or war will change North Korea’s systems to something more efficient. Again, lovely.
And me? I’m registered as an independent, having swum back and forth in the waters of both liberalism and conservatism. As the owner of a small business owner for the last 25 years, it’s the freedom-thing and the personal responsibility-thing for me and so I find myself some kind of hybrid libertarian/conservative, skeptical of government’s ability to manage things well. What I have accumulated in life is of my own doing, and after spending time deep in some non-democratic third world countries, I appreciate the ladder that is available to me in the free world. In too many places individual hard work and innovation takes one nowhere.
And what about the less fortunate, those at the bottom rungs of the socio–economic ladder? Yes, of course those truly in need must be cared for by the rest of us but as Dennis Miller said, and I paraphrase: “it’s my responsibility to take care of the helpless, not the clueless. And lately there seems to be a lot more clueless.” Can a dependant class be cultivated into a numbnuts voting block by relentless handouts?
You tell me.
Finally, and in relation to the above thoughts on the socio-economic ladder, this needs to be said: In a democratic capitalistic society like the United States, at any given time, there is a percentage of the population residing at the bottom rungs. It’s important to remember that in a free market economy there are constant up and down movements on the ladder. Those on the bottom rungs today are often on the top rungs tomorrow, and vice-versa. It’s fluid. In a free market society, one has the opportunity to climb and descend based on one’s own actions. In socialist and semi-socialist state systems, that upward movement is difficult – in the worst cases, literally a caste system. In North Korea, for example, 99% of the population is stuck at the bottom rung with no chance of climbing up and out. And anyway, there just isn’t that much ladder to climb.
What works in the real world is the equal opportunity that the capitalist free market system offers, not the socialists’ utopian promise of equal-outcome. On this planet, it just doesn’t work.
Call me a capitalist.
(And, one more time: I’ve carefully explained my conclusions based on the systems mindset and not ideology. If you disagree with my analysis, I challenge you to respond on that basis: Poke holes in the systems mindset reasoning and avoid straight ideology rebukes. As I mentioned at the beginning, I will respond to feedback in the December 15th post.)