Some Chicago Boyz know each other from student days at the University of Chicago. Others are Chicago boys in spirit. The blog name is also intended as a good-humored gesture of admiration for distinguished Chicago School economists and fellow travelers.
Paul Midler began his academic career in Chinese history and literature and then went to Wharton for an MBA and further graduate work in East Asian business. Fluent in Chinese, over the past ten years he spent his time in southern China working as a consultant to American importers and was witness to the economic boom that’s amazed the world.
This book, however, is about all the other things he witnessed … the methodical transfer of technology and profit to Chinese manufacturers and the methodical transfer of risk, liability, and innovation/marketing/design costs to American companies. “Poorly Made” is a master class in how ill-equipped American companies are to operate in “low circle of trust” cultures … even when those American companies are managed by savvy mercantile clans and even organized crime!
This may seem slightly redundant, in light of David Foster’s post below which inspired me to post this on my own blog, but Lexington Green strongly felt that the point could stand repeating ( or shouting from the rooftops). So, here goes:
The above-market prices, called feed-in tariffs because panel owners feed power into the grid at premium prices guaranteed for decades, are high enough in Italy to generate average revenue of 35 euros ($48) a day for a 100-square-meter (1,076-square-foot) roof, according to Bloomberg calculations.
“The feed-in tariff drives our business plan and profitability,” said de Vergnies, whose plans include two photovoltaic plants in southern Italy that will generate enough electricity for 25,000 homes.
The gist:
The solar industry is “built on subsidies,” said James Britland, an alternative energy analyst at Allianz RCM in London. “This is a non-competitive industry that has to be subsidized.”
The investment capital that’s diverted by taxes into subsidies for politically-correct tech fads, and by investors themselves in response to the distorted incentives created by such subsidies, is capital that doesn’t get invested in productive ventures in biotech, medical devices, etc., etc. Keep this fact in mind the next time you or someone you know needs advanced medical treatment. Those chemotherapy agents and other wonder drugs don’t invent themselves. Fewer of them get invented to the extent we allow our reckless political class to divert precious capital to unproductive solar-energy schemes and other financial sinkholes.
Another example of not thinking through the consequences of the consequences is the standard reaction in economics to Ricardo’s law of comparative advantage giving benefit on both sides of trade. Ricardo came up with a wonderful, non-obvious explanation that was so powerful that people were charmed with it, and they still are, because it’s a very useful idea. Everybody in economics understands that comparative advantage is a big deal, when one considers first order advantages in trade from the Ricardo effect. But suppose you’ve got a very talented ethnic group, like the Chinese, and they’re very poor and backward, and you’re an advanced nation, and you create free trade with China, and it goes on for a long time.
Now let’s follow and second and third order consequences: You are more prosperous than you would have been if you hadn’t traded with China in terms of average well-being in the United States, right? Ricardo proved it. But which nation is going to be growing faster in economic terms? It’s obviously China. They’re absorbing all the modern technology of the world through this great facilitator in free trade, and, like the Asian Tigers have proved, they will get ahead fast. Look at Hong Kong. Look at Taiwan. Look at early Japan. So, you start in a place where you’ve got a weak nation of backward peasants, a billion and a quarter of them, and in the end they’re going to be a much bigger, stronger nation than you are, maybe even having more and better atomic bombs. Well, Ricardo did not prove that that’s a wonderful outcome for the former leading nation. He didn’t try to determine second order and higher order effects.
If you try and talk like this to an economics professor, and I’ve done this three times, they shrink in horror and offense because they don’t like this kind of talk. It really gums up this nice discipline of theirs, which is so much simpler when you ignore second and third order consequences. The best answer I ever got on that subject in three tries was from George Schultz. He said, “Charlie, the way I figure it is if we stop trading with China, the other advanced nations will do it anyway, and we wouldn’t stop the ascent of China compared to us, and we’d lose the Ricardo-diagnosed advantages of trade.” Which is obviously correct. And I said, “Well George, you’ve just invented a new form of the tragedy of the commons. You’re locked in this system and you can’t fix it. You’re going to go to a tragic hell in a handbasket, if going to hell involves being once the great leader of the world and finally going to the shallows in terms of leadership.” And he said, “Charlie, I do not want to think about this.” I think he’s wise. He’s even older than I am, and maybe I should learn from him.
In this article titled “Why Many Investors Keep Fooling Themselves” by Jason Zweig from the Wall Street Journal, Mr. Zweig does an excellent job of explaining why individuals assume that they will receive a rate of return that is too high, which means that either they are not saving enough to meet their goals or that they are taking too much risk of running out of money.
This post describes what the rate of return means in practical terms, and why it is important.
One of the core elements of investing is the assumed “rate of return”. Along with your base investment (or amount that you are periodically adding, say annually), your time frame (number of years out you want to go), the “rate of return” is the percentage variable used to determine whether you will have enough to retire and / or meet your needs for a specific goal (such as will you have enough funded to send your child to college).
