John Maynard Keynes, Milton Friedman, and the Robinson Crusoe Economy

Many writings have led most people to believe that, in essence, Milton Friedman (1912–2006) ideologically antagonized with John Maynard Keynes (1883–1946). This simplistic –and inaccurate– perception would lead us to believe that to solve most economic challenges, Keynes would recommend changes in government expenditures, while Friedman would go with monetary way –modifying the money supply, and interest rates levels– both of them almost exclusively recommending the mentioned changes, in the corresponding direction, up or down. While it is true that those two outstanding economist of the 20th century were mostly known for their research and findings in the mentioned areas, the scope of their vision was well beyond their major area of expertise. Both were very bright economists and, as such, very well versed on the complexities of any economic system. In the final analysis, Keynes’s and Friedman’s way of focusing the economy are actually two different –and indispensable– sides of the same pyramid, and so, are not necessarily antagonistic by definition. Furthermore, in most cases, they complement each other. To avoid sterile debates and confusions, a return to basics is an extremely useful thought pattern for all science and humanities disciplines; economics is no exception.

Simplicity is not incompatible with depth and truth. It is rather unnecessarily complex approaches, that can easily throw us into confusion and error. Unnecessary complexity is often quite harmful; its added value is very questionable. Since many centuries ago, remarkable and famous thinkers have unequivocally leaned on the direction of simplicity. The lofty Leonardo Da Vinci would say, “Simplicity is the ultimate sophistication.” And the great Albert Einstein commented, “Everything should be as simple as possible but no simpler.”

Comparing and analyzing any confusing situation with the basic premises often leads us to the right track, clarifying the picture –going back to basics.

The monetary system, unquestionably represents a useful and pragmatic sophistication of thought evolution and social practice. However, analyzing the pre-monetary economy, that is, the barter system, is a very useful exercise because it helps tremendously to clear up doubts and confusion. This type of economy is referred to as the Robinson Crusoe economy: the most basic kind, in its simplest form.

Let us visualize this character’s environment, once his idyllic island was inhabited and several hundred families ended up living there in peaceful, harmonious coexistence. It was a primitive subsistence, yet an organized society and economy. In essence, everything worked similarly to today’s economy regarding the items they produced and the activities they developed. Of course, this kind of economy produced and developed only very basic items and activities: drinking water, food, clothing, housing, harvesting and herb storage, and very elementary  entertainment (such as swimming, running, and having lots of time to enjoy nature). Of utmost importance, they already had specialized labor.

It was, however, an unpretentious, subsistence economy without money. In such society, the economic cycle was closely associated with three key variables:

  1. Demographic variables, the composition of the workforce in particular: the proportion of young people to seniors and children, as well as the proportion of men to women. In the end, too many children and elderly people relative to working adults would cause severe production and service disruptions, because of the imbalance between the work force and its dependents.
  2.  Health risks: for example, epidemics (in both humans and their animals) or pests in their crops.
  3. Natural disasters: hurricanes, floods, earthquakes, volcanic eruptions, droughts, fires, and so on.

The economic cycle would be virtually nonexistent while none of the above three sets of variables underwent substantial, unfavorable changes. This was a subsistence economy (essentially, an agricultural economy) to the extent that all people of working age (men and women) could work every day (probably including Saturdays and Sundays). Some would fish, hunt, or milk the cows and goats, while others (probably women) would collect or plant fruit and vegetables, make clothes, and so on. Unemployment and contraction of the economy would be unknown in such an economy, as long as none of the adverse factors contained in any of the three groups of variables materialized.

On the island, everyone would understand the need to individually fulfill specific functions, according to the community’s solidarity spirit, needs, and possibilities. It would be an economy that Karl Marx would envy, since everyone would have more or less the same, sharing the resources and products of their labor with the others. In summary, it would be a primitive life in itself but reasonably harmonious, with all the basic necessities covered.

This would be a very stable economy, with close to full, permanent employment. The only possibility of a contraction of economic activity would be due to an adverse development in any of the three previously mentioned groups of variables (or combination thereof).

It stands to reason that, if the contemporary monetary system were managed in a highly efficient and effective manner, in essence, there should not be any other valid reason for contractionary cycles (recessions and depressions), unless any of the 3 previously mentioned groups and variables  (or combination thereof) experienced a sizeable setback. The evidence, however, clearly points we still have a lot to learn before fiscal and monetary management of any economy gets near that the level and excellence required. That is, if and when both fiscal and monetary policies are managed with a high level of effectiveness (around 85 or 90% rate of success) the economic cycle will continue to behave as we have known it for the past centuries.

The Multiplying Effect of Knowledge

Intellectual capital —that is, knowledge— is often underestimated.

Whenever goods are exchanged, the selling party deducts them from an inventory and receives money in return. However, that does not happen with knowledge. If properly processed, whoever receives that knowledge increases his or her intellectual heritage and information level. But whoever transfers it still retains the knowledge. If dealing with more than a simple piece of information, quite frequently such knowledge is enhanced and perfected during the process. This is what happens to teachers every day—a truly perfect win-win situation!

Today’s communications tools, especially the Internet, provide a virtually limitless supply of information, including very valuable university level courses in different disciplines. Apple Inc. [AAPL] through its iTunes Store, and YouTube, a subsidiary of Google Inc. [GOOG], offer an endless menu of free academic materials in various media formats, such as video and audio, and are related to virtually all areas of knowledge taught in dozens of renowned universities from around the world. The areas of knowledge covered include business, engineering, mathematics, science, fine arts, medicine and health sciences, history, humanities, languages, literature, social sciences, pedagogy, and education. Because this scheme is fully flexible, it can be extended with virtually no limits. Examples are MIT’s courses on video, and an analysis of various famous literary works from the University of British Columbia in Vancouver. It is important to consider that these academic institutions and companies are highly competitive and feature their best talents within their vast range of options. There is no way to overstate the monumental importance of this kind of development: the highest quality, university education, is now available worldwide for free!

In order to provide an idea of the extensive variety of possibilities mentioned in the paragraph above, we must underline that when this survey was conducted, more than one hundred prestigious universities from different countries, such as the United States, Canada, the United Kingdom, France, Spain, and Australia, were already offering this amazing free service.

There truly is no way to overstate the extraordinary opportunities, many of them free, that our times offer to anyone who is genuinely willing to improve his or her skills.

Information availability has undergone a radical transformation since the Internet’s birth. Just take a look at Google [GOOG], Wikipedia, and social networking. Not too long ago, only a few narrow-minded, jealous guardians had access to information and knowledge. This is no longer the case —the current amount of available information is overwhelming, quite frequently at a nominal cost, as the case previously exposed. In fact, we now suffer from the opposite problem, surplus instead of scarcity of information. This makes it imperative to analyze all the available information, so as to be able to keep the best and discard the rest.

Even knowledge follows the principles of creative destruction. Good sense about the content, of course, should include a very high dose of basic moral values in addition to appropriate intellectual essence.

The World’s State-Owned Oil Companies

There are very few global instances where an industry analysis can be made with so much public and contrasting information available; furthermore, an instance where meaningful comparative analysis between state and private sector performance.

There is not much point in debating which arrangement, on the average, makes more economic sense for society, privately owned and managed oil companies versus state-owned and managed ones. We all are well aware that private structures, on the balance, tend to outperform government ones; structural incentives to run a company well tend to be higher and more effective in the private sector than in the governmental. However, it is very important to recognize some exceptional cases of well-managed state oil companies, like Norway’s StatOil [STO], Brazil’s Petrobras [PBR], and more recently Colombia’s Ecopetrol [EC]. The legal and management structures set up by the governments behind these three companies are praiseworthy. The results obtained, on the average, have been excelled in adding value to society.

The state-owned oil company cases can be classified in several groups, related to their performance levels. It is not the purpose nor the reach of this post to delve into too much detail and depth in this fascinating topic; in fact, only the top twenty oil producing nations were considered in this analysis. The purpose is to provide a general perspective on the subject.

Source: Computations based on GLOBALIZATION, Opportunities and Implications, The ABCs to a Global Social Revolution, Martin Marmolejo. Market prices obtained from www.bloomberg.com

The top of the performance list is formed by the group of the three cases already mentioned. Those three companies have a lot in common. In addition of being government owned and operated, they are very well managed companies, with shares listed in the NYSE as well as in their respective countries of origin; these three outstanding companies have independent management –from their governments– with a meaningful number of independent board members. The table below summarizes some relevant financial information about them.

Brazil’s PBR has worldwide recognition for its deep-water operations, with several world records set along the way. Norway’s STO has generated such a surplus in the past two decades, that the autonomous fund established in 1990 for this purpose, had accumulated about $557 billion USD by the end of 2010, two times Norway’s GDP! Colombia’s EC, the youngest of them, was listed on September of 2008 in the NYSE, and evidently has modeled itself after STO and PBR, with excellent performance both in increasing reserves and oil production in recent years.

Listed in a separate category, the oil companies of Saudi Arabia, UAE, Kuwait and, Qatar, all of them with strong interactions and joint-ventures with the big oil multinationals. Although transparency and accountability can be substantially improved in all four cases, some well-invested surpluses, in well-taught efforts to diversify from hydrocarbons, are a clear, if indirect, testimony of a reasonable level of proper management practices and performance.

China must be placed in a special category because: a) Its gigantic size (world’s second largest economy); b) PTR is by far, the world’s largest market cap among state-owned oil companies; c) Despite having its two largest oil companies listed in the NYSE, when dealing with China, the level of transparency and accountability must be taken with a grain of salt, until proven otherwise.

In a fourth category are countries like Russia, Iran, Venezuela, Iraq, Nigeria, Algeria, Angola, and Libya. These countries share two basic similarities, very closely interrelated between them: a) Very poor level of transparency and extremely poor accountability –if any at all. b) To different degrees, oil revenues are considered a personal right –somehow shared with the inner circle of power– by the rulers of those countries.

Finally, Mexico, and Kazakhstan belong to a fifth category, of stated-owned oil companies that seem to be transitioning away from the fourth previous category. Mexican government has been struggling in the past decades –essentially since 1988– to open-up that industry to private investment, with limited success so far; Pemex is still a very poorly run operation. Kazakhstan is more advanced in that topic, since january 2001, it established a sovereign oil fund with its surpluses modeled after Norway’s experience, currently worth over US$20 billion.

Both the energy and the oil markets are very dynamic. There is a lot of change in progress in many countries in those areas. The coming years might present a very different energy landscape, with more evolved management structures, where the global private sector continues to increase its participation in numerous joint-ventures –if not outright ownership– in many projects all over the world. The increasing availability and development of alternative energy sources is also enriching the possibilities and additional supply of that precious resource.

Beyond the ownership and management of any company, there is something non-negotiable: transparency and accountability, effective checks and balances systems in place. There is no substitute for that. When that basic principle is appropriately observed, at the end of the day the ownership and management issue is not necessarily that relevant. The private sector has also had plenty of sour experiences in the corporate arena all over the globe: the Enrons, the Tycos, the Parmalats, the Lehman Brothers, the AIGs, the Olympuses of the world, just very disgraceful recent cases.

Why are most of the world’s nations socially and economically underdeveloped?

Undeniably the most important question within the realm of social sciences as well as in the economical standpoint. How to account for the abysmal performance gap that separates the developed nations from the underdeveloped ones?  Before going forward with this, let’s keep in mind that, during 2010, at the very top of the pyramid, a little less than 13% of the world’s population generated 46% ($34.29 trillion) of the world’s total output. Whereas, at the very bottom of the same pyramid, a little less than 26.5% of the world’s population only generated 3% ($2.236 trillion) of the world’s output! In between those extremes lies the majority of humanity ($38.014 trillion), most of it tilted towards the lower part of the pyramid.

There have been many attempts of explaining this question and understanding the major reasons behind it. Most of them are very agreeable. From my personal perspective, there is a fundamental element missing: simplicity. Very frequently, simplicity is the key which unlocks the most profound and complex questions, and yet we insist on making it difficult for ourselves to find the most simplest of answers!

The major reason behind the huge gap which separates the developed nations from the underdeveloped ones is a lack of a true understanding of the nature of things, in the lagging countries. In short, a lack of proper understanding (and  the corresponding implementation) of two fundamental philosophical principles:

  • Cause and effect.
  • Cost/benefit relationship.

Those two principles are very closely intertwined in every day situations, at any level, in most circumstances in life. This particular analysis is no exception.

First of all, social and economic underdevelopment is a consequence, an effect due to a well known cause. The short, obvious answer is that underdevelopment is the result of noticeable lack of appropriate organization and management in the lagging societies. As well as the lack of proper social and political leadership, another fundamental cause; a different side of the same coin.

Secondly, underdevelopment is the result of a marked lack of a proper understanding of the cost/benefit relationship. If that relationship were more appropriately practiced and understood, the majority of the underdeveloped world would swiftly move in the right direction, closing the gap with the developed nations in an accelerated manner.

Very fortunately, there are a few, quite commendable countries that indeed are closing the gap that separates them from developed nation status, at a vigorous and consistent way. Currently, among the most outstanding cases are: China, Czech Republic, Slovakia, Estonia, Poland, Croatia, Lithuania, Latvia, and Chile. Along with these countries, there are others on the tracks to development such as: India, Brazil, Russia, Mexico, Indonesia, Turkey, Kazakhstan, Trinidad and Tobago, Gabon, Mauritius, and Botswana. Finally, on the-almost-there-countries category, Israel, Slovenia and New Zealand have done a tremendous job!

China has been, rightly so, making plenty of headlines concerning its astounding rate of growth. China’s case is very particular due to a virtuously rare combination: huge population mass -the largest on Earth in a single nation- combined with an astounding economic growth rate. There are very few nations that have been growing at around 10% a year for the past three decades, China is one of them. They have found a near-perfect way to lever their poverty, making a constructive utilization of their large population mass.

Other than China, (being still a very poor country on a per capita basis) the rest of the world is either growing at a dismal pace or, in the best of cases, growing at a pace significantly below its true growth potential. In all cases, lagging countries are lagging the developed nation status by a factor of 5.8 times# (the 2010 weighted average). That is, the average lagging country will need to grow its output by about an additional 5.8 times before being able to get to the bottom of the range of a developed nation standard of living. Since the total 2010 output of the lagging countries was $40.25 trillion (the complement of the 46% aggregate of the developed nations’), the relinquished annual output amounts to a staggering $233.45 trillion, over three times the total current world output!. That is the opportunity cost of the current state of affairs. That humongous gap cannot be filled overnight, even if everything that has to be done took place right away. That gap must be closed in several decades. The beauty of it is that, in so doing, the average annual growth rate of the whole world would be increased by several points, not less than 2-3%, on many decades to come, while the catching-up materializes, depending on how many countries participate in this colossal undertaking.

It is beyond the reach of this post to get deeper into such a fascinating and promising, yet disturbing subject. In GLOBALIZATION, my book, I delve deeper into this analysis, reaching a self-sustainable solution to this most pressing problem confronting mankind.

SOURCE: Computations based on GLOBALIZATION, Opportunities and Implications, The ABCs of the Global Social Revolution, Martin Marmolejo, Appendix VI, page 693.

Kazakhstan and the Former Soviet Republics

The world offers an almost unlimited supply of very interesting countries to analyze and learn from. That’s one of the most useful and promising aspects of globalization. One of those very attractive cases is Kazakhstan, a relatively unknown Central Asia republic with 15.5 million inhabitants, and the world’s largest land-locked country –the world’s ninth largest, overall– with a territory slightly larger than Western Europe’s. Kazakhstan was one of the 24 countries that emerged as an independent nation from the Soviet system implosion in 1990–1991.

Unquestionably, the most interesting aspect of Kazakhstan’s contemporary history is its relative good economic performance, within a relatively stable political local environment. Kazakhstan is the most affluent Muslim country in Central Asia. Like the popular saying goes, “Kazakhstan is a good house in a terrible neighborhood”. Although Kazakhstan is far from being at the forefront in socioeconomic development among its former Soviet brethren –like Slovenia, Czech Republic, Slovakia, Poland, Estonia, Croatia and Lithuania–, whose performance, on the average, exceeds that of Russia’s, it is not that far behind from the latter. Most unfortunately, the remaining 16 former Soviet republics’ socioeconomic performance is very poor, some of them indeed deplorable. Among the former Soviet republics, Hungary could have been classified as a successful case, until recently; however, given its ongoing monumental debt crisis, it is left apart. Among those 16 lagging, former Soviet countries are Kyrgyzstan, Uzbekistan, and Turkmenistan, three neighbors of Kazakhstan.

The current and only president Kazakhstan has had during the last 20 years as an independent, post-Soviet nation is Nursultan Nazarbayev, its former communist-era leader. To a different degree, Nazarbayev has been following some of Deng Xiaoping’s transformation footsteps. The major similarity in both cases is the commitment to get away from the centrally-planned economy model.

Kazakhstan’s vast oil and gas reserves make it an energy powerhouse, the major pillar of its economy. It has been making significant progress toward developing a market economy, becoming one of the first former Soviet country to receive an investment-grade credit rating, in September 2002. Kazakhstan established, since January 2001, a sovereign oil fund, modeled after Norway’s StatOil experience, currently worth over US$20 billion; it is  funded from oil, gas, and other extractive industries taxes, royalty payments, and signing bonuses by joint venture partners.

Kazakhstan has, since 1998, an ambitious private pension program in place. Vanguard tax reforms have been adopted since the 1990s, lowering the tax burden across the board. It has also embarked itself on an ambitious diversification program, aimed at developing strategic sectors like telecommunications, transport, pharmaceuticals, petrochemicals and food processing.

During 2011, Kazakhstan had a solid economic performance: both the budget deficit and the government debt level, as a percentage of GDP –2.3% and 16%– are low and very low, respectively. The inflation rate, is still at an unacceptable level –8.3%, although it seems not to represent any immediate threat. The economy approximately grew by 6.5% during 2011.

Kazakhstan may have a very bright future ahead, provided that profound structural reforms continue to materialize. It is very encouraging to see the smart government policies this Central nation has taken since becoming independent from the Soviet Union. Kazakhstan’s government has been remarkable in overcoming its communist origins, and having chosen an increasingly pro-market orientation.  Although, in that regard is seriously lagging most of its European former Soviet brethren, so far it is the only viable former Soviet country in Asia. In the political side, there is much to be done still, towards a more open, democratic, transparent, accountable and equitable society. A solid economic background, however, seems to be an ideal springboard for that utmost objective. Kazakhstan is, by and large, the most prosperous of the Central Asian countries, compared to everyone, not only to the former communist countries. It seems to have the momentum in place for an adequate transition to a developed economy status in the decades ahead.

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