Monday, February 28, 2011

Another Example Of Financial Market-Real World Disconnect

People like to believe what they want to believe. Well, they are free to do so.

Here is another example of the blatant disconnect between the stock market and GDP. All charts from



Venezuela has still been in a recession but her stock market continues to climb.

Believing in the infallibility of conventional wisdom can mislead. Unknown to many, negative knowledge is a risk.

Sunday, February 27, 2011

Dealing With Financial Market Information

Ideas and only ideas can light the darkness. These ideas must be brought to the public in such a way that they persuade people. We must convince them that these ideas are the right ideas and not the wrong ones. The great age of the nineteenth century, the great achievements of capitalism, were the result of the ideas of the classical economists, of Adam Smith and David Ricardo, of Bastiat and others. What we need is nothing else than to substitute better ideas for bad ideas-Ludwig von Mises

Markets operate on a pricing system. And prices are manifestations of people’s actions guided and coordinated by information aimed at the efficient allocation of resources.

As the great F. A. Hayek wrote[1],

Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coördinate the separate actions of different people in the same way as subjective values help the individual to coördinate the parts of his plan.

The financial or capital markets (stock markets, bond, currency, derivatives, etc...) function the same way. They are information sensitive since they operate as intermediaries of savings and investments. Perhaps they even could even represent more information sensitivity than the real economy for the following reasons:

-Financial markets today are organized formal markets that are far larger than the economy


According to the table above from McKinsey Quarterly[2], despite the 2008 crisis, financial depth still accounted for 293% of the GDP (Here financial markets include equity, bank deposits, private and government debt)

-Financial markets are more globally integrated have been buttressed by the digital technology

-Financial markets are more liquid and volatile, and have been lubricated by the central banking based monetary system.

Of course not all information are equally useful or relevant.

There are information that are considered as useful or to quote Hayek anew “only the most essential information is passed on and passed on only to those concerned[3]” and that many information are not.

Furthermore information isn’t complete. They are dispersed, localized and account only for a portion of the system, writes author Peter L. Bernstein[4], (bold emphasis mine)

The past or whatever data choose to analyze, is only a fragment of reality. That fragmentary quality is crucial in going from data to a generalization. We never have all the information we need (or can afford to acquire) to achieve the same confidence with which we know, beyond a shadow of a doubt, that a die has six sides, each with a different number, or that a European roulette wheel has 37 slots (American wheels have 38 slots), again each with a different number. Reality is a series of connected events, each dependent on one another, radically different from the games of chance in which the outcome of any single throw has zero influence on the outcome of the next throw. Games of chance reduce everything to a hard number, but in real life we use such measures as “a little”, “a lot” or “not too much please” much more often than we use a precise quantitative measure.

Falsifying Popular Delusions

This brings us to the gist of what supposedly are useful information/ facts/ data sets for the financial markets.

Here is a great example, this isn’t being nostalgic for 2008 crisis but should be a thought provoking exercise

Information/Fact A

According to ABS CBN[5] (bold emphasis mine)

In a statement Sunday, the PSE reported that the combined net income of publicly listed firms dropped to P198.91 billion in 2008 from P281.54 billion in 2007, a banner year...

Lim noted, however, that revenues of listed firms grew 12.8 percent to P2.67 trillion from P2.37 trillion.

The recent data were culled from the latest financial statements submitted by 233 out of 246 listed companies. Of the 233 reporting firms, 159 posted net gains while the remaining 74 posted net losses.

Interpretation: Public listed companies were down from a RECORD highs in 2007 but remained overall positive. To add, 68% of publicly listed posted profits in 2008.

Information/Fact B


The above is the % change of the Philippine economy courtesy of[6]

Interpretation: Like corporate profits, the Philippine economy slowed but did not suffer a recession in 2008.

Information/ Fact C


The Phisix closed at the end of 2007 at 3,621.6 and at the year end of 2008 at 1,872.85

Interpretation: The Phisix fell 48.28% in 2008!


Fact A partly reflected on Fact B because Fact A is part of the computation of Fact B, or corporate profits are part of the computation for the GDP[7]

Where the conventional wisdom is to generalize

Fact A (corporate profits) + Fact B (economic growth) = Fact C (rising stock markets),

then we see that three facts tells us the contrary

A+B ≠C

The conventional wisdom of A+B=C has been demonstrably falsified.

Let me add Fact D

According to Bloomberg at yearend of 2008[8],

The S&P 500 decreased 38.5 percent, the most since the 38.6 percent plunge in 1937, to 903.25 and sank to an 11-year low of 752.44 on Nov. 20. Volatility increased, with the index rising or falling 5 percent in a single day 18 times. The Dow Jones Industrial Average slumped 34 percent to 8,776.39 for the steepest drop since 1931.

Additional analysis: The Phisix did not suffer a recession or a crisis, yet the local stock market endured MORE losses compared to the epicentre or the source of the crisis—the US markets.

In short, there has been no meaningful correlation or even an established causation nexus between corporate profits and the economy relative to the stock market under the local setting.

Asymmetric Risk Taking

Why this matters?

Because any serious or prudent investors would attempt to pursue information or assimilate knowledge that are relevant or one that works, something which Nassim Taleb calls as “positive knowledge[9]”, and presumably ignore those that don’t.

Not every individual engaged in the stockmarket or the financial markets share the same incentives: instead of the primary pursuit for profits or returns, many are there for the adrenalin (thrill or the gambling tic) or to stimulate the dopamine “brain’s pleasure centers” (intellectual or ideological strawman), some are merely active for social purposes (signalling via talking points) or possibly to simply to keep busy.

The deviance from the pursuit of profits makes risk taking activities largely asymmetric.

Thus the demand for workable ‘positive’ knowledge in the financial markets would be proportional to the desire to generate real returns. We increase our profits by dealing with information or knowledge that will give us profits.

The famous Wall Street maxim, ‘bulls and bear make money but pigs get slaughtered’ are representative of market participants who see profits or returns as a secondary priority. Of course, everyone will likely say that they are in for profits but their subsequent actions will reveal of their unstated or subliminal priorities—or that actions should speak louder than words.

The great part in today’s marketplace is that the internet has allowed us vast access to information and on real time basis. This gives us the opportunity to screen information. And this also means that filtering information will tilt one into an information junkie to the risk of an information overload.

Again from Peter Bernstein[10], (bold emphasis mine)

We tend to believe that information is a necessary ingredient to rational decision making and that the more information we have, the better we can manage the risk we face. Yet psychologists report circumstances in which additional information gets in the way and distorts decisions, leading to failures of invariance and offering people in authority to manipulate the kinds of risk that people are willing to take.

In short information or facts can be tainted.

Agency Problem, Again

This brings us to the most sensitive part of information sourcing: the principal-agent or the agency problem

Economic agents or market participants have divergent incentives, and these different incentives may result to conflicting interests.

To show you a good example, let us examine the business relationship between the broker and the client-investor.

The broker derives their income from commissions while the investor’s earning depends on capital appreciation or from trading profits or from dividends. The economic interests of these two agents are distinct.

How do they conflict?

The broker who generates their income from commissions will likely publish literatures that would encourage the investor to churn their accounts or to trade frequently. In short, the literature will be designed to shorten the investor’s time orientation.

Yet unknown to the investor, the shortening of one’s time orientation translates to higher transaction costs (by churning or frequent trading). This essentially reduces the investor’s return prospects and on the other hand increases his risk premium.

How? By diverting the investor’s focus towards frequency (of small gains) rather than the magnitude. Thus, a short term horizon tilts the risk-reward scale towards greater risk.


Nassim Taleb has shown this in the analogy of the Turkey problem[11] as shown in the chart[12] above.

The Turkey is fed from day 1 and so forth, and as a consequence gains weight through the feeding process.

From the Turkey’s point of view such largesse will persist.

However, to the surprise of the Turkey on the 1,001th day or during Thanksgiving Day, the days of glory end: the Turkey ends up on the dinner table. The turkey met the black swan.

The turkey problem is a construct of the folly of reading past performance into the future, and likewise the problem of frequency versus the magnitude, both of which serves as the cornerstone for Black Swan events.

Going back, such conflict of interest may also apply to bankers too. Bankers are likely to publish literatures that goad their clients to use their facilities where the bankers earn from having more fees than focusing on the client’s interests of generating above average returns.

At the end of the day, for both cases the gullible investor ends up holding the proverbial empty bag.

So unless one is aware of such distinction, information embellished by statistics which may be construed as facts can instead represent promotional materials.

It is important to note that conflicts of interests emanating from the agency problem played a significant or crucial role during the bubble days that was also responsible for the last crisis[13].

In addition, the common practise of politicians and their apologists to present statistical facts to promote their interventionist agenda is another example of agency problems.

Most of these facts do not objectively represent the problems in a holistic sense, but instead are selectively chosen facts or data mined statistics that fits into their theories. These proposals are also usually wrapped in logical fallacies.

And most of their so-called solutions are usually framed with noble sounding intentions so that these will easily sell to the vulnerable voters. Little do the hapless voters know that such policies focuses on the short term are booby trapped with unintended consequences.

Conclusion: Ideas Have Consequences

Bottom line:

Ideas have consequences.

And so with ideas forged by false theories.

Prudent investors need to screen, test and falsify ideas and observe their validity rather than simply accepting them without due scrutiny. Failing to do so is to assume the risks of the proverbial Wall Street Pigs that have been the traditional fodder of Bears and Bulls.

Moreover, prudent investors should adapt on ideas that are likely to produce positive results over the long term at the same time reducing the prospects of being swallowed by black swan events.

In short, prudent investors need a critical and constructive mind to examine the usefulness of information as sources for ideas that underpins the subsequent action.

In addition, prudent investors must be vigilant with the source of information as this can reflect more of the interest of the information conveyor than that of the recipient.

[1] Hayek, Friedrich von, The Use of Knowledge in Society

[2] McKinsey Global Institute Global Capital Markets Entering a New Era, September 2009

[3] Hayek, Friedrich von ibid

[4] Bernstein, Peter L. Against The Gods: The Remarkable Story of Risk, p 121

[5] Listed firms' profits down 29% in 2008, May 31, 2010

[6] Philippines percent change in GDP at constant prices

[7] Bureau of Economic Analysis, National Economic Accounts

[8] U.S. Stocks Post Steepest Yearly Decline Since Great Depression, December 31, 2008

[9] Taleb Nassim Nicolas Anti Fragility, How To Live In A World We Don’t Understand, Chapter 5, How (NOT) To Be A Prophet

[10] Bernstein, Peter Op. cit. P.278

[11] Black swan theory

[12] Kinsella Stephan, The Turkey Problem

[13] See Agency Problem: Examples, Risks and Lessons, December 25, 2009

Always A Bull Market Somewhere

Some of the nattering nabobs of doom have resurfaced.

They argue that the present weakness in the markets signify as signs of the next market meltdown.

These people seem to argue not from evidence but from dogma.

And people blinded by dogma tend to get market predictions utterly and consistently wrong.

Even if they are correct and that a market meltdown occurs, it isn’t likely the same scenario as 2008.

We must be reminded that despite ANY market condition “there always will be a bull market somewhere”. The intrinsic difference is one of the idiosyncratic operating conditions which produces diverse types of bullmarkets.

In the 2008, despite a general financial market meltdown brought about by the recession that culminated with the Lehman collapse, the bullmarket was seen in the US dollar and US treasuries.

clip_image002chart from netdania

Yet the same experts who failed to see the recent rallies and have made the Great Depression as the fount of their predictions seem to be singing the same tune again.

The idea of a Great Depression circa 2011 is false for the simple reason past conditions are patently dissimilar from today.

True, the US stock markets had its first major episode of correction for the year 2011.

But was it a broad market meltdown?


From US Global Investors

Obviously not.

The energy sector defied last week’s downturn. This goes to show that there has been an ongoing rotation of money—all too symptomatic of inflation dynamics at work.

As it is rare to find this gem of reality check from the mainstream; from the Wall Street Journal

It's important to keep in mind, however, that oil was already trading in the $85 to $90 a barrel range before the recent irruption in the Arab world. The run-up to that price territory began in earnest last year after the Federal Reserve embarked on its QE2 strategy of further monetary easing.

The Fed absolves itself of any responsibility for rising oil prices, attributing them to rising demand from a recovering global economy. Demand has been rising, but not enough to explain what has been a nearly across-the-board spike in prices for dollar-traded commodities. (Natural gas is the big exception, thanks to a boom in domestic exploration.) A spike in one or two commodities can be explained by a change in relative demand. A uniform price spike suggests at least in part a monetary explanation. The Fed will use the Libya turmoil as another alibi, but there's no doubt in our mind that oil prices include a substantial Ben Bernanke premium.

We have been told by most media outlets except the above that rising oil prices represent as a supply shock.

However, even if the Middle East Crisis fizzles out you’d be surprise to see that after the Libya premium would have been covered, oil prices will continually rise and will exceed the last highs and approach the $200 as we have been predicting.


chart from Pragmatic Capitalism

Of course we don’t believe that it’s a bear market, not yet anyway.

What we may be seeing instead could be another bubble at work in the US equity markets as margin trade in the US have been ballooning.

So people who argue that cash should be king will likely be wrong again.

Not with more chatters of QE 3.0 or where global governments have been deliberately destroying the purchasing power of money or currency values. And certainly not when the adjusted monetary base which is one of the monetary component which the Federal Reserve controls.


From St. Louis Fed

At the end of the day, all these money will have to flow somewhere. And unless governments learn to restrain themselves the likelihood is that we would likely see higher commodity prices—food, gold, oil etc....

As a side note fiat money stands for political redistribution, and similarly shackles to freedom and liberty. Meanwhile gold stands for the opposite, as per Ralph Waldo Emerson, “The desire for gold is not for gold. It is for the means of freedom and benefit”. Do not confuse one for the other.

Saturday, February 26, 2011

How Valid is The Concept of American Exceptionalism?

A comment prompted me to share my insight on the so-called American exceptionalism

American exceptionalism, according to, refers to the theory that the United States is qualitatively different from other nations.

America is allegedly “qualitatively different” in two ways (from

-via Alexis de Tocqueville, “emergence from a revolution, becoming "the first new nation", and developing a uniquely American ideology, based on liberty, egalitarianism, individualism, populism and laissez-faire”

-via American Communist Party (1920s), their belief that "thanks to its natural resources, industrial capacity, and absence of rigid class distinctions, the United States of America might for a long while avoid the crisis that must eventually befall every capitalist society.

Wikipedia further adds, ``Although the term does not imply superiority, some writers have used it in that sense.”

I would reckon that every nation’s history is in many ways unique or implies exceptionality, except that to quote Winston Churchill, “History is written by the victors”.

This means that the string of America’s successes may have prompted many writers to overconfidently believe that America’s successes represent a permanent state of order.

In my view, this could be analogized to the famous but worrisome Wall Street maxim “This time is different”.

Also the thought of America’s “exceptionalism” seems guilty of what is called as the survivorship bias or to quote the Wikipedia, “the logical error of concentrating on the people or things that "survived" some process and inadvertently overlooking those that didn't because of their lack of visibility”

Moreover, there is a time consistency problem with both assertions: the ideology of liberty, egalitarianism, individualism, populism and laissez-faire can’t be seen as exclusively unique to the American race, since these can be learned and assimilated by other nations. The world does not operate on a vacuum. People learn and adapt.

Alternatively, if these traits represent the core of exceptionalism, then any significant erosion would also risk reducing such perceived ‘exceptionality’.

Thus, exceptionalism largely depends on how the US struggles to maintain this “uniquely American ideology”, and similarly, how other nations respond to incorporate on such success model as their own.

I am less inclined to respond to the American Communist Party view: industrial capacity is simply an output of this “unique American ideology” while natural resources depends on the economic value assigned to it by the market, while the absence of class distinction seems like an opaque premise—all forms of government have ‘rigid’ class distinctions.

Also in response to implications that America had been endowed with wealth by birthright, it must be remembered that the essence of the annual Thanksgiving Day celebration emanates from a painful chapter of US history, where the Pilgrims experimented with and suffered from the collectivist state which eventually prompted them to espouse the “unique American ideology”.

Writes Heritage Foundation Conn Carroll, (bold emphasis mine)

When the first Pilgrims founded the Plymouth Colony, all property was taken away from families and transferred to a “comone wealth.” In other words, the Pilgrims tried to do away with private property. The results were disastrous. According to Bradford, the stronger and younger men resented working for other men’s wives and children “without any recompence.” And the women forced to cook and clean for other men saw their uncompensated service as “a kind of slavery.” The system as a whole bred “confusion and discontent” and “retarded much employment that would have been to [the Pilgrims’] benefit and comfort.” Unable to produce their own food, some settlers “became servants to the Indians,” cutting wood and fetching water in exchange for “a capful of corn.” Others tragically perished.

It was not until private property rights were restored and every man was allowed to “set corn for his own particular” that prosperity came to the colony. Bradford reported, “This had very good success for it made all hands very industrious. … [M]uch more corn was planted than otherwise would have been. … Women went willingly into the field, and took their little ones with them to set corn.”

More, American exceptionalism does not imply that other countries have been accursed to suffer from ‘codified poverty’. This perspective unjustly sees Americans as in a state of permanent entitlement.

There are reasons why society suffers from impoverishment, but the least of which is that people volunteer to be poor.

The principal cause why many are poor is due to economic repression or policies that interdict people to trade, inhibit the exchange of ideas that leads to innovation and importantly suffer from lack of capital.

As Ludwig von Mises once wrote, [bold highlights mine]

What distinguishes contemporary life in the countries of Western civilization from conditions as they prevailed in earlier ages, and still exist for the greater number of those living today, is not the changes in the supply of labor and the skill of the workers and not the familiarity with the exploits of pure science and their utilization by the applied sciences, by technology. It is the amount of capital accumulated. The issue has been intentionally obscured by the verbiage employed by the international and national government agencies dealing with what is called foreign aid for the underdeveloped countries. What these poor countries need in order to adopt the Western methods of mass production for the satisfaction of the wants of the masses is not information about a "know how." There is no secrecy about technological methods. They are taught at the technological schools and they are accurately described in textbooks, manuals, and periodical magazines. There are many experienced specialists available for the execution of every project that one may find practicable for these backward countries. What prevents a country like India from adopting the American methods of industry is the paucity of its supply of capital goods. As the Indian government's confiscatory policies are deterring foreign capitalists from investing in India and as its prosocialist bigotry sabotages domestic accumulation of capital, their country depends on the alms that Western nations are giving to it.

Finally American exceptionalism can be represented by the state of US dollar functioning as the world’s premier currency reserve or forex anchor.


From Google

Looking at the above, I’d say that American exceptionalism has been on a decline and will likely suffer from a further loss of competitiveness, in the condition that her government continues to implement policies that corrodes her “unique American ideology”.

Globalizing Hollywood and the Philippine Entertainment Industry

The Economist hits the proverbial nail on the head, (bold highlights mine)

THE film-awards season, which reaches its tearful climax with the Oscars next week, has long been only loosely related to the film business. Hollywood is dedicated to the art of funnelling teenagers past popcorn stands, not art itself. But this year’s awards are less relevant than ever. The true worth of a film is no longer decided by the crowd that assembles in the Kodak Theatre—or, indeed, by any American. It is decided by youngsters in countries such as Russia, China and Brazil.

Hollywood has always been an international business, but it is becoming dramatically more so. In the past decade total box-office spending has risen by about one-third in North America while more than doubling elsewhere (see chart). Thanks to Harry Potter, Sherlock Holmes and “Inception”, Warner Bros made $2.93 billion outside North America last year, smashing the studio’s previous record of $2.24 billion. Falling DVD sales in America, by far the world’s biggest home-entertainment market, mean Hollywood is even more dependent on foreign punters.


Read the rest here

Since I’ve learned about the importance of free markets, I have also veered from watching TV talent competitions or Film awards for the simple reason that I’ve realized that a handful of judges cannot substitute for the real voters—the consumers.

And that’s exactly the message of the Economist.

Where media contests are decided by the subjective preferences of select judges (typically represented here as ‘experts’-yes again modeled after technocratic government), they tend to get politicized, and importantly, overlook discovering talents with immense potentials.

The Philippines has two good examples:

One, our local version of the Oscar Awards, the Metro Manila Film Festival, have been repeatedly plagued by controversies.

I’d prefer to see local production outfits compete with international filmakers for international or even local migrant audiences than have second raters squabble over what I see as “mediocre” titles.

In the food industry, the dominance of Jollibee in the local market and her expansion as an international brand should serve as an example of how local outfits can achieve global competitive standards. If Jollibee can do it, so could other industries like media.

The problem is the dominant filmmakers or media outfits here appear to have either reached their comfort zones or have been operating as political enterprises.

Two, this is also why I’ve cheered for online discovered celebrities such as Ms. Charice Pempengco.

Ms. Pempegco’s early stints with the local TV contests had not borne fruit, instead it took the youtube and foreigners to discover her.

From this, it would seem that either the domestic audience did not appreciate her talents (or her type of music) or that local scouts or judges may have simply discounted her. I would suspect the latter because her overseas success has prompted the local audience to also embrace her.

I would even further my hunch: the reason she has not been recognized early on here is that there appears to be a bias for mestiza-looking with model shaped features for female celebrities (except in comedies). So mainstream talent scouts may have misjudged her from this angle.

Nevertheless the Economist shows how the US film industry has been globalizing.

And it is also likely that local entertainment industry will have to pattern along with the major trend or otherwise get consumed or overwhelmed by fast expanding international players who might likewise tap on the local audience.

As the Economist notes, (bold emphasis mine)

The success of a film outside America is not purely a marketing matter. As foreign box-office sales have become more important, the people who manage international distribution have become more influential, weighing in on “green-light” decisions about which films are made. The studios are careful to seed films with actors, locations and, occasionally, languages that are well-known in target countries.

Things are likely get done a lot differently from now on.

US Government’s Social Networking Infiltration Strategy

The internet has nearly been a free market for information and knowledge on a global scale.

And it is why as we wrote in The Web As Foundation To The Knowledge Revolution, global governments will continue to find ways to counteract the increasingly horizontal flow of information which they view as threat to their interests. [You see, governments want to keep people gullible]

A recent approach reportedly enlisted by the US government is one of “If you can’t beat them join them”—an infiltration strategy aimed at shaping public opinions.

Here is Darlene Storm of the (bold emphasis mine)

It's recently been revealed that the U.S. government contracted HBGary Federal for the development of software which could create multiple fake social media profiles to manipulate and sway public opinion on controversial issues by promoting propaganda. It could also be used as surveillance to find public opinions with points of view the powers-that-be didn't like. It could then potentially have their "fake" people run smear campaigns against those "real" people. As disturbing as this is, it's not really new for U.S. intelligence or private intelligence firms to do the dirty work behind closed doors.

EFF previously warned that Big Brother wants to be your friend for social media surveillance. While the FBI Intelligence Information Report Handbook (PDF) mentioned using "covert accounts" to access protected information, other government agencies endorsed using security exploits to access protected information.

It's not a big surprise that the U.S. military also wants to use social media to its benefit. Last year, Public Intelligence published the U.S. Air Force social media guide which gave 10 tips for social media such as, "The enemy is engaged in this battlespace and you must engage there as well." Number three was "DON'T LIE. Credibility is critical, without it, no one cares what you have to's also punishable by the UCMJ to give a false statement." The Air Force used the chart below to show how social media influences public opinion.


Read the rest here

This only confirms our earlier observation of the governments broadening engagement against the spread of knowledge and how the web has continued to expose them.

Friday, February 25, 2011

MENA’s Revolt Has Neo (Classical) Liberalism Roots?

Many pundits say that the revolt in MENA isn’t about neo (classical) liberalism, but simply about regime (figurehead) change.


This is Egypt today even after the fall of ex-President Hosni Mubarak.


This comes even amidst speculation by some political pundits alleging that Egyptians will have a difficult time to wean away from the decades long of military rule.

The above picture from Al shows that this simply isn’t so, as Egyptians demand for more than just President Mubarak's ouster but also the repeal of the emergency rule, release of political prisoners and removal of Mubarak's members--from Associated Press.

My salute to Al’s outstanding live stream coverage of the MENA revolt.

In Libya, when I see placards that demand for the advancement of the role of civil society and institutional changes (I wasn’t quick to enough to capture them) and even call for changes to a constitutional government...


aside from the below....



....I am delighted to know that the seeds of classical liberalism have been sown --in Libya or possibly also in Egypt and perhaps in the other unfolding People Power revolutions in the Middle East and North Africa.

Thanks to the web too for disseminating knowledge and for inspiring people to act.

Seeing all these gives me reasons to be an optimist.

Philippine Corruption: Not Because Of Political Culture, But Due To State Capitalism

In watching the live coverage of the unfolding Libya unrest at the Al, a news segment reported on the 25th celebration of People’s Power revolution here, in the Philippines.

Al Jazeera interviewed a local political analyst who said that the People Power has not vanquished many of the deeply rooted deficiencies, primarily corruption, in the Philippine society mainly due to “political culture”.

This is a vivid example of misreading the effects as the cause.

Where the definition of Culture, according to wikipedia is “the set of shared attitudes, values, goals, and practices that characterizes an institution, organization or group”, this only means that what has been represented as “political culture” is actually the embedded incentives that has shaped “the set of shared attitudes, values, goals, and practices” of society.

Obviously, corruption as a culture didn’t emerge mainly from tradition or religion, but from arbitrary “noble sounding” anti-competitive and redistributive welfare laws which has underpinned the local political economic platform.

Given the social democratic ethos of the local society, where government has been romanticized as supposedly the nation’s “would be” saviour, and where the failure to attain government utopia has been attributed to the lack of virtuosity, then obviously, but unknown to many including the above expert, economic dependence based on non-price sensitive political distribution of resources only nurtures and feeds on corruption.

This is because society’s main energy have been directed towards lobbying, in order to secure politically granted economic rents, instead of competing to satisfy consumers via voluntary exchanges.

And that’s how corruption emerges—by determining society’s winners and the losers, the politically granted winners rewards or shares the rent with the political authorities.

So the maxim “it is NOT what you now but WHO you know” encapsulates the operating environment under the political culture of overregulation and patron-client based corruption or state/crony capitalism.

Thus the expectations of a virtuous government represents as no less than signs of ignorance of how the politics of violence has and will always be wielded. And that’s why we keep getting the same set of recycled leaders to the dismay of the many wrongheaded deluded idealists.

The only way to reconfigure “political culture” is NOT to elect or put to power a virtuous central planner, which is an illusion and a source of sustained frustrations, but to divert the energy or activities of the population from politics to productive voluntary exchanges.

We have to remember that governments comprise of human beings who suffers from the same flaws as everyone else, i.e. subject to personal biases, lack of knowledge, operates on preferred networks and comfort zones, has their own distinct and most likely flawed perception and interpretation of events and etc...

Importantly politicians and the bureaucrats are also self interested agents whom are subject to personal preferences and needs—career, self esteem or etc…

The only difference is that they have the mandate to use force over us.

So the power to control and the human aspect of supposed “public servants” makes them vulnerable to asymmetric (patron) exchanges with select economic clients.

Thereby the only way to eradicate corruption is by reducing dependence on political power as means to distribute economic opportunities, which alternatively also means expanding society’s reliance on the price based market system.

We can start with the junking of many of inequitable and protectionist laws and streamlining of the others.

In short, let the rule of law and respect of property rights prevail, culture will follow.

Remembering The Philippines’ People Power

In the midst of the ongoing string of upheavals in MENA, today, the Philippines celebrate our version of nonviolent revolution which also toppled a dictator, popularly known as People Power, an event that occurred in 1986 or 25 years ago.

And in the spirit of Étienne de La Boétie, the early proponent of nonviolent resistance and civil disobedience, I quote Dr. Antony Mueller’s poignant comment on the ongoing revolution in Libya,

All it takes for government to fall is not to follow orders. Just stop doing what you're being told and the state will wither away and dictators will stand naked.

Though yours truly was an avid participant of both People Power and People Power 2, I was lucky to be part of a portrait taken by a magazine for an airline called 'Mabuhay ' during People Power 2.


But no same luck or remembrance for the original People Power.

Thursday, February 24, 2011

Example of How the Web Neutralizes Propaganda

At the Library of Economics and Liberty Blog, Professor David Henderson writes about the psywar recently employed by the US government through the New York Times.

He writes,

Glenn Greenwald has an excellent piece telling us what the New York Times essentially told us if anyone cared to notice: the New York Times admits that it enabled the U.S. government's lying about a CIA agent in Pakistan named Raymond Allen Davis.

The U.K. newspaper, The Guardian, broke the story but stated that some U.S. newspapers were aware of the facts too but hadn't disclosed them. The New York Times fessed up. Its reporters, MARK MAZZETTI, ASHLEY PARKER, JANE PERLEZ and ERIC SCHMITT, wrote:

“The New York Times had agreed to temporarily withhold information about Mr. Davis's ties to the agency at the request of the Obama administration, which argued that disclosure of his specific job would put his life at risk. Several foreign news organizations have disclosed some aspects of Mr. Davis's work with the C.I.A.

This exactly is what we talked about in The Web As Foundation To The Knowledge Revolution. I noted that

1. Government’s traditional medium in disseminating its political agenda has been through mainstream media. (Here, the New York Times)

2. Government will try to censor and manipulate information flow but will be negated by competing sources. (here, UK’s Guardian exposes the New York Times)

3. Democratization of knowledge or competing sources through the web has been responsible for the neutralization of propaganda.

Professor Henderson opens with this striking statement:

“Thank goodness for international trade and the web.”

We will see more of this in the future.

Incentives Driving People To Social Networking As Facebook

Adam Hartley at the MSN says that having thousands of Facebook friends don’t reflect on the friendship in the traditional sense because our capacity to have friends is limited.

Mr. Hartley who calls Facebook friend acquisition as “Friend Farming” writes,

According to evolutionary anthropologist Robin Dunbar, 150 is the largest number of people that you can share trust and obligations with, explains psychologist Dr Rebecca McGuire-Snieckus.

That magic number of 150 friends is thought to be a cognitive limit to the number of friends we can maintain, the psychologist adds. "While people can boast hundreds and thousands of friends on Facebook, Dunbar would say that it is impossible to feed and nourish all of these relationships."

So having friends in excess of the Dunbar 150 suggests that social networking has hardly been about friends but about something more.

Mr. Hartley adds, (bold highlights mine)

Recent academic research suggests there are four primary motivations for going on social networking - social (meeting friends, having an online community); information (finding jobs and useful knowledge); entertainment (FarmVille!) and self-status seeking. It is this latter urge that drives friend farming.

Well different people have different incentives to join Facebook or other social networks.

To my account, some of my non-traditional friends, who shares the same ideas, ideals, values or philosophy as I, have been a fountain of informational wealth. In short, I learn alot from them and I am very appreciative of that.

Of course shared interest also means an online community, which is what I have been saying all along as the vertical flow of communication and knowledge dispersion. People with shared interest can exchange ideas directly which results to increased knowledge. Local knowledge is now globalized through Facebook and Twitter. Our personal interests are channeled by niches or by specialization. We form tribes despite the geographical distance.

And there are others whom I also gladly got to know through online games.

And importantly, they connect me real time to my family wherever they are.

While it may true for some or for many where adding or farming friends could be a form of status signalling, I find the zeitgeist of social network sites as expanding the human experience.

And it is why social networking will change the way we live.

Quote of the Day: Innovation Drives Productivity Growth

Again here is another of Professor Donald Boudreaux’s provocative wisdoms, which makes my quote of the day... (bold emphasis mine)

Economic growth is overwhelmingly the proximate result of innovations that allow fewer workers to produce more output – thereby releasing that most precious of all resources, human labor, for use in producing goods and services that earlier were too costly to produce.

Philippine Competitiveness: Cut Capital Income Taxes

Duanjie Chen and Jack Mintz writes, (special thanks to Cato's Chris Edwards for this)

Many industrial and emerging countries have reduced their corporate tax rates over the last decade or so. The largest rate cuts were in Austria, Bulgaria, Canada, the Czech Republic, Germany, Greece, Iceland, Ireland, Italy, Netherlands, Poland, Slovakia, Turkey, Egypt, Georgia, Kazakhstan, Lesotho, Mauritius, and Singapore. America’s largest trading partner, Canada, cut its statutory corporate rate from 43 percent to 29 percent, which helped to bring down its effective rate from 44 percent to 21 percent, according to our calculations. Substantial cuts were also achieved in Australia, Belgium, China, Denmark, Finland, Korea, Luxembourg, Mexico, New Zealand, Taiwan, and the United Kingdom. Taiwan cut its statutory rate from 25 percent to 17 percent in 2010, and now has an effective rate of just 10.9 percent.

A number of countries are initiating or phasing-in further corporate tax-rate cuts in coming years, including Australia, Canada, Ecuador, Israel, Japan, New Zealand, and the United Kingdom. In some countries, such as Israel and Japan, these are straight rate cuts. In other countries, such as New Zealand and the United Kingdom, rate cuts are being paired with base-broadening measures. When these reforms are in place, the average effective tax rate in 2014 will be 18.0 percent in the OECD and 17.4 percent among all 83 countries.

Philippine corporate tax rate is at 32%.

It’s positive to note how the world has been trying to stay competitive by lowering tax rates. This has been consistent with the growth explosion of global trade.

I hope the trend continues in spite of the recent crisis. And it would certainly be positive if the Philippines joins this global bandwagon.

It’s one of the many things that can be done to incentivize capital formation, build on research and attract foreign direct investments that could lead to more jobs.

As a side note, I honestly detest the rubric “jobs”, but this has been the mainstream vernacular. I’d rather say “economic opportunities” which is where jobs come from anyway.

And I hope that politicians will stop diverting people’s attention over to education policies. Education hasn’t been the answer, a big number of unemployed have been college graduates. Instead, the Philippines need to be competitive.

Back to taxes, in the Philippines, on top of corporate taxes there are capital gains and final withholding taxes on dividends. So you have a double whammy on capital income. Is it not a wonder why investments are low? And the hurdle rate is high?

While my ideal scenario would be to abolish all these taxes, this isn’t likely to be politically palatable, so I would suggest to start with the reduction of corporate tax rate or get taxed once by abolishing either capital gains or the final withholding tax on dividends.

Of course, there are other many factors that could lead to competitiveness, such as repealing obstructive regulations and avoiding distortions from arbitrary interventions, but this would be a topic for another post.

Overall, competitiveness boils down to economic freedom.

Wednesday, February 23, 2011

Knowledge Revolution: Globalizing Education

Technology enhanced globalization forces are likewise enveloping the education industry.

This from Ben Wildavsky at the Foreign Policy (bold emphasis mine)

But over the long term, exactly where countries sit in the university hierarchy will be less and less relevant, as Americans' understanding of who is "us" and who is "them" gradually changes. Already, a historically unprecedented level of student and faculty mobility has become a defining characteristic of global higher education. Cross-border scientific collaboration, as measured by the volume of publications by co-authors from different countries, has more than doubled in two decades. Countries like Singapore and Saudi Arabia are jump-starting a culture of academic excellence at their universities by forging partnerships with elite Western institutions such as Duke, MIT, Stanford, and Yale.

The notion of just how much a university really has to be connected to a particular location is being rethought, too. Western universities, from Texas A&M to the Sorbonne, have garnered much attention by creating, admittedly with mixed results, some 160 branch campuses in Asia and the Middle East, many launched in the last decade. New York University recently went one step further by opening a full-fledged liberal arts campus in Abu Dhabi, part of what NYU President John Sexton envisions as a "global network university." One day, as University of Warwick Vice Chancellor Nigel Thrift suggests, we may see outright mergers between institutions -- and perhaps ultimately the university equivalent of multinational corporations.

In this coming era of globalized education, there is little place for the Sputnik alarms of the Cold War, the Shanghai panic of today, and the inevitable sequels lurking on the horizon. The international education race worth winning is the one to develop the intellectual capacity the United States and everyone else needs to meet the formidable challenges of the 21st century -- and who gets there first won't matter as much as we once feared.

Read the rest here

Two comments

In terms of education, people should focus on the general or macro trend more than just looking and interpreting localized developments. With the introduction of the internet, what used to be local has increasingly become global.

I’d also say that there is more to expect than just the above. We’re likely to see an explosion of web based education that would bring down the cost of education, which subsequently should increase demand for it. The vertical flow of knowledge and communication process will enhance the Hayekian Knowledge revolution, education will be part of it.

Moreover, the web will possibly rearrange or restructure many aspects in the education-job process such as decentralization and more diversification (curriculum), more specialized jobs, reconfigure recruitment and hiring process, adaption of new certification or recognition standards and etc….

Example Of How The Welfare State Destroys The Individual

This is a graphic example of how the welfare state destroys the individual or the intermporal effects (short term gain, long term costs) of welfarism.

Gerry Garibaldi writes [hat tip: Dan Mitchell] (bold emphasis mine)

Connecticut is among the most generous of the states to out-of-wedlock mothers. Teenage girls like Nicole qualify for a vast array of welfare benefits from the state and federal governments: medical coverage when they become pregnant (called “Healthy Start”); later, medical insurance for the family (“Husky”); child care (“Care 4 Kids”); Section 8 housing subsidies; the Supplemental Nutrition Assistance Program; cash assistance. If you need to get to an appointment, state-sponsored dial-a-ride is available. If that appointment is college-related, no sweat: education grants for single mothers are available, too. Nicole didn’t have to worry about finishing the school year; the state sent a $35-an-hour tutor directly to her home halfway into her final trimester and for six weeks after the baby arrived.

In theory, this provision of services is humane and defensible, an essential safety net for the most vulnerable—children who have children. What it amounts to in practice is a monolithic public endorsement of single motherhoodone that has turned our urban high schools into puppy mills. The safety net has become a hammock.

And this applies to the Philippines as well.

For instance, in terms of demographics and education, public schools relieve the personal responsibility of the “poor” to have children, since the entrenched impression is that the state provides “free” education. So family planning becomes less of a priority because of such skewed incentives. I have personally spoken to many ‘poor’ people whose brains appear hardwired to the state’s ‘free schooling’.

And this seems backed by statistics which shows that the highest fertility rate is seen among the poorest in the society.

And this also departs from the layman’s opinions who mostly see that the “poor people have less to do except make babies”.

Of course, I am quite sure that there are many other laws which contribute to the distortion of people’s behaviour. The essence of which are that these laws (welfare programs) essentially abdicate personal responsibility and are substituted for government dependence, with the provision that individual freedom is compromised or curtailed in return for “safety nets” and votes.

Furthermore, people hardly know that there is no free lunch and such law distorting behaviour will eventually lead to an entitlement crisis. Yet politicians and their apologists continue to sell promises which they don't intend to fulfill.

Free Trade As Unilateral Policy

A popular objection to free trade is when a nation's trading partner is perceived as having to apply mercantilist policies, then trade relations is seen as uneven. Thus the popular oversimplified political justification is to go tit-for-tat via "fair or managed trade" which is euphemism for implied protectionism.

This we say is wrong. Even under such conditions Free Trade should be a unilateral policy. Why?

As Professor Don Boudreaux lucidly explains, (bold highlights mine)

By erecting tariffs that dampen competition, mercantilism encourages home producers to become unresponsive and uncreative. By issuing subsidies paid for with higher taxes, government debt, or distortionary monetary policies, mercantilism helps exporters only by inflicting more-sizable damages on the nation’s economy writ large. By turning the national government into a bazaar for the buying and selling of monopoly privileges, mercantilism deflects entrepreneurial energies away from building better mousetraps and into building politically advantageous political connections. And by raising prices in the home market, mercantilism makes consumers poorer as well as makes producers who rely upon imported inputs less efficient.

Well said.

[update: Earlier what I thought as saving as in a draft, I mistakenly published-thus the garbled commentary]