Thursday, May 17, 2018

Sustainability Boils Down to Scale

Only small scale systems can sustainably impose "skin in the game"-- consequences, accountability and oversight.
Several conversations I had at the recent Peak Prosperity conference in Sonoma, CA sparked an insight into why societies and economies thrive or fail: It All Boils Down to Scale. In a conversation with a Peak Prosperity member who goes by MemeMonkey, MemeMonkey pointed out that social / economic organizations that function well at small scales (i.e. localized) fail when scaled up and centralized (i.e. globalized).
I was immediately struck by the impact of scale on markets (Capitalism) and the state (Socialism), an ideological spectrum I've written about recently.
Both markets and governance function well at a small scale because those making the decisions must absorb the consequences of their actions/choices.
In large-scale centralized systems, those at the top of the wealth-power pyramid who wield the greatest influence are typically immune from the consequences of their (self-serving) decisions.
Indeed, the entire point of centralized hierarchies is to buffer top decision-makers from the consequences of their actions and choices.
This ties directly into Nassim Taleb's most recent popularization of the critical role played by participants having "skin in the game," i.e. exposure to the consequences of their actions and choices.
In a small localized group, it's basically impossible for anyone, even those at the top of the local welth-power pyramid, to escape the consequences of extractive activities that disupt the local ecosystem.
For example, should overfishing destroy the local fisheries, even the leaders no longer have access to fish.
Should the leadership pursue a conflict with a neighboring tribe, the leaders are just as likely to be killed or maimed as any participant (and very possibly more likely to be killed/injured, as leaders are naturally high-value targets).
History offers many examples of leadership that suffered the consequences of their poor choices/strategies. In the catastrophic Roman defeat at Cannae, roughly a third of Rome's entire political leadership elite was killed in combat. This is the acme of "skin in the game," a point Taleb makes by noting that our political leadership is free to pursue wars of choice with zero risk of being killed on the battlefield. No wonder it's so "cost-free" for leaders of highly centralized hierarchies to pursue disastrous policies: they evade any of the consequences or blowback.
In a conversation with fellow Peak Prosperity scribe Davefairtex, Dave described the centrality of the reward structure of cheating: approximately 20% of the populace experiences an outsized positive brain-chemistry reward (dopamine release) when they get away with some form of cheating--passing off a lie or deception or successfully concluding a fraud or scam.
A similar percentage of humanity is genetically predisposed to experience outsized brain-chemistry rewards for detecting and revealing cheating.
Dave also noted that human groups (and primate groups including monkeys, chimpanzees, et al.) become very agitated when group standards of fairness are flouted.
Cheating--broadly speaking, what's known as the "free-riding problem," as cheaters get a free ride on the work of everyone who abides by the rules and fulfills their duties-- pays dividends.
Males who father children via a secret tryst with a married woman pass on their genes without having to support their offspring or the mother. Cheaters who reap unearned wealth from the group benefit by slicing off some of the income and wealth of everyone else in the group.
So there are powerful incentives to cheat and equally powerful incentives to ferret out and expose cheaters, lest the group dissolve and everyone is tossed out to face the world (and potentially hostile groups) alone.
This conversation made me realize this is partly why small-scale markets and groups succeed: cheaters must work in a small theater where their actions are more easily observed and exposed. It's therefore much more difficult to get away with systemic cheating in small-scale organizations.
Compare this to the vast centralized hierarchies that are the controlling dynamics of our socio-political-economic system (i.e. our Mode of Production). Cheaters at the top of the wealth-power pyramid hire slick attorneys to evade consequences, or they buy political influence/protection, in effect legalizing cheating by those at the top of the pyramid in systemic ways.
Once we grasp the critical role played by scale, we conclude that centralized hierarchies cannot function effectively because their scale makes it too easy and too rewarding for those at the top of the wealth-power pyramid to cheat and evade consequences.
Only small-scale markets and structures of governance can succeed in the long run because only these small scale systems can sustainably impose "skin in the game"-- consequences, accountability and oversight.
State-issued currency ("money") is the perfection of a centralized system: here is the Venezuelan national currency the bolivar, a once-stable currency obliterated by Venezuela's political-economic elite:



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Tuesday, May 15, 2018

U.S. Healthcare Isn't Broken--It's Fixed

Healthcare/sickcare will bankrupt the nation by itself.
If you want to understand why the U.S. healthcare system is bankrupt, financially, morally and politically, then start with this representative anecdote from a U.S. physician. I received this report from correspondent J.F. on the topic of direct advertising of pharmaceutical products to the public (patients).
As background information, pharmaceutical companies were not allowed to advertise directly to consumers (patients) in the good old days. Now, as we all know, half the adverts on TV are for pharmaceutical products, and many of the remaining half are advertising lawsuits relating to pharmaceutical products that harmed or injured the patients who received them (or clamored for them as a result of endless direct-to-consumer adverts).
Here is J.F.'s report:
This morning, I read a report on augmentation of antidepressants. It seems folks who get a little better, but not a lot better on an antidepressant may improve if a drug in the class of second generation antipsychotics is added. Three of these drugs have been tested, with pretty much equivalent benefit - quetiapine, aripiprazole, and brexpiprazole. As the names suggest, the last two are very similar in chemical structure.
- quetianpine and aripiprazole are available in cheap generic for. Brexpiprazole is not, it's sold only as branded Rexulti.
- shortly after reading the piece, I walked past the waiting room TV which was playing an ad urging folks to "ask your doctor about Rexulti".
- lowest costs for a month's supply in my neighborhood, courtesy of goodrx.com:
quetiapine - $6.80
aripiprazole - $22.60
Rexulti - $1,120.20 (!)
- so the ad is urging folks to "ask their doctor" about a drug that is 16,473% more expensive than a similar drug that may work just as well.
Thank you, J.F. There you have it in a nutshell: U.S. Sickcare is organized to maximize profits by any means available, including adverts aimed at patients, adverts aimed at physicians, lobbying to include costly medications in the list of what Medicare pays for, and so on, in an endless profusion of crony-capitalist skims and scams, starting with research that's funded to reach the conclusion the funding pharmaceutical company desires, all the way through masking the real-world consequences of medications.
U.S. healthcare isn't broken, it's fixed--fixed to exploit the many to benefit the few, fixed to maximize profits in a we-win, you-lose system of perverse incentives.
AS I have long held, healthcare/sickcare will bankrupt the nation by itself.Endless wars of choice, unaffordable pensions and rising costs of soaring debt will only speed the arrival of insolvency and systemic collapse.



My new book Money and Work Unchained is $9.95 for the Kindle ebook and $20 for the print edition.
Read the first section for free in PDF format.


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Sunday, May 13, 2018

A Funny Thing Happened on the Way to Market Complacency / Euphoria

Fortunately for Bulls, none of this matters.
A relatively reliable measure of complacency/euphoria in the stock market just hit levels last seen in late January, just before stocks reversed in a massive meltdown, surprising all the complacent/euphoric Bulls.
The measure is the put-call ratio in equities. Since this time is different, and the market is guaranteed to roar to new all-time highs, we can ignore this (of course).
Two of the more reliable technical patterns are falling/rising wedges, also known as descending/ascending wedges or triangles. Ascending wedges are bearish, descending wedges are bullish.
The VIX index, one measure of volatility, has been crushed by the recent euphoria/complacency as participants realize that since this time is different, we don't need no stinkin' hedges. Unsurprisingly, the VIX has traced out a falling wedge:
But a funny thing happened on the way to market complacency/euphoria this year: every "this time is different" manic rally in the S&P 500 (SPX) formed a bearish rising wedge which promptly reversed once the pattern peaked.
Fortunately for Bulls, none of this matters. Fundamentals trump technicals (heh), and since profits are soaring while wages stagnate (funny how that works, isn't it?), higher oil prices mean something or other that's positive (it can't be higher gasoline prices are good, can it? Must be something else), Facebook has recovered from its temporary swoon and the Fed is easing or tightening or doing whatever it's doing, so it's a clean sweep: the fundamentals are all rip-roaring good.
Oh wait a minute--technicals do matter--when they support the Bullish case.The descending trendline from the January highs was just broken to the upside, a clear technical signal that new all-time highs are essentially guaranteed--not later this year, but this month--maybe this week, so buy buy buy, you snooze you lose, don't fight the Fed, etc. (insert your Bullish aphorism of choice).
Even more compelling (if that's even possible), the quatloo-bat guano ratio just flashed a huge buy signal, something that only happens on 1.3% of trading days since 1968, so let me repeat: BUY BUY BUY (repeat your Bullish aphorism of choice).


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Thursday, May 10, 2018

How Safe Are We? Our Blindness to Systemic Dangers

How do we explain our obsession with relatively low risk dangers and our collective blindness to manufactured/marketed scourges that kill tens of thousands of people annually?
If you've bought a new vehicle recently, you may have noticed some "safety features" that strike many as Nanny State over-reach. You can't change radio stations, for example, if the vehicle is in reverse. Who knows who or what you'll run over in reverse if you were allowed to change radio stations while in reverse gear?
How many injuries can be traced to people changing radio stations while in reverse?
A friend recently told us that the California Legislature is considering a law that makes it legal for parents to let their children walk to school unattended.
Perhaps this is "fake news," but it's certainly plausible, given that leaving any child unattended is now viewed as not just irresponsible but criminal.
The mainstream "news" is chockful of worried-looking news anchors announcing another e coli outbreak or recall of a consumer product, many of which now sport absurd warnings, including scary-sounding ones such as "This product contains chemicals known to the state of California to cause cancer."
This is scary until you realize it's on practically every consumer product in the state of California, which mandates the warning.
The narrowness of this obsession with safety comes into focus if we ask: how can a society so obsessed with safety have spawned an opioid addiction crisis that kills tens of thousands of people and ruins the lives of millions of Americans?
How safe are we when products that addict millions and kill thousands are readily available via prescription within our healthcare system?
While addictive illegal drugs have long been targeted with extremely harsh criminal penalties, how is it that the legal drug industry and the officially sanctioned and regulated healthcare industry created the vast destruction of the opioid crisis without anyone tasked with "safety" noticing?
How do we explain our obsession with relatively low risk dangers and our collective blindness to manufactured/marketed scourges that kill tens of thousands of people annually? (Tobacco and alcohol come to mind.) Then there's the well-documented impact of rising wealth and income inequality on public health--for example, The Health Effects of Income Inequality: Averages and Disparities.
Several dynamics come to mind: the immense profitability of products such as tobacco and synthetic opioids, and the profitability of fear-inspiring content in terms of attracting eyeballs to media and social media engagement. Fear gets our attention and is thus a powerful marketing tool.
In other words, there are built-in incentives in our system to profit from dangerous products, and influence government regulators to overlook the dangers.
I also wonder if our narrow obsession with low-risk safety (warnings on everything, etc.) reflects a subconscious awareness of rising systemic insecurity, which we counter by regulating what can be easily regulated in terms of manufactured consumer products. This gives us a sense of control in a world in which our ability to control systemic risks is decaying.
Adding regulations aimed at increasing safety/reducing risk also gives elected officials an opportunity to say "we're doing something useful here to protect you."
It's well established that our innate ability to assess risk is limited; we tend to exaggerate some kinds of risk (being attacked by sharks while swimming, etc.) and under-estimating other kinds of risk (eating junk food, getting addicted to prescription painkillers, etc.)
As a result, a single tragic accident caused by someone changing radio stations while in reverse gear can trigger a new law/regulation ("we should make it impossible to change radio stations while in reverse, as this will preclude any more of these preventable tragedies"), we don't recognize the systemic tragedy of the loss of positive social roles that fuels much of the despair and pain that we treat with addictive prescription painkillers.
There is a terrible irony at work: We live in a system in which an opioid-addicted individual whose life has been devastated by an entirely preventable systemic scourge can put his/her car in reverse with less likelihood of injuring others, if the vehicle is new enough to have all the mandated safety features--and we pat ourselves on the back for our obsession with preventing injury.
Assessing risk and improving safety are complex issues, but we clearly have a political-social-economic system that is blind to systemic dangers that could be prevented, were we to widen our narrow obsession with safety to include them.



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Read the first section for free in PDF format.


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Wednesday, May 09, 2018

Before You Tell Me What You "Know," Tell Me Your Sources

We can no longer trust data and conclusions being published as impartial by institutions that were once trustworthy.
When someone says they "know" what's happening on the ground in Syria, how can we assess the validity of their claim to knowledge, i.e. their claim to "know" "facts" or (gasp) "truth"?
When someone says they "know" the U.S. economy is growing and unemployment is at record lows, what is the basis of their claim to knowledge?
Before you tell me what you "know," tell me your sources. We all know how this works nowadays: the sources are rigged or gamed to support the pre-selected narrative.
In "fake news," the sources are designed to appear legitimate via official-sounding institutional titles for the source organizations and human "experts" / researchers, and the data that's presented to support the "fake news" is also designed to be indistinguishable from legitimate data.
The cursory consumer of such content will be inclined to grant the institution, source and data as equal in legitimacy to other accepted sources. For example, if we read that the United Nations Labor Information Council has collected data showing the U.S. unemployment rate is actually 7.2% rather than the official 3.9%, the invocation of the UN and the precision of the data point suggests a legitimate source and data base.
But it's "fake news;" there is no United Nations Labor Information Council (at least not to my knowledge).
Official sources have learned that the most effective way to propagate the sanctioned narratives is to rig or game the data and/or its interpretation. Thus the bailouts of the U.S. "too big to fail" financial institutions in 2008-09 were purposefully obscured; it took independent researchers to assemble all the bailout guarantees and publish the staggering total of over $16 trillion.
official data is massaged to promote the official narrative. This is well-known to anyone who digs into the actual mechanics of the adjustments made to the raw data. For example, to mask real-world inflation, big-ticket expenses such as healthcare are minimized as a percentage of the basket of expenses being measured, and hedonic adjustments reduce the sticker price we actually pay.
The unemployment rate of 3.9% is based on excluding 95 million working-age residents from the labor pool. Many of these people are indeed unavailable for work, but millions have been categorized as "discouraged" and thus are not counted as being in the work force.
In other words, the process of rigging and gaming "facts" to support a pre-determined narrative is identical for both "fake news" and "official news."When researchers compared electricity consumption in China with the official growth rate, a vast discrepancy appeared: electrical consumption, a reliable indicator of economic activity, lagged the official growth rate.
The official response was to stop reporting electrical consumption data or rig the numbers to match the official narrative.
Now that the loss of trust in official reporting of data is widespread (due to the obviousness of the rigging / gaming / manipulation), the institutions tasked with generating belief in the sanctioned narratives are accusing anyone questioning the officially sanctioned data or narratives of issuing "fake news."
The irony is thick enough to cut with a knife: as institutions gin up ever more dubious "evidence" that all is well with the status quo, the line between "official news" and "fake news" has effectively dissolved.
We are now being bombarded with engineered data from supposedly legitimate sources that's explicitly designed to support insider rackets or profiteering cartel. A prime example is medical/pharmaceutical research data, which is increasingly funded by self-serving corporations or institutions with the explicit goal of finding (or rigging) evidence supporting some claim of efficacy that is highly profitable to the owners of the medication/genetic material.
In other words, we can no longer trust data and conclusions being published as impartial by institutions that were once trustworthy as these institutions become politicized or funded by corporations whose sole goal is to maximize profits by any means available.
Much of this legerdemain is statistical and therefore difficult for laypersons to analyze or assess. Despite the educational industry's focus on STEM skills (science, technology, engineering, math), relatively few citizens seem equipped to read the results of a pharmaceutical Stage III trial (human subject trials for the efficacy and risks of a new medication/treatment) or scientific paper that supports some overarching policy or a "headline number" such as GDP or unemployment.
A skeptical reader naturally looks for weaknesses such as small sample size, wide margins of error, various assumptions made when eliminating data samples, and so on.
The general lack of interest and/or ability to make even a rudimentary critical assessment of the officially sanctioned evidence and narratives plays right into the hands of those engineering the evidence.
But the Internet is messing everything up by providing a universal forum for skeptics to publish critical assessments of officially sanctioned evidence. The spectrum of critics is wide, ranging from those promoting improbable theories backed by little substantiated evidence to those who have conducted rigorous critiques that interested parties can critique.
Such a forum requires a skeptical populace with critical-thinking skills and the willingness to ask cui bono--to whose benefit? As institutions are politicized and dissenters are marginalized and profit-maximizing organizations fund their own self-serving research, it falls to the citizenry to sort the wheat from the politicized. self-serving chaff.

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