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Full circle: state of nature to virtual state of nature

December 16th, 2013

by Abbe Mowshowitz
Image: The Ouroboros (Wikimedia Commons)

Writing in the mid-17th century the social contract theorist Thomas Hobbes characterized the state of nature as a “time of war, where every man is enemy to every man” and “the life of man, solitary, poor, nasty, brutish and short.” Unbridled competition was the dominant feature of this primitive condition, leading people eventually to accept agreements which placed constraints on their behavior designed to end the state of war, ensure personal safety and establish conditions capable of supporting the necessary activities of daily life. Social contract theorists such as Hobbes, Locke and Rousseau argued that such agreements are implicit in the rise of civil society. The accounts of these philosophers differ in important ways, but all agree on some form of contract as the foundation of society.

Social philosophers may no longer accept the historical reality of social contract preceded by a state of nature, but the latter concept is useful for establishing a starting point or base case for gauging human social progress. The instruments and capabilities of primitive groups for shaping the environment were insignificant compared with those of the modern world, but both primitive and modern share a common feature, namely their tolerance of unbridled competition. Advances in technology have not been matched by progress in the ways individuals and groups deal with each other. A glance at daily news reports of conflict and strife in too many regions of the world is enough to convince one this observation is true.

Economists argue that competition is essential to the proper functioning of the market economy. It stimulates innovation and development of new or improved products and services, keeps production costs in check and lowers prices to consumers. Experience since the dawn of the Industrial Revolution testifies to the accuracy of this argument. However, there is no such thing as an absolute good – something of which there cannot be too much – and competition is no exception to this rule.

Economic conditions in the wake of the most recent financial crisis begin to resemble the mythical state of nature. The stark realities of ruthless competition have come to the fore in this time of economic duress and Hobbes’ war of all against all rages once again. Virtual organization, made practicable by advances in transportation, information and communication technologies, has intensified competition in the global arena. Commercial activity on a global scale is certainly not new, but the ability to move goods, people and capital easily, quickly and cheaply has given it a historically unprecedented boost.

Virtual organization supports, encourages and demands switching to lower cost alternatives for satisfying requirements in the making of products and delivery of services. This may take the form of shifting production from one venue to another, selecting the lowest cost supplier of particular goods and services, using transfer pricing schemes to lower global tax obligations, and substituting one individual for another on a project team. All of these types of switching, and many related organizational or accounting tricks, exploit opportunities for taking advantage of competition in the marketplace. Desire for increased profits realizable through such exploitation urges practices that stimulate competition between firms and individuals, undermine loyalty to place and person, and contribute to the “war of all against all.”

Just as technological and economic innovations in an earlier period underpinned the evolution of the centralized nation state, current innovations are undermining those same states. The great nation states, despite their military prowess, are doomed like the dinosaurs of old, unable, unwilling or insufficiently nimble to meet the threat to their dominance posed by agile virtual organizations that have no sense of national identity. As national governments wrested power from feudal barons in the early modern period, virtual corporations operating in global markets are taking it back by making it all but impossible for governments to gather the resources needed to govern effectively. Added to this slow but inexorable starvation is the complicity of government officials who are in effect tools of the rising power elites. Regulators who keep a weather eye out for lucrative employment opportunities in the companies they are charged to regulate are not likely to be over zealous in promoting the public interest. Absent the protection of the state, we will converge inexorably to a virtual state of nature. So much for progress and the perfectibility of man.

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Signs of emerging virtual feudalism

October 22nd, 2013

“You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don’t you call me ’cause I can’t go
I owe my soul to the company store”
From the lyrics of Sixteen Tons, popularized by Tennessee Ernie Ford

“Former President Jimmy Carter said Monday [October 7, 2013] that the income gap in the United States has increased to the point where members of the middle class resemble the Americans who lived in poverty when he occupied the White House.”

Read more:
Carter: Middle class today resembles past’s poor

 

“Magnetar Capital LLC, investigated by the Securities and Exchange Commission for its housing bets leading up to the property crash, acquired a rental business in January with about 1,900 properties [in Huber Heights, Ohio]. In April, its management company applied for the largest cut to property tax assessments in the county’s history. The move could curb funding for public schools, the police and fire departments and services to the disabled, said Montgomery County Auditor Karl Keith.

Private-equity firms and hedge funds have bought as many as 200,000 homes across the U.S., typically in areas hardest hit by the housing crash, to profit from soaring demand for rentals. What makes Magnetar’s investment unique so far is its focus, buying one in 11 homes in the Ohio suburb, magnifying its influence over the residents and the town’s finances.”

Read More:
Magnetar Goes Long Ohio Town While Shorting Its Tax Base

 

Also read:
Bodies Double as Cash Machines With U.S. Income Lagging: Economy

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The greatest Ponzi scheme of them all

August 15th, 2013

by Abbe Mowshowitz

Pyramid Scheme (source: US Securities Exchange Commission)

Ponzi schemes operate on the principle of rewarding existing members with funds acquired from new members. Each new member brings in money, treated as an ‘investment’ for example, and interest is paid regularly to existing members according to their current balance and length of time in the scheme. No use is made of the money while it is invested in the scheme. The attraction is the relatively high rate of return on the investment, a rate that one might say is too good to be true. So long as membership grows everyone is happy. However, experience shows that something always comes along to interfere with growth, just as trees do not grow to the sky. Since the only source of revenue is the money brought in by new members, Ponzi schemes crash when growth stops. In one of the more notorious recent cases, namely the scheme perpetrated by Bernie Madoff in which participant losses amounted to an estimated $18 billion, the end came when Madoff allegedly told his sons about the massive fraud. Prosecution followed when the scheme was revealed to authorities and Madoff was eventually convicted of fraud and sentenced to a prison term of 150 years.

Is termination of growth unavoidable? Madoff kept his scheme going for decades despite occasional probes by financial regulators such as the Securities and Exchange Commission. What if the authorities remained blind to wrong doing or simply were befuddled by the seeming rectitude of a Ponzi scheme operator? After all Madoff was regarded for years as a pillar of his community, contributing substantially to his favorite charities and political parties. Perhaps he could have kept the scheme going and passed it on to the next generation. The key question for historians is what prompted Madoff to wind up his ‘business.’

Almost all natural phenomena one can think of have a finite life cycle. Plants and animals come into being then grow decay and die. Such is the way of nature. The lengths of these life cycle stages vary from one class of creature to another, but all are subject to the iron rule of growth decay and death. The same rule seems to apply to social and cultural phenomena as well. Empires and civilizations have come and gone. Are there any exceptions to the iron rule? At first glance there does appear to be one, namely, economic growth.

Economic growth has all the earmarks of a Ponzi scheme. The detailed workings vary from place to place and change over time, but certain basic features of the scheme are noteworthy. Each succeeding generation pays into the scheme by undergoing a protracted period of costly education and training. Families effectively manage trusts for children as they pass through the education and training system. When certified as skilled workers, the rising generation begins to receive ‘interest’ on its ‘investment’ in the form of wages derived from a job, and at the same time continues to contribute to the scheme. Clever accounting reduces the interest payments to active workers by withholding a portion that is reserved for various social insurance programs so that, for example, retirees can receive ‘interest’ from the system. Thus the amount invested in the scheme increases as the population grows. If economic growth comes to an end, as it does temporarily in recessions, those invested in the scheme can no longer count on any interest income.
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First the workers, then the retirees – victims of the cut-and-paste management of virtual organization

August 5th, 2013
Library of Congress

Library of Congress

Pandemic of pension woes plagues nation
By John W. Schoen | CNBC

Detroit, you’re not alone.

Across the nation, cities and states are watching Detroit’s largest-ever municipal bankruptcy filing with great trepidation. Years of underfunded retirement promises to public sector workers, which helped lay Detroit low, could plunge them into a similar and terrifying financial hole.

A CNBC.com analysis of more than 120 of the nation’s largest state and local pension plans finds they face a wide range of burdens as their aging workforces near retirement.

Thanks to a patchwork of accounting practices and rosy investment assumptions, it’s not even clear just how big a financial hole many states and cities have dug for themselves. That may soon change, thanks to a new set of government accounting standards that could serve as a nasty wake-up call to states and cities relying on rosy scenarios and head-in-the-sand accounting.

Even less clear is who will pay to clean up the messes. Will it be the millions of retirees owed trillions of dollars in benefits, the bondholders who lent states and cities trillions more, or local taxpayers who may have to pay more to cover the shortfalls or see deeper cuts in public services?

Regardless, the painful process will likely play out for years.
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Downside of virtual staffing

August 3rd, 2013
image by Zuza Ritt

image by Zuza Ritt

Source: Pennsylvania Kills An IBM Contract That’s 3 Years Late And $60 Million Over Budget

By Julie Bort | Business Insider

The state of Pennsylvania is killing a contract with IBM because, as of July, the project was $60 million over budget and a whopping 42 months behind schedule, state officials said.

That’s three and a half years late.

Chris Kanaracus at IDG’s News Service broke the news.

In 2006, Pennsylvania signed a $106.9 million contract with IBM to be completed in 2009.

It was, by any measure, a huge and complex project. It was to give the state a new computer system to track employee wages, employer taxes and handle unemployment claims, appeals, payments.

Half of IT projects with budgets of over $15 million dollars run 45% over budget and are 7% behind schedule, according to research from McKinsey. So, sadly, it’s not surprising that a project this big would have problems.

By August 2012, with the project not yet complete, Department of Labor Secretary Julia Hearthway commissioned Carnegie Mellon University’s Software Engineering Institute to tell her if the state should finish or bail.

On Wednesday, the report came back, recommending that the state pull the plug.

[Read More] »

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