Dear Readers:
In order to improve the quality of my blogs, I have moved to WordPress. Additionally, I have broadened the scope of this blog. It will now be named after my entrepreneurial education company: Entrescape. The new URL is http://entrescape.wordpress.com
My more politically/philosophically oriented blog, Common Sense Liberty, may be found at http://commonsenseliberty.wordpress.com
Thanks for your involvement so far. I believe the new site will be better for you and for me.
Best,
Terry
Wednesday, July 22, 2009
Thursday, July 16, 2009
The Thief in the Living Room
I like television. My wife and I love to watch programs on history, science, and yes, sometimes I watch COPS. Is that a waste of time?
Whether it's COPS or a more elevating documentary, I have chosen to do something that will probably not improve my material, mental, or spiritual well-being substantially. Well, maybe science or history shows. At least they make me intellectually richer.
Everyone needs a break now and then, and I am certainly not begrudging anyone his/her rest time. Yet I have observed a multitude of people whose time in front of the TV is astounding. Hour after hour, they soak up images and sounds that one can only describe as chaotic and mindless.
It is not the time in front of the TV that is the culprit so much, but the things we are not doing while we watch. These same people seem to be the ones who complain about their income and lack of time. When I suggest they spend a few hours a week building a business, I invariably hear, "I don't have time!"
Oh, really? If you want to build a business but don't think you have time, just add up the number of hours you watch TV. And be honest. Write it down for one week. That's right--every second, including those times you watch while eating, talking with the kids, or doing a crossword puzzle.
My guess is that you will find out just how much of a thief you have in the living room. Now, what are you going to do? For heaven's sake, don't swear off TV. You know perfectly well you won't quit completely. I am not even sure that is a good idea. Just pick a few hours when you watch something less than uplifting. Maybe it's COPS, maybe it's sports, or maybe it's American Idol. Decide whether your life is better spending time with them or time building your future.
Whether it's COPS or a more elevating documentary, I have chosen to do something that will probably not improve my material, mental, or spiritual well-being substantially. Well, maybe science or history shows. At least they make me intellectually richer.
Everyone needs a break now and then, and I am certainly not begrudging anyone his/her rest time. Yet I have observed a multitude of people whose time in front of the TV is astounding. Hour after hour, they soak up images and sounds that one can only describe as chaotic and mindless.
It is not the time in front of the TV that is the culprit so much, but the things we are not doing while we watch. These same people seem to be the ones who complain about their income and lack of time. When I suggest they spend a few hours a week building a business, I invariably hear, "I don't have time!"
Oh, really? If you want to build a business but don't think you have time, just add up the number of hours you watch TV. And be honest. Write it down for one week. That's right--every second, including those times you watch while eating, talking with the kids, or doing a crossword puzzle.
My guess is that you will find out just how much of a thief you have in the living room. Now, what are you going to do? For heaven's sake, don't swear off TV. You know perfectly well you won't quit completely. I am not even sure that is a good idea. Just pick a few hours when you watch something less than uplifting. Maybe it's COPS, maybe it's sports, or maybe it's American Idol. Decide whether your life is better spending time with them or time building your future.
Tuesday, July 7, 2009
Health Care and Your Right to Life
Never underestimate the foolishness of anyone in a hurry. Get 535 people in a hurry at the same time, and it's Katie Bar the Door. That is what is happening to our health care in this country.
We all want to know we can go to the doctor when we need to. We also want to be able to extend our lives by undergoing a surgical procedure or taking medicine. The problem is, we still want it to cost what it did when a doctor could carry all his/her tools in a black leather bag.
The miraculous advance of medicine allows us to improve and extend our lives in ways we could not have imagined a few years ago. Instead of medicine being something that is practiced between an individual and one doctor, it is now practiced between an individual and the thousands of people whose skills are brought to bear on complex diseases. Think about an MRI machine and the almost unimaginable amount of knowledge that had to be brought together in one place for it to work.
In other words, we should expect that health care will cost more than it once did, just as a car with air conditioning and leather seats costs more than the vinyl benched oven-on-wheels we used to drive. Unfortunately, instead of letting bright and industrious people work on solutions to the problem of high health care costs, we have a government hard at work to destroy it.
Government will meddle and tinker, tinker and meddle, until they give us the equivalent of Social Security and Medicare. Hopelessly over-promised, national health care will, sooner rather than later, go broke.
What then?
They will ration care. Of course, no one will call it rationing. Instead, they will find yet another way to put lipstick on a pig and parade it around like a supermodel. Yet even in the midst of this, there is hope. As the public system crumbles, the irrepressible creative instincts of young men and women will be brought to bear on the practice of medicine. Bright people who want to use their talents to help others will find ways to offer care to the sick when they need it, not months down Waiting List Road.
This is already happening in Canada. Technically, most private care in Canada is illegal. This means that citizens cannot go outside the system by using private doctors. Fortunately, this law is rarely enforced. As a result, a host of private practices have sprung up, giving those who can pay the option of bypassing the waiting lists and suboptimal medical choices represented by the public system.
If we in the U.S. move toward a universal health care system, do not expect our government to learn anything from Canada's recent lessons. Expect instead that they will attempt to outlaw private practice. They will do so because as the public system breaks down, more doctors will move out of it in favor of serving the needs of the sick privately.
This is where the health care battle line should be drawn. The right to preserve and enhance our life and our health is as fundamental as the right to self-defense or free speech. Being forced to die or live as a cripple because one's care is not "cost-effective" enough for public funding, and then being denied the right to seek a private physician's services is an assault on any sane person's notion of freedom.
Allowed to flourish, the creative power of the human mind will bring forth new cures, new medical services, and longer, more enjoyable lives for all. New insurance structures, medical care cooperatives, and charities will emerge, providing care for those who truly cannot afford care. Instead of fighting and scratching for a limited resource, we can all contribute to creating more.
It is beginning to look like some form of government-run health care is inevitable. It won't be pretty, but it will be survivable unless they outlaw private care. If they do, consider it the equivalent of censorship or illegal search and seizure. It's your right, don't let them take it.
We all want to know we can go to the doctor when we need to. We also want to be able to extend our lives by undergoing a surgical procedure or taking medicine. The problem is, we still want it to cost what it did when a doctor could carry all his/her tools in a black leather bag.
The miraculous advance of medicine allows us to improve and extend our lives in ways we could not have imagined a few years ago. Instead of medicine being something that is practiced between an individual and one doctor, it is now practiced between an individual and the thousands of people whose skills are brought to bear on complex diseases. Think about an MRI machine and the almost unimaginable amount of knowledge that had to be brought together in one place for it to work.
In other words, we should expect that health care will cost more than it once did, just as a car with air conditioning and leather seats costs more than the vinyl benched oven-on-wheels we used to drive. Unfortunately, instead of letting bright and industrious people work on solutions to the problem of high health care costs, we have a government hard at work to destroy it.
Government will meddle and tinker, tinker and meddle, until they give us the equivalent of Social Security and Medicare. Hopelessly over-promised, national health care will, sooner rather than later, go broke.
What then?
They will ration care. Of course, no one will call it rationing. Instead, they will find yet another way to put lipstick on a pig and parade it around like a supermodel. Yet even in the midst of this, there is hope. As the public system crumbles, the irrepressible creative instincts of young men and women will be brought to bear on the practice of medicine. Bright people who want to use their talents to help others will find ways to offer care to the sick when they need it, not months down Waiting List Road.
This is already happening in Canada. Technically, most private care in Canada is illegal. This means that citizens cannot go outside the system by using private doctors. Fortunately, this law is rarely enforced. As a result, a host of private practices have sprung up, giving those who can pay the option of bypassing the waiting lists and suboptimal medical choices represented by the public system.
If we in the U.S. move toward a universal health care system, do not expect our government to learn anything from Canada's recent lessons. Expect instead that they will attempt to outlaw private practice. They will do so because as the public system breaks down, more doctors will move out of it in favor of serving the needs of the sick privately.
This is where the health care battle line should be drawn. The right to preserve and enhance our life and our health is as fundamental as the right to self-defense or free speech. Being forced to die or live as a cripple because one's care is not "cost-effective" enough for public funding, and then being denied the right to seek a private physician's services is an assault on any sane person's notion of freedom.
Allowed to flourish, the creative power of the human mind will bring forth new cures, new medical services, and longer, more enjoyable lives for all. New insurance structures, medical care cooperatives, and charities will emerge, providing care for those who truly cannot afford care. Instead of fighting and scratching for a limited resource, we can all contribute to creating more.
It is beginning to look like some form of government-run health care is inevitable. It won't be pretty, but it will be survivable unless they outlaw private care. If they do, consider it the equivalent of censorship or illegal search and seizure. It's your right, don't let them take it.
Friday, July 3, 2009
Property: The Forgotten Freedom
I think of freedom in straightforward terms. Any individual should be free to do as he/she likes as long as it does not demonstrably impinge on the same rights in others. This idea is not new, of course, but it is largely misunderstood, especially with regard to property.
Were we all composed of pure spirit, with no need to feed, clothe, or shelter ourselves, property rights would be meaningless. Since we are mere flesh and blood, each individual needs to have control of certain things to survive. The reason is simple--most things we need are created, not found.
With the possible exception of air and sunshine, every material thing we need comes about because some individual, often in cooperation with others, has the ability, will, and desire to turn a beneficial idea into reality. Fortunately, the human race has also discovered that trading with others results in more material goods for oneself.
Who owns such wonderful things? In my view, the creator. From spear tip to computer chip, the rightful owner is the person who created it. If he/she contracted with others to create it, that contract defines who owns what fraction of its value.
Some people in society are more capable than others at producing certain things. No one wants to hear me sing opera or see me dance for Chippendale's. Yet I do not begrudge the vocalists or 20-somethings with six-pack abs their due. Neither should they begrudge me my ability to write a book or teach a class.
Inevitably, some people on the whole are able to create more value than others. They own more things as a result of their benefiting others more. They are better off than others because they are better to others. It is their ability that enables others to benefit from the things they cannot create themselves. The more benefit they provide, the more they prosper.
This is disturbing to those who are less willing or less capable. In the name of "fairness," they seek to take from the creators and give to those they deem more deserving. The most obvious example is the thief, motivated at a primal level to take by force what he/she either cannot or will not create.
Some people make a profession of taking from the creators and giving to others. They are called politicians. In addition to getting to pat themselves on the back for doing so much good for society, they get a generous cut themselves. Lacking the forthrightness of a thief, they mask their willingness to take from others by force in byzantine tax codes and arcane regulations.
What would our society look like if we were to refuse to allow either thieves or their governmental counterparts to take what each of us has created? Those disposed to believe in the fairy tale of a benevolent and fair government imagine hordes of the poor wandering the countryside, victims of arrogance and callousness of the elite. I see something quite different--the blossoming of a new human spirit.
When people are able to trade freely, they are able to tap their potential for creating value for others. Virtually all human beings have some capacity for doing so. In return, the less capable benefit from the more capable in two ways. First, goods and services are cheaper because capable people compete to provide them without fear of having a large portion confiscated by government. Second, the truly incapable, such as the severely handicapped, benefit from the benevolence of the wealthy. Humanity, for all its tendencies toward wanton cruelty and unjustified violence, has also shown a tremendous capacity for kindness and charity.
This Independence Day, we will all remember the precious rights our ancestors earned for us. Along with your ferocity in protecting your freedom of speech and religion, kindle a fierceness in protecting your property. You earned it, now fight to keep it.
Were we all composed of pure spirit, with no need to feed, clothe, or shelter ourselves, property rights would be meaningless. Since we are mere flesh and blood, each individual needs to have control of certain things to survive. The reason is simple--most things we need are created, not found.
With the possible exception of air and sunshine, every material thing we need comes about because some individual, often in cooperation with others, has the ability, will, and desire to turn a beneficial idea into reality. Fortunately, the human race has also discovered that trading with others results in more material goods for oneself.
Who owns such wonderful things? In my view, the creator. From spear tip to computer chip, the rightful owner is the person who created it. If he/she contracted with others to create it, that contract defines who owns what fraction of its value.
Some people in society are more capable than others at producing certain things. No one wants to hear me sing opera or see me dance for Chippendale's. Yet I do not begrudge the vocalists or 20-somethings with six-pack abs their due. Neither should they begrudge me my ability to write a book or teach a class.
Inevitably, some people on the whole are able to create more value than others. They own more things as a result of their benefiting others more. They are better off than others because they are better to others. It is their ability that enables others to benefit from the things they cannot create themselves. The more benefit they provide, the more they prosper.
This is disturbing to those who are less willing or less capable. In the name of "fairness," they seek to take from the creators and give to those they deem more deserving. The most obvious example is the thief, motivated at a primal level to take by force what he/she either cannot or will not create.
Some people make a profession of taking from the creators and giving to others. They are called politicians. In addition to getting to pat themselves on the back for doing so much good for society, they get a generous cut themselves. Lacking the forthrightness of a thief, they mask their willingness to take from others by force in byzantine tax codes and arcane regulations.
What would our society look like if we were to refuse to allow either thieves or their governmental counterparts to take what each of us has created? Those disposed to believe in the fairy tale of a benevolent and fair government imagine hordes of the poor wandering the countryside, victims of arrogance and callousness of the elite. I see something quite different--the blossoming of a new human spirit.
When people are able to trade freely, they are able to tap their potential for creating value for others. Virtually all human beings have some capacity for doing so. In return, the less capable benefit from the more capable in two ways. First, goods and services are cheaper because capable people compete to provide them without fear of having a large portion confiscated by government. Second, the truly incapable, such as the severely handicapped, benefit from the benevolence of the wealthy. Humanity, for all its tendencies toward wanton cruelty and unjustified violence, has also shown a tremendous capacity for kindness and charity.
This Independence Day, we will all remember the precious rights our ancestors earned for us. Along with your ferocity in protecting your freedom of speech and religion, kindle a fierceness in protecting your property. You earned it, now fight to keep it.
Wednesday, June 24, 2009
The Time Value of Money
We often hear the phrase "the time value of money," but what does that actually mean? Fundamentally, it means that money now is "worth more" than money later. For example, if I were to put $100 in a savings account at 1% interest, I would have $101 (not including compounding) at the end of a year. How can that be? How does money get more valuable?
It doesn't. The money itself, when there is no inflation or deflation, retains its original value. In order for there to be any return to money invested, it must be put to work. The only way money can be put to work is by using it to help transform one thing into another thing that is more valuable.
For example, if I take $100 to buy 100 plain wooden blocks and some paint, then invest my time painting the blocks for decorative purposes, I can sell them for, say, $120. The "extra" $20 is the result of my ingenuity and effort. I take cash, some raw materials, and my time and combine them to create value that did not exist before.
If I have an idea for creating such a product, but do not have enough cash on hand to purchase the plain blocks and paint, I cannot create value. A banker or someone else that lends money might recognize my idea as valuable and offer to lend me the money. Say I borrow $100 and agree to pay the lender $105 at the end of a year. I still make $15 on the enterprise. The bank also made money--$5.
This brings us back to our original example--the 1% return on a savings account. For nothing more than the trouble of depositing money in the bank, it pays me 1% It can do so only because it then takes my money and loans it out for 5% It can do that only because someone is willing and able to take that money and create more than 5% value with it.
Now, who makes the most money? We can figure this out by reasoning that a bank will never make money if it lends it out for less than it pays depositors. So the owner of the savings account necessarily makes less money than the bank. What about the business owner? If he/she makes less than the interest rate paid to the bank, that business is a losing proposition. In other words, the business has to make a 5% return just to break even.
This is of course a drastically simplified description of rates of return. The point is that the business owner has the greatest potential of making money. Note that I said potential. Business ownership entails risk, but it is essential for there to be a return on that $100 at all.
Whenever we invest our money, it provides us a return. Behind that return, there is a business, or multiple businesses, actually doing the work of creating value. If the investment is stable and strong, it can be a good strategy for providing for the future. It will never match the potential of a self-owned business, though, because too many other people take their cut first.
Wouldn't you rather get the biggest cut on at least some of your income? I would, and I'll bet you would too. Don't wait, start learning now.
It doesn't. The money itself, when there is no inflation or deflation, retains its original value. In order for there to be any return to money invested, it must be put to work. The only way money can be put to work is by using it to help transform one thing into another thing that is more valuable.
For example, if I take $100 to buy 100 plain wooden blocks and some paint, then invest my time painting the blocks for decorative purposes, I can sell them for, say, $120. The "extra" $20 is the result of my ingenuity and effort. I take cash, some raw materials, and my time and combine them to create value that did not exist before.
If I have an idea for creating such a product, but do not have enough cash on hand to purchase the plain blocks and paint, I cannot create value. A banker or someone else that lends money might recognize my idea as valuable and offer to lend me the money. Say I borrow $100 and agree to pay the lender $105 at the end of a year. I still make $15 on the enterprise. The bank also made money--$5.
This brings us back to our original example--the 1% return on a savings account. For nothing more than the trouble of depositing money in the bank, it pays me 1% It can do so only because it then takes my money and loans it out for 5% It can do that only because someone is willing and able to take that money and create more than 5% value with it.
Now, who makes the most money? We can figure this out by reasoning that a bank will never make money if it lends it out for less than it pays depositors. So the owner of the savings account necessarily makes less money than the bank. What about the business owner? If he/she makes less than the interest rate paid to the bank, that business is a losing proposition. In other words, the business has to make a 5% return just to break even.
This is of course a drastically simplified description of rates of return. The point is that the business owner has the greatest potential of making money. Note that I said potential. Business ownership entails risk, but it is essential for there to be a return on that $100 at all.
Whenever we invest our money, it provides us a return. Behind that return, there is a business, or multiple businesses, actually doing the work of creating value. If the investment is stable and strong, it can be a good strategy for providing for the future. It will never match the potential of a self-owned business, though, because too many other people take their cut first.
Wouldn't you rather get the biggest cut on at least some of your income? I would, and I'll bet you would too. Don't wait, start learning now.
Thursday, June 18, 2009
Why Your Goals Don't Work
Yesterday, I assigned my students a voluntary overnight project. We had discussed goal setting in class and I wanted to impress upon them the importance of writing down and prioritizing their goals. As I generally find in my classes, only a small number did the whole exercise.
I already know why many of my students failed to follow through on this well-established method for getting what we want out of life. It is the same reason many of us fail to follow through. We say we want to achieve great things, but in the end, we would really rather stay in our comfortable cocoon of low-level misery.
We know from well over a thousand studies that goals work--that is, they lead to high performance. If you want to lose weight, make more money, or achieve anything else quantifiable, goals are the way to do it. Yet we all know how easy it is to get distracted while working on a goal. Why is that?
In my view, there are two major reasons we find it difficult to achieve things. The first stems from what I call a "mind-split." On the one hand we want to accomplish what we set out to do. On the other, we are afraid that we just might succeed. If we succeed, we show ourselves and the world that we really are capable. It renders null and void all the excuses we used before, and by implication, the excuses we may want to use in the future.
The second hindrance to goal achievement is having the wrong goals. High performance does not necessarily lead to happiness and personal fulfillment. I see this in "achievement junkies," people who crave the next chunk of conspicuous wealth or yet another trophy in a sport they have grown to despise.
Learning the mechanics of goal setting takes twenty minutes. Learning to set the right goals may take twenty years. As you set out on the great journey that is entrepreneurship, remember that getting what you really want is scary and that getting what you think you want may make you miserable.
I already know why many of my students failed to follow through on this well-established method for getting what we want out of life. It is the same reason many of us fail to follow through. We say we want to achieve great things, but in the end, we would really rather stay in our comfortable cocoon of low-level misery.
We know from well over a thousand studies that goals work--that is, they lead to high performance. If you want to lose weight, make more money, or achieve anything else quantifiable, goals are the way to do it. Yet we all know how easy it is to get distracted while working on a goal. Why is that?
In my view, there are two major reasons we find it difficult to achieve things. The first stems from what I call a "mind-split." On the one hand we want to accomplish what we set out to do. On the other, we are afraid that we just might succeed. If we succeed, we show ourselves and the world that we really are capable. It renders null and void all the excuses we used before, and by implication, the excuses we may want to use in the future.
The second hindrance to goal achievement is having the wrong goals. High performance does not necessarily lead to happiness and personal fulfillment. I see this in "achievement junkies," people who crave the next chunk of conspicuous wealth or yet another trophy in a sport they have grown to despise.
Learning the mechanics of goal setting takes twenty minutes. Learning to set the right goals may take twenty years. As you set out on the great journey that is entrepreneurship, remember that getting what you really want is scary and that getting what you think you want may make you miserable.
Saturday, June 13, 2009
Is This Socialism?
In order to understand the premises of socialism, we need to understand two words: "from" and "to." Specifically, socialists believe that justice is served when societies observe the following rule: From each according to his abilities; to each according to his needs.
On the face of it, this sounds just. Who would quarrel with the idea that people should get what they need? It is the "from" part that get us into trouble. If life were a matter of us all standing around a pre-existing barrel of goods--food, clothing, shelter, and other necessities--and taking what we needed, one might justify this distribution rule.
Of course, we all know that is not how the things we human beings need come to exist. Except for air, basic necessities have to be created by someone. Socialism presumes it is right to take from the creators and give to others. Is that what our economic system has become?
You bet it has, but not in the way you may think.
The complexity of our economic system has allowed us to take from people who don't exist yet. How can that be? It is called debt. Debt is en extremely useful tool. If someone lends you money to buy something you could not purchase with cash, say a house, many people benefit. You benefit because you are able to use something valuable before you pay for it completely. The seller benefits because he/she can sell to someone who otherwise could not purchase. The lender also makes money.
If we had no system for borrowing and lending money, it would be nearly impossible to own anything like a house or car. Here is the problem. Not only can regular people and private businesses borrow money, so can the government. The difference is that the government borrows from future generations.
One way the government does this is to borrow money literally. It essentially issues IOUs to its citizens. The government can also print money. In the first case, debt can build until the present generation cannot pay it all off. In the second, government spends money it has "printed" and hopes no one notices that the resulting inflation has robbed citizens of buying power.
Either way, the system makes chumps of us. If we live frugally, save our money, and teach our children to do the same, we wind up feeding the government's insatiable appetite for spending at our own expense. At some point, the system has to break down. Either our children and grandchildren will have to pay absurd tax rates or the value of our currency will diminish to zero. Maybe both.
And this brings us back to socialism. If the government tried in the present to take the amount of money it needs to sustain its orgy of spending, citizens would revolt. If they hide their theft by passing it on to its future citizens, we who are right here right now may grumble, but we won't revolt.
Is this how we want to live? If so, let's be honest about it. Socialism advocates taking from the "able" and giving to the "needy." If you believe that, are you willing to look future generations in the eye and tell them that we gave and gave and gave and that by the way, they owe the bill?
I didn't think so.
On the face of it, this sounds just. Who would quarrel with the idea that people should get what they need? It is the "from" part that get us into trouble. If life were a matter of us all standing around a pre-existing barrel of goods--food, clothing, shelter, and other necessities--and taking what we needed, one might justify this distribution rule.
Of course, we all know that is not how the things we human beings need come to exist. Except for air, basic necessities have to be created by someone. Socialism presumes it is right to take from the creators and give to others. Is that what our economic system has become?
You bet it has, but not in the way you may think.
The complexity of our economic system has allowed us to take from people who don't exist yet. How can that be? It is called debt. Debt is en extremely useful tool. If someone lends you money to buy something you could not purchase with cash, say a house, many people benefit. You benefit because you are able to use something valuable before you pay for it completely. The seller benefits because he/she can sell to someone who otherwise could not purchase. The lender also makes money.
If we had no system for borrowing and lending money, it would be nearly impossible to own anything like a house or car. Here is the problem. Not only can regular people and private businesses borrow money, so can the government. The difference is that the government borrows from future generations.
One way the government does this is to borrow money literally. It essentially issues IOUs to its citizens. The government can also print money. In the first case, debt can build until the present generation cannot pay it all off. In the second, government spends money it has "printed" and hopes no one notices that the resulting inflation has robbed citizens of buying power.
Either way, the system makes chumps of us. If we live frugally, save our money, and teach our children to do the same, we wind up feeding the government's insatiable appetite for spending at our own expense. At some point, the system has to break down. Either our children and grandchildren will have to pay absurd tax rates or the value of our currency will diminish to zero. Maybe both.
And this brings us back to socialism. If the government tried in the present to take the amount of money it needs to sustain its orgy of spending, citizens would revolt. If they hide their theft by passing it on to its future citizens, we who are right here right now may grumble, but we won't revolt.
Is this how we want to live? If so, let's be honest about it. Socialism advocates taking from the "able" and giving to the "needy." If you believe that, are you willing to look future generations in the eye and tell them that we gave and gave and gave and that by the way, they owe the bill?
I didn't think so.
Wednesday, June 3, 2009
Candy from Babies
If pure socialism were instituted suddenly in this country, the near-universal descent into grinding poverty would be brutal and quick. Current creators of goods and services would have no reason, moral or economic, to provide anything for sale, knowing it would be confiscated and given to someone deemed more needy. As wishy-washy as we have become, we citizens still wouldn't allow that to happen.
The strategy instead has been stealth. The gradual ramping up of tax rates over decades has acclimated us all to a burden we would have vigorously refused a few decades ago. But, alas, politicians cannot get all the money they want to spend because that strategy has played out. They know that other sources of money have to be tapped. To that end, they steal from future generations. They can do that because those yet to be born cannot object. As the national debt (now 82% of GDP) grows, our ability to pay it back at all nears zero. The question is not if the system will crash, but when.
We got here because we as a people are largely ignorant of how the government steals from us and our children. The smoke-and-mirrors illusion that passes for fiscal management can only be sustained as long as we are gullible enough to fall for it. Every time we let pass without a thundering public outcry the nationalization of an industry (automakers), the bailing out of virtually an entire industry (big banks), and the promise of yet another unaffordable entitlement program (health care), we are partners in crime.
I don't know about you, but I don't want to have to explain to my two sons why we left them working nine-tenths of every year to pay back with interest money we spent. I don't want to have to tell them that we had a chance to stop the insanity and didn't. I don't want to see a once proud and free country descend into tyranny and poverty because we were lured by the seductive pull of something for nothing.
How about you?
The strategy instead has been stealth. The gradual ramping up of tax rates over decades has acclimated us all to a burden we would have vigorously refused a few decades ago. But, alas, politicians cannot get all the money they want to spend because that strategy has played out. They know that other sources of money have to be tapped. To that end, they steal from future generations. They can do that because those yet to be born cannot object. As the national debt (now 82% of GDP) grows, our ability to pay it back at all nears zero. The question is not if the system will crash, but when.
We got here because we as a people are largely ignorant of how the government steals from us and our children. The smoke-and-mirrors illusion that passes for fiscal management can only be sustained as long as we are gullible enough to fall for it. Every time we let pass without a thundering public outcry the nationalization of an industry (automakers), the bailing out of virtually an entire industry (big banks), and the promise of yet another unaffordable entitlement program (health care), we are partners in crime.
I don't know about you, but I don't want to have to explain to my two sons why we left them working nine-tenths of every year to pay back with interest money we spent. I don't want to have to tell them that we had a chance to stop the insanity and didn't. I don't want to see a once proud and free country descend into tyranny and poverty because we were lured by the seductive pull of something for nothing.
How about you?
Wednesday, May 27, 2009
Thank Heaven for Mistakes
Thank heaven for failure.
Last night, I had my students do something unusual. I assigned them to teams of 3-5 people and had them do an "overnight" business. They were to take an investment of $25 and turn it into $50 within 24 hours. The only restrictions were that the business had to be legal and safe (no discount bungee-jumping).
The looks on their faces ranged between puzzlement and loathing. Almost all groups had trouble coming up with ideas, and most of them were fairly run-of-the-mill--not much creativity. Many expressed frustration at not knowing "what to do" or "what I (the professor) wanted."
Of course, I could not have cared less how much money they made, as long as they honestly tried to double their money. I wanted them to experience firsthand the terror of entrepreneurship and the sting of failure (only a couple of groups made their goal,though most all of them made at least some money).
This morning in class, I talked about how most of us are raised with the implicit message that mistakes are bad. And they are, in a certain sense. Some mistakes, like driving drunk, are bad no matter how you dress them up. These are to be avoided at all costs. For the most part, though, not making enough mistakes is deadly. It probably means you are sitting on the couch watching TV when you could be making life better for you and the ones you love. It is safe, but is it living? Then one day your "safe" world comes apart around you and you have neither the smarts or the stamina to survive.
As we debriefed in class on the experience, I asked everyone to look around the room. Was anyone dead? Were there any serious injuries? None. "So," I prodded, "What was the big deal? Now you know you can make money on your own without a job. Isn't that a step forward?"
Too bad that as a country we have forgotten what my students just learned. We are pulling out every stop to make sure GM and other big companies don't fail. Companies fail for one of two reasons: 1) they are not allowed to compete effectively because of antitrust laws and excessive regulation or 2) they are simply not providing what the customer wants as well as someone else can.
In case #1, the answer is for government to get out of the way. In case #2, it is to let them fail so that other people can provide what the customer wants more effectively. What's so hard to understand about that? Is it disruptive? Yes. I feel for dislocated workers as much as anyone. But what happens to a society that sits on its collective couch wasting away, playing it "safe?"
Like our couch potato above, we become ill-prepared to meet even the mildest crisis. Instead of seeing mistakes as a routine and necessary part of growth, we scurry around pointing fingers at each other and ask "someone" to bail us out. One day, probably soon, there will be no one to bail us out. What then?
I don't know about you, but I have to go. There are some serious mistakes to be made today, and I don't want to get behind.
Last night, I had my students do something unusual. I assigned them to teams of 3-5 people and had them do an "overnight" business. They were to take an investment of $25 and turn it into $50 within 24 hours. The only restrictions were that the business had to be legal and safe (no discount bungee-jumping).
The looks on their faces ranged between puzzlement and loathing. Almost all groups had trouble coming up with ideas, and most of them were fairly run-of-the-mill--not much creativity. Many expressed frustration at not knowing "what to do" or "what I (the professor) wanted."
Of course, I could not have cared less how much money they made, as long as they honestly tried to double their money. I wanted them to experience firsthand the terror of entrepreneurship and the sting of failure (only a couple of groups made their goal,though most all of them made at least some money).
This morning in class, I talked about how most of us are raised with the implicit message that mistakes are bad. And they are, in a certain sense. Some mistakes, like driving drunk, are bad no matter how you dress them up. These are to be avoided at all costs. For the most part, though, not making enough mistakes is deadly. It probably means you are sitting on the couch watching TV when you could be making life better for you and the ones you love. It is safe, but is it living? Then one day your "safe" world comes apart around you and you have neither the smarts or the stamina to survive.
As we debriefed in class on the experience, I asked everyone to look around the room. Was anyone dead? Were there any serious injuries? None. "So," I prodded, "What was the big deal? Now you know you can make money on your own without a job. Isn't that a step forward?"
Too bad that as a country we have forgotten what my students just learned. We are pulling out every stop to make sure GM and other big companies don't fail. Companies fail for one of two reasons: 1) they are not allowed to compete effectively because of antitrust laws and excessive regulation or 2) they are simply not providing what the customer wants as well as someone else can.
In case #1, the answer is for government to get out of the way. In case #2, it is to let them fail so that other people can provide what the customer wants more effectively. What's so hard to understand about that? Is it disruptive? Yes. I feel for dislocated workers as much as anyone. But what happens to a society that sits on its collective couch wasting away, playing it "safe?"
Like our couch potato above, we become ill-prepared to meet even the mildest crisis. Instead of seeing mistakes as a routine and necessary part of growth, we scurry around pointing fingers at each other and ask "someone" to bail us out. One day, probably soon, there will be no one to bail us out. What then?
I don't know about you, but I have to go. There are some serious mistakes to be made today, and I don't want to get behind.
Thursday, May 21, 2009
Killing the Goose
We all remember the story of the Goose and the Golden Egg. Anxious to become wealthy without working for it, the farmer eventually kills the goose because one golden egg a day just isn't enough.
California voters just sent a message to their politicians that they will not become the second goose to die at the hands of the shiftless and lazy. By an astonishing margin, the general populace told Sacramento that increased taxes and smoke-and-mirrors borrowing will not fly. Let us pause to celebrate a victory.
Most Americans still believe that we each own what we create. To politicians, this is a novel idea. They prefer instead to think of wealth creators as being at their disposal. Not content with only maintaining essential services like police protection, they find in taxpayers a never-ending source of wealth to confiscate and distribute according to their notions of "fairness." Of course, "fairness" is usually linked to re-election.
Fellow citizens, we are the geese and the farmer is trying to kill us. Like California, let's send the message loud and clear that enough is enough.
California voters just sent a message to their politicians that they will not become the second goose to die at the hands of the shiftless and lazy. By an astonishing margin, the general populace told Sacramento that increased taxes and smoke-and-mirrors borrowing will not fly. Let us pause to celebrate a victory.
Most Americans still believe that we each own what we create. To politicians, this is a novel idea. They prefer instead to think of wealth creators as being at their disposal. Not content with only maintaining essential services like police protection, they find in taxpayers a never-ending source of wealth to confiscate and distribute according to their notions of "fairness." Of course, "fairness" is usually linked to re-election.
Fellow citizens, we are the geese and the farmer is trying to kill us. Like California, let's send the message loud and clear that enough is enough.
Wednesday, May 13, 2009
Whose Money Is It Anyway?
Most of us work until sometime in May to pay our taxes. The rest of what we earn is ours. Hey, wait a minute. Isn't that first five months ours too?
Not according to the government. In fact, they take it before we ever get our hands on it. Those of us with jobs have taxes withheld. Take a look at your next pay stub and remind yourself how much money you DON'T get each pay period.
Here's the kicker. Far and away, it is the middle class that gets whacked for taxes. Why? Because it is easier to collect from us. The poor don't have any money to confiscate; the rich have enough money to hire people who can protect what they earn.
Is that fair? I leave that to you. But, if you decide that paying less in taxes is a good thing, read on.
Owning a side business has numerous advantages. You control it, and if you manage it properly, you can build up a solid retirement to supplement or replace your "traditional" retirement. Better yet, you can protect more of your "regular" income from taxation.
Tax laws allow numerous deductions for business. Many expenses can be used to reduce your taxable income. So, in addition to having more income, you get to keep more of your money. Be sure to use a good tax advisor, because the laws must be followed closely.
The Boston Tea Party was prompted by a 3% tax. Many of us pay over ten times that amount now. I doubt that pouring tea into the harbor will do much good these days, so throw your own little tea party. Start a side business and keep more of what was yours to begin with.
Not according to the government. In fact, they take it before we ever get our hands on it. Those of us with jobs have taxes withheld. Take a look at your next pay stub and remind yourself how much money you DON'T get each pay period.
Here's the kicker. Far and away, it is the middle class that gets whacked for taxes. Why? Because it is easier to collect from us. The poor don't have any money to confiscate; the rich have enough money to hire people who can protect what they earn.
Is that fair? I leave that to you. But, if you decide that paying less in taxes is a good thing, read on.
Owning a side business has numerous advantages. You control it, and if you manage it properly, you can build up a solid retirement to supplement or replace your "traditional" retirement. Better yet, you can protect more of your "regular" income from taxation.
Tax laws allow numerous deductions for business. Many expenses can be used to reduce your taxable income. So, in addition to having more income, you get to keep more of your money. Be sure to use a good tax advisor, because the laws must be followed closely.
The Boston Tea Party was prompted by a 3% tax. Many of us pay over ten times that amount now. I doubt that pouring tea into the harbor will do much good these days, so throw your own little tea party. Start a side business and keep more of what was yours to begin with.
Wednesday, May 6, 2009
Truth or Consequences: Holding Big Business Accountable
When you or I start a business, we do not usually have the luxury of picking up the phone and calling our Congressman. Imagine actually getting through to your representative and having this conversation:
Noel: "Congressman Smith, this is Terry Noel."
(Smith motions to his Executive Assistant, shrugs his shoulders, and writes a note asking who the hell this guy is.")
Congressman: "Larry! Great to hear from you! You know, I am doing everything I can to stop global warming, guard against the swine flu, and get steroids out of baseball."
Noel: "Well, Congressman, that's not really why I called."
(Smith motions again. Writes a note asking for the caller's record of campaign contributions.)
Congressman: "Nothing?"
Noel: "Huh?"
Congressman: "What? I mean, nothing is more important than my constituents."
Noel: "Well, you see, I have a big problem. My business is coming up short this quarter. To tell you the truth, I could use a bailout."
Congressman: "I see..."
(Circles his finger at the side of his head in a cuckoo motion.)
Noel: "Not much. I mean nothing compared to the big banks."
Congressman: "Well, Harry, it's been nice talking to you and I appreciate your vote."
Noel: "Wait! The bailout?"
Congressman: "Yes, I am making sure that all these companies are held accountable. I am glad you support me. American jobs for American workers. That's what I say. We can't let our businesses suffer because of low wages in Fiji. Call again. Anytime."
Noel: "But...(click)...
When government injects itself into the economy, its actions are arbitrary, capricious, and usually based on campaign contributions. As long as politicians are given the power to reduce competition through regulation or provide subsidies outright to their contributors, businesses can grow. In fact, they can grow rapidly because they no longer have to work as hard to satisfy their customers. When things get rough, they ask their political friends to change the rules instead of competing fairly. Businesses don't get winnowed out for failure to perform.
The winnowing process of a truly free market is supremely neutral. If you or I do not provide a better product or service than our competitors, we lose money. If we lose enough, we go out of business. The only way to stop the current insanity of propping up businesses that are "too big to fail" is to take away politicians' power to interfere.
Noel: "Congressman Smith, this is Terry Noel."
(Smith motions to his Executive Assistant, shrugs his shoulders, and writes a note asking who the hell this guy is.")
Congressman: "Larry! Great to hear from you! You know, I am doing everything I can to stop global warming, guard against the swine flu, and get steroids out of baseball."
Noel: "Well, Congressman, that's not really why I called."
(Smith motions again. Writes a note asking for the caller's record of campaign contributions.)
Congressman: "Nothing?"
Noel: "Huh?"
Congressman: "What? I mean, nothing is more important than my constituents."
Noel: "Well, you see, I have a big problem. My business is coming up short this quarter. To tell you the truth, I could use a bailout."
Congressman: "I see..."
(Circles his finger at the side of his head in a cuckoo motion.)
Noel: "Not much. I mean nothing compared to the big banks."
Congressman: "Well, Harry, it's been nice talking to you and I appreciate your vote."
Noel: "Wait! The bailout?"
Congressman: "Yes, I am making sure that all these companies are held accountable. I am glad you support me. American jobs for American workers. That's what I say. We can't let our businesses suffer because of low wages in Fiji. Call again. Anytime."
Noel: "But...(click)...
When government injects itself into the economy, its actions are arbitrary, capricious, and usually based on campaign contributions. As long as politicians are given the power to reduce competition through regulation or provide subsidies outright to their contributors, businesses can grow. In fact, they can grow rapidly because they no longer have to work as hard to satisfy their customers. When things get rough, they ask their political friends to change the rules instead of competing fairly. Businesses don't get winnowed out for failure to perform.
The winnowing process of a truly free market is supremely neutral. If you or I do not provide a better product or service than our competitors, we lose money. If we lose enough, we go out of business. The only way to stop the current insanity of propping up businesses that are "too big to fail" is to take away politicians' power to interfere.
Friday, May 1, 2009
Too Big To Succeed
When I first read about being "too big to fail," I started eating like Henry VIII. Why not? If businesses can get too big to fail, I figured I could too. Fortunately, I discovered the error in my logic before I had to get a new wardrobe and went back to building my businesses the old-fashioned way--hard work and perseverance.
Let's think about this. How can a business get too big, much less too big to fail? The answer lies in competition. Specifically, businesses in a free market are constantly subjected to competitive pressure. If I open a business and fail to provide my customers a satisfactory product or service, they will soon find another provider. If enough of them flee to the other guy, I am out of business. That is bad for me (boo hoo) but great for customers, who now get better stuff (hurrah).
What is the best size for a business? The answer is, "Whatever works best." There is no "right" size other than that determined by the market. Let's take the example of WalMart. WalMart started out in the early 60's as a barely-known retail discounter. Sam Walton set his sites on K-Mart and set out to do a better job. It worked. Over a period of years, Walton built stores in places that everyone said were much too small for a big store. He also incorporated computer technology and built an ultra-efficient distribution system.
In the end, Walton was able to offer cheaper goods to more people and K-Mart crumbled. But what about all those small local stores, the so-called Mom and Pops? The truth is, they could not (or perhaps would not) do what was necessary to satisfy their customers. In this case, WalMart's size was an advantage. Small stores could not bargain as effectively with wholesalers or the people who delivered goods to the store. Size matters, and in this case, it was an advantage.
In some cases, size is a disadvantage. Large companies tend to become stodgy and bureaucratic, which in turn makes them less competitive. They often innovate less and respond more slowly to changes in technology and markets. Eventually, whatever advantages they enjoy from sheer size are outweighed by the disadvantages of being slow and cumbersome. They will be eliminated if the market is allowed to work.
The most obvious example of being sheltered from the market is a government agency. Governmental agencies grow large because their funds come from taxes. Taxes are not voluntary--they are confiscated and then used to pay for whatever it is that agency does. There is no reason for an agency to be reduced in size or eliminated because by law they are the only ones that can do what they do.
Less obvious are the large business entities that are shielded from competition through regulation and licensing laws. Take insurance. A person in State A may have to pay double the amount for health insurance than a person in State B. Current laws prevent some types of insurance companies from competing across state lines. As long as the company in State A does not have to worry about its customers going to the company in State B, it can charge a higher premium.
So why does such an insane system remain in place? Because politicians make sure it does. Their campaigns are funded largely by businesses that do not want to compete fairly in the marketplace. Businesses become "too large to fail" precisely because they were not allowed to fail before they got that big. Now we have financial institutions whose failure could bring down the whole system, insurance companies that can charge exorbitant premiums, and car manufacturers that make impossible promises to union members, knowing taxpayers will bail them out.
What is the solution? No restrictions whatsoever on markets. Outside preventing the initiation of violence or fraud, government should remain completely out of the economy. The companies we love to hate because they are too big to fail only got that way because our government is too big to work.
Let's think about this. How can a business get too big, much less too big to fail? The answer lies in competition. Specifically, businesses in a free market are constantly subjected to competitive pressure. If I open a business and fail to provide my customers a satisfactory product or service, they will soon find another provider. If enough of them flee to the other guy, I am out of business. That is bad for me (boo hoo) but great for customers, who now get better stuff (hurrah).
What is the best size for a business? The answer is, "Whatever works best." There is no "right" size other than that determined by the market. Let's take the example of WalMart. WalMart started out in the early 60's as a barely-known retail discounter. Sam Walton set his sites on K-Mart and set out to do a better job. It worked. Over a period of years, Walton built stores in places that everyone said were much too small for a big store. He also incorporated computer technology and built an ultra-efficient distribution system.
In the end, Walton was able to offer cheaper goods to more people and K-Mart crumbled. But what about all those small local stores, the so-called Mom and Pops? The truth is, they could not (or perhaps would not) do what was necessary to satisfy their customers. In this case, WalMart's size was an advantage. Small stores could not bargain as effectively with wholesalers or the people who delivered goods to the store. Size matters, and in this case, it was an advantage.
In some cases, size is a disadvantage. Large companies tend to become stodgy and bureaucratic, which in turn makes them less competitive. They often innovate less and respond more slowly to changes in technology and markets. Eventually, whatever advantages they enjoy from sheer size are outweighed by the disadvantages of being slow and cumbersome. They will be eliminated if the market is allowed to work.
The most obvious example of being sheltered from the market is a government agency. Governmental agencies grow large because their funds come from taxes. Taxes are not voluntary--they are confiscated and then used to pay for whatever it is that agency does. There is no reason for an agency to be reduced in size or eliminated because by law they are the only ones that can do what they do.
Less obvious are the large business entities that are shielded from competition through regulation and licensing laws. Take insurance. A person in State A may have to pay double the amount for health insurance than a person in State B. Current laws prevent some types of insurance companies from competing across state lines. As long as the company in State A does not have to worry about its customers going to the company in State B, it can charge a higher premium.
So why does such an insane system remain in place? Because politicians make sure it does. Their campaigns are funded largely by businesses that do not want to compete fairly in the marketplace. Businesses become "too large to fail" precisely because they were not allowed to fail before they got that big. Now we have financial institutions whose failure could bring down the whole system, insurance companies that can charge exorbitant premiums, and car manufacturers that make impossible promises to union members, knowing taxpayers will bail them out.
What is the solution? No restrictions whatsoever on markets. Outside preventing the initiation of violence or fraud, government should remain completely out of the economy. The companies we love to hate because they are too big to fail only got that way because our government is too big to work.
Friday, April 24, 2009
Thanks, Mr. President
No doubt hearing the cries of Tea Party attendees last week, President Obama bravely slashed $100 million dollars from the budget. $100 million dollars is a lot of money. That is, unless you compare it to the rest of the budget. Let's do some math. At least seven or eight trillion dollars has been created and injected into the economy. My calculator won't go that high, so I got out a big piece of paper and starting dividing. It turns out that it is 1/70,000 or .00001.
My first reaction was laughter. I thought I had accidentally stumbled upon The Onion web site. Nope. Turns out it was legitimate news. I had to ask myself, "What kind of nation have we become that we allow our leaders to insult us so roundly?"
Of course, we know exactly why Obama is doing this. It is to take our minds off what he and the rest of the government (our government) are not telling us about the financial crisis. When the truth comes out, will we fall for yet another cynical ploy like this one?
My first reaction was laughter. I thought I had accidentally stumbled upon The Onion web site. Nope. Turns out it was legitimate news. I had to ask myself, "What kind of nation have we become that we allow our leaders to insult us so roundly?"
Of course, we know exactly why Obama is doing this. It is to take our minds off what he and the rest of the government (our government) are not telling us about the financial crisis. When the truth comes out, will we fall for yet another cynical ploy like this one?
Thursday, April 16, 2009
Routines and Reality
Life is full of routines. We tend to eat the same foods, frequent the same places, and even put our clothes on in the same order over and over. Disrupting our routines can be unnerving or it can be invigorating, depending on how we look at it. Try putting your pants on "other leg" first and see what I mean.
Our economy is full of routines as well. The baker knows how much bread to bake because a certain number of people routinely buy a certain amount from him/her. This allows the baker to plan ahead of time, neither baking too many nor too few loaves.
What happens when routines are disrupted in the economy? If our baker suddenly has 20% more customers than usual, it can mean running out of inventory. 20% less means waste eats up profits. On a larger scale, bread-eating trends could change within an entire economy. Think of the low-carb diets that became popular a few years ago.
Changes in routines are necessary and healthy. None of us escapes personal growth. No economy moves forward without the endless cycle of birth and death. Products and services that sell like hotcakes for years suddenly die off in favor of the "new thing."
We cannot stop change from happening, but we can prepare for it. Think about your profession. What will current trends in technology and our social structure mean for your future? Will you job be changed radically in the next few years? Will it even exist? Write down your thoughts about how you will deal with changes in your industry. Then write a plan for dealing with those changes.
When the winds change, you want to be the one who knows how to trim the sail.
Our economy is full of routines as well. The baker knows how much bread to bake because a certain number of people routinely buy a certain amount from him/her. This allows the baker to plan ahead of time, neither baking too many nor too few loaves.
What happens when routines are disrupted in the economy? If our baker suddenly has 20% more customers than usual, it can mean running out of inventory. 20% less means waste eats up profits. On a larger scale, bread-eating trends could change within an entire economy. Think of the low-carb diets that became popular a few years ago.
Changes in routines are necessary and healthy. None of us escapes personal growth. No economy moves forward without the endless cycle of birth and death. Products and services that sell like hotcakes for years suddenly die off in favor of the "new thing."
We cannot stop change from happening, but we can prepare for it. Think about your profession. What will current trends in technology and our social structure mean for your future? Will you job be changed radically in the next few years? Will it even exist? Write down your thoughts about how you will deal with changes in your industry. Then write a plan for dealing with those changes.
When the winds change, you want to be the one who knows how to trim the sail.
Thursday, April 2, 2009
Challenge the Rules
According to legend, Alexander the Great was given a puzzle, the Gordian Knot, to solve. Whoever could untie the knot was destined to become the King of Asia. Seeing no way to untie it by regular means, Alexander drew his sword and cut the knot in half.
Sometimes we operate within a set of rules that are arbitrary. Sometimes the need for the rule has long been forgotten. Alexander was not call "the Great" for nothing. He realized that the real solution lay outside the set of rules assumed by everyone else who had tried and failed.
What opportunities do you have for bold and decisive action? Does it scare you to think about "breaking the rules?" Are you worried about starting a business because of what other people will say? "But what if I fail?" You're right. You may. Twice. Three or four times, maybe.
Professors are supposed to be educated idiots. You know, the kind that can explain how a watch works but can't tell time. They aren't "supposed" to start an online university. They are supposed to earn tenure and live happily ever after. As my cousin Tommy used to say, "*&^%* that noise."
I would rather fall on my face a thousand times than stay on the porch with the rest of the university dogs. It scares me every single time I take a chance. It hurts when I fail--every single time--at least for a while. But in the end, I can look in the mirror and know I belong in Alexander's company rather than the in that long line of timid souls who "followed the rules."
Draw your sword. Cut the knot.
Thursday, March 19, 2009
By Land or by Sea?
Paul Revere made his famous midnight ride to warn the countryside of an attack by the British. He asked his friend, who was to be in the North Church tower, to light one lantern if the attack was by land, two if by sea. Seeing the first light flicker in the belfry, he leaped astride his horse and whirled to take one more look. A second flame! The attack would be by sea and Revere set out at a thundering gallop to take his place in history.
I wish we had someone in a tower who could look and listen for the shuffle of British feet manning the boats on shore. We are not so fortunate, though. We know only that our nemesis--an economic meltdown--is lingering in the dark, waiting to attack like our oppressors of that time. Whether it comes by land or by sea, we do not know.
In a sense, all of us are looking toward that tower. Like the Americans of Revere's era, we have endured the harassment and insults of arrogant and incompetent tyrants. We know the big attack is coming, but from where? Deflation? Inflation? A major depression?
Our leaders think that injecting trillions and trillions of dollars of paper money into our economy will keep the enemy at bay. It may, for a while. In the end, though, the bill will come due and the unholy legions will come calling. When it does, where will you be? Asleep in bed armed only with a sheet of paper money or in a financial fortress built of solid knowledge and sound discipline?
Wake up, my friends. Midnight is upon us.
I wish we had someone in a tower who could look and listen for the shuffle of British feet manning the boats on shore. We are not so fortunate, though. We know only that our nemesis--an economic meltdown--is lingering in the dark, waiting to attack like our oppressors of that time. Whether it comes by land or by sea, we do not know.
In a sense, all of us are looking toward that tower. Like the Americans of Revere's era, we have endured the harassment and insults of arrogant and incompetent tyrants. We know the big attack is coming, but from where? Deflation? Inflation? A major depression?
Our leaders think that injecting trillions and trillions of dollars of paper money into our economy will keep the enemy at bay. It may, for a while. In the end, though, the bill will come due and the unholy legions will come calling. When it does, where will you be? Asleep in bed armed only with a sheet of paper money or in a financial fortress built of solid knowledge and sound discipline?
Wake up, my friends. Midnight is upon us.
Tuesday, March 10, 2009
Business Models
Business Models
Remember those plastic models kids used to put together? I put together a few. My favorites were fighter jets. When the model was finished, I had a replica of something much too big to keep in my room. Even though it was small, I could imagine the fighter jet in all its wonder, down to the finest detail. It was neat, being able to have a small and manageable version of something so large and powerful.
Models have a more serious use as well. Aeronautical engineers make small versions of jets before they build the real thing. They want to put it to the test and make modifications after seeing its performance in a wind tunnel and under various forms of stress. Only after examining the model's performance closely do they risk the time, money, and lives to build a real jet.
Business models are like that. They help us see ahead of time what a business is likely to look like when it opens and after it has run for a certain period of time. Just as no model jet can reproduce every possible event in the life of a real jet, a business model cannot tell us everything that will happen when the real business is up and running, but it sure can help us tell whether it will fly.
Just as all airplanes have certain things in common, so all businesses have certain things in common. ALL businesses operate on the concept of value-added. A business takes something in, say raw materials, makes it more valuable, and then sells it for more than was paid for it. When the selling price per unit exceeds the total of the cost of the raw material and the cost of adding value, the business makes a profit.
Raw “materials” do not actually have to be “material.” An author takes his/her knowledge and transforms it into a book. One might say that the author takes paper or digital media and adds value by adding words. Words are free, at least so far, so the author creates something out of nothing. Remember that next time someone tells you it takes money to make money. Advertising firms take a product or service and increase the perception of its value in the eyes of the consumer. What a wonderful concept! Creativity pays. Hotel owners and managers increase our comfort and convenience by using a building a certain way.
Try this exercise. Look at each business you see today and ask yourself what the basic business model is. How do they create value by transforming something “raw” into something refined and useful? Notice which businesses do a good job of this and which ones need improvement. Think about how you would do things differently. Write down some ideas for improving the business models of businesses you know nothing about. Then, tell me what you learn!
Remember those plastic models kids used to put together? I put together a few. My favorites were fighter jets. When the model was finished, I had a replica of something much too big to keep in my room. Even though it was small, I could imagine the fighter jet in all its wonder, down to the finest detail. It was neat, being able to have a small and manageable version of something so large and powerful.
Models have a more serious use as well. Aeronautical engineers make small versions of jets before they build the real thing. They want to put it to the test and make modifications after seeing its performance in a wind tunnel and under various forms of stress. Only after examining the model's performance closely do they risk the time, money, and lives to build a real jet.
Business models are like that. They help us see ahead of time what a business is likely to look like when it opens and after it has run for a certain period of time. Just as no model jet can reproduce every possible event in the life of a real jet, a business model cannot tell us everything that will happen when the real business is up and running, but it sure can help us tell whether it will fly.
Just as all airplanes have certain things in common, so all businesses have certain things in common. ALL businesses operate on the concept of value-added. A business takes something in, say raw materials, makes it more valuable, and then sells it for more than was paid for it. When the selling price per unit exceeds the total of the cost of the raw material and the cost of adding value, the business makes a profit.
Raw “materials” do not actually have to be “material.” An author takes his/her knowledge and transforms it into a book. One might say that the author takes paper or digital media and adds value by adding words. Words are free, at least so far, so the author creates something out of nothing. Remember that next time someone tells you it takes money to make money. Advertising firms take a product or service and increase the perception of its value in the eyes of the consumer. What a wonderful concept! Creativity pays. Hotel owners and managers increase our comfort and convenience by using a building a certain way.
Try this exercise. Look at each business you see today and ask yourself what the basic business model is. How do they create value by transforming something “raw” into something refined and useful? Notice which businesses do a good job of this and which ones need improvement. Think about how you would do things differently. Write down some ideas for improving the business models of businesses you know nothing about. Then, tell me what you learn!
Wednesday, February 25, 2009
Uncovering Your Hidden Value
All business operates on a simple premise. One person creates value for another. Outside of gift-giving and other types of benevolence, the creator gets paid. He or she receives value, often in the form of money, and both partners to the trade are better off than they were before.
Many forms of value are obvious. Clothing, shelter, food, and the people who create them are valuable because we need those basic things to survive. Music, paintings, sports and other non-essentials improve our lives even though we could live without them. But they too are commonplace and obvious.
Many people who start businesses are stuck in the obvious. They try to provide more of what others are already providing quite well: dry cleaners, groceries, web design, etc. There is nothing wrong with opening this kind of business. If you can do it better, faster, or cheaper than your competitors, you may do well. But why butt heads with the rest of the market?
Each of us has value to others that may have gone unrecognized. We may know how to do something unique or make something unusual that is valuable to 0thers. But how does one discover these hidden veins of value? Start by brainstorming fifty ideas for businesses. Don't criticize or question any idea, just write down fifty. Even if some turn out to be "obvious" keep writing. Chances are, you will find something valuable that only you can provide.
The next step is refining your idea into a business model. A business model takes your initial idea and builds around it a "delivery system" that allows you to get paid for what you do well. More on business models next post.
Many forms of value are obvious. Clothing, shelter, food, and the people who create them are valuable because we need those basic things to survive. Music, paintings, sports and other non-essentials improve our lives even though we could live without them. But they too are commonplace and obvious.
Many people who start businesses are stuck in the obvious. They try to provide more of what others are already providing quite well: dry cleaners, groceries, web design, etc. There is nothing wrong with opening this kind of business. If you can do it better, faster, or cheaper than your competitors, you may do well. But why butt heads with the rest of the market?
Each of us has value to others that may have gone unrecognized. We may know how to do something unique or make something unusual that is valuable to 0thers. But how does one discover these hidden veins of value? Start by brainstorming fifty ideas for businesses. Don't criticize or question any idea, just write down fifty. Even if some turn out to be "obvious" keep writing. Chances are, you will find something valuable that only you can provide.
The next step is refining your idea into a business model. A business model takes your initial idea and builds around it a "delivery system" that allows you to get paid for what you do well. More on business models next post.
Wednesday, February 18, 2009
What is an Asset?
Accountants, financial advisors, and the popular press talk constantly about "assets." Most people have only a vague notion of what an asset really is. My favorite definition comes from the book Rich Dad Poor Dad. An asset puts money in your pocket. A liability takes money out of your pocket.
Let's think about that a minute. What kinds of things take money out of your pocket? Well, that bass boat sure does. Unless you make a heck of a lot of money fishing, more money goes into the monthly payments and upkeep than comes out in the form of income. If you are like most of us, you don't expect any money to come your way on account of that boat. That, friends, is a liability.
This is not being judgmental, by the way. If you enjoy fishing, buy that boat by all means. As long as you have the money, live it up. In the case of a pleasure boat, no one really expects to make money. But what about your house? Haven't you always been told that it is an asset? The truth is, it takes money out of your pocket too. Even if you have paid it off, you are still spending money on upkeep, utilities, and insurance. That makes your house a liability. But don't you make money when you sell? Try that about now. And even if you could sell it, where would you live?
The only thing that truly counts as an asset is something that puts money in your pocket. Assets are money machines. When you put some amount of money in an asset, you expect to receive more money than you put in at some point in the future. There are two ways to accomplish this. One is for the asset to throw out a stream of money like, say, a savings account. (I know. It's not much of a return, but stay with me.) As long as you keep that money in the account, you earn money. Another example is a stock that pays a dividend.
The second way for an asset to make money for you is appreciation in value. Imagine buying a Silver Eagle coin for $15 and selling it six months later for $20. This type of asset makes you money, but you have to sell it to realize the gain. House flipping was a popular form of this type of investing until the housing market crashed.
A successful business is a tremendous asset. By building a business, you can realize both kinds of return. A business creates an income stream as long as you own it. If you build it the right way, you can also sell it at some point for much more money than you put into it. Another great thing about building a business is that you can put much more than just money into it. You can put your know-how, your time, your social network, and your creativity into it. The bank does not care what I know or how hard I am willing to work when I open a savings account. I park some cash and it works for me for the rate determined by the bank, end of story. A business gives me an opportunity to capitalize on things other than money.
It all comes back to value. All businesses operate on the principle of creating value that other people are willing to pay for. Many times, we vastly underestimate how valuable we are to others because we are stuck in the J-O-B trap. Chances are, you have much more potential value than you realize. Next week, we'll take a look at some ways to tap that hidden value.
Let's think about that a minute. What kinds of things take money out of your pocket? Well, that bass boat sure does. Unless you make a heck of a lot of money fishing, more money goes into the monthly payments and upkeep than comes out in the form of income. If you are like most of us, you don't expect any money to come your way on account of that boat. That, friends, is a liability.
This is not being judgmental, by the way. If you enjoy fishing, buy that boat by all means. As long as you have the money, live it up. In the case of a pleasure boat, no one really expects to make money. But what about your house? Haven't you always been told that it is an asset? The truth is, it takes money out of your pocket too. Even if you have paid it off, you are still spending money on upkeep, utilities, and insurance. That makes your house a liability. But don't you make money when you sell? Try that about now. And even if you could sell it, where would you live?
The only thing that truly counts as an asset is something that puts money in your pocket. Assets are money machines. When you put some amount of money in an asset, you expect to receive more money than you put in at some point in the future. There are two ways to accomplish this. One is for the asset to throw out a stream of money like, say, a savings account. (I know. It's not much of a return, but stay with me.) As long as you keep that money in the account, you earn money. Another example is a stock that pays a dividend.
The second way for an asset to make money for you is appreciation in value. Imagine buying a Silver Eagle coin for $15 and selling it six months later for $20. This type of asset makes you money, but you have to sell it to realize the gain. House flipping was a popular form of this type of investing until the housing market crashed.
A successful business is a tremendous asset. By building a business, you can realize both kinds of return. A business creates an income stream as long as you own it. If you build it the right way, you can also sell it at some point for much more money than you put into it. Another great thing about building a business is that you can put much more than just money into it. You can put your know-how, your time, your social network, and your creativity into it. The bank does not care what I know or how hard I am willing to work when I open a savings account. I park some cash and it works for me for the rate determined by the bank, end of story. A business gives me an opportunity to capitalize on things other than money.
It all comes back to value. All businesses operate on the principle of creating value that other people are willing to pay for. Many times, we vastly underestimate how valuable we are to others because we are stuck in the J-O-B trap. Chances are, you have much more potential value than you realize. Next week, we'll take a look at some ways to tap that hidden value.
Tuesday, February 10, 2009
What is Money?
If your answer is the green stuff in your wallet or purse, go to the back of the line. The paper we all carry is a facsimile, a representation--a marker, really, for real money. It is fake. It works well in the place of real money, but only under certain conditions.
The idea behind money itself is brilliant. We can imagine how the first humans developed the barter system--you make arrows better and I make blankets better. Hmmmm...maybe we could trade and both be better off. Free trade ranks as one of humanity's crowning achievements. As we grew in intelligence and sophistication, the barter system became cumbersome. If you did not happen to need blankets at the same time I needed arrows, we were out of luck.
Money was invented to "mark" an asynchronous exchange of value. That is just a fancy way of saying that one of us could store the value he/she had created for future use. Neat idea, huh? The only problem was what to use for a marker.
Not just anything would do. In order for something to serve as money, it had to be durable, portable, and rare. Durability allowed value to be stored safely. No good using a tree leaf if it disintegrates before it can be spent. Portability allowed the value to be transported over large distances, thus expanding trade to the benefit of all. Those two characteristics are fairly obvious, and real money over the course of human history has nearly always been durable and portable. But why rare?
Rareness is a desirable characteristic for money to have because it needs to represent the value that is created and stored by the holder. If we were to use any old seashell, everyone could become rich by going to the beach. Something is wrong here, though. How can everyone become rich by picking up seashells? The answer is, they can't, though our government believes they can. This is the primary reason we are all facing the biggest financial crisis in decades.
Money is not usable. We can't eat it, can't wear it, and can't cure disease with it. What we want is the value behind it. If I am sick, the only reason I want money is to purchase your services as a physician. That seashell is worth only what I can trade it for. If the supply in a particular economy (let's say a village) gets too high, its value goes down. Soon it takes a bushel basket full of shells to purchase what three shells would purchase before.
The reason shells become worthless is that anyone can get them without providing any tangible value to anyone else. Over thousands of years, two main materials have emerged that prevent such flagrant abuses of the idea of money--gold and silver. Yes, some people acquire wealth by digging up gold or silver, but it is a lot of trouble and the supply is limited. In a sense, the miners of precious metals earn their value by providing the rest of us with a solid standard of exchange.
Gold and silver became the only real money not because anyone decreed them to be so, but because people in general recognized them as money. Governmental interference came much later, mostly with undesirable consequences.
Today, our government is creating currency hand over fist. All this in the name of "saving the economy." Note that I said "currency," not money. Did you ever wonder where that now nearly one trillion dollars comes from? They create it out of thin air. It represents no tangible value whatsoever. Like the village I just spoke of, our politicians are going to the beach, gathering shells, and calling it money. Oh, and they force us to use it as money. That is why you see "This note is legal tender for all debts, public and private" on our currency.
Our nest eggs all got hammered last year because we were counting on currency. We all thought that we would be able to trade what we thought was money for things we will want and need when we retire. Not likely. If your portfolio was mostly stocks, bonds, and mutual funds, you have been had. If you thought that Social Security would allow you to at least buy food and shelter and that Medicare would pay your doctor bills, think again.
The good news is that we do not have to sit and take this. No, I do not mean storming Washington, much as I love to dream of that. I mean that living the life you want to live and being able to retire comfortably now requires more courage and savvy than ever before. Next week, I will explain why you must learn what assets are and how you can start creating them.
The idea behind money itself is brilliant. We can imagine how the first humans developed the barter system--you make arrows better and I make blankets better. Hmmmm...maybe we could trade and both be better off. Free trade ranks as one of humanity's crowning achievements. As we grew in intelligence and sophistication, the barter system became cumbersome. If you did not happen to need blankets at the same time I needed arrows, we were out of luck.
Money was invented to "mark" an asynchronous exchange of value. That is just a fancy way of saying that one of us could store the value he/she had created for future use. Neat idea, huh? The only problem was what to use for a marker.
Not just anything would do. In order for something to serve as money, it had to be durable, portable, and rare. Durability allowed value to be stored safely. No good using a tree leaf if it disintegrates before it can be spent. Portability allowed the value to be transported over large distances, thus expanding trade to the benefit of all. Those two characteristics are fairly obvious, and real money over the course of human history has nearly always been durable and portable. But why rare?
Rareness is a desirable characteristic for money to have because it needs to represent the value that is created and stored by the holder. If we were to use any old seashell, everyone could become rich by going to the beach. Something is wrong here, though. How can everyone become rich by picking up seashells? The answer is, they can't, though our government believes they can. This is the primary reason we are all facing the biggest financial crisis in decades.
Money is not usable. We can't eat it, can't wear it, and can't cure disease with it. What we want is the value behind it. If I am sick, the only reason I want money is to purchase your services as a physician. That seashell is worth only what I can trade it for. If the supply in a particular economy (let's say a village) gets too high, its value goes down. Soon it takes a bushel basket full of shells to purchase what three shells would purchase before.
The reason shells become worthless is that anyone can get them without providing any tangible value to anyone else. Over thousands of years, two main materials have emerged that prevent such flagrant abuses of the idea of money--gold and silver. Yes, some people acquire wealth by digging up gold or silver, but it is a lot of trouble and the supply is limited. In a sense, the miners of precious metals earn their value by providing the rest of us with a solid standard of exchange.
Gold and silver became the only real money not because anyone decreed them to be so, but because people in general recognized them as money. Governmental interference came much later, mostly with undesirable consequences.
Today, our government is creating currency hand over fist. All this in the name of "saving the economy." Note that I said "currency," not money. Did you ever wonder where that now nearly one trillion dollars comes from? They create it out of thin air. It represents no tangible value whatsoever. Like the village I just spoke of, our politicians are going to the beach, gathering shells, and calling it money. Oh, and they force us to use it as money. That is why you see "This note is legal tender for all debts, public and private" on our currency.
Our nest eggs all got hammered last year because we were counting on currency. We all thought that we would be able to trade what we thought was money for things we will want and need when we retire. Not likely. If your portfolio was mostly stocks, bonds, and mutual funds, you have been had. If you thought that Social Security would allow you to at least buy food and shelter and that Medicare would pay your doctor bills, think again.
The good news is that we do not have to sit and take this. No, I do not mean storming Washington, much as I love to dream of that. I mean that living the life you want to live and being able to retire comfortably now requires more courage and savvy than ever before. Next week, I will explain why you must learn what assets are and how you can start creating them.
Thursday, February 5, 2009
"I'm not dead yet." scene from Monty Python's Holy Grail
"In the long run, we are all dead." John Maynard Keynes
This ranks as one of the most irresponsible remarks in the history of humanity. Keynes may have filled his own prophecy. He is dead. We are not--at least not yet. But we are living in Keynes' long run and we are about to find out how wrong he was.
Keynesian economics called into question the premises of the classical theory that preceded it. Keynes thought that laissez-faire capitalism, the freedom of individuals to trade with little or no interference from the government, would lead to sub-optimal outcomes for the economy as a whole. He advocated a more aggressive role for government to counterbalance business cycles and to promote economic well-being through "stimulus" spending.
Little wonder that politicians embrace his message. Keynes' invitation to spend, spend, spend is like telling an alcoholic to drink, drink, drink. The only difference is that taxpayers get the hangover. A huge economy like ours is a hard thing to break. Because we have, at least up until now, retained enough economic freedom to entice bright people to create and sell things we all want and need, we have survived. Until last year, we even gave off the impression of having prospered. That is, until millions of retirees watched their portfolios implode. Welcome to the long run.
Many of us with limited-government sensibilities thought the last nail had been driven into Keynes' coffin two decades ago. As it turns out, he may drive the last nail into ours. Obama and his Democratic allies in Congress have conjured up his spirit, invoking heroic images of FDR, the imagined savior of the Great Depression. And lest you think this is a Republican-friendly blog, they are no better. If anything, they are more devious, pretending to prefer less government while spending like inebriated seamen. In a way, Democrats are the streetwalkers of American life. They don't pretend to be anything but what they are or they are too stupid to hide it. Republicans are call girls, cleverly pretending to be respectable, but eager to go spread-eagle for a slightly higher fee.
No amount of ranting about politicians, cathartic as it may be, will help any of us. The system has been rigged over a period of decades and is now beyond repair without radical changes. Don't hold your breath waiting for politicians to learn anything. What will help us as individuals is a realistic preview of what is about to happen and how to protect ourselves. This time, folks, it is different. We are beyond arguments about what government should do. We are about to find out what they cannot do.
This ranks as one of the most irresponsible remarks in the history of humanity. Keynes may have filled his own prophecy. He is dead. We are not--at least not yet. But we are living in Keynes' long run and we are about to find out how wrong he was.
Keynesian economics called into question the premises of the classical theory that preceded it. Keynes thought that laissez-faire capitalism, the freedom of individuals to trade with little or no interference from the government, would lead to sub-optimal outcomes for the economy as a whole. He advocated a more aggressive role for government to counterbalance business cycles and to promote economic well-being through "stimulus" spending.
Little wonder that politicians embrace his message. Keynes' invitation to spend, spend, spend is like telling an alcoholic to drink, drink, drink. The only difference is that taxpayers get the hangover. A huge economy like ours is a hard thing to break. Because we have, at least up until now, retained enough economic freedom to entice bright people to create and sell things we all want and need, we have survived. Until last year, we even gave off the impression of having prospered. That is, until millions of retirees watched their portfolios implode. Welcome to the long run.
Many of us with limited-government sensibilities thought the last nail had been driven into Keynes' coffin two decades ago. As it turns out, he may drive the last nail into ours. Obama and his Democratic allies in Congress have conjured up his spirit, invoking heroic images of FDR, the imagined savior of the Great Depression. And lest you think this is a Republican-friendly blog, they are no better. If anything, they are more devious, pretending to prefer less government while spending like inebriated seamen. In a way, Democrats are the streetwalkers of American life. They don't pretend to be anything but what they are or they are too stupid to hide it. Republicans are call girls, cleverly pretending to be respectable, but eager to go spread-eagle for a slightly higher fee.
No amount of ranting about politicians, cathartic as it may be, will help any of us. The system has been rigged over a period of decades and is now beyond repair without radical changes. Don't hold your breath waiting for politicians to learn anything. What will help us as individuals is a realistic preview of what is about to happen and how to protect ourselves. This time, folks, it is different. We are beyond arguments about what government should do. We are about to find out what they cannot do.
Welcome to Empty Nest Egg
Welcome to the first in a series of posts on the topic of our current financial crisis. I teach entrepreneurship at the university level and have spent a large amount of time researching and thinking about how and why people start businesses. Some want to, perhaps because they do not like working for someone else or they hate working by the clock. Others are interested in achieving great wealth, something that is next to impossible with a job.
The events of 2008 have created another compelling reason to start a business. Many of us will simply have to. Though I am at my core an optimist, I believe that we have reached a tipping point. In the blink of an eye, we have seen the imminent collapse of our largest financial institutions, insurance companies, and automakers. Job layoffs are increasing rapidly, as are foreclosures. It is not pretty and it will get worse.
My purpose in writing this blog is twofold. First, I want to offer my interpretation of these disturbing events. The mainstream press has done an abysmal job of exposing the real culprits in our descent into economic madness. Second, I want to offer readers a way out. While the next few years are going to be a rough ride, those who are willing to learn some basic business skills and to question their previously held assumptions about the relationship between government and the economy have the opportunity not only to survive, but to prosper in the coming years.
The events of 2008 have created another compelling reason to start a business. Many of us will simply have to. Though I am at my core an optimist, I believe that we have reached a tipping point. In the blink of an eye, we have seen the imminent collapse of our largest financial institutions, insurance companies, and automakers. Job layoffs are increasing rapidly, as are foreclosures. It is not pretty and it will get worse.
My purpose in writing this blog is twofold. First, I want to offer my interpretation of these disturbing events. The mainstream press has done an abysmal job of exposing the real culprits in our descent into economic madness. Second, I want to offer readers a way out. While the next few years are going to be a rough ride, those who are willing to learn some basic business skills and to question their previously held assumptions about the relationship between government and the economy have the opportunity not only to survive, but to prosper in the coming years.
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