Sugar, Central America, CAFTA and Economics

I am writing “Scheider’s Simplifed Rules for Economics”. The product would be similar to my “Rules for Life”, or my “Rules for Managers”, or even “Rules for Politicians”.

This economics stuff fascinates me, and I am sure that there is a way to simplify the mess and make it comprehensible – but it is taking longer than I want. And my document keeps growing!

Our local paper recently had a nice short piece on sugar subsidies. Instead of a total overview of economics – why not a story at a time? No one is going to read a long thing on “economics” anyway.  This piece in the Wisconsin State Journal is very well done, nice and short, and makes all the key points. SugarSubsidy yields a bitter harvest  I just want to add a bit of framing to it.

When CAFTA was originally proposed, the ONLY benefit that economists in Central America could identify for that region was about 140 added jobs in the sugar industry. Sugar is one of the things that Central America can produce more cheaply than the US. After CAFTA was passed, the sugar industry lobbied our fearless elected leaders to provide them a subsidy. End of the benefit for Central America.

The American farmer can produce rice and corn and beans more cheaply than anyone can in Central America, ship them there, and still sell them for less than the local producers. But sugar – not so.

The way trade works is that when someone can do it better or more cheaply than you can – you should buy it from them. That increases our wealth – all of our wealth. Of course, there may be some people doing this for a living – and this causes a modest disruption in their lives. But for the good of the whole, and to grow wealth for all of us, you should focus those people on doing something else. Help them grow corn, or figure out how to get energy from wind. Subsidizing something that can be done more cheaply elsewhere is called “destroying” wealth.

Any time we restrict trade like this, we all pay for it – all of us – including the people in Central America, or Africa, or elsewhere on the planet. Most directly, of course, you and I in this country are paying a lot more for sugar - $3.5 Billion per year. I would have preferred to have put that money into research into better anything that would help grow the economy and facilitate wealth creation – not wealth destruction. We would have gotten more miles out of subsiding college educations for all of the displaced workers and their kids! And it would also have rewarded those Central American farmers for their productivity.

Do you see how this works? Yes, it costs us something in jobs, yes we need to adapt to that – but NOT doing that would put us back to subsidizing pin manufacturers, or buggy whip makers, or cotton spinning. With that approach, we would all still be farming, just as 97% of us did when this country was founded. Now we can feed the world with 0.7% of us actually farming. With that approach, all of your clothing and fancy gadgets would also cost you a small fortune, because virtually all of them are made elsewhere – increasing OUR wealth. ALL of us.

We are, after all, all in this together. Thank you, Red Green.
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N.B. As my good friend Pat Patten pointed out to me after this was posted, we cannot actually feed the world - we cannot even actually feed ourselves - but you get the point. The American farmer is amazingly productive - which generates wealth for ALL of us.

Conscious Capitalism

I’ve been laboring along here in this blog with issues relating to economic development, and also touching on economics issues. Along the way, I have also been reading a lot about economics. It seems complicated enough – there are all these different schools, and all these economists who never seem to agree with each other. As Harry Truman famously said, I want a one armed economist. They keep saying, on the one hand, and then, on the other hand!  http://www.iwise.com/tFhbr

But as you read more broadly, it becomes clear that there really are some simple things that make up our economic system. I keep thinking it should be possible to reduce this “economics of capitalism” to a few simple concepts that we could teach in grade school, that would help overcome the erroneous ideas most of us are walking around with, which lead to lousy decisions. The lousy decisions happen on a personal level, and most importantly, on the global and national level. Our fearless elected officials are not immune to the errors of the common man in this arena, any more than they are in any other arena. We have lots of lousy economics preconceptions driving national policy all the time.

Along the way, I have found some excellent books and authors that have greatly simplified the ideas of economics for me. The history is almost fun to read in the right light. It is amazing how we got to where we are. And the principles that underlie our economic world do appear to be amenable to human understanding. I’m working on my own “10 rules of economics” – but the publication of that will have to wait a bit.

But I just stumbled on an interview with the CEO of Whole Foods – John Mackay. The company always impressed me, but his ideas are even more impressive. You can watch the video here, and there is also a transcript:
   http://bigthink.com/videos/four-principles-for-successful-conscious-capitalism

What follows is an attempt to reduce his words to an outline format. It helps me to understand it better, and it might also help you. If nothing else, it might persuade you to listen to the talk.

Principles of Conscious Capitalism

He asks us to become aware (conscious) of the principles that support the Capitalistic system. It is not a “free market free for all”, where anything goes, and the strong prevail while the weak perish. Without some basic principles, supported by laws and custom, we have no capitalistic system. You can see the effect in countries that do not support one or more of these principles. Their economies tend to suffer compared to others.

1 The Right to Own Property. Our system is built on this basic principle. People can own property, they can own wealth. It is one of the prime motivators of our system for creating wealth.
2.      The Right to Trade. We must be able to exchange property, or labor, for other property. We enhance wealth by means of trade. The more we can trade, the greater wealth we can create overall. Restrictions on trade restrict our wealth creation. There are short term problems with free trade, and we often resist it because of that. For example, we enact laws which restrict trade in order to try to preserve jobs. But that is really short sided and self defeating. He is right there, but he would need to explain that a bit more to get general acceptance.
3.      The Rule of Law. Just and predictable laws are a basic requirement for any society, but they are especially important in the capitalistic world. They support the basic process of wealth creation.

Personally, I would add my favorite mantra to these basic principles, but he includes it in the next section: “We are all in this together”.

Principles of a Conscious Business

Given the basics of a stable economic system, the next thing is to understand or be conscious of is how a business really works.

1. 1.      A Business Has a Transcendent Purpose. I like the way he does this. No human lives just to eat or breathe. We do need to eat and breathe – but that is not what life is about. Just so, a business does not exist just to make money, or to maximize profits. That is not a HUMAN goal. If making money is the whole deal, then we have a real problem. The purpose of a doctor, or lawyer, or teacher, is not to make money. The profession has a purpose, a goal in society to fulfill. Just so, any business has to fulfill a role in its society. And of course, it has to make money, or at least break even. But that is NOT its PURPOSE! 
2. 2.      A Business Has Many Interdependent Stakeholders. These are its customers, employees, investors, communities, suppliers, etc. There are other, more remote stakeholders as well – unions, government, the world economy, the environment, etc. And they are all interdependent. Focusing on just one of them is not enough. The win / win business model is to seek to maximize the benefits to ALL stakeholders. This is my "we are all in this together". When one of us benefits, the others do as well. When one is hurting, the rest of us pay the price as well. Some are more remote, some nearer - but we are all interconnected in this economic reality. 
3. 3.      A Business Has Servant Leadership. The leaders of an organization are not there to maximize their own personal gain – but the return of all of the stakeholders. They are there to serve the enterprise, not themselves. That is what higher purpose is about. That is what enables a complex, interdependent society to thrive.
4. 4.      A Business Must Create a Culture that supports these principles. All of this does not happen by itself, or by accident. This conscious culture provides the background and the structures that support the higher business purpose.
   

And what do you think?

Poverty, Development and the Future - Garment Industry

Planet Money on Cotton and T-Shirts

OK, I give up. I know that what I write here will have minimal effect on poverty and development opportunities around the world. But sometimes, I come across things that I simply MUST share. This is one. NPR's Planet Money just published a series of videos and articles on how T-shirts are made. It is simply amazing.  You HAVE to watch it, and read the notes.

13 workers in a single cotton farm in the US, generate enough cotton to make 9.4 million T-shirts. That is an amazing story of US productivity. But it is much more than that as we learn where that cotton goes. Watch the videos, but also read the details, please.  Follow the 5 links to see the whole Planet Money story.
 http://apps.npr.org/tshirt/#/title

Planet Money funded this research by selling the T-Shirts! Push the "Begin" button and watch the video. Then read the bit below the video - it has some amazing information. Then - go to the next one. The series follows the cotton from the farm, through all the steps making it into yarn and then t-shirts. There is good and bad - but all thought provoking.

Watch it, read it, and then come back here, please.  Or read this and then go watch it - whatever works.

My thoughts:

The People Part of This is the Best
I hope you watched that part. If not, go back and check it out. You will recall that thousands of workers were killed not long ago when a garment factory in Bangladesh collapsed. And thousands of workers in Nicaragua travel many miles a day for this same kind of opportunity.

US Farming Productivity is Amazing
Not just cotton, but virtually everything. And much of it comes from mechanization and from genetically modified seeds. Virtually all cotton is GMO. And the quality is very high and very consistent.

US Manufacturing Needs Help
You may have noticed that all of the big cotton machines have either German or Japanese names. The tractors on the farm might have been US made - not sure. But not much else was.

Government Agricultural Subsidies Seem Crazy
And you will also note that the cotton industry is subsidized, just as is most of US agriculture. I have a very good friend who is a farmer. He is also amazingly productive. But I really doubt that this amazingly productive part of our economy needs government support to compete with the rest of the world. The rest of the world does it too - but that is no excuse. But  . . . that's another whole story. I would spend the money on research for new industries, new ideas, which see below.

It could be worse.
As noted in the piece, the US was about here in the early 1900s. The minimum wage helped solve some of the problems. We had lots of women working in terrible conditions for a meager living. Bangladesh factories are terrible - but they are better than no work, no added income. Columbia's are a clear step up. All of that used to be done here - until the cost of labor went up.

Race to the Bottom
I thought it was interesting that Jockey does not think that there is another part of the world that can make the garments any cheaper! And the current cost of the labor in a $12 shirt is only about $1. So they may be able to raise their wages and not lose the business. But . . . I would bet a dollar that parts of Africa will eventually get some of this. All they need is a bit more education, and a more stable political world. We can bemoan the low wages, but that is not likely to change until the poorest of the poor are making a living wage. That will change everything. We really are ALL in this together. Our consumer economy is constrained and helped by the poorest of the poor.

There is Hope
Watch the last segment. Look at the people who work in this world. We were there too - we can all do better.

Ultimately - NO labor, NO Wages.
As the cost of producing T-shirts does eventually go up - what is the next logical step? That garment factory is not the major cost of the T-shirt. But even so, the wage will eventually rise. The other parts are already highly automated: the cotton, the shipping, the cloth making. Those things are about as automated as they can get - albeit I am sure there will be more improvements. What would it take to build an intelligent gadget that could cut and sew and assemble T-shirts without a single human hand involved? I am quite sure that the technology is very doable at this very moment. It is just waiting for the cost of production to rise to the point that the shirts can be made completely by machines. Lots of T-shirts - but very few people able to buy them!

The Solution?
I don't have one.  But I do have some thoughts.

I think we have to get past the idea that the wealth which we generate can only be shared by those who invest their capital or labor to produce it. Eventually, our automation, our ingenuity, our productivity will reach the point where there will not be enough jobs to go around. We will still create the wealth, the products - but very few people will be able to buy them. We have to let go of the idea that participation in our wealth generating engine has to be based on employment. The wealth that our world creates really does belong to ALL of us - not just those fortunate enough to get the education, the job, or to live in a stable society where things actually work.

But we still want a competitive, capitalistic based economy. We still want the best and the brightest to to generate wealth, to solve the problems of health and disease, and to create new engineering, etc. As they continue to do this, we are all enriched - so let's keep motivating them.

BUT . . . let us also create the mechanisms needed to really SHARE that wealth. We need better education, we need arts, we need scientific research, we need people to be able to buy food and clothing and gadgets! A guaranteed minimum income seems to me to be the natural outcome. This year, Switzerland is voting on a measure to guarantee $2,800 / month to every citizen. They plan to pay for it by reducing government programs for the poor. Both progressive and conservative politicians support it, but for different reasons. Imagine that!
 http://hereandnow.wbur.org/2013/11/27/swiss-guaranteed-income

A minimum basic income has been supported over the years by both the left and the right. See here for a bit more history of the idea and current programs. http://www.basicincome.org/bien/index.html.

This is not a pipe dream - we will eventually realize it.

What do you think?