Friday, August 31, 2007

Capitalism and Freedom, by Milton Friedman

Milton Friedman's Capitalism and Freedom packs so much wisdom in such concise language, I felt like my IQ rose 50 points after just four hours of reading. Mr. Friedman is a polarizing figure. His views on some subjects, such as eliminating Social Security and legalizing drugs and prostitution, are radical; however, Friedman makes the underlying rationale behind these proposals seem bulletproof when he explains their libertarian foundation. Some passages show the inherent reasonableness of his arguments:

"Freedom to advocate unpopular causes does not require that such advocacy be without cost. On the contrary, no society could be stable if advocacy of radical change were costless, much less subsidized...Indeed, it is important to preserve freedom only to people who are willing to practice self-denial, for otherwise freedom degenerates into license and irresponsibility... Freedom is a tenable objective only for responsible individuals."

Friedman's main motif is that freedom requires self-evaluation and self-policing, which is preferable to government interference. The alternative, state-sanctioned coercion, necessarily leads to less freedom--a theme Friedman patiently hammers into the reader.

If there is a flaw in Friedman's analysis, it is the missing link of how to prevent citizens with less self-control or citizens who are more susceptible to temptation from interfering with other, more reasonable citizens. Friedman may answer that this is where government is useful. He writes, "The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the 'rules of the game' and as an umpire to interpret and enforce the rules decided on."

Although government is a necessity, Mr. Friedman wants readers to ask, "How much government is necessary," and "What form should government take"?:

"Political freedom means the absence of coercion of a man by his fellow men. The fundamental threat to freedom is power to coerce, be it in the hands of a monarch, a dictator, an oligarchy, or a momentary majority. The preservation of freedom requires the elimination of such concentration of power to the fullest possible extent and the dispersal and distribution of whatever power cannot be eliminated--a system of checks and balances."

Thus, Friedman escapes any contradiction by making the point that while government is necessary, it is necessary only in the most minimalist form possible. Friedman also promulgates several broad principles to support his philosophical framework, namely,

1. The scope of government must be limited.
2. Government power must be dispersed.
3. "The power to do good is also the power to harm; those who control the power today may not tomorrow; and, more important, what one man regards as good, another may regard as harm."

The last principle is stunning in its beautiful, simple logic, and there are gems like this on almost every page.

Friedman's other point is that the "great advances of civilization...have never come from centralized government. " FDR's New Deal is one counterargument, but Friedman indirectly addresses this potential hole by stating that the Depression was a unique instance in history that could have and should have been avoided: "The Great Depression in the United States, far from being a sign of the inherent instability of the private enterprise system[,] is a testament to how much harm can be done by mistakes on the part of a few men [i.e., the Federal Reserve] when they wield vast power over the monetary system of a country." Friedman says that had the Fed provided money to the banking system through its discount window, the Great Depression might have been avoided. (It is interesting to note that Bernanke, in the face of widespread economic fear, recently opened the discount window to banks, which is an interesting development, because he is known in academic circles as favoring inflation targeting.)

Perhaps Friedman's most salient point is that we forget the short history of mankind's relative affluence. He states, "Because we live in a largely free society, we tend to forget how limited is the span of time and the part of the globe for which there has ever been anything like political freedom: the typical state of mankind is tyranny, servitude, and misery." In other words, there is no such thing as a free lunch, and freedom is a goal worth striving for.

I will leave you with an interesting passage that is relevant to the recent subprime mortgage mess in the markets and the lack of financial liquidity:

"The result [of the banks lending money and keeping only 15 to 20 cents of each dollar deposit] is that for every dollar of cash owned by banks, they owe several dollars of deposits. [Thus,] any widespread attempt on the part of depositors to 'get their money' must therefore mean a decline in the total amount of money unless there is some way in which additional cash can be created and some way for banks to get it. Otherwise, one bank, in trying to satisfy its depositors, will put pressure on other banks by calling loans or selling investments or withdrawing its deposits and these other banks in turn will put pressure on still others. This vicious cycle, if allowed to proceed, grows on itself as the attempt of banks to get cash forces down the prices of securities, renders banks insolvent that would otherwise been entirely sound, shakes the confidence of depositors, and starts the cycle over again."

It looks like Bernanke made the right decision, at least in the short term, by opening the discount window. If, however, he lowers interest rates in September, his reputation as an inflation targeter may not be deserved.

In any case, read Capitalism and Freedom. It's an incredible education to be had, and in just 202 pages. I recommend the 40th Anniversary edition, with the year 2002 introduction by Friedman.

Note: the picture above is of Mr. Friedman's son and myself at Santa Clara Law School.

Tuesday, August 7, 2007

Book Review: Niall Ferguson's The Cash Nexus


[Note: this post was written and published on June 14, 2012 but has been backdated.]

I just finished Niall Ferguson’s tome, The Cash Nexus (2001) (paperback, by Basic Books).  It took me a long time to get through it, and I still think The Ascent of Money is a much better book, but I wanted to share some tidbits:

1.  For whatever reason, the engineers I know don’t tend to be great investors.  So I wasn’t overly surprised to learn that Sir Isaac Newton, the genius of his time, failed at investing, buying at the peak and selling at the low—of a bubble, no less.  However, I was surprised to read that Karl Marx, of all people, was a daytrader or short-term trader.  He wrote his socialist friend, Ferdinand Lassalle, in 1862 about his market-timing skills:

I have, which will surprise you not a little, been speculating--partly in American funds, but more especially in English stocks, which are springing up like mushrooms this year (in furtherance of every imaginable and unimaginable joint stock enterprise) are forced up to a quite an unreasonable level and then, for most part, collapse. In this way, I have made over £400 and, now that the complexity of the political situation affords greater scope, I shall begin all over again. It’s a type of operation that makes small demands on one’s time, and it’s worth while running some risk in order to relieve the enemy of his money.   [page 319]

2.  Ferguson seems to have predicted the collapse or at least the instability of the present-day EU.  He points out that many historians believe that a “homogeneous nation-state was the only proper setting for a liberal polity” and then describes Europe's ethnic and linguistic diversity, especially in Central and Eastern Europe. [page 378 and 379]

Earlier in the book, he referred to a Freedom House survey that "suggests that countries without a predominant ethnic majority are less successful in establishing open and democratic societies than ethnically homogeneous countries (defined as countries in which over two-thirds of the population belong to a single ethnic group).  Of the 114 countries in the world which possess a dominant ethnic group, 66--more than half--are free.  By contrast, among multi-ethnic countries only 22 of 77 are free--less than a third." [pages 375-376]

Personally, I think the EU's current instability owes more to the lack of a single dominant language and differing corruption and tax enforcement levels (e.g., efficient Germany vs. corrupt Greece) than any ethnic differences.  Also, Ferguson is highlighting a survey with a 57.8% to 28.6% numerical difference--which is perhaps not statistically significant unless one examines the survey's definition of "ethnic" and the time periods involved (which could be either too limited or too broad).  In any case, Ferguson does not elaborate much on the survey's methods or underlying data.  

3.  Ferguson states that the Germans were the “worst offenders” in terms of ethnic conflict and forced resettlement: “In addition to murdering between five and six million Jews, their racial policies were responsible for the deaths of around three million Ukrainians, 2.4 million Poles, 1.6 million Russians, 1.4 million Belorussians and a quarter of a million gypsies.” [page 380]

4.  On state monopolies in relation to commodities: “Around 5 percent of American state and local government revenue comes from state utilities and liquor stores.  State lotteries play a similar role: in each case the state monopolizes the gratification of a particular vice…And like the vices themselves, the revenues they generate can be hard to give up.” [page 55]

5.  For the gold bugs: most gold is used for jewelry, and India consumes 700 tons of gold annually (at least per 2001 data).  Ferguson also includes this interesting note: "It should be emphasized that, contrary to popular belief, gold has been a poor hedge against inflation in Britain and the United States.  The purchasing power of gold has actually increased more in periods of deflation like the 1880s and 1930s; whereas during war-induced inflations it has lost ground relative to industrial commodities needed for military purposes.  The real attraction of gold is that it is accessible and exchangeable even when established monetary institutions fail."  [page 325]

Ferguson relies on The Changing Relationship Between Gold and the Money Supply, by Michael D. Bordo and Anna J. Schwartz, and Gold as a Store of Value by Stephen Harmston.  

6.  On the increasing size of government: “In 1891 total government personnel amounted to less than 2 per cent of the total labor force in Britain.  The figures on the continent were higher, but not by much.  For Italy in 1871 the equivalent was just 2.6 per cent; for Germany in 1881 3.7 per cent.  Even the famously elaborate Habsburg bureaucracy was small in relation to the swelling population of the Empire. But from the turn of the century onwards there was sustained growth in the public sector almost everywhere.  By the 1920s public employment exceeded 5 per cent of the workforce in Italy, 6 per cent in Britain and 8 percent in Germany.  [pages 90 and 91]

According to the United States Census Bureau, in 2010, state and local governments had 16.6 million full time employees.  (See here.)  The federal government had about 3 million total employees, with 2.583 million having full time jobs.  These federal numbers apparently do not include the 185,295 employees within the Department of Homeland Security.  (See here.)  Taken together, the aforementioned numbers indicate that we had about 19,368,295 full time government employees in 2010.  In 2010, the U.S. Census Bureau indicated that the resident population of the United States on April 1, 2010 was 308,745,538.  These figures indicate that in 2010, total government personnel in the United States was about 6.27% of the total resident population.  

7.  Some general facts: 

“At the time of [Bill] Clinton’s inauguration, more than 13 per cent of US federal government bonds were in foreign hands.” [page 263] 

Ferguson seems to have predicted the 2008 financial collapse when he wrote the following in 2001: 

“And the growth of international derivatives markets has been even more rapid.  The total amount of futures and options instruments traded on exchanges rose from $7.8 trillion at the end of 1993 to $13.5 trillion at the end of 1998.  The amount of so-called 'over-the-counter' (OTC) instruments traded outside established exchanges rose from $8.5 trillion to an astonishing $51 trillion.  The OTC derivatives market is now by any measure the biggest financial market in the world—more ‘terrifying’ even than the $34 trillion bond market.” [page 263] 

Monday, August 6, 2007

West by West: My Charmed, Tormented Life

[This post was published on October 26, 2011 but backdated.]

Jerry West's autobiography showcases a man of pure class and professionalism.  I've summarized parts of the book I found most interesting below. 

West grew up poor in West Virginia, the fifth of six children. He had a distant mother plagued by her husband's infidelity and a father who was abusive towards West and his siblings. West writes that his dislike of authority figures probably comes from his father. At the same time, West has a non-confrontational personality due to his shyness.

Jack Nicholson describes West as "fierce, frank, but very fragile."

West suffers from depression and atrial fibrillation. He takes Coumadin and Xanax for the atrial fibrillation and Prozac for the depression.

Two interesting quotes: "The coal industry and its lobbyists have run West Virginia for years, and it depresses me that education is not the first priority." (page 28)

"I have a coal -mining, company-store mentality, born out of the state we both grew up in: that if you are doing well, the company will reward you. But there's no point in asking because it would be un-Southern and ungracious, and besides, they have all the power anyway."

West voted for Obama. West dislikes Jesse Jackson. His hero is James Brown, who also wore #44.

Cooke, the Lakers' owner before Buss, was apparently a pompous arse. One example: he called John Wooden to his home to ask him to coach the Lakers, even though Wooden had insisted beforehand he would not leave UCLA. Nevertheless, Cooke wrote a number on a piece of paper and slid it over to Wooden. Wooden looked at it and said, "No coach is worth this amount of money." Cooke immediately told Wooden to get out of his house. 

West pulled a "Barry Bonds"--he surprised his second wife with a prenup shortly before the wedding day, primarily because his first marriage (he married too young) had ended badly and expensively. He is still married to his second wife, Karen.

West on Kobe Bryant, the player he recruited, with the help of Arn Tellum: "Kobe was young and immature. He had a showboat style and a bottomless reservoir of drive that fueled him; he wasn't content just to beat people, he had to embarrass them, even players on his own team."

Although West views himself as a father figure to Kobe, Kobe chose not to participate in the book, unlike Kareem, Pat Riley, etc.

West thinks that Kobe was "set up" by the woman in Colorado who accused him of rape. When the incident occurred, Kobe sought out West for advice, even though West was working for Memphis at the time.

Phil Jackson told Jerry to get the eff out of the locker room after a game. No one had ever told Jerry to get out of the Lakers locker room before, and that incident strained an already tense relationship. When Phil first joined the Lakers, West felt that Phil deliberately ignored him.  Jackson apparently wouldn't even say hello as he walked by West's office.

Basically, Phil had already won six championships when he joined the Lakers, had just come from a situation in Chicago where he and the GM had clashed, and had no need for West's advice or input. As Mitch Kupchak says, "Phil didn't need Jerry's advice and wouldn't have wanted it anyway."

At the end of the day, West didn't leave the Lakers solely because of Phil--there were many reasons, including Buss's increasing separation from the team once they moved to Staples Center, as well as Glen Rice's back-handed salary negotiations.

West praises Kurt Rambis both in personal and professional terms. He also says that Kurt was responsible for the Showtime Lakers' success because of the quick way he would collect the ball, get out of bounds with one leg, and pass the ball to Magic to start the fast break. Magic agrees.

West participated in a strike where the players were demanding a pension plan. They succeeded.

West believes that the expansion of the NBA roster from 10 (the limit during his time) to 15 players allows non-NBA-caliber players to join the league.  These days, West says the additional three to five players basically serve as practice players, i.e., players who are primarily utilized to challenge teammates during practice.  He seems to say that we should either reduce the roster size or the number of teams.  He believes the higher number of teams harms the ability of small market teams to compete against larger market teams.  Ironically, West indicates that Pat Riley--whose work ethic was exceptional--may have been in the category of a practice player.  Given Riley's success as a coach, one wonders whether a modern-day version of a Pat Riley would still be able to get his start in the NBA today, especially if it had smaller rosters or fewer teams.

Some final notes: 1) Jerry's brother, David, died in the Korean War when Jerry was a boy. David was apparently the family's favorite. David's death probably gave Jerry a kind of survivor's guilt, which, coupled with his abusive father, led to his depression; 2) despite being asked to contribute some thoughts to the book, Kobe did not do so, which "shocked" West; 3) West continues to be plagued by the six times the Celtics beat his Lakers in the Finals, even though West won the championship in 1972; his Lakers team continues to hold the longest active winning streak in professional sports (33 games); and he won a gold medal in 1960, his most prized possession); 4) West claims he didn't give away Pau Gasol to the Lakers out of favoritism but because the owner of the Grizzlies wanted to save money; 5) one of the pictures in the book is of Riley with a mustache--it's hilarious; and 6) at the end of the book, West included a touching comment to his wife of "33 years (and counting)": "It has not always been smooth, I know that, but I am grateful that you stayed in the game."

Mr. West, on behalf of NBA fans everywhere, thank you for "staying in the game."

Sunday, August 5, 2007

The Persia Cafe, by Melany Neilson

Ever since attempting Faulkner, I've always had a strange relationship with Southern literature. It's exasperating to read about the South and the thinking that inspired George Wallace (who was actually far more interesting than his infamous chant of "segregation today, segregation tomorrow, segregation forever" would indicate). Coming from California--mentioned in the book as a place to get away from constrictive social mores--reading about the Southern mentality before President Johnson and the Civil Rights Act seems just plain foreign. But happy "normalcy" creates the same dullness, as Tolstoy might have said; indeed, perhaps the South has produced its share of writers because of the turbulence caused by the civil rights movement, and the weight of history upon the Southern damp soil.

If Faulkner were a woman who could cook and wanted to write Mississippi Burning, The Persia Cafe might have been the result. Food is the motif that emanates throughout the book, placing its protagonist, a cafe owner, Fanny Leary, right on the DMZ of the racial divide. Of course, the notion of food separating people rather than bringing them together shows the reader the type of town that is Persia, Mississippi. Some passages are absolutely golden:

"You have to say this about the cafe: Smells curtained the place. Odors from one room climbed to another. Cinnamon. Frying bacon. Blackberry cobbler, serene as ink. There was a smell in our sheets like bread dough. There were nights when moonlight spilling along the river and through the window gave the wallpaper dimension."

Right away, we learn that Fannie Leary isn't your typical Southerner:

"I for one had often thanked the Lord that I did not have to listen to Brother Works's sermons as long as there was a pot of coffee and a pillowed bed, a newspaper, the loose-sheeted freedom of a Sunday morning. "

However, in the middle of the novel, some Southern soap opera makes its appearance, bogging down the novel. The beginning of The Persia Cafe is interesting, as we are getting to know the characters; the ending, absolutely enthralling, as the plot slowly unfolds; but the middle seems like one story too much, as it focuses on Fanny's alcoholic husband, a Southern stereotype that dilutes the novel's interesting prose and plot. Still, some passages are too good not to share:

"So this too was Will. Pacing there, I had what I thought was a refreshing perspective and saw that the boy I had married had not been true and fine but just a boy. I saw that he had not been mine but merely near, and though he had taken me in his arms he had not fallen for me, but had merely felt that mysterious jolt in the pulse."

Still, as soap operas go, that's not a bad piece. And again, I take you back to food to show you that the author never loses her touch for too long:

"I hung up. It rang again. I picked up and hollered, 'What the hell you want?' A listening silence, then click, the dial tone, a long hollow blowsy tunnel, spit and crackle, like frying eggs."

And this passage also references food, mentioning cats, "their nostrils sniffing the meaty air...soft paws scurried, tiny white fangs tore at bones, backs arched and tails batoned and fur rose and brushed my ankles, making electric shocks."

But the real sadness of the South is that one never truly knows one's neighbor because of the secrets and lies, buried with the strange fruit Billie Holliday sang about. Laws and social mores that constrict human interaction prevent possibilities, and this is where the novel enters a more sophisticated realm:

"And I was still mad at her for being black and being my friend, two things that together she was never supposed to have been."

"Well I had not known. I had not known; how could I in this town where it seemed you could never really know another person? I was alone in the world, in a way that made me feel the dryness in my mouth and the deep ache in my breathing, and the darkness rising through the room, like smoke."

There are two sides to this loneliness. From one perspective, loneliness is good, at least where injustice is concerned--better to be alone than complicit in the company of apathy. Thus, the reader will empathize with Fanny, but also wonder why the situation arose in the first place. Looking around, especially in San Jose, CA, Mississippi just forty five(!) years ago seems like another planet. And it is here that the crux of the novel is revealed. Southern novels seem strange to many readers because they chronicle a bygone era. The key is to remember that this tension did actually exist once upon a time. Without suspending modern day notions, Southern novels make no sense, and we should be glad that reality has to be pushed aside to let Southern literature into our lives.

Still, no Southern novel would be complete without some reference to the thick swampy climate, and I will leave you with that weight:

"I didn't find much to say to that. So I continued to sit there for quite a while, holding Mattie's hand, which she seemed to want, and looking out into the night, which coiled dampsweet and thick toward the river, in the direction of the cafe."