Philippines as Call Center Capital of the World Has Not Been about Wages

If markets are to function freely, we are likely to see division of labor and competition based competitive advantage as the main force driving economic growth.

One such remarkable evidence has been the booming call center industry of the Philippines which has recently been enthroned as “A New Capital of Call Centers” by the New York Times.

And contra Keynesians, who see economics as operating in a homogenous dynamic, the local boom HAS NOT BEEN about wage LEVELS.

From the New York Times (bold emphasis mine)

Over the last several years, a quiet revolution has been reshaping the call center business: the rise of the Philippines, a former United States colony that has a large population of young people who speak lightly accented English and, unlike many Indians, are steeped in American culture.

More Filipinos — about 400,000 — than Indians now spend their nights talking to mostly American consumers, industry officials said, as companies like AT&T, JPMorgan Chase and Expedia have hired call centers here, or built their own. The jobs have come from the United States, Europe and, to some extent, India as outsourcers followed their clients to the Philippines.

India, where offshore call centers first took off in a big way, fields as many as 350,000 call center agents, according to some industry estimates. The Philippines, which has a population one-tenth as big as India’s, overtook India this year, according to Jojo Uligan, executive director of the Contact Center Association of the Philippines.

The growing preference for the Philippines reflects in part the maturation of the outsourcing business and in part a preference for American English. In the early days, the industry focused simply on finding and setting up shop in countries with large English-speaking populations and low labor costs, which mostly led them to India. But executives say they are now increasingly identifying places best suited for specific tasks. India remains the biggest destination by far for software outsourcing, for instance.

Executives say the growth was not motivated by wage considerations. Filipino call center agents typically earn more than their Indian counterparts ($300 a month, rather than $250, at the entry level), but executives say they are worth the extra cost because American customers find them easier to understand than they do Indian agents, who speak British-style English and use unfamiliar idioms. Indians, for example, might say, “I will revert on the same,” rather than, “I will follow up on that.”…

In addition to language skills, the Philippines has better utility infrastructure than India — so companies spend little on generators and diesel fuel. Also, cities here are safer and have better public transportation, so employers do not have to bus employees to and from work as they do in India.

The Philippine call center boom has been about serving the needs of consumers, where consumers perceive that the Philippine preference for American English has been providing her the comparative edge, and of the more superior utility infrastructure investments made by local companies.

Quoting David Ricardo (Mises Wiki) [bold emphasis mine]

Under a system of perfectly free commerce, each country naturally devotes its capital and labor to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labor most effectively and most economically: while by increasing the general mass of productions, it diffuses general benefit, and binds together, by one common tie of interest and intercourse, the universal society of nations throughout the civilized world. It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.

Quote of the Day: Charitable Markets

But the truth is, Wal-Mart and its counterparts spread far more holiday-food cheer than do churches and public-service groups.

Scholars estimate that the presence of Wal-Mart in a community reduces food prices somewhere between 10% and 15%. That's equivalent to shoppers receiving an additional 5.2 to 7.8 weeks of "free" food shopping. That Wal-Mart's customer base is skewed toward lower-income shoppers reinforces the beneficent consequences of its price effect.

That’s from T. Norman Van Cott of Ball State University in a letter to the Editor at the Wall Street Journal (hat tip: Don Boudreaux)

Apple Jumps Into the TV Industry

A Steve Job-less Apple won’t be inhibited from their innovative ways, they’re moving into integrating TV with their current line of products.

From Bloomberg,

Apple Inc. (AAPL) is turning to the software engineer who built iTunes to help lead its development of a television set, according to three people with knowledge of the project.

Jeff Robbin, who helped create the iPod in addition to the iTunes media store, is now guiding Apple’s internal development of the new TV effort, said the people, who declined to be identified because his role isn’t public.

Robbin’s involvement is a sign of Apple’s commitment to extending its leadership in smartphones and tablets into the living room. Before his Oct. 5 death, Apple co-founder Steve Jobs told biographer Walter Isaacson that he had “finally cracked” how to build an integrated TV with a simple user interface that would wirelessly synchronize content with Apple’s other devices.

“It will have the simplest user interface you could imagine,” Jobs told Isaacson in the biography “Steve Jobs,” released yesterday by CBS Corp. (CBS)’s Simon & Schuster.

Trudy Muller, a spokeswoman for Cupertino, California-based Apple, declined to comment. Outside of Jobs’s remarks in the book, Apple hasn’t acknowledged that it’s developing a TV set. And according to one person, it’s not guaranteed that Apple will release a television.

Until now, the company’s TV efforts have been limited to Apple TV, a small $99 gadget that plugs in to a television and gives users access to content from iTunes, Netflix Inc. (NFLX)’s streaming service and YouTube. Jobs had called it Apple’s “hobby,” rather than something designed to be a serious moneymaker.

The relentless pursuit of profits forces producers to earnestly work to satisfy the consumers, partly through innovation. If they fail, then they lose money. It’s a calculated risk for them that comes with no guarantees.

For consumers this means more choices and access to products at lower prices.

That’s the beauty of free markets.

Greed and the ONE Percent

Greed.

One way to win voters during an election period is to bash a minority group and appeal to the majority for the use of institutional or organized political force to achieve social goals as ‘equality’.

This Wall Street Journal article spares me precious time to parse on the newly released 2011 Wealth report from Credit Suisse, but nevertheless reflects on the du jour political theme: Greed is evil.

Wall Street the Wealth Report Blog’s Robert Frank writes,

Here’s another stat that the Occupy Wall Streeters can hoist on their placards: The world’s millionaires and billionaires now control 38.5% of the world’s wealth

According to the latest Global Wealth Report from Credit Suisse, the 29.7 million people in the world with household net worths of $1 million (representing less than 1% of the world’s population) control about $89 trillion of the world’s wealth. That’s up from a share of 35.6% in 2010, and their wealth increased by about $20 trillion, according Credit Suisse.

The wealth of the millionaires grew 29% — about twice as fast as the wealth in the world as a whole, which now has $231 trillion in wealth.

The U.S. has been the largest wealth generator over the past 18 months, according to the report, adding $4.6 trillion to global wealth. China ranked second with $4 trillion, followed by Japan ($3.8 trillion), Brazil ($1.87 trillion) and Australia ($1.85 trillion).

There are now 84,700 people in the world worth $50 million or more — with 35,400 of them living in the U.S.. There are 29,000 people world-wide worth $100 million or more and 2,700 worth $500 million or more.

The fastest growth in the coming years will be in China, India and Brazil. China now has a million millionaires. Wealth in China and Africa is expected to grow 90%, to $39 trillion and $5.8 trillion respectively, by 2016. Wealth in India and Brazil is expected to more than double to $8.9 trillion and $9.2 trillion respectively.

The article does not specify ‘greed’ or what form of greed constitutes evil. Nevertheless, the article already suggests that the statistics presented by the study could serve as an emotional fodder for the current movement of global protests.

Yet to broaden the perspective let me add more charts from the same study

Worldwide wealth in dollar terms has been expanding

The degree of growth varies from nation to nation

Or even seen from the perspective of region to region. The point is that wealth is relative.

Alternatively, this also means that wealth creation basically reflects on the idiosyncratic structure of a nation’s political economy.

Bottom line: Wealth is NOT created equally and will never be equal.

This runs contrary to socialist utopian abstractions which tries to project ‘equality’ where everyone should not only have same degree of income and wealth or access to public goods, but also perhaps the impossibility of us having to look alike, think alike, share the same value, share similar space for our presence and spouse, etc...

A Wall Street Journal editorial expounds on Asia’s newfound wealth (bold emphasis mine),

Rising net worth ought to be a sign that a growing number of individuals are spotting productive economic opportunities and profiting handsomely in return for the big entrepreneurial risks they've taken. That's certainly how the likes of Steve Jobs or Richard Branson made their billions in the West. There's also a fair share of that in Asia.

But it's also true—and troubling—that so much wealth-creation in the region is related to various forms of government patronage. There are the Hong Kong tycoons who benefit from favorable government land-sale rules, or the Korean chaebol executives who gain from lenient treatment "for the national economic interest" when corporate fraud allegations pop up. China is especially notable for being an environment where friendly connections with government officials can pave the way through a bureaucratic labyrinth, even easing access to capital that's scarce for purely private-sector enterprises.

In a modern free economy it's false to suggest that the wealth of one entrepreneur impoverishes others—the pie can grow for everyone even if it grows faster for some. But wealth amassed through collecting government favors often does impoverish others: those who don't enjoy similar benefits. This fact, and the cynicism it breeds, is a greater threat to social stability than unequal wealth distribution.

In short, wealth is achieved either by political means or by market (economic) means.

The other way to say this is that ‘greed’ as a human trait influences BOTH the market and politics. And the process undertaken to achieve an end (‘equality’) extrapolates to a TRADEOFF between these two means.

For example if society aims to attain ‘equality’ through the markets then the tradeoff equates to lesser political interventions. Yet if society opts to distribute resources ‘equally’ via the political means then market influences will diminish.

The $231 trillion question is which of these two means will function as the more efficient way to arrive at social prosperity.

Thus such tradeoffs suggests that there will either be market inequality or political inequality. The reality is that there will be no equality in whatever sense.

In the real world operating on scarce resources, then equality is no more than a utopian fantasy or mental self-abuse.

To give you an idea how some of the world’s wealth have been politically derived, the following excerpt is from the New Scientist (bold emphasis mine)

The Zurich team can. From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 TNCs and the share ownerships linking them. Then they constructed a model of which companies controlled others through shareholding networks, coupled with each company's operating revenues, to map the structure of economic power.

The work, to be published in PloS One, revealed a core of 1318 companies with interlocking ownerships. Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What's more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world's large blue chip and manufacturing firms - the "real" economy - representing a further 60 per cent of global revenues.

When the team further untangled the web of ownership, it found much of it tracked back to a "super-entity" of 147 even more tightly knit companies - all of their ownership was held by other members of the super-entity - that controlled 40 per cent of the total wealth in the network. "In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network," says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

The list of the biggest interlocking companies

Focusing on the financial behemoths, the above serves as example of crony capitalism or corporatism, where politically privileged private companies benefit from political concessions, regulations, monopolies, subsidies, private-public partnerships or other anti-market policies premised on “privatizing profits and socializing losses” that SHOULD BE differentiated from wealth derived from entrepreneurial or capitalist functions, whose gains are derived from pleasing consumers.

Political wealth (pelf) is mainly extracted from the looting of the taxpayer.

In fact the above only underscores the Austrian economic school’s thesis of a central-bank-cartel based [banking-and-financial sector cronyism] whom has lately been living off tremendous amounts of government subsides, bailouts, central bank QEs and massive interventions in the marketplace all of which has been designed to preserve the current cartel based welfare-warfare state.

Of course not all of the abovestated interlocking companies represent cronyism or politically generated wealth.

Cato’s Dr. Tom Palmer explains the differences of wealth in the video below

Cato’s Dan Mitchell also expounds on differences of entrepreneurship from political privileges in this Fox interview

Finally a good reminder comes from this classic video interview of the illustrious Milton Friedman on Greed, as I earlier posted

The magnificent Milton Friedman quote:

Well, first of all, tell me is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course none of us are greedy; its only the other fellow who’s greedy.

The world runs on individuals pursuing their separate interests. The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history are where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear: that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.

As said above, greed is a human trait that plagues politicians too.

Here is the list of the richest politicians of the world

Again to re-quote Milton Friedman above

none of us are greedy; its only the other fellow who’s greedy

Paul Krugman’s Positive Take on the Blogsphere

I have been saying that the information or digital age has been changing the way information flows or has been democratizing knowledge.

Writes Paul Krugman (Hat tip Bob Wenzel) [bold emphasis mine]

What the blogs have done, in a way, is open up that process. Twenty years ago it was possible and even normal to get research into circulation and have everyone talking about it without having gone through the refereeing process – but you had to be part of a certain circle, and basically had to have graduated from a prestigious department, to be part of that game. Now you can break in from anywhere; although there’s still at any given time a sort of magic circle that’s hard to get into, it’s less formal and less defined by where you sit or where you went to school.

Since there’s some kind of conservation principle here, the fact that it’s easier for people with less formal credentials to get heard means that people who have those credentials are less guaranteed of respectful treatment. So yes, we’ve seen some famous names run into firestorms of criticism — *justified* criticism – even as some “nobodies” become players. That’s a good thing! Famous economists have been saying foolish things forever; now they get called on it.

And this process has showed what things are really like. If some famous economists seem to be showing themselves intellectually naked, it’s not really a change in their wardrobe, it’s the fact that it’s easier than it used to be for little boys to get a word in.

As you can see, I think this is all positive. The econoblogosphere makes it a lot harder for economists to shout down other people by pulling rank — although some of them still try — but that’s a good thing.

Mr. Krugman doesn’t say it directly, but the econoblogsphere has been functioning as self-regulating free market of economic opinions or ideas and this is a development to cheer about.

Graphic: A Prospering World

From USAID (sourced from Professor Don Boudreaux's Cafe Hayek)

From USAID,

More interesting is the shift over the last two decades of countries out of the bottom two groups and into the top two groups (see Chart 1). The number of Low-income and Lower Middle-income countries, often referred to as ‘developing economies’, is clearly diminishing.

A further look at total population by World Bank Income Group shows that the majority of the world’s population in absolute poverty cannot possibly be in the Low income group. In fact they are in the two Middle income groups (see Table 3 and the ESDB’s Data by Sector: Poverty and Income Distribution).

Thanks to Globalization, the world is indeed getting richer.

Telecommunication Boom: This Time for Africa

There’s an ongoing mobile technology economic boom in Africa that’s bringing in a slew of new enterprises from from banking to agriculture to healthcare

Here is Killian Fox of the Guardian (hat tip Mark Perry)

My survey underlined a simple fact: Africa has experienced an incredible boom in mobile phone use over the past decade. In 1998, there were fewer than four million mobiles on the continent. Today, there are more than 500 million. In Uganda alone, 10 million people, or about 30% of the population, own a mobile phone, and that number is growing rapidly every year. For Ugandans, these ubiquitous devices are more than just a handy way of communicating on the fly: they are a way of life.

It may seem unlikely, given its track record in technological development, but Africa is at the centre of a mobile revolution. In the west, we have been adapting mobile phones to be more like our computers: the smartphone could be described as a PC for your pocket. In Africa, where a billion people use only 4% of the world's electricity, many cannot afford to charge a computer, let alone buy one. This has led phone users and developers to be more resourceful, and African mobiles are being used to do things that the developed world is only now beginning to pick up on.

Read the rest here

Chart from McKinsey Quarterly

What’s even more interesting is that even in stateless and civil strife torn Somalia, the mobile industry has been flourishing. (much of this civil strife are due to foreign intervention, e.g. the US CIA has been exposed for maintaining several prison cells)

According to the BBC.co.uk (bold emphasis mine)

The business success story of the last 20 years has been the growth of the mobile telecommunications sector.

Somali telecoms expert Ahmed Farah says the first mobile telephone mast went up in Somalia in 1994, and now someone can make a mobile call from anywhere in the country.

There are nine networks to choose from and they offer services from texting to mobile internet access.

All this required investment in infrastructure, but, as Mr Farah argues, Somali investors were betting on the need for people to stay in touch in times of crisis.

More from Wikipedia, (bold emphasis mine)

Somalia now offers some of the most technologically advanced and competitively priced telecommunications and Internet services in the world. After the start of the civil war, various new telecommunications companies began to spring up and compete to provide missing infrastructure. Funded by Somali entrepreneurs and backed by expertise from China, Korea and Europe, these nascent telecommunications firms offer affordable mobile phone and Internet services that are not available in many other parts of the continent. Customers can conduct money transfers and other banking activities via mobile phones, as well as easily gain wireless Internet access.

After forming partnerships with multinational corporations such as Sprint, ITT and Telenor, these firms now offer the cheapest and clearest phone calls in Africa. These Somali telecommunication companies also provide services to every city, town and hamlet in Somalia. There are presently around 25 mainlines per 1,000 persons, and the local availability of telephone lines (tele-density) is higher than in neighboring countries; three times greater than in adjacent Ethiopia. Prominent Somali telecommunications companies include Golis Telecom Group, Hormuud Telecom, Somafone, Nationlink, Netco,Telcom and Somali Telecom Group. Hormuud Telecom alone grosses about $40 million a year. Despite their rivalry, several of these companies signed an interconnectivity deal in 2005 that allows them to set prices, maintain and expand their networks, and ensure that competition does not get out of control.

"Investment in the telecom industry is one of the clearest signs that Somalia's economy has continued to grow despite the ongoing civil strife in parts of the southern half of the country". The sector provides important communication services, and in the process thus facilitates job creation and income generation.

Somalia also has several private television and radio networks. Prominent media organizations in the country include the state-run Radio Mogadishu, as well as the privately-owned Horseed Media,Garowe Online and Radio Laascaanood.

Talk about how the free markets in telecoms has thrived and even blossomed under a stateless society. And how the beauty of competition has worked to give African consumers one of the lowest prices at best quality of services.

Filipinos should stop bickering over PLDT-DGTL buyout and study the lessons of Africa. If we want true competition then we should simply get government’s hands off the industry (repeal Congressional franchise, allow 100% foreign ownership and abolish the NTC)

As for the Mobile-telecom boom, Shakira in the music video below has an apropos theme for the mobile revolution boom in Africa: “This Time for Africa”

Quote of the Day: Problem Solving as an Enabling Force of Innovation

When we fight constraints and eliminate them, we often gain access to new insights, new productivity and new solutions. It also makes it easier to compete against people who don't have those constraints.

There's a useful alternative: embrace the constraints you've been given. Use them as assets, as an opportunity to be the one who solved the problem. Once you can thrive in a world filled with constraints, it's ever easier to do well when those constraints are loosened. That's one reason why the best filmmakers learn their craft making movies with no budget at all.

That’s from marketing guru Seth Godin.

I would further add that this would work best in a competitive decentralized profit and loss driven environment.

Effective Disaster Recovery Programs are Based on Personal-Community Relationships

The success of disaster recovery programs has mostly been associated with personal relationships. (Sorry but it’s hardly about governments)

That’s the findings of NPR’s Shankar Vedantam. (hat tip: Prof Peter Boettke) [bold emphasis mine]

Aldrich's findings show that ambulances and firetrucks and government aid are not the principal ways most people survive during — and recover after — a disaster. His data suggest that while official help is useful — in clearing the water and getting the power back on in a place such as New Orleans after Katrina, for example — government interventions cannot bring neighborhoods back, and most emergency responders take far too long to get to the scene of a disaster to save many lives. Rather, it is the personal ties among members of a community that determine survival during a disaster, and recovery in its aftermath.

When Aldrich visited villages in India hit by the giant 2004 tsunami, he found that villagers who fared best after the disaster weren't those with the most money, or the most power. They were people who knew lots of other people — the most socially connected individuals. In other words, if you want to predict who will do well after a disaster, you look for faces that keep showing up at all the weddings and funerals.

Hayek’s local knowledge plays a key role. Again from the same NPR article (bold emphasis)

It's this passion for a local community and granular knowledge about who needs what that makes large-scale government interventions ineffective by comparison. It's even true when it comes to long-term recovery...

Governments and big nongovernmental organizations — which are keenly aware of the big picture — are often blind to neighborhood dynamics...

The problem isn't that experts are dumb. It's that communities are not the sum of their roads, schools and malls. They are the sum of their relationships.

Why does personal-community based relationship matter more than governments?

As I previously explained, (emphasis original)

Remember it is in the vested interest of the private sector to be charitable.

This is not only due to self esteem or social purposes but for sustaining the economic environment.

Think of it, if retail store ABC's customer base have been blighted by the recent mass flooding, where a massive dislocation- population loss through death or permanent relocation to other places- would translate to an economic loss for the store, then, it would be in the interest of owners of store ABC to "charitably" or voluntarily provide assistance of various kind to the neighborhood in order to prevent such dislocation from worsening, or as a consequence from indifference, risks economic losses.

Hence, such acts of charity is of mutual benefit.

Moreover, charity is the province of the marketplace. That's because markets produce and provides the goods and services required by society to operate on. Whereas government essentially don't produce goods or services but generates revenues by picking on somebody else's pocket.

With government, personal relationships are merely reduced to political interests.

With the marketplace, people see the benefit of social cooperation arising from social exchanges, which is fundamental to community building.

As the great Ludwig von Mises wrote, (bold emphasis added)

Within the frame of social cooperation there can emerge between members of society feelings of sympathy and friendship and a sense of belonging together. These feelings are the source of man's most delightful and most sublime experiences. They are the most precious adornment of life; they lift the animal species man to the heights of a really human existence. However, they are not, as some have asserted, the agents that have brought about social relationships. They are fruits of social cooperation, they thrive only within its frame; they did not precede the establishment of social relations and are not the seed from which they spring.

The fundamental facts that brought about cooperation, society, and civilization and transformed the animal man into a human being are the facts that work performed under the division of labor is more productive than isolated work and that man's reason is capable of recognizing this truth. But for these facts men would have forever remained deadly foes of one another, irreconcilable rivals in their endeavors to secure a portion of the scarce supply of means of sustenance provided by nature. Each man would have been forced to view all other men as his enemies; his craving for the satisfaction of his own appetites would have brought him into an implacable conflict with all his neighbors. No sympathy could possibly develop under such a state of affairs.

This is a truism which politicians and their media bootlickers always misrepresents.

Do Filipinos Need a New Attitude on Entrepreneurship?

I received a promotional email for an entrepreneurship seminar which comes with a column from Brian Quebengco entitled “Championing Philippine Ideas: The Rise of Silicon Valley in the Philippines”

Mr. Quebengco writes, (no link included in the email),

It is not an evolution that we need, nor is it a revolution. Rather, what we need is a transformation. Since the glory days of Semi Conductors and the Filipino entrepreneurs that championed them, we have evolved a great deal up to our present state. And as we are witnessing right now, a revolution in technology and communication has made the world flat. But what is lacking, and I feel the most important, is for us, the individual Filipino, to transform our attitude and ways to give rise to the Filipino Entrepreneur. We don't need mechanisms, infrastructures, or even the presence of a strong venture capital community to do this. In my own view, business is about people first, and everything else second. That transformation must and can only start with the individual Filipino.

He further says entrepreneurs should be individually motivated which should permeate to culture and subsequently to infrastructure. And from this he advocates the promotion of “a new kind of Enterpreneur”, one who will “challenge the global arena”.

I am delighted that there are local experts advocating entrepreneurship which functions as the cornerstone for any market economy.

However, I would suggest that any “new kind of entrepreneur” hardly matches the operational concept of entrepreneurship.

Entrepreneurs are those who allocate factors of production (labor, capital goods and natural resources) in the service of consumers. (Mises wiki)

Further, entrepreneurs employ “discovery” or “alertness” to profit opportunities in scanning the market horizon which can bring about innovation, better quality of goods or services or cheaper prices. (Israel M. Kirzner)

So aside from Silicon Valley which he seems to see as a paradigm to emulate, homegrown entrepreneurs are the balut vendors, carinderia operators, laundry services and etc… to the bigwig who compete internationally like Jollibee, San Miguel Brewery and others.

Each of them offers specific goods or services to serve their consumers in return for profit opportunities. These voluntary exchanges constitute the free markets.

What I am trying to say is that the marketplace hardly operates on “new” entrepreneurs founded on “new attitudes” but rather on individual specialization.

As the great Austrian economist Ludwig von Mises wrote, (bold emphasis mine)

The selection of the market does not establish social orders, castes, or classes in the Marxian sense. Nor do the entrepreneurs and promoters form an integrated social class. Each individual is free to become a promoter if he relies upon his own ability to anticipate future market conditions better than his fellow citizens and if his attempts to act at his own peril and on his own responsibility are approved by the consumers. One enters the ranks of the promoters by spontaneously pushing forward and thus submitting to the trial to which the market subjects, without respect for persons, everybody who wants to become a promoter or to remain in this eminent position. Everybody has the opportunity to take his chance. A newcomer does not need to wait for an invitation or encouragement from anyone. He must leap forward on his own account and must himself know how to provide the means needed.

It must be understood too that the entrepreneurship ethos is also hardly acquired from formal educational training.

Again from von Mises, (highlights added)

In order to succeed in business a man does not need a degree from a school of business administration. These schools train the subalterns for routine jobs. They certainly do not train entrepreneurs. An entrepreneur cannot be trained. A man becomes an entrepreneur in seizing an opportunity and filling the gap. No special education is required for such a display of keen judgment, foresight, and energy. The most successful businessmen were often uneducated when measured by the scholastic standards of the teaching profession. But they were equal to their social function of adjusting production to the most urgent demand. Because of these merits the consumers chose them for business leadership.

There is NO holy grail to successful entrepreneurship, as it takes sustained “keen judgment, foresight, and energy” to compete in the marketplace, even in the global arena.

What needs to be transformed is NOT the individual attitude towards entrepreneurship but rather the Filipinos’ seeming dependence on political means of dispensing economic opportunities.

In the environment where...

-taxes are high,

-red tapes are byzantine,

-bureaucracy is bloated

-regulatory compliance costs are numerous, time consuming and burdensome,

-corruption is rampant,

-competition is restricted,

-economic opportunities are distributed as political concessions (subsidies, monopolies, private-public partnership, cartel, and etc.)

-redistribution programs are plentiful (which essentially transfers productive resources to non-productive activities and at worst, induces people toward entitlements and subsequently takes away the drive for entrepreneurship)

-and many more,

...so even if most Filipinos would want to become entrepreneurs they can’t. That’ because the Philippine government (regardless of who is in power) prevents them from doing so. The cost of doing business or the risk premium is prohibitive enough to require high hurdle rates for entrepreneurs to generate decent returns.

All these signify as the Filipinos’ aversion to free markets which is what genuinely inhibits the Filipino entrepreneurial discovery process from taking hold.

Video: Christien Meindertsma on the Economic Value of Pigs

Here is a fascinating talk by Ms. Christien Meindertsma on TED, about the economic value of Pigs. I mean the animal (oink oink) variety and not the debt plagued acronym of peripheral European countries.

Ms.Meindertsma's talk somewhat resembles Leonard Read's I, Pencil except that she focuses on the pig as a product than as part of the market process [pointer to Mike Du]



Some passages:

The market process of pigs (bold emphasis mine-from TED)

And what I was curious about -- because historically, the whole pig would be used up until the last bit so nothing would be wasted ... and I was curious to find out if this was actually still the case. And I spent about three years researching. And I followed this one pig with number "05049" all the way up until the end and to what products it's made of. And in these years, I met all kinds people, like, for instance, farmers and butchers, which seems logical. But I also met aluminum mold makers, ammunition producers and all kinds of people. And what was striking to me is that the farmers actually had no clue what was made of their pigs, but the consumers -- as in us -- had also no idea of the pigs being in all these products.

The pig's economic value: (bold emphasis mine)

In total, I found 185 products. And what they showed me is that, well, firstly, it's at least to say odd that we don't treat these pigs as absolute kings and queens. And the second, is that we actually don't have a clue of what all these products that surround us are made of.

And you might think I'm very fond of pigs, but actually -- well, I am a little bit -- but I'm more fond of raw materials in general. And I think that, in order to take better care of what's behind our products -- so, the livestock, the crops, the plants, the non-renewable materials, but also the people that produce these products -- the first step would actually be to know that they are there.

We can't surely know everything. But we can understand the market process. And that's why markets are indispensable.

As Leonard Read writes,(emphasis added)

There is a fact still more astounding: The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred.

Should Doomsayers Be Censored?

It had been a calculation error says the California preacher, thus doomsday will be reset on October 21. Booooo!

Reports the Yahoo, (bold highlights mine)

A California preacher who foretold of the world's end only to see the appointed day pass with no extraordinarily cataclysmic event has revised his apocalyptic prophecy, saying he was off by five months and the Earth actually will be obliterated on Oct. 21.

Harold Camping, who predicted that 200 million Christians would be taken to heaven Saturday before catastrophe struck the planet, apologized Monday evening for not having the dates "worked out as accurately as I could have."

He spoke to the media at the Oakland headquarters of his Family Radio International, which spent millions of dollars_ some of it from donations made by followers — on more than 5,000 billboards and 20 RVs plastered with the Judgment Day message.

It was not the first time Camping was forced to explain when his prediction didn't come to pass. The 89-year-old retired civil engineer also prophesied the Apocalypse would come in 1994, but said later that didn't happen then because of a mathematical error.

Not only has the events proven him wrong, but the preacher even admits to it: econometrics has failed him as I predicted. Yet he continues to apply the same methodology.

But I hear some people clamor that government has to “act” on Mr. Camping’s doom mongering.

Should the US government apply censorship on Mr. Camping?

Does it mean that we should rely on his poor track record to use force against what we may perceive as wrong predictions or ideas we don’t agree with?

But what if he will be correct and October will indeed account for as doomsday? Remember Aesop’s famed fable, The Boy who cried Wolf?

I am not saying that I agree with or believe in him. I think his overdependence on math camouflaged by religious creeds will continue to lead his predictions astray. But I could be wrong.

But there are two important points here:

-he is selling an idea of what he purportedly believes in and

-two we don’t know the future.

On the issue of selling ideas, marketing guru Seth Godin has a terrific commentary on the possible lessons gleaned from the recent apocalyptic prophesy.

Mr. Godin writes, (italics original)

Sell a story that some people want to believe. In fact, sell a story they already believe…

Not everyone wants to believe in the end of the world, but some people (fortunately, just a few) really do. To reach them, you don't need much of a hard sell at all.

In other words, many of those who listen to Mr. Camping’s prophesies could be people who already believed in them or that Mr. Camping merely personifies the belief of an extant segment of captive audiences. That's why he gets donations.

If Mr. Camping’s followers represent as zealots of doom, can we legislate away beliefs or faiths? Are we supposed to prevent the expression of ideas that doesn’t mesh with ours?

Besides, who should decide whose ideas are accurate anyway, the President? If governments have been shown as unable to sufficiently resolve social problems, then why should we expect them to know the substance of information which signifies relevance for us and what are not? Have you ever heard of propaganda or indoctrination-false information deliberately spread as truths for political ends?

This shows of the assumptions that government have superior knowledge accounts for as fatal conceit-the fallacious presumption of omniscience.

As US playwright and Nobel awardee Eugene Gladstone O'Neill said,

Censorship of anything, at any time, in any place, on whatever pretense, has always been and will always be the last resort of the boob and the bigot

Second is the issue of uncertainty.

All of us speculate about the future, that’s because we don’t know exactly how things will turnout. That’s why markets are there. And that’s why money exists. And that’s why people use mathematics, such as statistics, in the perpetual attempt to “smooth out” risks and uncertainties.

True, some issues are more predictable than the others, but again that’s why markets exist—to allocate resources according to one’s perception of time variant needs (satisfying one’s unease, e.g. some people see the need of believing in doomsdays).

As Professor Art Carden writes

People with strong beliefs should be willing to put their money where their mouths are. The late Julian Simon was a master of this. Superior knowledge and insight can be turned into profitable opportunities. My personal property no longer has value to me after the Rapture, but it might have value to someone else. If I knew the precise date of the end of the world, I would sell everything in the months leading up to it and use the resources to spread the word, as some of Camping’s followers have apparently done.

If I were pretty sure the Rapture might happen sometime over the next 40 years, I should be able to make a deal with someone who disagrees but who would be willing to pay me now in exchange for title to my property after the Rapture. I could then use the resources to spread my message. I got no takers on my offer of $1000 for all of one apparently Camping-affiliated group’s earthly belongings I made after I first learned about the claim that Judgment Day would happen on 5/21/2011.

Harold Camping isn’t the only discredited doomsday prophet among us. As I’ve followed this, I’ve wondered what percentage of the people who laugh at Camping and his misled followers nonetheless nod sagely, furrow their brows, and reach for their checkbooks whenever professional doomsayers in the environmental movement like Lester Brown and Paul Ehrlich warn of overpopulation, the end of oil, and the end of prosperity in spite of track records littered with doomsday predictions that failed to come true.

Indeed, beliefs can be parlayed into profit opportunities. We can profit from someone else’s mistakes, so why apply censorship?

This is like investing the stock market where wrong analysis or flawed theories or inaccurate information can lead to losses. So given the logic of advocates of censorship should we effectively ban losers (applied not only to stockmarkets but to all markets)? Or should we also apply censorship on newsletters fund managers and analysts whose prediction of the markets have been inaccurate?

What people say and do are frequently detached. Did global economic activities stop prior to May 21^st in anticipation of the rapture? Did you sell or give away your assets because of this?

If not, then the obviously you were not affected, because you didn’t believe, you were a skeptic. This is called demonstrated preference. Because the world didn’t fall into a stasis, most people around the world simply ignored such cataclysmic prophesy.

Only media likes to drum up on sensational issues because they profit from them. Fear draws attention. Yet shooting the messenger won’t eradicate the message. So censorship would signify as a fool’s errand.

At the end of the day, the issue of Judgment day will be one decided by your and my personal disposition and not by the government. Unless you honestly believe that governments can stop doomsday [har har har].

Finally, it would be an issue of legal fraudulence if modern day Cassandras engage in purposeful misrepresentation or deception to profit from prophesies of Armageddon.

But that would mean personal issues of those who felt affected or victimized, whose recourse should be channeled through the courts of law.

I close this anti-censorship ‘freedom of speech’ rant with this prominent quote which has been frequently (mis) attributed to Voltaire (but according to Wikipedia is from Evelyn Beatrice Hall who wrote “under the pseudonym of Stephen G Tallentyre in The Friends of Voltaire (1906), as a summation of Voltaire's beliefs on freedom of thought and expression)

I disapprove of what you say, but I will defend to the death your right to say it.

Video: Rob Harmon On How Markets Keep Streams Flowing

In this talk, Rob Harmon shows, where regulations failed, how the markets solved a common pool resource dilemma. His example is the case of the Prickly Pear Creek where the institution of market mechanism has successfully brought back water to a formerly "dewatered" stream.

(hat tip: Briggs Armstrong/Mises Blog)

Do Central Banks Uphold Or Undermine Free Market Principles?

When I read Professor Art Carden’s statement from this article,

Far too often, people use terms like "capitalism" and "socialism" sloppily, either because they don't understand them or because the words make for cheap but effective (albeit inaccurate) political rhetoric. The Great Conversation suffers because of it.

It struck me that many arguments supposedly for the so-called advancement of the political philosophy of libertarianism, free markets and or classical liberalism have precisely been anchored on this—rhetoric misrepresented as principles.

And this is exactly the essence of my last article, The Middle Of The Road Policy Of A Local Free Market Group. Where I was earlier disappointed about the issue of principles, I was even more dismayed by the responses.

Given the benefit of the doubt that perhaps my article or my “spin” could have lacked clarity, or that specialization may have lead to the misunderstanding of my message, my argument against the positive relationship between central banking and the free market was certainly not about utility nor was it about market failure.

By utility, I mean it would seem misguided to compare what is essentially is a monopoly—operating on the power of coercion, funded by taxpayer resources and whose decision making process by the authorities are (externality) risk borne by the taxpayers—with private and semi-private enterprises operating mostly on a competitive environment.

By market failure, the standard statist ‘Paul Krugman’ tactic—throw up a strawman, assail or shoot it down with econometric gibberish or economic models, and declare “market failure”, thus justifying government intervention—eludes the question about this relationship between free markets and the central bank.

The fact that the local central bank began only in the Philippines in 1949, goes to show that even in our colonial past the nation has survived without it, thereby, disproving the presumed sine qua non nature of central banking to the local economy.

As my colleague Paul How writes in his 'as-yet unpublished manuscript', the “Philippine Banking And The Business Cycle” about how the domestic monetary system operated, (bold emphasis mine)

During the 19^th century, the monetary system had a gold standard in place, where each monetary note was presumed to redeem a fixed amount of gold...

Clearly, people, in their private capacity, preferred the use of a medium of exchange whose value was based not on government decree but on the amount of rare metals contained in the item. Even after the Spanish handed the Philippines over to the United States in December 1898, Filipinos continued using the Mexican coin, much to the chagrin of US officials keen on imposing their culture on the new colony’s inhabitants.

Where half of our transactions are settled for by money which is issued by an institution owned and controlled by the government, this extrapolates to half of our trading activities under the indirect purview of the government. Thus it is very important to put in question the role of such institution under the Free Market precept.

Ultimately, what for stands as the most important issue is through this question:

Do central banks promote or undermine the Free Market Principles?

This brings us back to definition. A free market, according to Wikipedia, is a market in which there is no economic intervention and regulation by the state, except to enforce private contracts and the ownership of property.

If freedom to contract and private property rights are the key pillars of free market principles as stated by such definition, do central bank activities promote these?

As a side note, under classical liberalism I would not say that free market is the absence of intervention or regulation, but instead a free market is self regulated by (mostly non-state) institutions operating under the rule of law.

Nevertheless the entire concept of freedom to contract and private property or even the rule of law are put into a test under the central bank’s operations: (bold highlights under below quotes are my emphasis)

1. Inflation of the monetary system

Thus, credit expansion unavoidably results in the economic crisis. In either of the two alternatives, the artificial boom is doomed. In the long run, it must collapse. The short-run effect, the period of prosperity, may last sometimes several years. While it lasts, the authorities, the expanding banks and their public relations agencies arrogantly defy the warnings of the economists and pride themselves on the manifest success of their policies. But when the bitter end comes, they wash their hands of it.

The artificial prosperity cannot last because the lowering of the rate of interest, purely technical as it was and not corresponding to the real state of the market data, has misled entrepreneurial calculations. It has created the illusion that certain projects offer the chances of profitability when, in fact, the available supply of factors of production was not sufficient for their execution. Deluded by false reckoning, businessmen have expanded their activities beyond the limits drawn by the state of society’s wealth. They have underrated the degree of the scarcity of factors of production and overtaxed their capacity to produce. In short: they have squandered scarce capital goods by malinvestment.

Ludwig von Mises, The Causes of Economic Crisis,

Does price signalling distortion, reduction of purchasing power of money and capital consumption from these forces represent as free market principle? The same question should all be applied on the following aspects shown below.

2. The nature of central bank’s fractional reserve system

As Huerta de Soto points out, the problem of the tragedy of the commons always appears when property rights are defined improperly. In the case of fractional reserve banking, bankers can infringe on property rights because it is not clearly defined who owns the deposit.

When customers make their deposits, the promise is that the deposit is always available for withdrawal. However, the deposits, by the very definition of fractional reserve banking, are never completely available to all customers at one time. This is because banks will take a part of these deposits and loan them out to other customers. In other words, they issue fiduciary media. By issuing more property titles than property entrusted to them, the banks violate the traditional property rights of their customers. (One of the most important contributions of Huerta de Soto's exhaustive book is to demonstrate how banking developed historically and that fractional reserve banking evolved as a perversion of deposit banking.)

Philipp Bagus, The Commons and the Tragedy of Banking

3. Externality costs from the knowledge problem

The odds that 19 men and women (a.k.a. the Federal Open Market Committee) will be able to select the overnight interest rate that keeps the U.S. economy growing at its potential in perpetuity are next to nil.

There would be a huge outcry if the Fed set the price of oil or copper or soybeans. Yet we accept the central bank as a price setter, a monopolist, when it comes to the interbank lending rate.

Caroline Baum Capitalism Still Has Legs That Are Long and Sexy

3. Operates from an environment of arbitrary rules

The concept of the rule of law in jurisprudence and political philosophy has several dimensions. At its core is the classical liberal principle of nondiscretionary governance that stands in contrast to the arbitrary or discretionary rule of those people currently in authority. In shorthand, either we have the rule of law or we have the rule of authorities. Under the rule of law, government agencies do nothing but faithfully enforce statutes already on the books. Under the rule of authorities, those in positions of executive authority have the discretion to make up substantive new decrees as they go along, and to forego enforcing the statutes on the books.

Dr. Lawrence H. White Rule of Law or the Rule of Central Bankers?

Think currency interventions in behalf of exporters and OFWs at the expense of importers and consumers via elevated prices of goods and services.

4. Operate on persistent political pressures

To put it into the hands of an institution which is protected against competition, which can force us to accept the money, which is subject to incessant political pressure, such an authority will not ever again give us good money

Friedrich August von Hayek A Free-Market Monetary System

5. Choosing winners and losers

The real reason for the adoption of the Federal Reserve, and its promotion by the large banks, was the exact opposite of their loudly trumpeted motivations.

Rather than create an institution to curb their own profits on behalf of the public interest, the banks sought a Central Bank to enhance their profits by permitting them to inflate far beyond the bounds set by free-market competition.

Murray N. Rothbard, The Case Against the Fed

6. Crony Capitalism

The answer was the same in both cases: the big businessmen and financiers had to form an alliance with the opinion molding classes in society, in order to engineer the consent of the public by means of crafty and persuasive propaganda.

Murray N. Rothbard, The Case Against the Fed

7. Promote Government Expansion

While, as we shall see presently, government's exclusive right to issue and regulate money has certainly not helped to give us a better money than we would otherwise have had, and probably a very much worse one, it has of course become a chief instrument for prevailing governmental policies and profoundly assisted the general growth of governmental power. Much of contemporary politics is based on the assumption that government has the power to create and make people accept any amount of additional money it wishes. Governments will for this reason strongly defend their traditional rights. But for the same reason it is also most important that they should be taken from them.

A government ought not, any more than a private person, to be able (at least in peace-time) to take whatever it wants, but be limited strictly to the use of the means placed at its disposal by the representatives of the people, and to be unable to extend its resources beyond what the people have agreed to let it have. The modern expansion of government was largely assisted by the possibility of covering deficits by issuing money-usually on the pretence that it was thereby creating employment. It is perhaps significant, however, that Adam Smith [54, p. 687] does not mention the control of the issue of money among the 'only three duties [which] according to the system of natural liberty, the sovereign has to attend to'.

Friedrich August von Hayek Denationalization of money

In my view, the fundamental case for free market capitalism begins with sound money and sound banking institutions (whether it is a 100% gold reserve or a free banking standard).