Because Free Markets are Sexy...

What follows is an excerpt from our new book: Bringing Sexy Back to Economics.

It is an understatement to say that the late 1700’s were a turbulent time in American History. The colonists were fed up with being considered second class citizens and more and more of them were eager to rid themselves of the ‘tyrannical yoke’. The British Crown, in the meantime, saw them as restless rabble-rousers who needed to be clamped down upon.

While all of this is true, and the ‘tyrannical yoke’ was undoubtedly referred to often, it is unlikely any colonist at the time saw it exactly that way. The Colonies felt they had just won the French and Indian war, and were happy to have come out the victors and return to their lives. Back in Europe, however, it was not only called the Seven Years’ war, but the British felt very successful in having kicked the French and Spanish out of North America and thought the American colonies should therefore help pay for the stationed troops.

King George III (who may or may not have been slightly insane) decided to do so by means of the Stamp Act in 1765. This declared that every piece of official printed paper (from newspapers, to magazines, to many documents) in the colonies had to have a royal “Tax stamp” on it, which obviously cost money. While the British saw this as just, the Americans balked at the idea, already foreseeing the end of journalism due to the extra costs.

Then, two years later, came the Townshend Acts, another series of taxes and revenue raising acts. Named after the then Chancellor of the Exchequer (the British version of the Treasury Secretary) there were at least 5 of these acts. The New York Assembly refused to comply with one of them, after which the New York Restraining Act was added on.

The British then created the American Customs Board with the sole purpose of enforcing these Townshend Acts. The board was located in Boston, and its members were so unpopular it wasn’t long before they requested a military guard. Things between local colonists and the military guard got out of hand one day. The spark wasn’t so much idealism as it was due to one of the British Captains not having paid a local wigmaker his fee. Of course, this opportunity was seized upon by many colonists who joined in the shouting and jeering. This chain of events ultimately culminated with the Boston Massacre.

The British Crown decided to repeal all of the Townshend Acts except for the Tea Act. It was argued that at least one Act should remain as a show of British sovereignty. The result was that American colonists decided to boycott tea from the British East India Company. Many of the local tea merchants at this time, such as John Hancock, were also smugglers. Boycotts such as this allowed people like him to smuggle tea from Holland without paying taxes.

Due in part to these smugglers, the British Crown finally decided, in 1773, to do away with any tax on tea and the British East India Company was able to sell tea again to the colonies at a competitive price. This would obviously be seen as a victory for the colonists: all of the Townshend Acts had been repealed and the Americans had succeeded in their boycott. The British had caved in!
Unfortunately, the reality was that the tea coming in from the East India Company was much cheaper than the smugglers’ tea. People started buying the cheaper tea, and the local merchants were underpriced in the process.

This removal of the Tea Tax did not benefit the local merchants, so they decided to protest. They threatened the British consignees (those receiving the British tea) through vandalism, and they organized protests when the British East India Company ships started coming into the harbor. After some weeks of a standoff, the owners of the ships agreed to sail back to Great Britain, but the mayor of Boston did not let them. So on December 16, 1773, Bostonians dressed as Narragansett Indians boarded the ships and threw around 45 tons of tea into the harbor.

Interestingly, getting rid of the cheaper East India Company tea would raise the price of tea for the average American. The fact that this was all done in opposition to a tax removal (and the subsequent loss to local merchants) means that the Boston Tea Party was not in opposition to “Taxation without Representation”, but was actually the United States’ first instance of Anti-Free Trade protectionism.

Order our new Book Bringing Sexy Back to Economics by Clicking Here.

The graph at the bottom of this page is enough to make me want to buy the book.

It’s Not as Bad as You Think: Why Capitalism Trumps Fear and the Economy Will Thrive , by Brian Wesbury.

A review will be forthcoming.

It is very interesting to read two books like Work the System: The Simple Mechanics of Making More and Working Less, by Sam Carpenter, and The Checklist Manifesto: How to Get Things Right, by Atul Gawande, back to back because what strikes you is how similar their message is.

Work the System details the long, hard trip Sam Carpenter took through his business and personal life, and how he found himself at the brink of collapse when, almost by epiphany (it seems a divine inspiration the way he describes it), he realizes he needs to create “systems”. These systems turn out to be basically numbered bullet points that are followed to the letter and that are never wavered from. He runs Centratel, whose objective is to provide the “highest quality telephone answering services in the United States”. If you wish to get hired by the company, you must fit certain specifications, adhere to certain principles and pass certain steps, all listed word for word in his “systems”.

I must confess I almost gave up on this book when he was talking about how he realized systems governed everything in this world and we were all part of one big system. It was eerily reminiscent of “The Secret” or some other form of New age fan-dangle. The more I read, however, the more I became convinced of his methods. If a method works, why not write down the steps needed so it is followed each time? Why not let people improve on this? Then, when he starts talking about how to maximize productivity when your brain is at its peak capacity, as well as how to avoid striving for perfection, I started thoroughly enjoying the information offered. If you deal with any form of operations or systems management, try to make it past the first chapter or two regarding his “epiphany”. It will be worth it.

The Checklist Manifesto is pretty much exactly what you expect it to be. It is, however, more convincing than you’d expect not only due to the fact that Atul Gawande is a surgeon, but that he is complaining at the lack of checklists in his profession and praising them in others. On the other hand, those of us who do not know much of the profession might wonder if he is keeping anything from us. Sure, checklists might help, but maybe expertise, resources, luck of the draw, etc. have much more to do with it (his examples of how great doctors can make seemingly elementary mistakes is rather harrowing). He then goes on to talk about other professions. His most convincing examples are in the airline industry. What you realize here is that no mistake has been made in this industry twice. If a crash happens due to a water leak in the fuel tank, you can be sure that same water leak will never happen again for any airline anywhere. Your second realization will be that this is indeed due to checklists. He seals the deal by detailing famous recent landing of Flight 1549 in the Hudson, pulled off to perfection, it turns out, thanks to a checklist.

Just another short point. Once you have read one or both of these books, you start noticing “systems’, “checklists”, “bullet points”, “flow charts” in all operations everywhere. Nick Sarillo, who runs Nick’s Pizza & Pub in Illinois, possibly the most successful independent pizza restaurant in the country, detailed in a recent edition of Inc. Magazine, how he turned his company around:

So what did he do? “I built a system to replace me,” Sarillo says. “I put together a checklist of things that had to be done by 4 p.m., so we could handle the volume. It took about four weeks until it could work without me. Now we’re nailing it.”

Work the System: The Simple Mechanics of Making More and Working Less, by Sam Carpenter
The Checklist Manifesto: How to Get Things Right, by Atul Gawande

Well it turns out John Maynard Keynes would have probably completely disagreed with the counter-cyclical policies we are currently seeing (reactions to free markets and deregulation leading to the over-regulations and over-muzzling of markets). I confess not having read Keynes’ A Treatise on Money (apart from several excerpts in our Macroeconomics class which I must have glazed over), but I now have it on my wishlist (it is currently out of print, so I do have a good excuse).

To quote Jerry O’Driscoll from ThinkMarkets:

In Keynes’ Treatise on Money (1930), Keynes analogizes (stimulus injections) to a family taking care of a sick child with doses of castor oil, a laxative. “It is as though different members of the family were to give successive doses to the child, each in ignorance of the doses given by the others. The child will be very ill. Bismuth [an antidiarrheal] will then be administered on the same principle.Scientists will announce that children are subject a diarrhoea-constipation cycle, due, they will add, to the weather, or failing that, to alternations of optimism and pessimism amongst members of the family.”

The parallels seem obvious, and so this book should certainly be enlightening. On the other hand, we have mentioned this principle in the past, referring it as the pendulum swinging too far one way and then too far back (once pundits stop seeing behavioral economics as a panacea they will start referring to it as wishy-washy and a waste). I would have loved to have a conversation in this respect with Keynes. Maybe through his book I can.

Full ThinkMarkets article here.

We warned readers several months ago to expect an onslaught of books talking of the evils of the free markets and (fallaciously) talking up Behavioral economics as the mutually exclusive counterpoint. So we can’t help feeling somewhat vindicated by the fact that How Markets Fail, by John Cassidy, does just this.

In all fairness, Cassidy does believe that the markets tend to work well, only that they fall far short of what is needed. Of course, he then neglects to explain what exactly is needed, and how much and by whom, but rather talks of the evils of “the market” when it comes to the environment, healthcare, CEO salaries, etc. He seems to forget that the market is comprised of individual players and is not a big monster operating willy nilly (although many would agree with his point of view over ours).

We do give him special mention, however, due to his analysis on Adam Smith’s “Wealth of Nations”. Few, if any, economists, let alone columnists writing about economics, have actually read the WoN and are able to address Smith’s views (such as how he stated banks should not make loans to speculators). For those of you interested in the history of economics, we recommend reading the first part of this book. The rest regurgitates much of the same dribble we’ve been hearing and will no doubt continue to hear.