Saturday, January 31, 2009

Religion and Democracy

Several days I posted this quote by an “Islamic Ideologue”.

Democracy is form of Polytheism.
Christians do not think about polytheism that much. Pluralism is probably a more common term.
America is a democracy, but how many gods does America have? Definitely more than one. That makes America polytheistic. The separation of church and state actually legitimises polytheism.

If democracy fosters polytheism, why are Christians not concerned?
One reason that many Moslems dislike democracy is that they see how it has undermined Christianity in America (with a large measure of immorality thrown in). They do not want the same to happen to their religion.

Looking at history, Moslems see that their religion did much better under the Caliphate. They also see that Christianity did better under the British empire. When Moslems see military force being used to establish democracy in Iraq and Afghanistan, they wonder what is the point of using force to advance democracy, if it will just undermine their religion. From their point of view, if you are going to use force, you might as well use it to re-establish the Caliphate, because at least that should protect their religion, rather than undermining it.

Most Americans believe that it is possible to have democracy and Christianity. However, the advocates of this view have to show that democracy does not destroy religion. There is plenty of evidence that Christianity can foster democracy. Unfortunately, looking at America, the evidence that democracy does not destroy religion is not very persuasive.

If democracy fosters polytheism and undermines religion, which one should people who value their religion choose? Many Americans seem to place a higher value on democracy. Moslems seem to be putting their religion.

See Political Polytheism.

Top Twelve

According to MandM, Blessed Economist is just outside the Top Ten Christian Blogs on Public Discourse in New Zealand. I think it comes in as number 12. Wow!

I am not sure what that means. Most readers of Blessed Economist live outside New Zealand, so I presume that the statistics refer to blogs published in New Zealand, rather than those that are read here.

The statistics are based on measures of unique visitors and links as published by Alexa. I am surprised that this site does so well, because I have never encouraged links from other sites. One way to increase the number of links is to develop a huge blogroll. Following the principle of “You scratched my back, so I will scratch yours”, most of the bloggers on the blogroll will place a link back to the blog on theirs.

I have never got into this game, because I am uneasy about linking to a blog unless I have confidence in the material that will appear on it. I prefer to link to particular posts or groups of posts that express views that I can endorse. This probably reduces my scores, but I care more about integrity than publicity.

DANG (12) - Biosecurity

Infectious diseases are another form of external attack, so biosecurity is a big issue for modern governments. The Bible teaches that biosecurity problems are the consequence of sin. They are the first step down a path that leads to invasion, as God sends a biological army, before he sends a human army.

The LORD will strike you with wasting disease, with fever and inflammation, with scorching heat and drought, with blight and mildew, which will plague you until you perish.

The LORD will cause you to be defeated before your enemies. You will come at them from one direction but flee from them in seven, and you will become a thing of horror to all the kingdoms on earth. (Deut 28:22,25).
The solution to biosecurity problems is to obey God’s law. If a nation rejects God, then no biosecurity measures can protect its border from biological invasion.

Friday, January 30, 2009

Reaping and Sowing

The current economic crisis is not the end of the world. It is not the great tribulation.

We are mostly just reaping what we have sown. Businesses that make to many bad decisions eventually fail, as the American auto industry is learning. Banks that buy shonky assets for excessive profits are eventually caught short. Households that borrow too much to speculate in a housing bubble, will often get caught between falling prices and rising interest payment.

Excessive reliance on debt usually has a bad consequence. During the good times, businesses and households used cheap credit to amplify their profits and gains. The problem is that leverage wacks back during bad times. The world that sowed leverage in abundance is now reaping a harvest of leveraged pain.

Unfortunately, the pain of the reaping is being amplified by two negative factors.

  1. A flawed banking and monetary system. Fractional reserve banking amplifies the pain of recession, just as if fed the exuberance of the preceding boom.
  2. A flawed system of government. Democratic governments are expected to solve all problems faced by society, but when dealing with a sick economy, they usually make the situation worse.
The pain that people are feeling is real, but that does not make it into the end of history. We are still just reaping what we have sowed.

DANG (11) - Defence

Some people believe that the state will defend them from war.

There are actually a variety ways of getting defence from invaders.

  1. Local communities can form militias, so they can defend themselves.
  2. Communities could employ mercenaries to defend them. The Vatican City has relied on Swiss guards for hundreds of years.
The government is just one method of getting defence and it is not a very good one.

The modern state is not seriously interested in protecting people. Defence forces plan to protect their capital city and military bases, but the rest of the country is expendable.

Many governments are reluctant to spend money on defence, as there are very few votes to be obtained from better armed forces. The state only defends those who support it and any innocent people are harassed by the state.

The reverse problem is that the modern state also tends to be over-ambitious at getting into unnecessary wars, so we should be cautious about giving governments this power.

Temporary military commanders are a safer method of defence.

Thursday, January 29, 2009

Safe Job

According to television reports, growing economic uncertainty is leading to an increasing number of young people signing up with the army. The young man interviewed said that he was looking for a secure job. His mother told the interviewer that she was glad that her son had found a job that is safe.

People must be really worried about the economy, if being shot at by Pashtun tribesmen in Afghanistan is considered to be a “safe job”.

DANG (10) - Justice

Most people who have something stolen expect two things to happen.

  • They expect the stolen goods to be returned.
  • They expect the thief to get sufficient penalty to stop them from stealing again.
Civil government cannot be counted on to do either of these things. The fines collected by the justice system go to the government. The victim only rarely receives financial compensation for their troubles. This is that this is now accepted as normal.

When criminals are caught, they are locked up in prisons. More and more people are being locked up, but very few are being rehabilitated. Putting people in prison is another expensive solution that does not work. The cost is paid by taxpayers, so prison punishes the victims a second time.

God's law applied by good judges is a superior system.

Wednesday, January 28, 2009

Ending the Depression

The Second World War did not end the Great Depression. The coming of war just replaced one form of misery with another. Unemployed men were moved off the streets into the infantry (where you lived like a dog and were used as target practice by the German and Japanese soldiers).

The Great Depression really ended in 1946 when factories that had been producing tanks and trucks for the military switched to producing cars and those that produced radios and radar for the military started making radios and television for American families. The war had produced a disciplined, hard-working work force so industry became very efficient..

People had saved during wartime, because they were earning, but could not spend due to rationing. After the war they started spending to sustain their growing families.

Production and Consumption grew rapidly together.


This definition bears thinking about.

Democracy is a form of Polytheism.
Any guesses whose words? Not Thomas Jefferson.

DANG (9) - Protection from Theives

A variety of options are available to those who are worried about their property being stolen.

  • Giving possessions away to the poor.
  • Placing all valuables in a band for security.
  • Employing a personal body guard.
  • Purchasing insurance against theft.
  • Putting locks on all doors and gates.
  • Living in a community of people who are honest.
The civil government does not protect our property, because the police will only act after a theft has occurred. If they catch the thief, he will be fined, but the stolen goods will not necessarily be returned.

The modern state claims responsibility, but it is not really interested in solving crime. Despite enormous advances in technology, crime is now worse than it was fifty years ago. A crime will often be too small to justify using police resources for an investigation and prosecution. Police avoid crimes they consider to be insignificant, but every crime is significant to its victim.

Tuesday, January 27, 2009

Education of Boys (5) - My Experience

I goofed around at secondary school, because I wanted to be a farmer and English, French and History did not seem very relevant. The one thing I gained was a love for reading. I was hopeless at sport, so I spent all my spare time in the school library to avoid sporting activities. I read large number of biographies and this inspired me that I could be anything that I chose to be. I left school when I was aged fifteen, because I was bored.

  1. I worked with my father who was a hard worker and a very wise farmer. I learned good work habits from him.
  2. I saw him treat people fairly, even if he sometimes got ripped off in the process. I noted that doing the right thing brings its own reward.
  3. I soon discovered that if I had a job to do, I might as well get on and get it done. No one else would do the job for me, so if I put it off, it would still be hanging over me tomorrow.
  4. Some of the work was physically demanding. It did not take me long to realise that I was not built for physical work and so I started to think about how I could use education to get me into a type of work that would suit me better.
  5. I developed to a point where I was physically stronger then my Father and that gave me a sense of achievment.
  6. My father was always looking for better ways to do tasks. For example when docking lambs, he worked out a way to do each action quicker. We applied this approach to all or tasks and I still find myself doing this.
  7. I realised that there was a lot that I did not know about farming. I started reading voraciously to learn what I needed to know. I discovered that education is interesting when it is relevant to what you are doing.
  8. I worked with a number of different men and observed their attitudes to work and life.
  9. Farming in New Zealand tends to get buffeted by international economic and political events. As I thought about falling prices for farm production, I realised that I needed to understand more about economics and politics, so I decided to go to university and study these topics.
  10. I prepared for and completed a university entrance by studying in the evenings.
  11. My university studies were more effective than my previous experience of education. I got much better grades than I had ever got before. There were several reasons. I was studying topics that were relevant to me. I had learned good work habits and I naturally applied these to my study. I had learned not to put tasks off. I was an adult with a much better understanding of how the world worked.
My education did not finsih when I left University. It has continued every day since. I love learning more and more.

DANG (8) - Protection from Violence

Many people want the government to protect them from violence. However, a variety of options are open to those who feel vulnerable to attack.

  • Staying inside at night and only going out when it is safe.
  • Learning a martial art.
  • Paying protection money to a local gang.
  • Employing a personal body guard.
  • Staying close to a group of people you trust. This is the cheapest option.
The civil government is a poor option, because the police do not undertake to provide protection for individual people. Their only commitment is to catch people who assault others and fine them.

The worst offenders will be put in prison for a time. The existence of the police may discourage people from being violent and may take the more violent people out of circulation. This may assist others, but it does not help the person who is being assaulted. Even if a person being threatened is able to call the police, they are unlikely to arrive in time to prevent an assault occurring.

Those who want government for protection from violence are likely to be disappointed.

Monday, January 26, 2009

Education of Boys (4) - Better Model

We need an education model that combines the power of the information age with the benefits from of youth work activity in traditional societies. Something like this.

  1. Boys should be sent to work when they reached the age of thirteen.
  2. The work should have a strong physical element to absorb the ample energy of youth. Much of the hard work in modern society is done by older men with not education. This work should be being done by young men.
  3. Once they begin working, boys should be expected to cover all their living costs. They would also make a contribution to their family to help with supporting younger children or aging grandparents.
  4. Each boy should work closely with a mature adult with good work habits and communication skills. He would learn about life from listening and observing this older man.
  5. Each boy should find a tutor in his community to teach him how to learn. The tutor would find out what the boy was interested in learning and help him to find the information relevant for his work and life. When necessary the tutor would refer him to another person with more skills in a particular field of endeavour.
  6. Young boys should be encouraged to save a significant share of their income. By the time they are twenty, they should have saved enough for a deposit on a house or to get started in their own business. This would equip him to support a wife and family.
  7. Once they are aged seventeen, some young men may need to participate in a more formal education organisation, like a university or technical institute. This should not be seen as an escape Families would only allow them to take this direction, if they have saved enough to pay for the cost of their education from work.

DANG (7) - Making Laws

Most people believe that we need the government to make laws.

God is our law-giver (Is 33:22). God's Law is the best that anyone can get.

Human laws are limited in what they can achieve. Laws can restrain the worst evil, but that is all. There are more than enough laws in the world, and many are ignored. I doubt that we gain much from inviting politicians to make more laws.

Sunday, January 25, 2009

Education of Boys (3) - Traditional Societies

In traditional societies, boys began working as soon as they developed adult strength. At the age of twelve or thirteen they were expected to begin contributing to the income of their family. This had several benefits.

  1. If they did not work hard, their entire family suffered, so they developed good work habits at a young age.
  2. Young men usually worked alongside other adult men who were a strong influence on their lives.
  3. They learnt to cooperate with a team to get a difficult task done. They see the benefit of submitting to those with wisdom and skills.
  4. Their education was part-time and related to the work they were doing, often in the form of apprenticeship training. Their learning was relevant to their doing, so they did not get bored.
    Hard physical work harnessed their enormous energy to productive purposes. When they finished work, they were usually too tired to get into mischief.
  5. A young man would usually begin working on the drudge jobs that no one else wants to do. He quickly realises that if he does want to be stuck on drudge forever, he had better gets some skills that make himself more useful to his community. Education was the key to escaping from drudgery, not a time of drudgery as it is now.
By the time he is twenty, a young man would have developed good work habits, established some good skills, learned to take responsibility for himself and others. He may have developed some leadership skills and may have built up some savings toward a home or a business.

Nationalising Banks

Bill Bonner has some great economic insights and he writes well. Here is an interesting quotation.

Just a few months go, ‘nationalization’ was practically a dirty word. No one – except a brain-dead Bolshevik – would have thought it desirable for a government bureaucracy to manage capitalism’s money. Now, few people can think of anything better.
Here is another.
Among the queerest financial stories of the last week was the proposal to create a ‘bad bank.’ It hardly seemed necessary. There were already dozens of them.
And the consequences.
But if the 'bad bank' idea could work, why not create a super baaaddd bank? We could use it to get rid of all our mistakes. Writers could unload their bad novels. Businessmen could sweep their errors under its broad carpet. What the heck, let people get out of bad marriages without penalty; the super baaaddd bank could pay the alimony and divorce costs.

The hitch with the bad bank idea is so obvious even a banker could spot it. If the cost of mistakes is reduced, people might make more of them. Like the rest of us, bankers are neither good nor bad, but subject to influence. Unlike metallurgy or particle physics, banking does not have a rising learning curve. It's not science. Instead, it's more like love and gambling…with a circular learning pattern. They learn…and then they forget. They get carried away in the boom upswing; then they get whacked when it turns down.

So let them have a good beating. It will give them of a lesson that will last a lifetime…and give the next generation a solid banking sector.

DANG (6) - Housing

Many governments now provide housing for the poor. There are two problems with the state taking this role.

  1. There is no shortage of people wanting to invest in housing, whereas the state is always short of capital. Instead of wasting its capital on housing, the state should leaving house to the many people who want to invest in housing.
  2. There is a problem of what to do when the recipients of state housing no longer need help. If they are allowed to continue to live on in ther state-owned residences, most state housing will be wasted on people who no longer need it. If they are forced out into private housing, they will be given an economic shock, just as they are getting back onto their feet.
It is always better to help people in privately owned housing as they can then stay on as long as they choose.

Saturday, January 24, 2009

Education of Boys (2) - Information Age

In the information age, the education factory is a redundant technology. Massive volumes of information and knowledge are now available to everyone anywhere. We no longer need a knowledgeable teacher to tell us what we need to know. All that is needed is someone to teach us to search for information and to distinguish between good information and unreliable information. The production line of the education factory does not do this very well, because it is designed for a one size fits all approach, whereas in the information age, education must be personalised to be relevant.

Thirteen Steps to a Credit Crunch

Juan Ramón Rallo Julián describes in plain English the thirteen steps that led to the global economic crisis.

  1. Banks grant new loans on a massive scale and the interest rate drops.
  2. Credit expansion drives malinvestments in projects far from consumption which were not profitable before the credit expansion..
  3. Capital goods rise in price.
  4. Prices climb on the stock market.
  5. The capital structure is artificially lengthened.
  6. Large accounting profits appear in the capital-goods sector.
  7. The capital-goods sector demands more workers.
  8. At some point the rate of growth in credit expansion ceases. The interest rate climbs. The stock market crashes.
  9. Consumer goods prices grow faster than wages, in relative terms.
  10. Accounting profits appear in the consumer sector (demand increases).
  11. The capital-goods sector sustains heavy accounting losses.
  12. Workers are laid off in capital-goods industries.
  13. Bank defaults mount. Marginally less solvent banks face serious difficulties. Credit crunch.
The current situation is precisely this: we face a credit crunch stemming from the creation of bad debt by the banking system (based on hyperabundant money) and the central banks. The recession seems to be inevitable: malinvested assets will undergo a severe adjustment due to the sale or the repossession of assets on a massive scale, which is necessary to repay the debt.
A problem cannot be solved, if the causes are not understood. I urge you to read the full article, particlarly the clear explanation that he gives for each of these thirteen points.

DANG (5) Social Welfare

Some people believe that we need the government to care for us if we fall into poverty. This is a false hope. The state will never resolve poverty, because its solutions create dependence. Governments have put enormous resource into caring for the poor, but their efforts have tended to increase the extent of poverty in the world. Despite 70 years of increasing taxation and hundreds of new social welfare programmes during a period of unprecedented economic growth, the state has failed to solve poverty.

A solution that has failed so consistently should be rejected. We should avoid solutions that take a large share of income to do something so ineffective.

A variety of options are available to people who fear falling into poverty.

  • Insurance allows people to share the risk of irregular events.
  • Insurance allows people choose the level of risks from which they want protection.
  • Families should provide for those in poverty.
  • Deacons in the church will often help those who are poor.
  • Belonging to a caring community is a good option.
  • Someone might feel sorry for you.
The bible provides options that actually work. Families should be the primary means of support. Deacons, poor loans, gleaning and sharing are effective methods for dealing with short-term poverty, if families fail. The gospel is the best solution to long-term poverty, because it changes attitudes and capabilities.

Friday, January 23, 2009

Education of Boys (1)

Modern secondary schools are education factories. They apply the principles of production line management and specialisation that were so successful in the production of automobiles and computer to the education of young adults. Large numbers of students are brought together in one place to achieve economies of scale. Young students are fed into the factory at one end and proceed through sequence of processes until they come out the other end as “well-rounded adults”.

Efficiencies are also achieved by getting teachers and counsellors to specialise. One teacher knows how to tighten the cylinder head and another and another can fit a door, but no one teacher is able to apply every process that is required to educate a student.

Teenage boys have enormous energy that is easily aroused. I am not sure why anyone would want to put a thousand of them together in one place. It is just asking for trouble, yet that is what happens at education factories.

Teenage boys are easily influenced, so they need good influences. Unfortnately the only adult influence in the education factory is the teachers, but they are outnumbered thirty to one. Most teachers are good people, but they are often not the types of people that boys respect as role models. Most of the influencing is done by other boys attending the education factory, and this is often the wrong kind of influence. Boys need to be with adults who can provide a more positive influence.

The education factory applies thee traditional classical education, which includes English literature, mathematics and history. Most teenage boys find these topics boring and irrelevant, and bored minds look to mischief for entertainment.

While they are attending the education factory, most boys do not need to earn their income. Most of what they need is provided by their family or the state. If they participate in part-time employment, they able to spend their earnings on themselves, because they have no other responsibilities. The education factory trains boys to be selfish, idle and careless. They are fully sexed up, but too immature to take responsibility for raising children.

The Death of Capitalism?

Michael Miller of the Acton Institute ends his article with these words.

Socialist economies, cartels, oligarchies, and union-controlled industries where the price mechanism cannot function produce stagnation and create incentives for corruption. It is a false hope to believe that regulation will make everything right. This is a utopian dream that ignores human failing and is the same promise that has been peddled by the socialists.

It is likewise delusional to believe that markets alone are enough. Markets require more than just efficiency; they require virtue. Our Founders taught us that without virtue political liberty could not long be sustained. The same holds true for economic liberty. And yet without economic liberty there can be no political liberty. Like liberty, the market must be moral, or it cannot exist at all.
The entire article is worth a read.

DANG (4) - Education

The state also struggles with education and generally turns out mediocrity and failure.

God has given parents responsibility for educating their children. (Deut 6:6,7). They are free to delegate that responsibility to schools with teachers that they trust. If parents are paying for the cost, they will choose quality education for their children.

When the state controls education, it inevitably becomes more and more secular. Politicians will generally be unable to agree on religious and moral values, so they will settle for secular education. State funded education is generally compulsory, so a world view that is hostile to God is foisted onto Christian families.

When parents fund and control the education of their children, they can teach their children within a theistic world view.

State education uses a factory system. I cannot understand why ayone would want to put a thousand teenage boys together in one place. Parents-controlled education will be radically different. Young adults are capable of work, so their education will take place within a work environment that provides interaction with adults of all ages.

Modern information technology has eliminated the need for teachers to pass information on to their students. Teachers will become tutors who show their students how to find and assess information. They will teach them how to communicate and present information in effective ways.

Thursday, January 22, 2009


We have been enjoying a lovely warm summer.

However, as I cycled to work this morning, I notices it felt a little cooler. I presume that means that President has got global warming under control, as he promised.

I wonder, if he can save the global economy tomorrow?

DANG (3) - For Health Care

People all over the world expect their governments to save them from sickness by spending more and more and more on health care. The problem is that sickness came into the world through sin, so dealing with the cause of sin is the key to healing sickness. Turning back the curse of sin is an impossible task for the state. When one sickness or disease is cured, another that is worse pops up in its place. Governments will always fail to deal with sickness, because they are unwilling to deal with sin, the cause of sickness.

Modern health technology is so incredibly expensive that health budgets are “blowing out”. As aging populations make this problem worse, rationing will be needed. Governments will be unable afford every treatment that is available for its citizens.

Compulsory funding of health care is morally wrong. If I choose to pay for the healthcare of another person, that is fine. However, the government does not have authority to make one person pay for another person’s healthcare. Taking money without consent is theft.

The only effective solution to sickness is the cross of Jesus, because it dealt with sin and removed the cause of sickness. The gift of healing is God’s solution to sickness. It works, because it rolls back the curse.

Wednesday, January 21, 2009

Record Attendance at Worship Service

President worship is alive and well.

Fortunately, the Lord God has his thousands, who have not bowed the knee to the god of political power.

DANG (2) - To Tell Them What to Do?

Does anyone need Government
To Tell Them What to Do?

There are several answers to this question. Most of them show that we are foolish to trust in human government and confirm that it is unnecessary.

Some people believe that we need someone to tell us what to do.
Children sometimes need some to tell them what to do, but generally they have parents for this purpose.

Most adults do not need someone to tell them what to do. Most of us prefer to make our own mistakes. Anyway free wisdom is plentiful in this world. There are plenty of people that we can ask for advice, if we need it.

Christians have God to show them what to do, so they need human government for this reason, least of all.

Tuesday, January 20, 2009

DANG - Does Anyone Need Government

For Salavation

Modern governments are full salvation providers.

Roman emperors took the title saviour, but for them it was just a title. They looked after their loyal elite, but treated the ordinary people as slaves.

The modern government does not take the title saviour, but it has taken over the role by promising to solve every problem that arises. Modern state salvation includes education, healthcare, roads, poverty, crime and defence. In each of these spheres of life, the state provides only very average salvation and not surprisingly, it sometimes treats people as slaves.

Jesus claimed the title saviour by dying on the cross and rising from the dead. He proved that he was saviour by healing the sick, casting out demons and raising the dead. Unfortunately his people do not understand the scope and substance of this salvation. God’s salvation is better than anything than the state can provide.

In the next few posts, I will describe some of the activities that people want Governments do, that are not needed. The full series can be found at Dang.

Monday, January 19, 2009

Savings and Investment (5) - Austrian Solution

Austrian economists propose a different solution. They suggest that the government should do nothing and let the dislocation work its way out of the economy. Unfortunately, if the dislocation has been really severe, businesses in category A and B will have to make massive cuts in production. This will lead to high levels of unemployment that reduces demands for the output of business in category C. Category A businesses will shrink more than is necessary.

Category C businesses, which should be the majority, will have to reduce production, when we really need them to increase production.

The Austrian solution is better in the longer term, as it allows the economy to move towards an optimal use of capital. This is the correct solution, but it may be very painful in the short. Very few people will choose short term pain for long term gain, so few governments will choose the Austrian solution.

I am not sure about which is the best policy. The short term pain of the correct solution may be so awful, that we might be best not to go there yet. Living in comfort has made he people of the west so soft, that we are so grossly unprepared for dealing with a tough economic adjustment. We might be better to live a while longer with suboptimal economic performance until we are ready to deal with real and costly change.

Of course, the Austrians are right. The best that governments can do is postpone the adjustment. We will have to face the day of reckoning eventually.

The real moral of the story is that getting into a situation where the only choice is between painful medicine and medicine that does not work well is foolish. Allowing central banks to distort an economy by manipulating interest rates is a journey down a “no exit” road.

Sunday, January 18, 2009

Savings and Investment (4) - Three Classes

When the central bank sets interest rates artificially low, a credit fed boom will follow, as households reducing saving and make more purchases using credit. Assets rise in price as the cost of borrowing declines. When the credit-fuelled boom comes to an end, businesses can be classified into three categories.

A) Some businesses will have expanded to be far larger than they would be if interest rates had been determined in a free market economy.

B) New business will have emerged that would not exist were it not for low interest rates and the credit-led boom. Their aggressive growth often fuels the boom.

C) Some businesses that would be economic in normal times will have shrunk after being squeezed out by other businesses chasing the boom. Hopefully this is still the largest category.
This suboptimal situation cannot continue indefinitely. It reflects the dislocation of the economy caused by artificially low interest rates. To correct this situation, households will begin cutting back on their purchases, and saving hard to reduce their exposure to debt. Businesses in categories A and B that have been selling to people on credit will have to stop producing stuff that is no longer needed. As they cut back production, staff will be laid off, increasing unemployment and further reducing the demand for goods services.

Mainline economics says that best solution is for the government to increase expenditure to keep businesses in category A and B operating at their current levels. Businesses in category C will be unable to meet the demand for what they are producing.

For the economy to operate in an optimal way, free from distortions caused by government intervention, we really need businesses in category B to disappear and businesses in Category A to eliminate the production driven by the low interest rates. At the same time, we need businesses in category C to expand their production to the optimal level. Alternatively category A and B businesses could start producing the things produced by category C, if they could do it as efficiently.

The problem with the standard solution is that government expenditure leads to businesses just keeps businesses in category A and B doing what they were previously doing. That does not get the economy to the optimal situation. It may get businesses in category C producing more, but not enough, because they would still be getting squeezed out.

The solution proposed by mainline economist just perpetuates the problem. It may prevent short term economic decline, but it results in long term sub-optimal performance.

Saturday, January 17, 2009

Savings and Investment (3) - Producers

The second problem is that when interest rates were set artificially low by the central bank, producers took this as a signal to buy more capital goods. They have already purchased more capital goods than is required for a properly functioning economy. Just as households responded to low interest rates, by overspending on consumption goods, business responded by excessive spending on capital goods.

When demand for consumption goods declines and resources should be moving towards the production of capital goods, the demand for them also dries up, because businesses have already overspent on investment goods. Just when spare resources are freed up for the production of investment goods that would benefit the entire economy, businesses are trimming their investment plans to tidy up their balance sheets.

Fiddling with interest rates causes the relationship between consumption and production and saving investment get out of sync. The economy will go into recession, as demand for both consumption and capital goods declines at the same time.

This is the decline in aggregate demand that is dreaded by many modern economists. What they do not seem to understand is that the lack of demand is the consequence of the distortion caused by the actions of the central bank. Artificially low interest rates create excessive demand for consumption and capital goods that cannot be sustained. Something eventually has to give, and it hits both consumption and investment at the same time.

Modern economists advocate additional government spending to artificially stimulate demand, but this just perpetuates the dislocation of the economy.

Friday, January 16, 2009

Four Bees

The Blessed Economist’s Economic Strategy has been leaked to the media, so we are making it available free of charge to households, CDHB nurses and doctors, businesses and governments everywhere.

  1. Bring down your debt, as fast as you can, while you can (it is probably too late to sell your house, unless you are really desperate and need to beat the next round of price falls).
  2. Build up your cash buffer at the bank, so you can cope with the unexpected.
  3. You do not need a new Ipod (or cellphone, or HD TV or SUV), so Be sensible.
  4. But, if you must go out for a meal, try Korean.

Savings and Investment (2) - Consumers

Artificially low interest rate interest rates cause dislocation in the economy. Households respond by reducing saving and increasing consumption (for most households, a car and a home are consumption goods and not investment goods).

Big spending on consumption goods makes people feel good, but it cannot last forever. When interest rates go up again, personal debt becomes a burden and interest payments take an ever greater share of disposable incomes. Households are forced to reduce spending on consumption goods to get their balance sheets back in shape.

When the demand for consumption goods declines, businesses have to cut back on the production of consumer goods. Ideally, the resources that are no longer needed to produce consumer goods should be switched to the production of investment goods. If this does not happen, the economy will decline as the resources that previously produced consumers will be underemployed.

Unfortunately, two things have happened that make this shift in resources impossible. Firstly, there is no additional savings available to fund any new investment expenditure. Although households have reduced their expenditure on consumption, their surplus income does not go into savings. Most of it goes toward payment of interest. Any surplus not used on interest is not available to fund additional investment, because it must go towards repayment of debt. Although there has been a decline in consumption, there are not additional savings to fund the purchase of new investment goods.

Thursday, January 15, 2009

Savings and Investment (1)

An interesting aspect of a free market economy is the way that savings are matched with investment. Decisions about saving and investment in capital processes are often made by different actors. Investment decisions are made by entrepreneurs and households. Savings decisions are made often made by people and households.

The link between these independent actors is the interest rate. When interest rates rise, people will save more. When interest rates fall, more potential projects become economic, so businesses and entrepreneurs invest more. In a free market, interest rates rise and fall to clear the market and ensure that savings are matched by equivalent investments.

Banks often act as intermediaries between savers and producers. Savers deposit their spare wealth with the bank and receive interest. Producers borrow from the bank to purchase capital goods to increase the productive capacity of their business. Their increased productivity improves living standards for everyone.

This all goes wrong when governments give their central banks authority to set interest rates. A central banker does not know the future, so he do not have enough information to set the interest rate. Following the dotcom crash in 2000, central banks pushed interest rates down, leading to the housing boom and following credit crunch.

Wednesday, January 14, 2009

FoC (8) - Rich Dad Poor Dad

Another example of the fallacy of composition that is ignored, because it applies during good times is the book called read Rich Dad Poor Dad by Robert Tiyosaki. I read this book several years ago. He explained how a person can build sufficient wealth to live without working by investing in real estate. I understood his approach, but I was never willing to commit sufficient energy to following his plan, so I have not followed his advice.

A key part of the Rich Dad Poor Dad approach is that well-chosen properties will increase in value over time. The value of the investment will grow even faster, if the purchase is highly leveraged (most of the purchase price is borrowed). This teaching is true during a time of inflation. It has been true for the last thirty years, because governments have inflated their currencies almost continually.

The fallacy of composition applies to this practice. Leveraged investing in property may be good for the individuals concerned, but it is bad for the economy as the whole. Residential property is unproductive, so speculative investment in property squeezes out investment in productive activities that would benefit the entire economy. Rich Dad activities produce Poor Bad economies.

People who have been successful in property investment should understand that the benefits of leverage (or borrowing) come through government-made inflation. Their wealth is the direct result of government policies that have harmed the economy.
They should also understand that when inflation of the currency stops and property prices begin to fall, the value of the outstanding mortgage is unchanged, so the owner’s equity takes the full hit. In a collapsing property market, leverage amplifies the losses, just as it amplifies the profits during the previous period of inflation.

If governments ever give up inflating their currencies, (there is not much sign of this happening yet), the Rich Dad Poor Dad method will stop working. Everyone who follows his advice should understand the consequences.

The complete series on the Fallacy of Composition is here.

Tuesday, January 13, 2009

FoC (7) -Keynes and Thrift

I have just come across this interesting statement by John Maynard Keynes. In 1931 during a BBC radio talk, he made the following plea.

Therefore, O patriotic housewives, sally out tomorrow early into the streets and go to the wonderful sales which are everywhere advertised. You will do yourselves good – for never were things so cheap, cheap beyond your dreams. Lay in a stock of household linen, of sheets and blankets to satisfy all your needs. “And have the added joy that you are increasing employment, adding to the wealth of the country because you are setting on foot useful activities, bringing a chance and a hope to Lancashire, Yorkshire and Belfast. (Nicoli Nattrass, Jeremy Wakeford and Samson Muradzikwa, Macreconomics, p. 140).
I still think that his paradox of thrift is inappropriate, but the remedy he advocated here is not quite the same as that pushed by mainstream economists. They urge households to increase consumption.

Household lien, sheets and blankets are semi-durable goods. They actually have a long life, if they are not used immediately, so the housewife who followed Keynes' advice was not necessarily increasing her present consumption. She was actually purchasing goods that could be consumed in the future when her current linen had worn out. This could be a form of saving, if she kept the linen for use in the future. She is increasing her potential to consume other goods in the future, at the time when she will not need to buy linen. This is more sensible than just buying non-durable consumption goods.

I do not know if Keynes was deliberate in the example he chose, but his followers do not seem to have noticed the difference.

The other important fact that Keynes noted, but did not seem to understand, was that the prices of household linen had fallen dramatically. They were cheaper than anyone could imagine them being. That should have been enough to get housewives purchasing linen without the encouragement of patriotism by government officials. This is the best solution to a recession. The falling prices enables people to purchase more with their existing income.

Monday, January 12, 2009

FoC (6) - Thrift and Prosperity

Thrift is the key to prosperity, so thrift is good. If households are thrifty during good times, they will not need to go into extreme thrift during bad times. If households are thrifty, everyone prospers and good times do not turn into speculative bubbles that are followed by serious recessions.

Debt is at the root of our crisis. We did not arrive at this bad place because consumers and government were saving too much and spending too little. We will not escape it by carrying on as we did before. There will be no foundation for a lasting recovery until Britain rediscovers the virtue of living within its means.

I despair when retailers say that "the downturn in spending is irrational”. No, it's not. People are steering away from the road to ruin. Shopkeepers can no longer expect customers to sacrifice themselves to rescue corporate profits.

Encouraging another burst of mindless consumption, without significant increases in productivity, can, perhaps, palliate short-term financial stress. But in the end, when the drug of excess runs out, the patient is wrecked. (Jeff Randall, Daily Telegraph).

Simple logic would dictate that excessive spending and loose lending standards caused this crash, so excessive spending and loose lending standards cannot possibly cure it. Indeed it is axiomatic that the problem cannot be the solution (Mish Shedlock).
Widespread thrift is only a problem when it follows a consumption boom fostered by foolish bank lending. In a free economy, different people will be in different situations. Some will be at a stage where they need to save for the future. Others will have things they need to purchase. Savers and spenders will generally balance each other out as interest rates adjust to clear the market.

Greg Boyd and Philosophy

For those of you with a philosophical bent, Greg Boyd has some interesting posts on the influence of the Plutarch’s warfare worldview.
Part 1
Part 2
Part 3

He shows how this influence led to a false understanding of God's nature and confusion about the cause of evil in the world.

Sunday, January 11, 2009

FoC (5) - Thrift

The paradox of thrift is an example of a wrong application of the fallacy of composition. Many economists claim that personal thrift harms the economy during a recession. If households stop spending, the reduction in aggregate demand slows the economy further. Some people lose their jobs and everyone is worse off. The solution is government spending. Keynesian economists urge governments to increase spending to compensate for household thrift. However, government spending is often wasteful, so this solution does long term harm to the economy.

The same economists suggest that governments should implement policies that will encourage household spending and discourage saving. The problem with this approach is that there can be no investment in capital goods without savings, so policies that discourage savings eventually reduce investment, which harms the economy in the long term.

The fallacy of composition should really be applied during the boom that precedes the recession. The real problem is not the “paradox of thrift”, but the “predicament of debt”. However, there is no “predicament of debt” in economic theory, because economists are not interested in the real problem. Most prefer a theory that justifies government intervention in the economy, because interventionist governments need more economists to advise them.

The reason that households need to slash spending during a recession is that they have overspent during the prior good times. When central banks reduce interest rates to strengthen the economy, households take advantage of cheap interest rates to buy goods on hire purchase and credit cards. They increase their mortgages and buy houses to take advantage of the increase in house prices. This is the predicament of debt. Massive increases in personal debt allow people to improve their lifestyle, but this is bad for the economy, because speculative bubbles and reduced investment in productive assets eventually produces a recession.

This is the real fallacy of composition. Increasing debt may be good for businesses and households, but it bad for an economy. Therefore instead of taking action to counteract thrift during recessions, governments should avoid policies that encourage excessive spending and debt during the good times that precede and cause the recession. Thrift is only harmful during a recession, if there has been a lack of thrift during the good times.

The complete series on the Fallacy of Composition is here.

Saturday, January 10, 2009

Bank of England

The Bank of England has reduced the bank rate to 1.5 percent yesterday. This rewards the frivolous borrowers who caused the current financial crisis, whereas prudent people who saved for the future are punished by declining interest rates.

The bank’s policy will eventually produce inflation, which will wipe out the debts of most of those who have borrowed. They will look back and think how wise they were. Those who saved will see their value of their savings eroded away, and wonder what they did to deserve it such harsh treatment.

Ehud Olmert on Peace

The Financial Times quotes a statement made by Israel’s outgoing prime minister Ehud Olmert last September.

Israel will never turn armed might into strategic security. If need be, it could win a war against all its enemies combined. But if it wants peace it must face the decision it has avoided for 40 years: withdrawal from the occupied Palestinian territories. Military victories and land grabs are futile. Security will come only with political resolution.

War does not Work (4) - Siachen Glacier

Eric Margolis tells the story of a ridiculous little war over the Siachen Glacier in the area where the borders of India, Pakistan and China meet on the slopes of the Himalayas. The altitude is so high that the air is almost to thin to breath. Soldiers who spent too long there are at risk of going blind or suffering from altitude sickness. Access is so difficult that only a few hardy, experienced mountaineers have ever been there. Yet the Pakistan and Indian armies moved into the area and fought a mini war to gain control of the region. They built rough tracks up into the mountains, pulled their weapons and started lobbing shells at each other.

The native people who do live there have no connection and no allegiance to any of the governments that sought to control their villages. Life is tough at this altitude, so they mostly just got on with the struggle to survive and ignored the soldiers. The armies did nothing to relieve their poverty and sickness.

What was the point of fighting over an area where it is nearly impossible to live? What is the point of maintaining permanent military bases at 20,000 feet. What was the point of spending so much money on a pointless war, when many of their people are living in poverty? Political posturing, I presume?

Siachen was another war that did not work.

Friday, January 09, 2009

War does not Work (3) - Afghanistan

War will not work in Afghanistan. I cannot believe that American mothers are happy for their sons to die in such a pointless war.

I have been reading some history of Afghanistan over the past few days. The period after the Soviet invasion at the beginning of the eighties is intriguing. During their occupation the Russians killed between half and two million Afghanis. It is not surprising that they were hated.

The mujahedeen rose in rebellion, but their situation was futile until the gained support from the Pakistan security services (ISI). They became more effective when the CIA and MI6 started training the mujahedeen and Saudi Arabia funded weapons imported from China.

One important development was the International Brigade, a group of young Moslems from all over the Middle East who came to support the Afghans in their struggle against the Russians. They were trained and equipped by the CIA. Among them was Osama bin Laden, who came from Yemen. He was trained by CIA operatives to fight against the Russians.

The turning point in the war came when the US supplied stinger missile launcher to the Mujahieen and ISI operatives trained them how to use them. This neutralised the Russian fighter and helicopter support, which had give them superiority. Within a couple of years the Russians withdrew from Afghanistan and the Soviet Union collapsed.

After the war most of the International Brigade left Afghanistan and become key fighters in hotspots all over the Middle East. Osama bin Laden remained in Afghanistan and started Al Qaida. Training your enemies is really clever.

I am not sure why the United State is now fighting in Afghanistan. I presume they are supporting democracy, but western democracy does not work in a place with such diverse cultures.

Afghanistan is divided through the middle by high mountains at the western end of the Himalayas. The people to the north of the mountains are Tajik and directly related to the people in the north. The people to the south are the Pashtun. During the nineteenth century, when Russia was pushing south, the British were worried about the security of the Indian empire. They created Afghanistan as a buffer between the Russian and British empires, by pushing two different tribal groups into one nation.

Worse still the boundary between Afghanistan and the Indian empire left half of the Pashtun people on the British side in what is now Pakistan. Putting the border right through the middle of a people group is not clever and is one reason why the Pakistan is so unstable today.

The government of Afghanistan that was set up after the war with Russia is dominated by Tajik warlords who fought against Russia too. Many of them are corrupt, some are drug dealers and others are enriching themselves by creaming of the foreign aid money. The Pashtun, who are the largest people group in Afghanistan, are mostly excluded from the government. I do not understand why the United States and Britain are fighting to support a corrupt government that allows one tribal group to profit at the expense another. That policy will never produce peace.

Some Americans think that they are fighting against Al Qaida. The problem is that the Taliban is not the same as Al Qaida. Al Qaida consisted of only a few hundred people and almost none of them were Afghanis. Most of those few hundred people are now dead or have escaped through Pakistan. The centre of gravity of Al Qaida has now moved west to Iraq and beyond, so Al Qaida cannot be defeated in Afghanistan.

The Taliban is different to Al Qaida. It is a Pashtun movement that emerged during the war with Soviet Union when the Russian were attempted to impose atheism onto Afghani culture. The Afghans were mostly only cultural Moslems, but they did not want to be atheists. The Taliban became more fundamentalist as their resistance to the atheistic Russians hardened.

The Taliban protected Al Qaida while they were useful to their cause, but the Pashtuns are independent people who do not want to be ruled by foreign Arabs any more than they wanted to be ruled by Russians or Tajiks.

The Taliban have grown in popularity in the southern part of Afghanistan for three reasons.

  1. The Taliban is the only group pushing Pashtun cause. The Pashtuns are tired of the corruption and lawlessness of their government.
  2. The Taliban is Moslem movement and not atheistic or Christian.
  3. The Taliban are resisting the invaders. The Pashtun people have a long history of attacking invaders, so the Taliban is just doing what the Pashtun people have always done.
The Taliban is not a nice group and I would not like to be under their control. However, nasty religious groups exist all over the world, but that is not a reason to go to war with them. Religious movements cannot be changed by Thunderbolt fighters and Hawk helicopter's. Afghanistan is a desolate place with very little strategic value. I cannot understand what the American military expects to achieve there. This is another war that will not work.

War does not Work (2) - Unmerciful Servant

The sad thing is that war will not work for Israel either. They will win this war, and more wars, but these wars are corrupting the Israeli soul. The problem for a nation founded by war is that a warring spirit somehow gets a hold on the people’s hearts. This seems to have happened in Israel. When the leaders of a nation time a war to help their election prospects, something is dreadfully wrong. Political leaders who claim to be morally superior while concentrating 1.5 million Palestinians behind barbed wire in Gaza and firing missiles into the prison when they cause trouble are on a slippery slope.

God's call on Israel has not been revoked. That gives privilege, but it also means that they cannot behave as other nations. If their government thumbs their nose at God's standards, they will all eventually reap the consequences. Unfortunately, they are not helped by confused Christians who think that supporting a secular-humanist, socialist, often corrupt, usually militaristic government is the same as blessing God's people.

I am reminded of the parable of the unmerciful servant.

Therefore, the kingdom of heaven is like a king who wanted to settle accounts with his servants. As he began the settlement, a man who owed him ten thousand talents was brought to him. Since he was not able to pay, the master ordered that he and his wife and his children and all that he had be sold to repay the debt. The servant fell on his knees before him. 'Be patient with me,' he begged, 'and I will pay back everything.' The servant's master took pity on him, canceled the debt and let him go.

But when that servant went out, he found one of his fellow servants who owed him a hundred Denarii. He grabbed him and began to choke him. 'Pay back what you owe me!' he demanded. His fellow servant fell to his knees and begged him, 'Be patient with me, and I will pay you back.' But he refused. Instead, he went off and had the man thrown into prison until he could pay the debt. When the other servants saw what had happened, they were greatly distressed and went and told their master everything that had happened.

Then the master called the servant in. 'You wicked servant,' he said, 'I canceled all that debt of yours because you begged me to. Shouldn't you have had mercy on your fellow servant just as I had on you?' In anger his master turned him over to the jailers to be tortured, until he should pay back all he owed (Matt 18:23-34).
The parable shows that people do not always learn from their own experience in their treatment of others.
Those who are bullied often go on to bully others. Mercy does not always lead to mercy.

The Jewish people received terrible treatment under the Nazi regime in Germany. They were imprisoned and powerless in lands where they were unwanted.

Now the boot is on the other foot and Israel is the strongest military power in of the Middle East. The people of Gaza are imprisoned by Israel in the land where they were born, but are now powerless and unwanted. Given that the Israelis know what it is like to be unwanted and imprisoned, I would expect the people of God to behave differently.

I can understand how this happened. When the Jewish people escaped from Europe, they resolved to never again be in a position where they could be bullied. Unfortunately, to get that place, they have had to become bullies. They have escaped from tyranny, but they are now behaving like tyrants. They have morphed from victim to bully in two generations.

The current Israeli regime will continue to live by the sword, but they will not obtain peace, and will eventually die by the sword. The irony is that they will be invaded, not by the neighbours they fear, but by one of their friends, which eventually gets exasperated with supporting and financing their militaristic shenanigans.

The violent men among your own people will rebel in fulfilment of the vision, but without success….

The invader will do as he pleases; no one will be able to stand against him. He will establish himself in the Beautiful Land and will have the power to destroy it (Dan 11:14, 16).

Modern Jews trust in a militaristic and socialistic state. They believed that they would only be safe in their own nation. This is not true.

The time will come when Israel will be a dangerous place to be. Life will become very insecure, as the militaristic, socialistic, secular state collapses. The only safety will be trust in God.

For more see Whats Going On.

Thursday, January 08, 2009

War does not Work (1) – Hamas

Hamas has a lot of justice on its side in the current dispute.

The Palestinian refugees in Gaza were victims of injustice. They lost their homes and farms to make room for the new Israeli nation. The Jews were tormented by the Europeans for over hundreds of years, but the Palestinians paid the price for a solution to the Jewish problem, while the Germans still have their homes.

Hamas is relatively free from the corruption that permeated the leadership of previous Palestinian organisations. Whereas the leaders of the PLO and Fatah used their positions to enrich themselves and their families, Hamas have mostly been successful in getting aid to the people who need it. Their effective system social of social support is one reason for their popularity.

Unlike most modern governments, Hamas won a democratic election that was not rigged in their favour, and despite American funding and Israel television support for the opposition.

Israel has kept a chokehold on Gaza by limiting trade and imports of fuel and food. Electricity supply is intermittent and many children are malnourished. I presume a people under siege are entitled to defend themselves.

Hamas established a ceasefire for most of 2008. This ceasefire was broken first by the IDF in June 2008, when an elderly Gazan farmer was injured by Israeli rifle fire.

The ceasefire was killed at the beginning of November by an Israel airstrike that killed four people in southern Gaza, while Americans were to busy voting to notice. Hamas responded by resuming the fire rockets at Israel.

Unfortunately, justice does not guarantee victory.

Launching rockets against Israel was a foolish mistake. The reality is that Palestinians in Gaza will never take back their homes and land by military means. Israel has the most powerful military machine in the Middle East. They made fools of themselves in Lebanon in 2006, but they are not going to be beaten on their home soil. There are only three nations in the world that are capable of invading Israel and none of them will support the Palestinians.

Whatever the justice of their situation, attacks on Israel will only produce further disasters for the Palestinian people. This is the reality of war. Skinny people should not pick fights with bullies. Weak people should not start wars with strong nations. War is a futile option when your enemy is more poweful than you.

Sometimes the better course is to walk away from injustice and wait for justice in heaven. Reality dictates that the Palestinian refugees will never return to their homes in Israel. Clinging to that hope just locks them into the past that has already disappeared. Their only viable hope is to start building a new life in Gaza where they now live.

Hamas would be wiser to focus on building up the economy of Gaza and building a better life for their people. That will be difficult as Israeli control will continue to be suffocating. I cannot see the Israelis allowing them to establish an airport or seaport in the foreseeable future, so trade will continue to be different. However, despite the obstacles, a strong economy is a better hope than futile wars.

I suspect that they will need to know Jesus of Nazareth to choose that hope. I wonder what would have happened, if a tenth of the Christians who visited Israel had visited and served in Gaza instead; if a tenth of the money that has gone to supporting Israel had gone towards Christian missions in Gaza. The situation might be quite different from what we are seeing today.

For God so loved ?....

Wednesday, January 07, 2009

Chris Vallotten - Transforming Culture

I have just listened to Kris Vallotton talking about leadership (Serpents and Doves) at Bethel Church in Redding CA. Using Daniel as an example, he said,

If you don’t have real signs and wonders, you will end up with picket signs.
That was good. Kris then talked about how Christians are called to influence nations and transform cultures. I really like the way he is getting stirred up about the Kingdom of God and is moving away from Jesus is Coming tomorrow escapism. He has some good great insights, even if he sometimes confuses the Kingdom of God with American culture. I am not too worried about that, because he is a man who listens to God and has a heart to go where he leads. He will eventually get there.

Kris has one important thing right.
Great leaders understand that real change can only take place when people are transformed from inside out, not from the outside in.
This quote is true and really important. Unfortnately Kris used the situation in Iraq to illustrate his teaching in this way.
The Iraqi war taught us the hard way that displacing an evil dictator is not nearly as hard as replacing him. We overthrew Saddam in thirty-seven days and declared victory on a battleship, but we have spent several more years and the lives of countless soldiers trying to establish democracy in a country that has only known tyranny for hundreds of years… Often people who are liberated after being controlled all their lives do not know how to behave in culture of freedom and soon create another prison for themselves.

We underestimated the nature of transformation. We thought that if we freed the people of Iraq, they would act free and they would want government that gave them choices. What we did not realise is that when people live under tyranny for generations, they know no other way. We underestimated what happens when a tyrant runs a country and people don’t get to think for hundreds of years. And suddenly you release people into governing themselves for themselves by themselves,
The first sentence of this quotation is true, but the rest of the quotation is quite patronising. Saying that the Iraqi people have not thought for a hundred years is unfair. I am sure they did a lot of thinking about what they wanted in place of Saddam Hussein. Some of their thinking is obvious.
  1. The Iraqis do not want a government imposed by an American invader. That is just swapping one tyranny for another. They do not want a president who is an American puppet. They want to choose their own method of government, whereas many American leaders assume that they know what is best for Iraq.
  2. The Iraqis want a government which is influenced by their religion. They do not want a secular government like the see in the United Sates. They see no evidence that America has worked out how to integrate church and state without the church becoming the handmaiden of the state. This is a challenging issue that Christians have not resolved yet. It is even more difficult when the boundaries of your nation include three strong and different religions. Democracy is not the solution, because it just results in one religion dominating the others. That is not what the people of Iraq want.
  3. A government that does not takes into account the strength of family and tribal relationships will not work in Iraq. Most Americans do not have a clue about how this could work. This is odd, because reading Deuteronomy, I find that God is really into tribal government. Democracy is not the solution, because it gives the largest tribe power to control all other tribes. This what Iraqis really fear and is the reason for much of the current fighting.
Kris tends to equate democracy and freedom.
Democracy emerges out of the Judeo Christian ethic, which values freedom above religion and highly esteems religion over control. The highest core value of democracy is a freedom that transfers power from a dictatorship to the people. The greatest challenge of freedom is teaching people who lived in virtual slavery how to make healthy choices for themselves by themselves. Free citizens are given the right and the responsibility to make up their own minds, to decide who is going to lead them and to vote for laws that will guide their society.
Freedom is not the same as democracy. Hitler was elected to power in a democracy. In a tribal culture, democracy destroys freedom by giving one tribe dominance over all others. America has democracy, but is losing freedom as people look to the government to free them from the credit crunch. Many Americans will choose political slavery for the sake of economic prosperity.

Kris then makes this great statement.
You can bomb people into submission, but people are actually changed from the inside out. You do not transform people by scaring them into a new behaviour. The greatest battle is not being fought in the streets of Baghdad, but is being waged on the battlefield of men’s hearts. The future of Iraq will be determined by the culture that is cultivated inside the souls of people.
Unfortunately, because the American military and political leadership assume they know best, they want to graft American democracy into Iraq. I suspect that they are incapable of helping the Iraqis develop a culture of government that will work in their environment.

Kris does understand the keys to changing culture.
When you love your enemies, you destroy your enemies. We went into Iraq, and capture Iraq, but we have not captured their hearts yet. The battle for Iraq or Afghanistan will not be won on the streets of their cities. The real battle is on the road to their hearts.
Having said this he still supports the war in Iraq, presumably because he thinks it necessary to protect America from terrorism (which is surprising given that the 9/11 was mostly organised in Hamburg Germany).

Kris ends with four strategic keys. Here are three.
We can stand strong in integrity without putting it on everyone else. Daniel did not make the king eat vegetables. He did not mock meat eaters. You can keep your own convictions and be a message instead of preaching a message that is not really a message at all.

You can honour people without agreeing with them. When people know you value them, you can influence them.

The world has heard our message. They are waiting for us to become it.

Daniel rocked ancient Babylon. He did not beat them with military might. Instead four boys tore down Babylon from the inside out.
Good stuff. Let’s start doing it.

Young Boy

What will become of this young boy? What are his dreams?

There is no point him growing up to be a businessman, because it is impossible to do business with irregular electricity supplies and no potential for international trade.

He cannot emigrate, because no country in the free world will admit him.

I suppose he could get educated, but what would he do with learning.

The chances of him becoming a Christian are quite low. He already hates the Christians who supplied the bombs that smashed the building behind him.

Who would bother taking the gospel to him?

I would not be surprised if he learned how to make rockets and fire them over the border. That might lead to an early death. But he might feel that is better than dying slowly in Gaza?

Tuesday, January 06, 2009

FoC (4) - Cost Cutting is Good

The idea that cutting costs is dangerous is the real fallacy. A good business manages costs at all times, regardless of whether the market is weak or strong. Reducing costs allows prices to fall making everyone better off because they can buy more.

In a free economy, some businesses will perform better than others. Producers who are not able to operate as efficiently will close, if they cannot catch up. The more efficient producers will be able to purchase their resources and recruit their clients. If one business has to put off staff, more efficient ones will take them on. Cost cutting pushes resources towards the most efficient producers.

Retaining staff that are not needed, buying inputs that will never be used, or producing goods that cannot be sold, never makes sense. Using the fallacy of composition argument to suggest that uneconomic producers should be encouraged to keep producing is the more serious fallacy.

Reducing costs and staff only becomes a problem after bad government and banking policies have created a false boom the economy. When this false boom grinds to a halt, every business is forced to cut back at the same time. This is not a fallacy of composition, because the uneconomic activities must be eradicated to strengthen the economy. The sad thing is that the cut backs would be unnecessary, if the government and the banks had not collaborated to produce the false boom that had caused the problem.

General Motors provides a good example of this fallacy. For the last few years, GM has been producing cars that cannot be sold at a price that covers the cost of production and a reasonable return on capital. To solve this problem, GM is now selling cars at zero percent interest. The danger is that the wrong solution to a problem can often make things better in the short term. Marketing cars with zero percent finance may sell cars in the short term, but it does not deal with the underlying problem. GM will only become a benefit to the American economy, if it can start producing cars that people want at a price they are willing and able to pay. Government assistance that enables GM to keep on operating in an inefficient way only puts off the evil day.

Silence Speaks

I am on vacation and the news coverage is not very good. As far as I can tell, something like this happened towards the end of 2008. George had been holed up at Crawford working on a solution to the global economic crisis. He hates failure, so he could not bear the thought of handing over to Obama before the problem was solved. Time was running out, so he needed something good real quick.

“I’ve got it”, he said to Dick and Condi at breakfast one day just before Christmas. “The economists all say that the Great Depression was cured by the Second World War. We need another war.”

“You can’t start a war without asking Obama first”, said Condi, “and he won’t give approval.”

“What about Iraq?” said Dick. “Couldn’t we just stir it up again?”

“No!” said George, abruptly, looking pleased with himself. “I’ve got a much better idea. Far better to get one of our fully-owned subsidiaries to start the war. That way we get the benefits, without copping the blame.”

“The Israelis are itching for another war. Since they got a bleeding nose in Lebanon, they have been looking someone easier to beat, so they can prove their masculinity. And there is an election coming up. You can’t win an election in Israel without winning a war first. They’ll be up for it.”

“Oh No!” cried Condi. “Not Iran. Think about the price of oil. Think about your shares in Texacon.”

“No", snapped George, “this is much better than that. They are going to attack Gaza. This is perfect. The Palestinians are all terrorists now, so they need to be beaten down. Who cares if a few of them die? They are descendants of Ishmael, so they won’t feel pain anyway.”

“Anyone who seeks peace in the Middle East might be the antichrist, so no one will seriously oppose Israel. Jimmy Carter might get stirred up, but he is to old to be the antichrist”.

“Just think of the benefits.” George was getting eloquent now. “Every bomb and missile dropped on Gaza will have to be replaced by the US armaments industry. A boom in that industry will solve unemployment in the rust belt".

“Some people are saying that the Israelis haven’t got the guts for a ground invasion, but I told them to have a crack. If they go in on the ground, they are sure to wreck hundreds of tanks and armoured vehicles that will have to be replaced by Government Motors. If GM can be kept busy producing military vehicles, the auto industry will soon be running at full throttle again.”

The evangelicals will be pleased”, said Condi, ”because a war over there always brings the second coming closer. Think about that. They will be raptured out before their Adjustable Rate Mortgages re-set at higher interest rates. Another perfect solution”.

“Wow!” said Dick. “That’s brilliant. Those bunker bombs we sold the Israelis will wreck hundreds of apartment buildings and offices. The UN will have to replace them, so Halliburton will get some great contracts. This work could get the US construction industry going up again”

“God will be happy to see the Israelis give those Philistines another hammering”, said George smiling.

“Don’t you mean Palestinians”, said Condi.

“Whatever?” George replied. “He will still be pleased. Remember how Karl Rove said that it is expedient for one people to die so that the entire world economy does not perish”.

“Hold on” said Dick, getting practical. “Where will the money come from?”

“Don’t worry about that”, said George replied. “Hank has $500 billion left over from rescuing the banks. It’s a waste of time giving any more to them, because they just add it to their reserves and sit on it. That helps no one.”

“Think about this. We give those billions to the Israelis. They use it to buy missiles and bombs from our armaments industry. The armaments people pay their staff, who will go to Walmart and spend billions on Easter presents made in China. Walmart pay billions to the Chinese manufacturing industries to replace what they have sold. The Chinese government creams most of it off the top and puts $500 billion into US treasuries”.

"That’s brilliant", said Condi. “We solve our unemployment, and kick start the Chinese economy, and the money ends up back with Hank where it started".

“If the world economy needs more stimulus”, added George, “we can get the Israelites to cut off food, water and electricity to the Gaza penitentiary and get them stirred up to do something stupid, so Israel can pummel them all over again. We can play pass the parcel with the $500 billions until the world economy is really humming. That’s better than giving it to those dreadful banks.

“Keynes claimed the best way to end a depression is to buy hundred dollar bills in the sand and let people search for them. I thought about that option, but it would make us look stupid. Burying people in the sands of Gaza is far more acceptable.”

“But what will all that violence and blood do the spirit of the Israeli people”, Condi wonder out loud, but no one seemed to hear.

“The icing on the cake”, said Dick, “is that we win the war of terror. The problem with Iraq is that people have started to believe that suicide bombers and IEDs create more terror than our best military equipment. If we can get some good footage out of Gaza, people everywhere will see that F16s launching US-made bunker bombs can create more for terror than a towelhead with dynamite strapped to his chest. We will prove once and for all that we can create more terror than those bloody Arabs. That will stop them mocking us”.

We could call it Mutually Assured Terror”, said Condi, going into academic mode. ”Soon terrorising governments all over the world will be knocking down our door wanting our weapons of mass terror.”

“Sounds Mad”, said George, “but my presidency will end on a high note. I began it by bringing peace and prosperity to Iraq. I will end it by solving the world economic crisis. Eat that Osama”

“You mean Obama” said Condi, but no one noticed.

"And make sure its all finished before the inauguration", said George. "The image of the presidency must not be tarnished".

Monday, January 05, 2009

FoC (3) - Bad Theory for Bad Times

This fallacy of composition is important for economists. They need to understand how the behaviour of individual businesses and households impacts the economy as a whole. However, there are serious problems with the way that the fallacy of composition is generally applied. The principle is often right, but the context is usually wrong, because economists only bring out the fallacy of composition in times of recession.

Applying this theory during a recession is dangerous in two ways. Focussing on the negative effects of thrift and the flight to liquidity prevents economists from seeing the real cause of the recession. More seriously, the fallacy of composition is used as a justification for government intervention and expenditure. If individuals do what is bad for the economy, then the government must counteract by taking actions that economists and politicians decide are good for the good the economy. Political power is expanded.

Sunday, January 04, 2009

FoC (2) - Examples

What is true at the microeconomic level is not necessarily true at the macroeconomic level. Here are some commonly stated examples.

  1. The best action for a business during a time of recession might be to lay off staff and reduce production. This makes sense for the individual business, but all firms lay off staff, incomes will fall, sales might decline and the recession might deepen. A response that is good for a particular business might be bad for the economy, if all businesses take the same action.
  2. An individual business can increase profits by reducing expenses. However, one businesses expense is another businesses sale, so if all firms try to increase their profits by reducing expenses, they might all experience a reduction in profits, as sales decline.
  3. If large numbers of investors attempt to get out of debt by selling assets. Irving Fisher described this back in 1933, observing that when people who are deeply in debt get into trouble they usually sell assets. He called it a “stampede to liquidity.” Investors dump stocks and property for any price they can get – desperate to pay off their debts before they are dragged into bankruptcy. What is good for every individual investor turns out to be bad for the economy itself. Asset prices fall. Sales fall. Unemployment rises. The slump deepens.
  4. Tariffs can reduce imports providing protection for local manufacturers. However, if every country in imposes trade barriers, world trade will decline and every nation will be worse off. What works for one nation may be harmful for the world economy.
  5. During an economic crisis, a sensible household will reduce spending and save as much as possible to prepare for the uncertainty that lies ahead. However, if all households take this action, sales will decline and businesses will struggle leading to further unemployment. The action is that sensible for any one household harms all households in the economy. Keynes called this the paradox of thrift.
    The paradox states that if everyone saves more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population. One can argue that if everyone saves, then there is a decrease in consumption which leads to a fall in aggregate demand and thus leads to a fall in economic growth (Paradox of Thrift).
    Keynes claimed that thrift is good for an individual, but if everyone saves more, it may cause a recession by reducing consumer demand. He argued that the common assumption that thrift is good for the economy, because thrift is good for the individual is a fallacy of composition.
I will explain in my next few posts why most of these examples are misleading.

Saturday, January 03, 2009

FoC (1) Fallacy of Composition

During difficult economic times, economists usually start talking about the Fallacy of Composition. This concept is actually a principle of logic.

The Fallacy of Composition is committed when it is concluded that what is true of the parts of a whole must be true of the whole, without there being adequate justification for the claim.
Here is an example from mathematics. One and three are odd numbers, so four is and odd number, because one and three are part of four (1+3=4). This statement is untrue, because four is an even number.

In economics, the fallacy of composition takes on a special meaning. The fallacy occurs when economists treatsthe economy as if it were a family or business. This leads to the assumption that a policy that will work for a business will work for the economy as a whole. When an economist just assumes without proof that what is good for a family is good for the economy, the fallacy of composition has occurred.

The principle is that that theories and practices that apply to a family may not be relevant to an economy containing numerous families. Economies work according to rules of economies and not according to the rules that apply to businesses. Something that is good for a business or family may be bad for the entire economy. When economic decision makers interact with each other, the outcome for the whole economy may be different from what was intended by the individual decision makers.

The complete series on the Fallacy of Composition is here.

Dairy Prices

The New York Times reports a huge surplus of milk production that is causing dairy prices to fall rapidly.

But now, demand for dairy products is stalling amid a global economic slowdown and credit crisis, even as supplies have increased. The result is a glut of milk — and its assorted byproducts, like milk powder, butter and whey proteins — that has led to a precipitous drop in prices.
The Agriculture Department has committed to buying 111.6 million pounds (50,000 tonnes) of milk powder at 80 cents a pound, for roughly $91 million.

This is bad news for our economy. Dairy production is to the New Zealand economy what the auto industry is to the United States. New Zealand used to be a country with 3 million people and 60 million sheep, but that has changed over the last few decades, as many farmers have converted from sheep to dairying. Dairy products now account for nearly a quarter of exports.

The collapse in the price of milk powder will have a serious impact on our economy.

Friday, January 02, 2009

Not the Real Thing

The current recession will not bring repentance and revival. A lot of people will feel a lot of pain, but most will continue their borrowing and consumption. The recession will be painful and may drag on for a while, but it will not usher in revival, as some Christian commentators seem to be suggesting.

To bring a radical change of heart and crying out to God, the economy would have to plummet much deeper into depression. A slump on this scale would have to be prayed into being by the church. When David Pawson visited New Zealand in 1982, he gave this challenge.

God wants to bring revival to New Zealand for the first time.
God will bring revival through economic ruin.
He then asked,
Who is willing to pray for economic ruin,
to make revival possible?
The current recession is not the answer to this prayer. How do I know?
  • Few Christians would be willing to pray such a daunting prayer.
  • The church is not ready, because the spiritual commando armies have not been training.

Thursday, January 01, 2009

Still Walking the Dog

The current recession is not the Great Depression over again. People are still walking their dogs.

GDP declined by 30 percent in the early 1930s. A quarter of the population was unemployed. With minimal welfare benefits, many people were destitute and on the brink of starvation. Large numbers of banks failed, robbing many people of all their savings. The share market lost ninety percent of its value. Many farmers walked off their land when they could not meet their interest payments. Many more people lost their homes in the cities.

We are not experiencing anything like what happened in the 1930s. Life is still a breeze compared to those times. People are still walking their dogs and not eating them.