Gabriel’s scarcity rent - it’s management stupid!

Coming from strategos, the greek word for general or commander, this is one of the most used -and missused- words all around. People use the world strategy to make their position more sexy, combining it with words like direction, information, product, customer or even online, web 2.0 and blog. Always followed by strategy. That way you can give your card proudly.

In this card you can also read the strategy!!!

The Chinese had their say with Sun-Tzu, that was the first strategy writer ever to be known. He was so good that his book, The Art of War, is still widely read today. His ideas are about winning the battle before the battle is even fought. For that you need to convince your enemy that you’re strong in places you are not, and hide your strongest points, so that he is moved to a position of weakness. In this position of weakness you can overcome a stronger enemy.

And then, when the battle is fought, we move from strategic to tactics. That means we associate the strategy concept with planning, and tactics are closely related to execution. Long run against the short run.

Another point of view, strategy sees the big picture, the systemic view. (See the Why systems thinking? post). Tactics seek to optimise locally, in execution, right now. Tactics are operational. Think about allocating resources, doing the most of what you scarcely have. Some things that come naturally, decisions you just have to make.

While strategy is not obvious at all. It’s necessary to forget your day-to-day, step back, try to see it all, reflect, interiorise, learn, generate new ideas, evaluate them, multicriterise them, plan.

I’m not going to focus on Ansoff (or Porter afterwards) that are always referred as father (and nourisher) of strategy. Tracing the roots of economic thought, we can find someone in the 19th century that was already grasping the idea. It was Germany and later in the US, and this man is an economist: Friedrich List. He didn’t live long. After a fortune reversal in America, he committed suicide in 1846.

List defended the idea of national economics, an important rule for the state in the economy. He proposed high tariffs on imported goods to protect the local industries, that is protectionism, plus the government implication building infrastructures and the need for a national central bank. Do those ideas sound familiar to you? In fact, with Alexander Hamilton, he cofounded the American School of Economics that is still alive today, only to be confronted by Keynesianism in the mid-twentieth century.

But the funny thing is that he also had a big influence on the other side. He was offered the editor post of a new liberal newspaper in Cologne, Rheinische Zeitung, that he didn’t accept for health reasons. Guess who accepted? Karl Marx.

Why is that important? List saw the need to plan by the state. There could be no nation letting individuals seek their own interest when that interest could harm colective interests. Freedom meant suicide for nations. There was a need to plan and decide thinking of the big picture: the state.

When Ansoff wrote about strategy in the mid-1960s, those ideas were heavily assumed by society. Democratic countries also needed central planning. Even companies did. Igor Ansoff, an American professor of Russian origin was the one to collect the imputs of those diverging currents and wrote the first book on strategy planning. Engineer and mathematician, overly analytical, he defined strategic decisions as those that would not generate themselves, opposed to operational and administrative decisions.

I’ve always defended simplicity. From Occam’s razor in the 14th century we know the lex parsimoniae, meaning parsimoniae simplicity, brevity and succincty. When different explanations are available, ceteris paribus or other things being equal in plain English, the simplest wins. Thus the simpler the better.

Probably you’ll also remember Einstein’s quote: “make it as simple as possible, but no simpler”. Why should we want complicated explanations when simpler are available? We shouldn’t, unless we were missing something.

What does that have to do with management? Well, there’s a connection. A fairly strong connection if you use systemic thinking. Remember the holistic approach I was proposing? The local maximums don’t lead to a global maximum, optimising the parts doesn’t mean optimising the system… that means that not only adding simple strategies in an organisation’s parts don’t lead to a simple global explanation but that maybe the simplest strategy may not be the most suitable one.

So, should we aim for the simplest solution? Well, that depends… it just may be too simple. There’s an exact point of compromise between simplicity and effectivity.

W. Ross Ashby, psychiatrist, one of the founding fathers of cybernetics

That takes us to Ashby’s law:

«The larger the variety of actions available to a control system, the larger the variety of perturbations it is able to compensate.»

Ashby’s law is also known as Law of Requisite Variety. It’s a funny concept because we intuitively know that sometimes we need very complicated solutions, but the idea of simplicity sells a lot more. So it’s not too fashionable to search for complex solutions. Looks like that you have the obligation to come up with something simple.

Guess what? Reality is stubborn. And while you try to implement simplicity, complexity will crawl and arise again and again. This basic law of life will stab your project.

One example: a railway level crossing. Engineers design the signals on the road efficiently. Other engineers design the traffic lights, with several tests and taking into account the different timings. Both teams with my-box thinking. Efficient. There are some problems, cars get very close to the trains. The system is reviewed and timings measured again. Nothing’s wrong again, until 1995:

October 25th 1995, Illinois. One of the worst track-crossing accidents in the history of the US. A train collides with a high-school bus. Seven teenagers killed. No human error. All the systems working fine. The warning lights activated on time. There simply was an unexpected, very improbable, combination of events that led to the disaster. $27.3 million were paid to the victims’ relatives, but that didn’t save them.

The control system was too simple. It didn’t contemplate all the variety that could be produced. It simply had some timings established and a big margin above them to ensure safety. But statistics and margins are not enough. There is a need to understand the system to be able to control it. That’s why there are still humans controlling machines.

There’s more to systems than meets the eye. The typical examples belong to engineering: from the first Tacoma Narrows bridge in San Francisco, also known as Galloping Gertie, that collapsed November 7th 1940, to the £18.2m Millennium Bridge in London, that was opened in 2000 and was closed three days later because of swaying and extreme wobble and remained closed until 2002 and an additional £5m. Bridges are good examples of systems doing things they were not meant to do.

But don’t read this as an engineering story. All this is also applicable to organisations. The manager must be able to counteract disturbances, and she is always outnumbered. Only organisations with enough variety and diversity will adapt to changing realities -and thrive in them-. Only that way they are prepared to foreseen -or unforeseen- contingencies. Those too homogeneous will crash when the wrong wind blows, unable to adapt.

In 1619 René Descartes opened a way of reasoning that sparkled scientific progress, but at the same time made it difficult for us westerners to think in certain ways. When we hear of things like holistic thinking or quantum management sometimes we gaze in surprise or awe, and we listen for a while… until we remember we have lots of things to do and want to be bothered no more.

And easterners that come to our European universities and schools sometimes are carried by our individualistic and simplificative values and begin to think like us, making one step back as well as of one forward. For what it’s worth, the individualistic approach to the world has earned us things like the Renaissance, humanism and capitalism. Without them the world wouldn’t be as it is today, and we wouldn’t be where we are. It’s great to acknowledge that. But it’s not enough.

Reductionists approaches, just like Descartes’ helped us to understand the trees in the forests, then the chemistry in their leaves, and the structure of their atoms. We even tried to go further and we succeeded and found an intriguing subatomic world of neutrinos, pions, muons and bosons. Although some bossons have been predicted but never observed it seems we have gone a long way to our knowledge of the basic structure of reality. All these are achievements of the western world.

But in the way we forgot to look at the whole picture. And that has happened in many ways. In managemente too. We jump to the parts that we can quantify, sometimes only the parts that we can exactly quantify. And then we start counting, and adding, spending a lot of effort in details we might not need.

We never try to mix sales data with customer perception on the same spreadsheet. After all we would be crazy if we did. We can add up sales, and costs, up to the cent, who’d want to mix up that precise and objective calculation with something that couldn’t be measured? Well, nature does just that. (Remember the Heisenberg principle that I introduced in the Quantum Organisation post? By the way, the quantums are the ones in the standard model chart above.)

Nature doesn’t really care about exact values. It cares about systems. The first grasp that we took at that was with Ecology. Ernst Haeckel defined it in 1866 as a science about relationships. There were no more isolated biological identities, no more rivers to measure or atmosphere to analyse. There was a system. With its changes, crisis, equilibriums, unstability.

Note: This beautiful piece of Earth is in Lithuania

Suddenly we realise that companies can’t be just measured with accounting figures, that organisations won’t be understood by their books. There’s much more to them. There are forces, just like the nature forces, but this time they are grouped into five groups by Porter. They will resist the change that managers want to drive. They will sometimes counteract, reject, or kill. They are alive, albeit in some strange way.

Einstein said “be as simplest as possible, but no simpler”. In a sistemic approach we are trying to be simple too, but seeing the whole, not just a collection of parts. No more local maximums that don’t add up to a global maximum. This time we are going towards the system.

(to be continued)

Reading Mintzberg’s 1971 definition was quite interesting, but management didn’t start there. The word comes from Latin, manus-mani, and means “hand”.

Not the hand that rocks the cradle but the hand that handles, that is manages, horses. And from horses, a basic aptitude to be mastered by humans a couple of millenia ago, to managing everything else. The basic idea can be traced back to the ideas of organising and controlling.

Even further, management, just like science, couldn’t exist without experience and reasoning. The antique civilisations had little of that and a lot of stories and myths. Eastern and western, they all had tried to explain the world with stories. Those stories didn’t really care about reality. They carried messages and that was enough. Great civilisations came and vanished. Management just wasn’t ready to be born.

It was on the west that things changed. Five centuries BCE. The Greek and Macedonian civilisations were thriving and pushing the Persian Empire back each day. Civilisations that focused on big independent cities (just like the ones that the libertarian Nozick thought to be the perfect form of government, as I wrote yesterday).

It was them who put aside their gods and decided to care about reasoning, about thinking, about the nature of things, about philosophy (the ultimate love for knowledge, but not just knowledge but deep and reflected knowledge, the one that makes you grow, the quest for self development… again :).

Reasoning had begun. And with it the idea of finding the individual’s place in society, as well as moral issues.

Plato and Aristotle are supposed to be in the center of this painting, by Raphael (Raffaello Sanzio).

Too bad all those thoughts would simply be forgotten. Saint Thomas Aquinas would recover part of Aristotle’s.

Another big share would go to Averroes, also known as Ibn Rushd. Islamic, he wrote a lot of books on logic and theology and greatly influenced European thought. He was the one that ultimately rediscovered Aristotle. Averroes also appears on Raphael’s painting.

The painting, as well as being one of the highlights of the Renaissance (which by the way means rebirth, and it’s a revival of the reasoned thinking) and Raphael’s masterpiece, is a tribute to the Athenian school of thought, where European thought was ultimately shaped. Management needed the Athenian school of thought to start existing, along with the Athenian philosophers that taught there, at the Academia: the Socratics.

With them, the first methodology: asking questions (the Socratic method), listening to the answers, examining ideas from different perspectives, reasoning, measuring things relative to man, deciding what whas good and what was not, tackling with moral issues, with consequences, seeking equilibrium. The first case studies.

Leaders had to be philosophers, philosophers had to be leaders.

An Academia that would last for five hundred years, until dark ages engulfed it all…

Some days ago I started writing about bubbles with the post Tulipmania, XVIIth century. Today I want to resume this journey throughout the major bubbles of the economy. Hopefully we’ll reach some conclusion together (I already have thought of some, and some are unexpectedly positive), or even see some bubble burst (probably).

We jump is from 1593 to 1711, from the Netherlands to England: the South Sea Company.

But the story begins somewhere else, earlier, with this king that was said was under a spell:

It’s 1700 and we are in Spain. King Charles II (Carlos II el Hechizado) has just died. He has been ill for almost all his life. He was 38, but looked much older.

But he has been the king of the biggest empire in the XVII century. An empire spread around the world that has splashed Europe around with his colors. An empire that imported tons of precious metals and discovered that the excess of currency also meant higher prices (hyperinflation). An unsustainable empire, thought to be very rich, but nonetheless an aging empire.

But Europe’s bound to change a lot after Charles II. Different powers were pushing at each other. And the rivalry of two families: the Habsburgs (Charles II was one of them) and the Bourbons.

And the prey is the Spanish Empire in Europe, not only Spain but also the Low Countries and parts of Italy. And, as vultures, the different European nations take sides in the Spanish Succession War.

The Bourbons win this war in Spain, but not in Europe. The initial plan had been to unite Spain with the emergent France, but Phillip V of Spain is forced to resign his post in the French line of succession.

He retains Spain’s overseas possessions but renounces to the Spanish Netherlands and the Spanish Italy both to Austria and Savoy, and Gibraltar and Minorca to Great Britain. France also cedes many colonial possessions overseas, but their borders are not changed.

All this is written and signed in the Treaty of Utrecht, 1713.

The South Sea House in Threadneedle Street

Why is this important for a company like the South Sea?

The company is established in 1911 by the financiers John Blunt and George Caswall, backed by Robert Harley, Lord Treasurer. It’s a time of war. The company is granted exclusive trading rights with South America if they take over the national debt caused by the war and consolidate it. Somehow it’s established as a sort of parallel organisation to the Bank of England.

After the war Britain is in debt for more than £10 million. (yes, 1713’s Pounds, not 2007’s). All that debt is funneled through the company transforming short-term debt into stock. In exchange the government is committed to paying £576,534 perpetually, that is roughly a 6% return.

But a trade company needs more than an annuity to exist. That is also provided by the Treaty of Utrecht. In it is also established that the Kingdom of Great Britain and Ireland will be able commerce with Spanish South America (something that they already discounted when founding the company). The South Seas company is able to send one trading ship each year.

Astonishingly, the company fails to do any trade for the first four years. Nonetheless it has the backing of the British Government, which soon converts a further £2 million in stock. No actual business, but a promise of a bright future (sound familiar?).

The company is also granted the exclusivity over the Spanish Asiento. That means being able to sell 4.800 slaves per year to the Spanish colonies. In 25 years they make around 70 voyages and sell 30.000 slaves. Only 4.000 perished in the journeys: that means being quite efficient for a slave trader.

Stocks going up…

But the company is not good enough at trade. What they are increasingly good is into transforming public debt into shares. And they manage to give away enough shares to important people (and rebuy them when they have increased enough) so that most politicians are interested in supporting and backing the South Seas Company. That is, to drive value up.

1719 is a good year for the South Seas company. They offer to buy half of the British national debt: £15 million. That means £15 million more in shares. But demand’s pace keep up. There’s a huge interest in their shares. After all they continuously rise and lucky owners feel they are richer every day.

1720 is going to be known as the bubble year. Not only will witness the skyrocketing of the South Seas but also the appearance of many similar ventures. The price per share will go from £100 to £1,000. People of all kinds will buy, selling whatever they have, going into debt, it’s the South Seas frenzy!

The fall follows the rise

The last idea that the company has is to lend people money to buy the shares. But the money has to be returned. And there is no other way to return it than selling shares again. Until it all collapses and the shares fall back to £150 in september. A great loss for most investors. And from that to obliteration.

Sir Isaac Newton

What about Sir Isaac Newton? Well, he won a lot of money with the South Sea when he sold it, but the shares kept rising and rising. Until he couldn’t resist the temptation to buy again. At the highest price. In the next week they plunged. He lost £20,000.

I can calculate the movement of the stars, but NOT the madness of men

Jonathan Swift also lost a fortune. He wrote Gulliver’s Travels, a satire about the British society. The cons fled somewhere else with their fortunes but, for Britain, the consequences of the crash lasted for a century.

I do not need to tell you what bubbles are: irrational exuberance leads to an inflation of prices, usually some kind of stock, expectations lead to greater expectations, until there comes a moment where people believe at the same time that assets are too high -much above value- but that they’ll keep skyrocketing. This contradictory belief leads to stubborn reality and, once you come to terms with it, prices crash, leading to a backslash in the percepti0n of price and value of speculative investments.

So it’s a matter of scarcity and demand. Scarcity leads to demand, and demand leads to scarcity, until craze comes.

Today I wanted to review one of the first paradigmatic cases of a bubble. Much is said today if this description is an ex-post judgement and it really wasn’t a bubble, but in any case, tulipmania is still a synonym for bubble.

lesson learned: don’t bet all your future into one flower

It all began in 1593 when the first tulips arrived to the Netherlands. They were new, scarce, pricey and everybody wanted one. And it had a maturity period: you bought the bulb and in time you’d have the flower, just like some investment. So people began buying more and more and prices soared.

In fact tulips’ bulbs had been introduced for medicinal uses, but beautiful tulips quickly became a distinctive and exclusive mark of beautiful gardens. And from that they became a mark on the social ladder: you had to have tulips in your garden if you wanted to be someone in the Dutch society.

One thing led to another. Bulbs were traded more and more. Prices multiplied: more than twenty-fold monthly increases. And, as it always happens, everybody wanted to invest: people became on debt to get rich and longtime accrued savings were transformed into bulbs.

object of greed and social desire

Of course value was not on the bulb itself, because the bulb wouldn’t produce anything. Value was speculative, and that meant that, to really earn something, you needed to find another buyer. With rising prices, the buyer’s base shrinked until it was too small. Maybe they thought that a bunch of wealthy foreigners would come and buy them all, but foreigners never came.

Instead there was a moment when people started worrying because selling them was getting more difficult: periods got longer, psychologically longer than whatever short term is.

And there was that contradictory thought that comes with all bubbles: this is too expensive but it will get even more expensive. Expectations of further risings and expectations of depreciation mixed. Until the first expectation overcomes the second: this is too expensive.

And bulb investors panicked. Specially when many realised they had traded lifelong savings for beautiful-when-flourished nonproductive bulbs. Wouldn’t you?

Too late as usual, even the Dutch state tried to intervene, proposing to cover contracts at 10% value. Of course that caused an immediate 90% drop-off. But the value punctured that 10% soil again and again and the bubble finally bursted. It happened in 1637. The bubble had lasted less than one year, some had won a lot of money, but the subsequent depression affected both winners and losers.

Did investors learn from this? I leave the question unanswered. For next post: Isaac Newton’s investments…

What happens when a few people have too much money?

Thorstein Veblen (1857-1929) lived in a very different Earth than ours. But he’d already made that question. Like others before him, he thought of a new, emerging class that no one had identified before: the leisure class. Born in Norway and emigrated to the US, he came from a hard-working highly-successful family.

Think twice before spending: Thorstein Veblen is watching

In a sense, he shared something with my admired Schumpeter: he took an approach to reality that included not only the dismal science but also Anthropology, Psychology and Sociology. That way he wasn’t seen Economics as an isolated science, but interrelated with human evolution and human behaviour. Social changes would mean economical changes. Instincts would matter.

In The Theory of the Leisure Class he explores the origins of property. For Veblen the first form of ownership was the property of the woman by the man. That would be coherent with some ancestral practices like seizing women from defeated enemies as trophies. Later that form of ownership would extend to new forms such as marriage, slavery or finally the ownership of things.

He opposes to explain the pursue of wealth as an evolution of the fight for subsistence. Sure that is possible in a very early phase of development or in a scarcity situation. But if the resources are high enough, people do not fight for subsistence. (you do?… cos I don’t)

Most economists would say that, survival assured, people fight to rise their way of living. That’s reasonable too. But those that already have a higher standard don’t need to worry about that. What drives the lives of those that already have too much?

For it’s not enough to posses wealth, people crave for honour. And honour is not something you can share with yourself. Honour requires recognition. The wealth or power must become evident for others, so they can recognise it.

It’s funny how Veblen thinks about the hierarchy of needs half a century before Maslow made his in 1943

And high thinking would require a separation of menial tasks. We still think of it. The highest class is abhorred of manual labor. That way of thinking has been going on for ages. And it’s not about survival: it’s about differentiation.

In Veblen’s thoughts that would mean two simple concepts:

Conspicuous leisure, kind of symbolic work, not quite useful for the community, but that marks a status:

• Activities like taking long exhausting vacations and, most of all, bringing souvenirs back to all our relatives. Where’s the value of a souvenir? Which signal do we send?
• Why did the highest class have to work when they had serfs? They didn’t.
• Why did hunting survive when farming or animal domestication was far more productive? It still does.
• Couldn’t armies help with menial work in times of peace? They didn’t either.
• Don’t you know someone who’s work is highly symbolical but of little practical utility? You’ll find closer examples at work, but Veblen was thinking of government, war, sports, and devout observances.

Conspicuous consumption, waste of resources to display a higher status than others.

• Of work. Like the consumption of servant’s work, specially totally unproductive work. Is there a better way of displaying power than having a lot of people just wasting your time for you? Just being there for your unproductive whims, to maintain and increase your honour? Of course you’d say that the well off class didn’t have time for doing things themselves. Specially when they had so many obligations like clubs, sports, or even sewing circles. (While they had their clothes sewed by servants)

• Of goods. Certain rituals, or beverages, were initially reserved for the superior class, specially intoxicating ones and stimulators. Women would administer them. It would be manly to consume them, always resisting the temptation of excessive indulgence. It still is. Luxuries would be for masters, the more refined the better. Are consumers seeking excellence? Differenciation again and again in everyday life.

Scarcity or differenciation? luxury or waste of money?

In 1899 Veblen was already thinking of Jumeirah Palm. Time has passed, the planet has changed, but we haven’t.

It’s easy to say that ideals don’t matter anymore and all political parties are very much alike. Maybe they are, maybe they are not, but ideals still do matter, and there are many ways to economic justice.

It’s always a good moment to review the works of John Rawls. American philosopher, 1921 - 2002, his definition of justice is specially interesting. John Rawls () was an egalitarian liberalist. He defined “justice” as equity and fairness opposed to favoritism, utilitarianism (greater good for the majority at the expense of a minority) and prejudice.

This necessity to avoid prejudice reminds us of the “social contract” of Locke, Hobbes and Rousseau. Justice would require a collective agreement by the different parts regardless of their private interests. This means that a valid contract requires freedom to accept it or not and thus can never be imposed.

The “veil of ignorance” would help the different parts to reach a just agreement because they’d forget who they are, where they come from and what they own, in a similar way that the ideal politician would try to represent all electors regardless of the political party they have voted (!!!) to ensure fair laws. That would mean no lobbying, no big business in election campaigns, and candidates wouldn’t need to be very rich (as they are now in the US, although the US Constitution agrees with Rawls).

For example, imagine a group of shipwreck survivors. They begin anew so they part the land. And they decide to share it on equal parts. But not all parts of the island are equally productive so they reach an agreement: they will all give their land to the lucky owner of the “food well” in exchange for the right to be fed for the rest of their lives.

But time goes by, and another generation comes. And the lucky child who has inherited all the land decides to share the “food well” only in exchange for twelve hours of labour from the other residents. Would that be fair?

From a liberalist point of view, it wouldn’t. The choice is forced upon the residents: either agree or perish. There’s not an equality situation in the contract, nor a way to opt-out. And if they were to make the new contract under the “veil of ignorance”, without knowing who’d be the fortunate ones, they wouldn’t make the bet.

Egalitarian liberalism tries to lever the playing field. It tries to identify which are the legitimate trades and which are not. (Remember the blog entry on Aristotle?) The market won’t produce justice by itself, so it must be controlled by some kind of superior institution: the state, that protects individuals from abuse. (More about Rawls political liberalism here)

And then there is Robert Nozick, also an American philosopher, 1938 - 2003. Nozick is a libertarian, opposed to the social-democratic liberalist values of Rawls.

Nozick wants to refute liberalism, which he sees opposed to personal freedom. He defines the state as a “watchman”, or a “security company”, but nothing more than that. It’s own existence would only come from the right of the individuals to defend themselves, which they’d externalise. From externalisation would come economies of scale that, in a competitive market, would end up in a monopoly of a great security company. Now change the name of the company and call it “state”.

The state wouldn’t regulate economic activities, wouldn’t provide education or wouldn’t think of what is fair or not. The state only would have the power to defend its citizens and its rights (emanating from the individual right to defend yourself). No taxes, no health care, no minimum wages. Nothing.

In the island case, the owner of the land could do with his property as he sees fit. And the contract would be a perfect valid contract. A capitalist act between consenting adults, nothing more to it. (More about Nozick here)

Rawls and Nozick provide their own conception of social justice. From this basic set of rules, they derive the way society should work. But they are two incompatible views. In this great duality between Rawls and Nozick many might see the dual principles that Europe and America developed from. Big government can be something inherently good for some Europeans at the same time its the “big Satan” for some Americans.

Needles to say between black and white there’s an infinite range of greys. (Fortunately)

I’ve just reviewed the last issue of “The Economist”. It includes article about Schumpeter, a new biography, “Prophet of Innovation: Joseph Schumpeter and Creative Destruction”.

The article falls short of calling Schumpeter the ultimate prophet of capitalism. It talks about his creative destruction theory, that states that capitalism reinvents itself through destructive cycles that end up in a new beginning. Of course that means putting the weight of reconstruction on entrepreneur’s shoulders. It’s one of the most cellebrated and lucid visions of capitalism.

When Schumpeter wrote it he already knew the work of Clement Juglar who, in 1860, described three phases in every cycle: prosperity, crisis and liquidation. Schumpeter believed that entrepreneurs began the cycle of prosperity accumulating productive factors in an era of scarcity, thus paying well, and expanding productive capacity to its maximmum extent. Then there would come a time with production surpluses, which also meant that means of production wouldn’t be needed so badly, and that lead to prices going down and consumers having less purchasing power. If you add that by that time entrepreneurs would have paid most of their loans, there would be cheap money all over the system, so there would be a triple surplus, and the economy would crumble.

Of course Schumpeter explained all that in other words, but what he wrote is still valid today. The cycles were thoroughly studied and Kitchin defined the inventory cycles (40 months), Kuznets the infraestructure cycles (18 years) and Kondratev (or Kondratieff, I’m never able to know the best way to write his name) the 50-year waves. If you add them to Juglar 10-year cycles, later redefined as 8-year cycles, to hog cycles (three to four years), cotton cycles (two years), beef (five years in the Netherlands) and leather (18-month cycle)… you have as many cycles as you want to be able to prove anything (or just the opposite).

But, as the article very well says, the turbulences (that would be caused when most of the cycles were simoultaneusly in lows) would be just a small place to pay for progress. Voilà. That’s one of the reason why Schumpeter was a great economist, and still is today. And I agree.

What I don’t agree is on the fact that Schumpeter still is a great economist because of his conclusions. I think he was great because of his methodology, using sociology, psychology, statistics added to the dismal science trying to build an unified social science. So the economy would be related to everything else, such as the entrepreneurs that make this society advance.

Conclusions are not that important, IMHO. The article fails to remember how Schumpeter predicted that capitalism would collapse by itself and great corporations would take the power and lead us to the ultimate socialist state. The success would lead to absolute control.

I hope that he wasn’t that right on that too. Or maybe he is already right?

I previously left the story with Aristotle and his admittance of domestic wealth management versus his rejection of personal enrichment per se, the modern idea of economics. (See Blackthumb’s great blog). But… what happened later? Let’s jump to the XIIIrd century…

In those days many would worry about being able to distinguish between the authentic values of God and the distorted inclinations of humans. There was an ongoing discussion about what was right or wrong, and what God wanted humans to do. Reason or faith, which to follow? Was nature a reflection of the divine reality? As in Plato, was what they could see just a shadow of a superior reality?

Averroes, an islamic spanish phylosopher, had his answer. He, who was known as the great comentator of Aristotle, asserted the separation between faith and rational knowledge. There was no incompatibility: religious knowledge and reason just followed different paths.

But averroism fell in disgrace. And with it the aristotelian point of view, heavily criticised by agustinism. The same fate had the separation between faith and reason, radically rejected and condemned by both muslims and christians. They were bad days for both reason and Aristotle.

And then there was San Tommaso d’Aquino, aka Saint Thomas Aquinas (1224-1274). Saint Thomas inherited both the aristotelian point of view and the defense of the ability of rational to operate in its own laws without leaving the frame of faith. That was because the mystery of God was incarnated in human language. Thus it was possible to derive new rules from those that existed as certain because they had been revealed by God. And as long as the previous were according to faith, the latter would be no matter how they were converted, ellaborated and transformated following the rules of rational activity.

Aquinas denied the possibility of money being productive. Following his reasoning, what had not been created by God but by humans and did not have the ability to reproduce, couldn’t be multiplied. It was an unnatural thing. That meant that what we know as interest was not justified but condemned. It was not possible to earn anything from lending money. Interest was usury. It still is, under Roman Law.

On the other hand that was totally coherent with Aristotle’s rejection of commerce. Of course that was a real problem in a society that desperately needed commerce to emerge from dark ages, that and also the ilegitimacy of accrued interest.

Fortunately there would be a way out of this, although it would still take a couple of centuries to get out of this mess. Mediterranean merchants -specially north Italians- not only would thrive on commerce -it would be the Renaissance-, but they would exchange foreign currency to be delivered at a future date.

The beginning of futures? Not yet. It would be a way to accrue interest for the lender without falling into usury and without actual trade of goods or foreign currency. They had invented the dry exchange.