PL: I'm a software engineer. I was brought up to believe that the wise accumulate wealth and save for the future. This is what I tried to do until the financial crisis spurred me to think more seriously about economics. I had never taken the time to learn basic economics before then, and what I learned shocked me. I've come to conclude that saving is not so smart.
Q: The consensus view seems to be that life is too short not to be doing what you enjoy doing anyway. Why didn't you follow this advice to begin with?
PL: I wouldn't enjoy an ordinary occupation because regardless of what I do, I'd contribute to an economic system I don't agree with. But there are some who find creative ways of rebelling against the system.
Here's an excerpt from an article from October 12, 2006:
COLUMBUS, Ohio - A man who couldn't find steady work came up with a plan to make it through the next few years until he could collect Social Security: He robbed a bank, then handed the money to a guard and waited for police.
On Wednesday, Timothy J. Bowers told a judge a three-year prison sentence would suit him, and the judge obliged.
Q: Why haven't you done something similar?
PL: I think this guy is also contributing to the system. The real problem today is useless economic activity. The US already imprisons something like 10 times as many people (on a percentage basis) as the average nation in the world. This is part of what keeps the unemployment rate so low.
Q: Last I checked, the unemployment rate was around 10-20%, depending on how you count.
PL: I think if we got rid of most of the inefficiencies in our economy, we'd have 90% unemployment.
Q: Would that make you happy?
PL: You bet. But getting there requires coordination. On the one hand, those who work a lot and save tend to starve the economy and thus encourage higher unemployment. On the other hand, those who don't work and live off of taxpayer's money threaten to bring down the economy by contributing to high national debt levels. In reality, the two groups tend to cancel each other out and the economy keeps chugging along.
Q: So how do we get to 90% unemployment?
PL: Free market philosophy will get us there. Already, we have far more capacity to produce (i.e. willing workers) than we have willing consumers. At the same time, no one likes other people getting overpaid, living on welfare, or doing unnecessary work. Smart people realize that free markets are the key to efficient markets and everyone wants more bang for their buck. These factors can only lead to higher unemployment.
Q: But governments all over the world are doing everything they can to create jobs for people. People are worried about the reduction in their standard of living and they need jobs to pay their bills.
PL: It's puzzling to hear so many people suggest that "fixing" the economy implies creating more jobs. I often hear people lament the way Americans buy things they don't need. They say we need to "live within our means". They complain about costs going up.
I think the problem may be that (1) those who didn't save really do need jobs to pay their bills. (2) Those who have some money are usually invested in houses and equities. To keep the asset prices propped up, they need others to go to work, earn a lot of money, and then spend or invest it.
Moreover, there's (3) an overwhelming percentage of people who have been brought up to believe that working for a living is a virtue. When they head into retirement, they don't know what to do with their lives anymore and so they continue trying to make money.
Q: Which group do you belong in?
PL: The latter two, at least until very recently. I no longer think it's worthwhile to hope that the Ponzi economy we all live in will continue for long.
Q: How is it a Ponzi scheme?
PL: In two ways. First, you have rising debt-to-GDP levels driving economic growth, as pointed out by Australian economist Steve Keen's blog, Mish's Global Ecnomic Trend Analysis, and others.
Secondly, money can be thought of as the claim to the fruits of someone else's labor. As long as we spend the money soon after we earn it, we can be fairly confident that the claim will be honored. When we invest money for use in the future, whether in gold, real estate, stocks, or what have you, we are making a risky bet: that in the future people will continue to be eager to spend a substantial portion of their lives working. If our children figure out that generations before them have been banking on their willingness to spend 40, 60, 80 hours a week toiling just to maintain an illusion of wealth, we'd see a drastic reduction in demand for everything except food.
Q: Isn't that like betting against human nature to think that one day our children will wake up and decide they don't want wealth, status, and power?
PL: The belief in working for a living in order to become successful is so extreme that it has only one way to go. In past generations, you had influential authors like Bertrand Russell and Erich Fromm proposing a reorganization of society to get away from today's inane consumer society. Today, everyone has jumped on the bandwagon and believes job growth is the solution to our problems.
Many people I know actively use around 20% or less of the living space they own. The other 80% is not even being rented out. It just sits idle. I myself live in my apartment less than 50% of the time. The rest of the time, it's empty. As a nation we've got massive overcapacity in housing. The dream of owning your own single family home is overdone. Having your own home means worrying about insurance, property taxes, landscaping, cleaning all the rooms... It's possible that more of our children will come to view home ownership as a burden.
Then you got people with multiple cars, PCs, dogs, college degrees. Schools are a horrendous waste of resources. Parents like it because it's free babysitting for them. Students are well aware that nearly all of what they learn is unnecessary, and the rest they will have forgotten by the time they become interested in it.
When you buy soft drinks or french fries at a fast food place, you pay dollars on what should cost pennies. The cashiers only serve to make customers feel uncomfortable about avoiding the purchase of such high-margin items. Otherwise, we'd be ordering using touch screens, saving the cost of human labor.
The financial sector of the economy serves mostly to facilitate bets on the market without producing anything useful on its own. Aren't mortgages wonderful because they allow you fulfill your dream of your own home even though you're just starting out? Actually it's a bad deal because you have to share your wealth with the banks, realtors, and the home improvement industry.
Health insurance is a huge bubble. What happens when people begin to think it's not worthwhile to work an extra 15 years in order to pay for medical procedures that allow you to live an extra 5?
Tax and legal codes have become too complicated to understand. People hire experts to deal with what should be trivial issues.
Legalization of drugs would result in massive reductions in need for wars and law enforcment.
Talk to the average Joe on the street and he'll claim that appliances, houses, etc. used to be built to last long, but now they're designed to break down after a few years so you have to keep buying.
There's talk about working past the age of 65 in order to afford retirement. The greater danger is people deciding at the age of 30 that they're done and retired. Housing and stocks will become worthless while the standard of living will skyrocket. I sure enjoy the lifestyle of not having to go to work. As 90% of the economy is waste, a 90% reduction in work hours could mean a tenfold increase in our standard of living.
Q: Can you name a single living person who thinks there's going to be a substantial reduction in work hours anywhere in the world?
PL: Hans Moravec suggested that robots will replace humans and create massive unemployment. But if you want to put robots to work to pay for your retirement, it's already possible today. See all those people who needlessly go to work every day? They're the robots.
Q: But even as a saver, you're forced to subsidize all kinds of inefficiencies in the system. You gotta have a car because cities are built to be navigated by automobile and car insurance is compulsory in most states. You gotta pay high taxes as soon as you make a high income because the government assumes you'll make the same amount until you're 65. You can't just make $100,000 one year and distribute the income over ten years so as to avoid income taxes. You still need to get a college degree because corporations won't pay you much without it, regardless of how meaningless a diploma may be.
PL: You're absolutely right. Unless you're part of the super elite, there's no way you're gonna retire at the age of 30. When you think about it, there are three main classes of people in today's world. (1) The world's poor who make do with $2.00 a day or less. They're supposed to represent about a third of the earth's population. (2) The world's rich who primarily live in the emerging economies. They often spend a whopping $5.00-$10.00 a day. That's roughly another third. (3) The world's super elite who live in first world countries and routinely command outrageous salaries like $30,000 - $60,000 a year. I believe in the US, they're called the middle class.
Q: Please elaborate.
PL: Let's start with the poor. Although I don't have a lot of experience with the world's poor, what little I've seen made an impression on me. I was taken aback by their lack of frugality. For example, it's a waste to me to spend a nickel or a dime to have motorized transport to cover a distance it takes me 5-10 minutes to walk, but for the poor it's apparently a status thing to show they can afford not to walk.
There's an interesting article about Daniel Suelo, a caveman in Utah who decided to stop using money. The article mentions Suelo's experience in the Peace Corps where he helped an impoverished tribe in the Andes. He realized that as the tribe began to produce a surplus, they traded it for things like sodas, MSG, and TVs, causing their health to decline. They became worse off for it.
Q: So you're saying let's go back to simple living?
PL: On the contrary, I think people like Suelo make the problem worse by leading more labor-intensive lives than the average office worker. The problem isn't money. It's loose spending habits and a deep-seated work ethic.
Q: Then what's your point about the world's poor?
PL: I want to contrast them to the world's rich, who enjoy a standard of living that is not substantially below that of the super elite. For example, I've spend the last couple of months in the Ukraine, where the cost of labor is about 8 times less than in the US. But if you compare a medium-sized Ukrainian city to a medium-sized American city, housing and food cost around the same. But people enjoy the same latest technologies as in the US, such as cell phones and high speed internet (at substantially lower prices).
Q: You claim housing costs in the Ukraine are about the same as in the US. Where in the US can you rent an apartment for $100-200?
PL: Here where I live I'd have to pay $300-400 a month. The housing cooperatives here are a better deal, though. If I tried to sell the place where I live, I might only be able $10,000 for it (in fact, I had it on the market for $9,500 between 2000 and 2004 and no one wanted to buy it. It comes with a monthly association fee of $132. You'll be hard-pressed to find a similar apartment in the Ukraine for such a low price.
Q: So you're saying Ukrainians have to work for a living. How does that make them rich?
PL: They live better than I do in the US. And I'm lucky enough to be part of the world's super elite. I enjoy a standard of living far beyond what many of the richest kings and queens in human history could have imagined. If I were frugal, I could survive on $10 a day. But I grew up a spoiled rich kid, so I live the high life by traveling around the world and spending an average of $20-25 a day. This is to make a statement. I'm not just rich, I'm filthy rich. I'm also very grateful for this and I'm gonna enjoy it while it lasts.
Q: $25 dollars a day comes to around $750 a month or $9,000. That's still below the poverty line.
PL: It's hugely ironic that I pay for my apartment, utilities, my car insurance, plane tickets, food, lodging, and many other things, and I'm classified as living in poverty. At the same time, the super elite likes to complain about the impoverishment of the middle class and blame overpaid Wall Street CEOs for their supposed financial woes.
Q: And why not? The wealthiest 1% control over 90% of the wealth. It's not deserved and they practically run the government.
PL: The wealth of the richest 1% is just a mirage. They can't possibly spend that money on anything meaningful. The middle and lower classes wield the true power in a democracy.
Q: Democracy? Ha! Where have you been??? We voted Obama into office so he'd end the war and look at what happened. Government policy is largely driven by money from special interest groups, not the will of the people.
PL: Democracy is alive and well. The economy merely reflects the will of the people. It's a misconception to think that the effectiveness of democracy derives from the political voting process. The idea that every vote counts is simply false. Each vote is insignificant, yet the average person is led to believe that voting is an important responsibility and we must do something about voter apathy. I feel for the apathetic voters because they are at least rational.
Since every vote doesn't really count, it follows that it would be much more effective to measure the public's will the same way we come up with consumer sentiment numbers. At least if you are in a pool of a few thousand, your vote counts a lot more than if you're one of millions.
Q: I don't think the public would be happy about that kind of voting system. The consumer sentiment numbers are just estimates. To be sure about what the majority wants you need to count everybody's vote.
PL: The only way to be sure that the voting system isn't rigged is to publish each and every vote along with the name of the person who made the vote on a public website. Then anyone can spot check the result. We can write our own programs to check the math.
Q: I'm confused. Are you saying it's better to have a subset of the population vote so that their vote truly counts, or are you saying we should publish the results so they can be independently verified?
PL: I live in a small housing community with only 44 shareholders. Each and every vote really counts in our community and one vote can mean the difference between survival and bankruptcy because once you put the wrong person in power, they have the power to misappropriate the funds.
The problem is that you have to know your neighbors really well to know who to vote for. I spent so many hours getting to know a few of my neighbors. Not just superficially, but to the point of becoming part of their day-to-day personal lives. Even in such a simple community I'm not completely sure who to vote for. I can only make an educated guess.
When you talk about voting people into power whom you don't really know that well, it's even harder. I don't know whether McCain or Obama is the better president.
Q: So aren't you saying that democracy doesn't work?
PL: No, it works extremely well. Americans have the power to put an end to greed and corruption any time they want.
Q: Are you asking the American middle class to live in run-down trailers scraping by with $5-10 a day? It's not gonna happen.
PL: When I look out the window, I don't notice any difference in the level of economic activity. People still drive, go to work, and buy overpriced products at Walgreens. If such a minor reduction in spending causes a big recession and a 50% decline in the stock market, what would happen if there's a change in consumer behavior that's actually visible with the naked eye?
Q: I don't see how it would get rid of greed and corruption or remove the top 1% in our country from their position of relative power.
PL: What I'm saying is that the American middle class is the world's super elite. We are the world's greed and corruption. We are no different than the top 1%. Outrageous CEO pay is a direct reflection of our own spendthrift attitudes. The trend of the rich getting richer would quickly reverse if we became pennypinchers.
Q: That's pure supposition. Prove it.
PL: At first, margins would narrow, and price wars would cause companies' profits to decline. CEO pay could easily remain high. However, pennypinching across the board would create a whole different atmosphere where it is clear to everyone that consumers want maximum efficiency and anyone who caters to this will be rewarded. Advertising and marketing would become obsolete if consumers base purchasing decisions on clear reasoning. However, companies advertising that their executive compensation is lower than the competition would get consumers' attention. It's conceivable that the rich will become richer in the relative sense, but that shouldn't bother us.
Q: Do you consider yourself to be greedy and corrupt?
PL: Absolutely. I have contributed remarkably little to the economy. A lot of what I've done is make-work and yet I've shamelessly demanded fat paychecks.
Q: You sound like you're proud of it. Why not continue?
PL: I was brought up to enjoy being frugal.
Q: You were also brought up to believe in getting ahead in life. What are you gonna do? Sit in the living room and twiddle your thumbs all day?
PL: It's better than producing more in a society that desperately needs less.
Q: What's your vision of the future?
PL: At some point in time, the belief in working for a living is going to break down. It's possible that a subsection of society wakes up one day and figures out that they've essentially been sold into slavery by their parents and grandparents, who believed that by accumulating ever-increasing claims on the labor of future generations, they could achieve wealth. In reality, this wealth is merely a Ponzi scheme that breaks down as soon as a significant shift towards laziness and frugality takes place.
The most intelligent views I hear in today's world call for freer markets and less government. Their views, however, suffer from a fatal flaw in that they covet job growth and see nothing wrong with a strong work ethic. Of the three main schools of economic thought that are often talked about, the Keynesian, Monetarist, and Austrian schools all suffer from the same fatal flaw. It's becoming increasingly difficult to overlook the fact that nearly all economic activity is useless. Just because you have a willing buyer and seller and some service or manufactured good that's exchanged doesn't automatically create wealth.
The difference between fraud, inefficiency, unwanted infrastructure projects, and businesses competing for profit by selling goods in high demand are trivial. We're all fraudsters and gamblers. You can't make an honest living in a system where everybody has to contribute, yet only 10% are needed to produce enough for our needs. What are the rest going to do? They have to either deceive others into buying things they don't need or they must deceive themselves into thinking that they are doing something useful for society. Both forms of deception result in massive amounts of make-work. That's all our economy is and all the education in the world and all the economics degrees in the world have only served to delude humanity into thinking otherwise.
Some AI proponents have suggested that robots will eventually replace us. However, it makes no difference whether a human or a robot does the work, so this isn't likely to be the trigger for a revolution in economics and our lifestyle. 30-40% of us are already rich enough not to work, yet we do it anyway. Is the other 60-70% going to make a difference? Utopia is here with us today. No social reorganization required.
Q: If you are right, why can't you point to a single living person who agrees with your point of view?
PL: People's views and opinions are based on no more than a cringing desire to agree with the majority. In theory, they can change overnight. In practice, we've slept through the 20th century, and continue to cling to values and beliefs that only make sense in the context of the 19th century. Today's fabulously rich sincerely believe they are poor just because there exists another section of the population that is even richer.
You got the entire American middle class submitting to being work slaves out of imagined necessity. You got them fighting wars on drugs and sex. You got every economist in the world talking about real wealth and productivity in abstract terms, conveniently ignoring that 90% of the economy is make-work.
If you are truly emancipated from the work ethic, I invite you to help create the SSP (Society of Smart People). Use the contact form to join the effort.
Q: I'm sure that smart people are already out there. You just haven't looked for them hard enough.
PL: I've already disproved this possibility in purelogic.info
The financiers convince the farmers that they are essential in maintaining a stable economy, protecting the citizens from threats such as deflation and unemployment. In reality, they spend their time talking and gambling, always trying to become as rich and influential as they can.
During the first year, the farmers start out with no money. By contrast, even the poorest financiers have at least $10,000 in their bank accounts. Each farmer grows $100 worth of food and each citizen buys $3.33 worth of carrots, potatoes, and beef. The farmers are quite pleased at the end of the first year, seeing that they made a profit of over $90 each. Scotty Potato is thinking about what to do with his newly earned money. "Why, $90 is enough to buy food for the next 9 years. That means I can take a rest from working for the next 9 years." Just to be sure, he calls his financial advisor for a second opinion.
"What? You saved $90 and you think that's a lot?" says his advisor, "That's nothing. Some of us have millions saved." "That's quite all right," says the farmer, "it would take me forever to save millions..." "Not so fast," interrupts the advisor, "even in farming there are huge opportunities. I hear that there are commodity traders offering five times last year's prices if you sell next year's harvest in advance." "That sounds too good to be true!" "But it's not. You might get much more than that. Find out for yourself."
Over the next days, the three farmers agree to sell next year's harvest for $1,000 each. That year, each citizen buys $33.33 worth of carrots, potatoes, and beef. The year after that, prices increase another tenfold to $333.33, and the year after that, again, to $3333.33. That year, the farmers read about a financial crisis in the newspapers, and the possibility of an economic collapse with deflation and mass unemployment. They don't really understand what it's about, but they sure hope the financiers will figure something out.
What happened is that some of the financiers didn't have too much luck while gambling and won't be able to afford food next year, unless society's wealth is rebalanced. One financier's situation is so dire, he's worth even less than the farmers by now. Fortunately, their chief banker Ben (who is in charge of the printing press) has an idea. He assures the financiers that if they each invest all their money in his emergency economic stimulus bonds, all will be fine. At the end of the year, all bond investors find that their investment has paid off big time. All financiers find themselves worth a million times what they were before.
Soon, the front page of the newspaper reads "Ben Saves World", and everyone is happy that business can go on as usual.
Q: Please interpret the story for us.
PL: There's a tiny bit of farmer and a lot of financier in each of us (unless, of course, you are a farmer). Government policy is fundamentally irrelevant in that it merely shuffles around our relative buying power. None of it changes our standard of living. Shoe producers don't produce goods that are entirely useless, but only the first 10% of shoes increase our standard of living. The next 90% is all about circulating money and keeping us busy working. Whether useless work is performed in the public or private sector is uninteresting. No matter how much money we accumulate, even on a relative basis, in the end we'll probably consume the same share of useful goods. Abolishing the printing press or backing money by gold does nothing to change this. In the end, none of us are any better off for having spent our lives working.