Negative Effects of Weakened Property Rights: IPRA Law as a Prime Instance

(Important note: although in this article I advocate dismantling the IPRA law, I do not advocate disobeying the law as it currently exists. As a citizen and resident of the Philippines, I abide by all Philippine laws.)

Our 1987 Philippine Constitution defines land ownership as a “stewardship”, which allows us to be administrators of land that we have title to, but not “own” it in the strict sense of the word.

At first glance, this would seem like a good idea borne of a good intention: to prevent misuse of the land that one owns title to. Theoretically the government can come in and correct the situation if you misuse the land, like selling it to a foreigner, for example. However, I don’t think it has improved land use, and it has very negative effects: it has weakened the enforcement of land property rights. I believe the result has been that, in the Philippines more than any other South-East Asian country, we have more land area (land with title) occupied by people who do not own such land and yet do not pay rent either. There are more “squatters” in the Philippines than in Indonesia or Malaysia or Singapore, for example. First World countries like in Europe, America, and Japan have very few land areas (if any) occupied by squatters. In the Philippines, it seems like it’s a permanent problem. It is definitely pervasive: I do not think there is any region in the Philippines in which the squatter problem does not exist. Please do tell me if your region, or even just your local province, does not have squatters.

This stewardship idea has spawned other laws that further weaken the rights of landowners. In my mind, foremost among these laws is the so-called Indigenous People’s Rights Act (IPRA). The idea is to preserve and protect the culture of indigenous tribes, and to grant them large swaths of land that are their “ancestral domains”.

As a side note, needed specially because my family and I have just been directly affected by this law, I have to state categorically that we have nothing against indigenous cultures and I and my family (most specially both of my deceased parents) do and did respect all unique qualities of indigenous culture.

Benefits and Demands of Competition

I believe in a society where everyone has the chance to prosper, but we cannot remove the fact that life itself is competitive. In fact, survival alone can be competitive. We forget how competitive life is in general, and do not see the benefits of competition to society. In a system where competition thrives, it’s not the winner alone that wins: we all benefit by choosing the winner because our very choice, on a daily basis, is founded on which product or company most benefits us. In fact, this competitive arrangement makes it very easy to survive in a capitalist society. In pre-capitalist societies, competition is for basic things like food: we hunt and the better hunter gets more food. Capitalism allows competition to progress from the very mundane and basic survival skills to the very advanced and challenging.

We forget the benefits of capitalism because most of us do not even ascribe these benefits to capitalism, much less to the competition inherent in capitalism. In the local fast food business, for example, not many people realize the intense competition that existed between Mang Inasal and Jollibee in areas where these two companies operate. The benefit to the consumer is tremendous: lower fast food prices, with better quality; and yet not many people even think about it. We all simply go to eat at the place with the most convenient, lowest-priced, and good quality food. (It would appear that because Jollibee has now bought Mang Inasal that such competition is now moot, but that is another subject worth exploring in another blog.)

As another example, very few of us have the time to look into why wages are low in our country and high in countries like Singapore and the first world countries. We believe the left when it asserts that wages are low because of “oppressive” companies like Nike and Apple who manufacture their products in low wage countries and try to keep it low. We don’t see that wages are low in our country because of our own making: we restrict foreign direct investments with our 60/40 rule of land ownership. Without much foreign capital, we rely on local capital which is slowly growing larger but still not large enough. Without enough capital, there is no demand for labor. Without demand for labor, wages are low. Instead of driving away companies like Nike and Apple, we should welcome them in order to enhance the competition for labor. The situation right now is reversed: it is labor that is competing for too few jobs. It’s a good thing the government at least allows us to go out of the country to get a job, but even in this our laws make it difficult and expensive for the OFW to freely get a job outside.

We all try to improve our competitiveness. It is a natural effect of a competitive society. We all went to elementary school because our parents instinctively knew that we would do better (in a competitive society) by having at least elementary education. In fact, we spend an enormous effort to get done also with high school and college. We do a lot of other things to stay competitive in the labor market. The worst thing we can do to our kids is to shield them from competition, and yet that is exactly what the government is doing to indigenous tribes with at least part of the IPRA law. Hiding from competition breeds dependency and welfare mentality. Many of these tribes now cannot survive without government aid.

Capitalism as the Minimum Common Denominator

I believe that capitalist competition can coexist with diverse cultures. The spirit of competition is not anathema to some cultures. Even Muslims who reside in a capitalist society can thrive in that capitalist system, if they choose to. Islam has its own system of government that, in practice, is basically socialist, and so it appears that Muslim culture is not compatible with capitalism. I suggest that this is negated by the fact that devout Muslims can and do prosper in a capitalist society.

The idea of preserving cultures is very much akin to preserving species: the idea is to preserve species without regard to usefulness or benefit to man. Culture preservation, as stipulated in IPRA, does not distinguish between useful and useless (even harmful) practices, customs, and values in indigenous cultures. For example, if an indigenous tribe does not value education, then this law can encourage (instead of frowning upon) such valuation. This law, by discouraging education among some indigenous tribes, therefore stunts the competitiveness of members of such tribes in the larger society.

Instead of blind preservation, I would advocate preservation of selected practices, customs, and values of indigenous tribes. The criteria for selection should be decided not by the government, or even the tribe itself. That decision (on which aspects of a culture to keep or dispose of) should be left to individual families, or even down to individual members of that tribe. In other words, I would advocate doing away with all of IPRA. But this leaves too little to preserve, anthropologists would cry. No, I don’t think things like language, clothing style, a large number of religious practices are too little to preserve.

In practice, capitalism leaves much of any culture alone. The Sikh tribe in India, for example, practices the wearing of very long hair, and covering such hair with a turban. Such practice is preserved by tribe members who live as far physically and culturally as capitalist America.

Stewardship and Ancestral Domain Claims

The stewardship concept of property fits in very nicely with IPRA. Some anthropologists claim that certain indigenous tribes even hold the philosophical tenet that we cannot own land because our existence is limited while land can exist far longer than we can; therefore, it is land that owns us instead of the other way around. We have progressed so far we have forgotten this tenet. It must be ancient. It lost in the battle of ideas a long time ago. Why did it lose out to cadastral titling of land?

At first glance, this ancient philosophical tenet makes sense; but even if it were true that such tenet existed, in practice it would have called for a very oppressive government. If nobody can own land, then only the government can because government can exist for as long as land exists. Therefore, the government should own all land and control its use. Imagine that. If there is no national government that exists, or if the tribe does not recognize any such national government, then whoever is strongest and able to assert control will control land, a situation that is still “competitive” but will only enhance the survival of the strongest, not necessarily the fittest. Moreover, the strongest chieftain in any area will tend to increase his area of control. Centralization of control is inevitable. As usually happens with centrally controlled systems, they lose out to more locally autonomous systems.

Cadastral titling allows for decentralized administration of land. You, the owner of a parcel of land, is responsible for maintaining it, plus you get all the benefits of owning it. If you plant rice in it, for example, you reap all the rice grains such activity produces. If you don’t do anything with your parcel, you don’t get anything except the benefit of a possibly increased price of that land in the future. You pay land taxes annually even if you do not till the land. Whatever you do with that land requires additional capital and risking that capital. If you fail, you can’t charge the government for capital spent; however, if you succeed, the government takes a small portion of your profits.

Cadastral titling has clearly won over the idea of “land owning us”. So why are we going back to the idea that has lost maybe thousands of years ago? Is the granting of “Ancestral Domain” claims in the form “Certificate of Ancestral Domain Title” (CADT) the best way to recognize our indigenous cultures?

What is Respect for Indigenous Cultures?

We do not have to weaken further our property rights in order to accommodate indigenous cultures. Doing so would be logically and practically infeasible, and yet we may have done just this with the IPRA law.

We preserve indigenous cultures and respect them by celebrating their uniqueness in festivals and other acts of government, not by gutting our system of land ownership. Our property rights are already weak as it is, and has been rendered even weaker by IPRA.

We respect an indigenous tribe not by shielding its members from competition, but by teaching them how to be competitive: get an education, don’t get drunk, etc. We respect them by allowing them to preserve those customs, traditions, values that do not conflict with the semi-capitalist system that we have so far established. For example, killing Christians is a practice that cannot be condoned, no matter how one’s culture or religion justifies it. In a similar vein, land grabbing is also a practice that cannot be condoned, no matter how much “ancestral domain” can justify it.

Posted in News and politics | 2 Comments

In Response to “6 Things Rich People Need to Stop Saying”

A Response to http://www.cracked.com/blog/6-things-rich-people-need-to-stop-saying/

Liberalism is in retreat, and nowhere is this more evident than in the contrast between the Occupiers and the Tea Party. The truth is that the 99 percenters identify themselves more with Tea Partiers than with the Occupiers. There has been a massive shift to the right, and most liberals of the 1960’s have grown up and become more conservative. Those few we find who still cling to their old and tired cliches are few and far between. Occasionally, however, we can still find good writers from the left. They somehow flourish still in outlets like Huffington Post. And then there’s Cracked.com. I haven’t heard of this outlet until now, when a friend sent me a link to Mr. David Wong’s article. The article has been viewed more than a million times, which is about a million more viewers than I can claim who will view this response. Nevertheless, for every Mr. Wong there are thousands of bloggers like me.

With regards to the last two things in his list (first two here), Mr. David Wong has simply dressed up Marx’s old ideas about which is more valuable to society: labor or capital. Marx declared that labor is more valuable, and we have seen the results of that idea. The question and our answer to it presupposes both a moral(ethical) and economic dimension. Answering it from a purely economic viewpoint misses the more important ethical point, and Marx was wrong on both counts.

Marx’s mumbo-jumbo about capital exploiting labor results from his error on how the capitalist-labor relationship creates surplus value. The fact is that ANY transaction can create surplus value. When a transaction occurs, both seller and buyer benefits, and the surplus is created by the fact that before the transaction, the seller valued less the commodity being sold than the amount of money it can exchange for (its price), while the buyer valued less the amount of money than the commodity itself. At the instant an exchange occurs (a sale), surplus value is created by as much as the sum of the differences in those valuations. The commodity is now in the hands of buyer who has real use for it and therefore values it more than its pre-exchange value, while the money is now in the hands of the seller who can now use it for other exchanges that create even more value. Likewise, in the capital-labor relationship, surplus value is created when the capitalist buys a persons time and effort to build a product.

If we can agree that the wealth of a nation does not consist of tax revenues and government buildings and parks and monuments, but rather consists of the wealth of its citizens, then capital in the aggregate means people’s capital. When I deposit money in the bank, I am contributing to the wealth of our nation. That money gets used by somebody else, in a thousand possible activities I can’t even begin to fathom, including starting a business. In this sense, capital is also people as much as labor is.

Taken in the above context, an amateur writer like me can now respond to Mr. Wong’s blog point by point.

I respond in the reverse order than that presented by Mr. Wong:

#1 – Stop Asking for Handouts! I Never Got Help from Anybody!

Liberals do not like to hear this because, by simply living in society, they argue, rich people benefit from the institutions of that society. So they should give up at least part of their wealth in return for that benefit they are getting. Give up to whom? The government, of course.

Never mind the fact that wealthy people are among the most philantrophic people around, and that therefore “Stop Asking for Handouts” is something that I don’t hear much from the wealthy. It is true that the rich do not get help from anybody in the sense that nobody helps them for free.  Every help that the rich person gets is paid for. What about the police that protects his properties, or the help he gets from judges who enforces the contracts he signs? He also pays for these by way of taxes.

While it is true that a rich person’s money is worthless outside of the society he lives in, he does contribute to the overall wealth of that society much more than the average person. His businesses earn him money precisely because people like his products and buy from him, and so his wealth is a measure, however imperfect, of his value to society.

If rephrased as follows, I like hearing this from the rich: “Stop Asking for Higher Taxes! I Never Got Help from Anybody for Free!”

#2 – You Shouldn’t be Punishing the Very People Who Make This Country Work!
Liberals think that
a. We don’t owe our jobs to rich people any more than we owe it to poorer members of society; and
b. Higher taxes (pitching in) does not harm the rich as much as it harms us, so the rich should pay higher taxes.

Is labor really more valuable to society than capital? Or are these two really one and the same thing? If labor is more valuable to progress and to society, then we must find ways to redistribute capital. We must tax the rich to give to the less fortunate among us. The fact is that a number of countries have done this to varying degrees, and the verdict is in: it does not work. The more you redistribute, the poorer everybody becomes. The word “punish” is apt in this sense. If you set a level by which people can be rich, beyond which taxes can be very high, it simply means you are discouraging (“punishing”) those who get to that level. The result is, naturally, you get less people striving to reach that level. That’s my response to point 2b. My response to point 2a follows from that for 2b as follows: if you discourage people from getting richer beyond a certain level, people who are already near that level, will tend to not invest their wealth to gain more wealth. Less investments from the rich means less capital for business. Less business means less people employed. Ergo, we do owe our jobs to rich people. If you force the issue and demand that wealthy people invest anyway, unless you really want to become a dictator the wealthy people will oblige, but only sparingly (because of the tax disincentive). If you really insist and turn yourself into a dictator, the wealthy will just move to another country, and your country will be much poorer, plus your sweet pretensions to “freedom” and “social justice” will sound hollow.

No problem here. I say the rich should keep saying this.

#3 – You’re Just Jealous Because I Made It and You Didn’t!
Yes it’s all about envy. All that the liberals can say about this is that it’s not true. Is it envy that drives the Occupiers? I would say that, based on their pronouncements and their placards most Occupiers do have this feeling of envy in them.

Mr. Wong then talks about how the 99 percenters feel: they only feel adoration for the rich, so therefore it is not envy that drives the 99 percenters either. Yes, I agree. The 99% of us have more common sense than the Occupiers.

In fact Mr. Wong’s tone himself reveals seething envy and hatred dressed as antagonism against those who “refuse to acknowledge that their power brings with it any responsibility” and against “bullies and dictators and supervillains”. This is crazy because a majority of the 1% probably agree with him. In fact, not just Warren Buffet, but also a large number of millionaires have come up to U.S. Congress asking to be taxed more. America is a free country: they don’t have to ask Congress to enact another law, they can simply give up their wealth and hand those to the government!

The defenders of the rich are ordinary people like me, and we do so only because it is, in fact, good for any country to welcome the rich and not punish them.

If you are rich, please keep saying this, specially to liberals. It hurts because it’s true.

 #4 – If I Can Do It, So Can You!
This one I agree that rich people should do away with.  Of course, it is NOT true that whatever rich people do we can all do. It’s obvious: people have different skills, personal qualities, habits, and virtues. Even looks can be different :-). This is just a form of encouragement, usually given by successful sales people to fellow sales people. It doesn’t really mean much as written, and people who say this usually qualify the words of encouragement. So yes,  Mr. Wong, I agree with you that rich people should stop saying this.

 #5 – Hey I Worked Hard to Get What I Have!
We understand what this means: you’ll never get to where you want to be unless you work hard. However, although working hard is a requirement, it is not sufficient to be successful. In other words, you can work really hard, even harder than Manny Pacquiao himself, to be a champion boxer; but if you are missing an arm, chances are you’ll never be one. However, you can work hard to excel in something else, say a symphony conductor.

I therefore urge the wealthy to keep saying this because it’s true.

 #6 – Well, $500,000 a Year Might Sound Like a Lot, but I’m Hardly Rich
Another way of saying this: no matter how high you’ve climbed the wealth ladder there’s always somebody wealthier than you are. Unless you are at the very top, which only very very people aspire for anyway.

If there is such a thing as a theory of relativity of wealth, even that person at the top will only feel the richest if those right below him are too far below to reach him. So he struggles to get higher still. The only way he can do this in a free market system is to invest and take risks, activities that only makes life easier for everybody else.

At what level does it make sense for society to impose a limit? A trillion? A billion maybe? How about a million? Well, we know what happens when we impose a limit: the market gets distorted like a car race that imposes a speed limit, and capital becomes poorly allocated. Everybody is worse off.

In America, the Alternative Minimum Tax law was enacted in the early 1970’s that originally targeted the very rich. It has since evolved and now affects practically all the middle class. When liberals cry “Tax the Rich!” they actually mean you and I, in more senses than one.

Here’s Richard Epstein on a related topic.

Posted in News and politics | 15 Comments

The Mighty Dollar May Still Hold Its Value

If we empty millions of cubic meters of water into a small lake, that lake would overflow. However, the same amount of water would not even raise the level of an ocean. That, in essence, is the reason why in my view the US dollar has not yet inflated. The mighty US dollar is the most widely used international currency, and not even the Fed can inflate its value, or so it seems.

There is an even more disastrous reason why the US dollar may not inflate. If the euro currency inflates first, currency traders who are in euros would surely jump ship and toss the euro in exchange for the US dollar. This mass action will further inflate the euro, but will deflate the US dollar. Dollar deflation is also catastrophic because economic actors who have loans outstanding would be at a great disadvantage. The creditor banks would win if this is what happens.

Will Germany and France allow the euro to crash in value? It remains to be seen; but at this point, even if Germany and France continue to prop up the euro, it is very difficult for several countries to agree on a strong, convincing solution. The US dollar is also in a precarious situation, but a possible scenario is that the euro crashes, while the US dollar deflates. Either inflation or deflation, the coming disaster is not good for everyone.

A rapid rise in the value of the US dollar will demand action on the Fed. The most likely action would be the printing of more dollars (because exports would be crimped, borrowers would complain, etc). The balance is very unstable, however, and other countries like China will not sit idly by while the dollar comes down in value. A currency “war” will ensue. That may spell the end of all fiat money.

There are many possible scenarios, and it’s difficult to predict; but most of them are disastrous. I wish I can write about good news, but at this point the prospect is bleak. Hold on to your gold!

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The Government Cannot Be Benevolent, and Shouldn’t Even Try To Be

I do not mean to say that we should not help the poor. Far from it. All I am saying is to keep the government out of our charitable giving. Why? Because whenever and wherever the government is involved, there is an element of force and not voluntary giving that is involved. So beware of politicians who hide their desire for control under the rug of our desire to help. The government is the last entity in society that can be designed to be benevolent. No matter what lawmakers put in any law to make the government more “sensitive” to our needs, exactly the opposite of what was intended occurs. As a matter of fact, the government cannot be benevolent.

Let me give an example to make this point clear.

Let’s say you are Manny Pacquiao, a conscientious lawmaker. You want to enact a law that would help the poor. So you introduce a law that would allocate more money to give to the poor. Sounds good. A fellow lawmaker who knows something about accounting tells you that without increasing the revenue, the annual amount you want added for help to the poor cannot be budgeted. You then say, OK, let’s increase taxes for those of us who are rich “including me, Manny Pacquiao”. The people love Manny Pacquiao for increasing taxes on himself, and the law proceeded to the next phase of enactment. Later on, other lawmakers added more sections to the text of the law, including a section defining who is poor and who is not. The poor are those whose income falls below a certain level, does not own much property, etc. Sure enough Manny’s new law to help the poor is enacted, and everybody now loves him even more because he wants to help the poor. But the story doesn’t end there.

In the first year of enforcement of the law, people who were borderline poor but not poor enough according to the law, did a simple thing to be counted as poor and therefore get more money from the government. All they did was avoid declaring certain incomes. After that first year, government and independent studies showed that the number of people who are poor has increased by more than 50%. Newspeople started asking the question, are we really helping the poor? Meanwhile, more and more people with large incomes found ways to circumvent the higher tax by putting their money somewhere the government says it’s OK to put it, like donating more of it to political causes favorable to those in power. Large amounts of capital are put in ventures that mostly benefited the friends of politicians, just to avoid taxes. Instead of starting new businesses that increase the demand for labor, the rich put their money somewhere else. People who were just entering the labor force found it more difficult to get a job.

Perceptive people can see that the overall result of the government forcing us to give our largesse to the poor is in fact more suffering and injustice. Jobs become hard to come by, and the poor are encouraged to be poor instead of fending for themselves.

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Prices to Increase by as much as 100% (double)

Even though it appears that the U.S. Congress and President Obama are about to make a deal to avert a financial collapse on August 2nd (this Tuesday), it does not mean that the world’s financial troubles are over. The bottom line is that the U.S. credit limit will increase, decreasing the demand for U.S. bonds. In order to keep interests low, the Fed will have to print even more money, money that will flood the world currency market. Price inflation here in the U.S. is inevitable.

The world’s financial woes have had a few decades to build, and it all started on that fateful date when the U.S. under Nixon abandoned the gold standard in the 1970’s. Since then all sovereign nations have followed the U.S. lead and abandoned the gold standard. The U.S. dollar, the Japanese yen, the British pound, and all other currencies ceased to be backed by gold sometime in the 1970s. We are now in the era of fiat money, money that is backed only by the reputation of governments. The world has not been in this situation before: we are indeed sailing in uncharted waters, and a bad storm looms ominously ahead.

It is foolish to make predictions, and we can only describe what has gone to pass. In a sense, the financial storm has already started. We can see it in our radars out there in the sea and it’s coming our way. It is coming, but we don’t know when it will strike our shores: it can hit us in a couple of months, or in a couple of years. But there is no mistaking that it is coming. It is wise to be prepared.

Inflation defined as the quantity of money released has already happened. However, we still have to feel it in terms of increased prices for everything. It is starting to creep up in certain things like the price of contract labor. I don’t have statistical data on this one, but I have direct, though anecdotal, experience. Since November I have worked here in the state of Washington as a contractor, and since then I have moved from one contract position to another twice, and each time I did it I was able to demand a higher price for my services. I am in my third assignment, and I am not worried that this assignment may last only until October because I have so many other agencies trying to entice me with even higher hourly rates. (This is a paradox because unemployment is supposed to be high and that it should be difficult to find most any job, but that is another story.) According to some economists, inflation starts to happen slowly at first, beginning with those commodities/services most highly in demand. Other sectors of the economy then demand higher prices, until soon there is no product or service spared from the onslaught of a currency that is diminished in value. We will experience as much as doubling of prices from how much they are now. Fresh milk that now costs about $3 a gallon will cost as much as $6 when inflation finally hits us. This is not really bad compared to what happened in other countries that inflated their currencies in the past: most recently in Zimbabwe where prices rose as much as 10% in a day (or 3,650% in a year!). Nevertheless, this has never happened to the U.S. before, and so the impact will be felt not only by those in the U.S. economy, but worldwide. This is equivalent to taxing everybody, including corporations, worldwide for half of their earnings. China will be hit particularly hard because they have been investing in U.S. bonds and stocks as a way to keep the yuan (and thereby their exports) low-priced. Japan will also be hit hard.

What to do? I sold my house in 2005, and I don’t intend to buy any real-estate property in the U.S. for a long time. I am in the process of buying a house in Cebu, but I may postpone even that. If you are still struggling to pay your monthly mortgage, the good news for you is that if you are on a fixed interest rate, you will be happy when inflation finally hits the U.S. because your monthly payments will not increase in face value (your monthly payments will decrease in real value, however, which is good). Also, the amount of money you owe against your house, which you have been fretting about, will now also decrease in real value by as much as half. Nudge your boss to increase your salary (if you have a job) by as much as the anticipated inflation.

I have credit card loans and my objective right now is to pay off all of those before the end of the year. I advise you to do the same. The problem with credit cards is that credit card companies can increase the interest rate on those as fast as the U.S. treasury bond rate (T-Bill rate).

Lastly, buy gold or keep the ones you already have. The only problem with gold is that if you keep physical gold in your possession, it is becoming more and more difficult to keep it safely. It is a very hot commodity right now, and soon everybody will be gunning for it. It’s a bad idea to hide gold coins yourself. Your best bet is to buy Exchange Traded Funds (ETF), and I recommend either IAU or GLD. Each share in these ETFs are backed by gold: each share you own has an equivalent amount of gold stored securely somewhere in a giant vault, and these are independently checked and certified regularly. The only risk is if the U.S. government decides to seize these gold stock, but I think that is highly unlikely.

Posted in Money and Economics | Tagged | 2 Comments

We Have Just Come Down from the Trees II

One of my favorite movies is now a classic “2001: A Space Odyssey” directed by the great Stanley Kubrick. Aside from a truly visual feast that it is, the movie treats the audience to a most fascinating examination of the ephemeral nature of life. Considering how eons long it took for the solar system to materialize, and then how long after that it took for earth’s carbon to yield the first colony of protozoa, and then for evolution to yield intelligence, it is indeed less than a second ago that man inhabited the earth. We have just come down from the trees.

Now earth’s perfect animal (man) has discovered how to control evolution itself. Evolution is no longer a phenomenon of mostly chance: the slow process of evolution guided only by a simple but ruthless rule, the survival of the fittest, and time measured in millions of years, is no more. Man now has the capability to chart the course of humankind. We can recreate ourselves to become super human beings, or with just the same amount of ability and probability, destroy ourselves.

This is my second blog on this topic, and the question still is: “Which way will we go? The way to a life we can only imagine and wonder, or the way to extinction?” Our path is fraught with danger, but by nature we are optimistic. And so we move forward, aware of the dangers, but always moving forward — at a faster and faster pace.

Less than a decade ago somebody invented the phrase “knowledge workers”.  He predicted that, on average, people’s salaries will be in direct proportion to the number of years spent in school or self-study. Now that has come to pass, not only in economically advanced countries, but in previously poor countries as well. Today millions of knowledge workers in India and China benefit from the high demand for knowledge workers worldwide.

But progress measured in millions of years now happen every month, even every day. Technology is changing our lives, not just in a linear, upward trend, but exponentially. The only prediction we can make is the exponential nature of the change from here on. It will be a wonderful life, if only we don’t destroy ourselves.

I want to introduce a new phrase: “Ideas Per Minute”.

Every minute, there must be millions of people around the world who come up with bright ideas. Whereas the output of knowledge workers are best harnessed for society by businesses organized for profit, the output of millions of people with a million ideas are best harnessed by 1) making such ideas known to all, and in order to incentivize such spread of knowledge, 2) protecting the most profitable ideas by a system of patents. Not too long from now, I think “Ideas Per Minute” will be a significant economic measure. In addition to GDP, I think Ideas Per Minute (IPM) can add to the insight into how a country is more advanced than another. Studies will be made on how a country’s measure of freedom affects IPM.

For-profit companies organized for the sole purpose of accumulating ideas (patents) are now in existence. Not surprisingly, the country with one of the highest IPM, the U.S.A., is leading in this kind of business. It was not too long ago that Nathan Mhyrvold (a former Microsoft technology leader) formed a company called Intellectual Ventures with the objective of accumulating ideas for profit. Now an offshoot has sprouted in California: Rational Patents. There will be more, and it won’t be long until this trickle becomes a raging river. If you have bright ideas, I urge you to take a look at these two companies. It can put your own life on an exponential trajectory.

Posted in Amateur Philosophy | Leave a comment

The Sweet Spot for Taxes

A blogger called evilgenius has this graph of prices versus revenues for ebooks:

Sweet Spot Pricing
Price versus Revenue Showing Sweet Spot

In this graph, the sweet spot price point is between $3 and $4. Graphs like this are commonly shown to marketing students because these illustrate very clearly that as you increase the price of a commodity, after a certain price point your revenues will decrease instead of increase.

Now hold this graph in your mind as we shift the topic to tax collection.

In a free country such as Pinas, tax collection is enforced but punishment for non-payment does not necessarily lead to imprisonment. In most cases punishment can mean fines, and in extreme cases garnishment of wages. There are many ways for an individual to reduce the tax burden, and in a lot of cases even escape this responsibility altogether. Revenues from tax collection can depend on the aggressiveness by which tax collectors approach their job. However, the same can be said of the salesmen selling products to earn revenues on behalf of their organizations.

In my view, there’s not much difference between government revenues and corporate revenues in terms of marketing versus collection. In a very major sense, the government is selling a “product”, much like marketers. What is the product? It is intangible, in the way that “insurance protection” is intangible. The term I have heard or read as the “product” of government is “legitimacy” or simply “being legal”. In the most negative sense, this kind of product is very much akin to any protection racket perpetrated by a gang on some locality: “we will not bother your store as long as you pay us only one-hundred pesos a month”. The difference is that we ourselves have pre-ordained that the government protect us and the protection is meant to be real: we should be protected even from the government itself.

And so, if you agree that “legitimacy” is just a form of product or service that we pay for by way of taxes (laying aside the caveat that this “product” is very different from those we ordinarily regard as products), it should be not much stretch of the imagination to relate the price/revenue curve to the price of legitimacy and tax revenue. Raising the price of legitimacy raises revenue, but only up to a certain point. Raising the price beyond the sweet spot LOWERS revenue instead of increasing it.

This is now a truism that many countries have applied the price/revenue curve in the calculation of taxes. In practically every case, whenever the tax rates were lowered, revenues went up. In modern economies like the U.S., there are those that still argue for higher taxes to increase revenues, but most economists can readily concede that there is a sweet spot for tax rates. It works in modern economies because, by lowering tax rates, what the government has done is simply allow both individuals and corporations to decide what to do with the extra money not paid to taxes. That part of the nation’s wealth freed from the tax collector will eventually contribute to the economy, no matter what the individuals or corporations decide to do with it. This increases business activity (more hiring, more products produced, more products sold) and thereby increases government revenue. It is not intuitive, and some politicians still hark to the “loss” from revenues due to lowering of taxes, but the graph above illustrates the phenomenon really well: by lowering prices, you increase your sales, thereby increasing revenue.

In backward economies like in Pinas, the effect of lowering of taxes can be even more pronounced, and the sweet spot is skewed to the left. Why so? Let’s examine a hypothetical case. If I want my sale transactions to be legitimate, I would pay the 12% EVAT tax for each such transaction. But I can choose otherwise, opening myself up to the risk of hefty fines over and above the EVAT tax. For my line of work, which is selling my software services to medical clinics, this is too much risk compared to the price, so let’s say I choose to pay 12%. I tell my clients that my price includes the EVAT tax. Most of them would try to negotiate the 12% away; but I’m the one taking the risk. I would insist that 12% be added to my price to pay for EVAT, unless I can make a deal with some tax collector. I can agree to carry the price of legitimacy if I can find a Bureau of Internal Revenue (BIR) officer who can help me get legitimacy for 6% instead of 12%. Most likely I can find such BIR officer, and most likely he would pocket the 6% instead of reporting it as revenue.

Now let’s imagine that, by some stupendous luck, our lawmaking body somehow decides to lower the EVAT to say, 8%. At this tax rate, I would not hesitate to pay for it, and I can even afford to insist on my clients that it is not negotiable. Most other small businesses would probably do the same, and for all of us that do, think of what would happen: the government is now earning 8% of our transactions instead of earning zero revenues when the tax collector took 6% for himself. Not all small businessmen would do the same, of course, by force of habit, but sooner or later they too will see that the price of “high-quality” legitimacy at 8% is really better than the price of dubious legitimacy at 6% (the price paid to the corrupt tax collector).

Now some smart politicians are suggesting that we RAISE the EVAT to 14%. At this price, I would definitely look for that BIR officer who “understands” the plight of small businessmen like me. Raising the EVAT to 14% would most certainly make a lot of BIR officers rich, at the expense of government.

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The Parable of the Good Father and National Five-Year Plans

A good father went against his instinct and let his second son go out on his own, out of the protective confines of his (the father’s) world, into the world outside. He would not have done so, knowing how cruel and difficult it was to learn the pitfalls of life on this earth. But his second son was so much independent than his first, and he felt that he had imparted enough character into this one for him to survive on his own. So let go he did.

The first son, who followed his father’s footsteps, was successful in the beginning, running the family business as he was trained to do. When the good father died, however, he lost his bearing and could not make decisions. Instead of doing something in most business situations, he waited for something to happen. Eventually, he drove the business to oblivion. The second son, as it turned out, also prospered on his own, founding his own empire that lasted beyond his lifetime. The father’s fears about the second son turned out to be unfounded.

Now the above is just an anecdote, and half of it is fictional. (I am thinking of the defunct Wang Labs for the non-fictional half.) My purpose here is simply to illustrate that, in the trainable animal universe as much as the human one, once an offspring has attained enough character (good habits and survival instincts), it is better to leave that offspring alone to make his/her own decisions. It does not matter how much natural talent she has, once an offspring gains the freedom to decide and learn lessons on her own, her success is almost assured. Protecting the offspring, or getting involved in planning his/her future, only serves to ease the parents’ worries, but does not really help the offspring in the end.

Whenever we intellectuals talk about the welfare of people in our country, we are like parents. Our instinct is to protect and plan, and thereby control. The five-year plans we propose consist mostly of what the government can do to the people, not what control it can phase out in an orderly manner. We propose to have the government encourage, initiate, or even build industries, as if we have the magical powers to decide correctly which industries would be good. We believe, for example, that the export industries was what made Japan and Taiwan successful, so we decide on behalf of the people that the government must be active in favoring export industries.

My idea of government is that it should do NONE of these. It should focus on its proper role, and for me the proper role of government is summarized in the Bill of Rights, which fortunately is also part of the 1987 Constitution. It should respect and enforce contracts, it should protect individual freedoms, it should resolve conflict among citizens whenever it is called upon to do so. It should refrain from being too benevolent. It should follow the rule of law not only when resolving conflicts, but also to control itself.

Many have argued that that is what we have been doing in Pinas, that we have had enough freedoms, and it has not worked. Many of us just cannot understand how restrictions on foreign investment are a big drag, that the process for starting a corporation is too cumbersome, that business in itself is generally beneficial. I agree wholeheartedly that our immediate goal should be to change our Constitution, in order to remove restrictions on foreign investment. I can see the near-term benefit of increased job opportunities, but that would not be my long-term goal. My long-term goal is to increase economic freedoms: not just the freedom for individuals (and thereby also corporations) to accept foreign investment, but also to engage freely in any business that is not harmful to anybody. For example, some intellectuals would impose controls to direct investments to certain industries (as is the practice now). Such controls are not necessary. If I want to engage in an import business to satisfy the need for some imported product, I should be allowed to do that. Too many of us are against this because it would appear to be detrimental to local industries producing the same product. This is the instinct of intellectuals even in developed countries. If my import business prospers, there will be more such businesses, which can only benefit the people, because of competition. How can we determine that an import business is not beneficial? The people themselves determine that, by not buying the imported product. Too many of us would rather that the government decide, which then grants those in government enough power on the people. I wonder why it is difficult for most of us to see that by itself, this power over the people is corrupting.

If we freely allow imports, not just of capital but also of any commodity (just as Hong-Kong does), I predict that the prices of commodities would track international prices. This has already happened with the liberalization of fuel imports. Gas prices at the pump in Pinas now mostly track international prices, despite incessant complaints from the public utility industry. It will only remain a political headache if we continue to insist on price controls on jeepney and other public utility fares. In other words, liberalizing one industry is not enough, we have to liberalize across the board as much as politically feasible. This is why I have also concluded, independent of Mr. Orion Perez Dumdum, that our first immediate priority is to do away with practically all parts of the 1987 Constitution except the Bill of Rights.

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What is Freedom?

I challenged a discussion group, whose members are graduates of my alma mater, to think about why our motherland Pinas is behind in a lot of areas. Somebody responded that may be we need to be more generous, and really care for the poor.

I am generous, and I see what he is saying, but I have a different view of what is virtue, and therefore of what is good for the country. I have just re-read Rizal’s Noli Me Tangere and El Filibusterismo, hoping to see in Rizal’s ideas something similar to my own. I do admire the stories told in these two great novels, but I did not see exactly the ideas I was looking for. May be it’s there and just did not see it.

What I am looking for is a definition of what is freedom. To the communists, the ideal is that everybody gives, not to the poor, but to a ghost called “the common good”. Their big problem is that if someone doesn’t get it, doesn’t get the ideal, he is punished for it, and punished heavily. In the end, the freedom from want that is sought, for the common good, leads exactly to the opposite, which is total control of a whole population.

God gave each one of us the means to survive: we have our own limbs for making food and building shelter, our own minds to make decisions for ourselves, and our own stomachs to feed. Of course, there are some who are unfortunate, and I would love to spend time with them not as a benefactor but just to chat. But the unfortunate ones are an exception as much as those brimming with talent are also exceptional. God equipped us mere mortals of the means to survive. God did not equip us with a giant stomach to which we are all connected to get sustenance. He gave each of us our own digestive system. He did not create us with only one brain shared by everybody, and so I believe that what He has in mind is freedom for each of us.

What kind of freedom is most appropriate for us? I don’t think it is freedom from basic wants. We all aim for an abundant society, but none of our basic needs can just come down as manna from heaven. If we define freedom as freedom from want as opposed to the freedom to work towards our purposes in life, purposes that do not harm anybody else, then we will gain neither the former nor latter type of freedom.

Many people confuse freedom with the absence of rules. The absence of rules leads to anarchy and therefore also loss of freedom. Freedom is simply allowing people to do good, to be the best in what they do, while not harming anyone else in the society they live in. Instead of the common good, I think it is much more virtuous to think of the primacy of the individual. Rules are there to protect the individual from society, and it is only in fewer cases where we need to protect society from the individual. After all, there are much fewer criminals than good citizens in Pinas. For me, the term “rule of law” is meant to limit the government instead of constraining the individual. The ideal situation is that in which the government is simply a mechanical signal light, unforgiving and indifferent in its application of the rules; but as a functioning traffic signal light, it prevents us from colliding with each other. It does not tell us where to go, it just prevents us from running into and harming each other.

And so by building our ideas (of how people should live in society) on the foundation of the primacy of the individual (as opposed to the common good), I believe we will gain more freedom and prosperity. The system that we come up with will not guarantee equality of outcome and freedom from want, but it should guarantee equality with respect to application of the rules. In Pinas we have always strived for equality of outcome, but for as long as I can remember we have always had the poor getting poorer and the rich getting richer, and it is not too often that we find equality before the law either. The common good is not good for everybody after all. The common good is just a figment of a politician’s imagination, but you and I as individuals are real.

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What is Money?

The love of money is the root of all evil. 
1 Timothy 6:10 (King James Version)

He had heard people speak contemptuously of money: he wondered if they had ever tried to do without it.
W. Somerset Maugham
Of Human Bondage.

Very few people understand the digital and radio technology that makes cell phones possible, and yet practically all of us use it. Very few people understand what is money, and yet all of us earn and spend it on a daily basis.

Why was money invented? Why did it have to come about? If we can answer this question, we can begin to understand what is money. Let’s go back to pre-historic times when there was no money.

Peter was a caveman. He was good at making stone tools. In his cave he had stashed several arrowheads which he had carved from pieces of stone. David, Peter’s next cave neighbor, was good at picking fruits and drying them. In David’s cave, one could find baskets of dried fruits. David had to protect his dried fruits from nasty robbers, and for that purpose he needed a weapon like a bow and some arrows. Peter, on the other hand, needed dried fruits to feed his family. David and Peter then did what is now called “direct exchange” or, in simple terms, barter: some quantity of David’s fruits for one of Peter’s arrowheads. In this case, money was not necessary, and direct exchange in fact means “no money”.

Now Mary came along. She was good at making baskets. She offered the baskets to David, but she didn’t need fruits. David did need the baskets. Would Mary have any use for arrowheads? If she did, direct exchange would still be possible: David could give Peter some more of his fruits for one of Peter’s arrowheads, which Mary could then accept in exchange for a basket. What if Mary had no need for arrowheads? Then no direct exchange could have been possible among the three, and this was the situation that necessitated the use of money. Money in this case was what Peter, David, and Mary recognized as valuable, convenient, and could be exchanged for any of the other valuables: fruits, arrowheads, and baskets. And so it happened that David told Mary: “I have these beautiful shells which I have collected, would you accept two of these for one of your baskets? You can take these shells and exchange them for anything else you might need.” And that’s how money came about.

Money allows for specialization of labor. I do not have to plant my own rice or corn if I can exchange money for rice or corn. I can specialize in making baskets because I can exchange the baskets for money, and that money can be exchanged for anything else. Money also allows me to be free to decide how much to produce and how much to receive. If I were a slave and am told to produce a certain number of baskets, I would do so only because I have no choice. Being a freeman in a society that allows the use of money, I can choose both what to produce and how much of it to produce. Money allows for an alternative societal organization that does not require the use of force to make people act.

As more people used money, as technology advanced, and as human organizations became more complex, the thing used to represent money became more sophisticated. Metals like copper and silver were used, and also gold. The need for money preceded the need for government, but eventually government took over the administration of money.

Soon it became necessary to store gold in banks. It used to be that all the banks did was store money in the form of gold. But paper and ink allowed the banks to more than just store gold: each owner of gold stored in the bank was given a certificate of gold ownership. This certificate eventually became the medium of exchange (in addition to its other functions, like in the transfer of value from one generation to another). It was more convenient to hand a piece of paper to the seller of that horse than take a certain amount of gold from the bank. The horse seller, in turn, used the certificate for other transactions, with the tacit understanding that the certificate was worth a certain quantity of gold stored in the bank. Banks soon discovered that they too can just issue certificates to lend to borrowers or pay their dues. It did not matter which bank people used because all of the banks recognized each other’s certificate. Paper money thus came into being. The story differs from one country to another, but in general it can be said that when paper money came along, most governments were not involved.

As with anything new and untamed, paper money was abused by some banks. Some banks overprinted and lent paper money, many more times worth than gold that was stored in their vaults. This went unnoticed as long as only a few people claimed gold in exchange for the paper they were holding, but if enough people claimed gold for paper money, a bank inevitably collapsed. The collapse of one bank can have a domino effect and collapse other banks as well. Whenever this happened, it was a major disaster and people suffered.

The government had to step in and reign in the banks. Laws were promulgated to limit the ability of banks to print money. This did not fix the problem of inflation and runs on banks, however. And soon, for lack of a better alternative, lawmakers thought it was best for the government to take over all matters pertaining to money. Now practically all nations have central banks charged with regulating all other banks, and the value of paper money has been completely dissociated from gold. Central banks can print paper money (“fiat money” because it is all based on our “trust” of the government) as much as they see fit. The only constraint in most countries is that they do it to improve employment levels and to refrain from doing it when there is too much inflation.

Free market advocates like me believe that there is too much power concentrated in governments for managing the value of money. Whether inflating or deflating, sudden changes in the value of money reduces its effectiveness as a feedback signal that determines how much of any commodity is produced. Moreover and more importantly, inflation of the value of money serves as a vicious hidden tax on the people. When inflation occurs, it is very easy for politicians to blame businesses for the increase in prices, when in fact it is totally the government to blame for mismanaging the value of money. We all suffer when fiat money loses a lot of value, and most of us blame the wrong people for it.

Is it possible to remove money from the clutches of government? Do we really need government to assure us that one peso or one dollar is worth something? We will soon find out because there are now several attempts afoot to use computers and theInternet to introduce a new form of money. One is called BitCoin, a completely digital money system devoid of any government guarantee.

I see several problems. One problem is the classic chicken-egg dilemma: I could only use Bitcoin if stores accepted it, and stores would accept it only if there were a lot of people using it. The stores would only equip themselves with the necessary hardware and software to be able to accept Bitcoins if there were customers wanting to use it, on one hand. On the other hand, customers would use it only if the stores were so equipped.

It is not enough that I trust that nobody can tamper with my money stored as Bitcoins.

I think what is needed is for some established business, ideally a very big and reputable company, to back Bitcoins. Such company will only do it if it gains something out of doing so. And even if such company decides to go for it, there is no guarantee that the government will not intervene. And so then we’re back to where we did not want to go.

I believe we are still far from a viable solution to the money problem.

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