Enemas Of The State

Happy nations have no history, according to Cesare Bonesano Beccaria.

Then, Americans must be happy. Richard Reeves tells us in a UPI column, “They are anti-history. The past is just that, past. And that is not always a bad thing by any means. Americans don’t kill each other over something that happened hundreds of years ago. They don’t even know what happened hundreds of years ago.”

This is in stark contrast to “old money” Europeans, who seem to have little idea of what is happening now. They see themselves, according to the Michel Pincon book, as custodians of property and family honor, threads in the velvet cord that connects the past with the future.

There is a debate raging in Europe. It concerns the history of the 20th century…a period in which we all spent most of our lives…and which was dominated by such colossal disasters that even Americans ignore it at their peril.

The debate, taken up in this week’s “Figaro,” and to which I will herewith contribute, begins with a question: What happened? How did the century…which began with such promise and such technological vigor…go so bad? Without even a computer at their disposal, nor even Al Gore nor Abbey Joseph Cohen, nor even CNBC — how did people manage to make such a monumental mess of things that we are still cleaning up after them today?

I have been planning a trip. Next week, the kids have a vacation from school. We are going to drive up to Normandy to visit the beaches where Allied forces fought their way back onto the continent…and “bailed their butts out” 56 years ago.

I will, no doubt, have occasion to wonder “what it was all about” and hope that a keener understanding will fall upon me like a woman’s undergarments tossed upon a soldier during a victory parade. But I will wade into the subject now…like a practice landing…and hope for the best. I will also make an effort to connect it to some of the themes we’ve been following.

Human progress may be reduced to two things: technology and the division of labor. Technology proceeds at its own feckless pace. But the places that really prosper — and the eras that are really prosperous — are those that allow the division of labor to flourish.

George Gilder is excited about broadband, not because he wants to access to 1,000 television channels — but because he sees it as an opportunity to take the division of labor to a new level. Individuals, and small groups, will now be able to participate in the global economy as never before.

Today’s “International Herald Tribune” provides an interesting illustration. A small tribe of Amerindians in Guyana set up a site to sell their handmade hammocks directly to consumers. “Last year,” the paper reports, “they sold 17 hammocks…for as much as $1,000 a piece.”

$17,000 doesn’t seem like a lot of money. But it made the hammock makers in the Amazon basin more profitable by far than the dot-com that bears the river’s name. In fact, it was so much money that it completely destabilized the community. “It is the classic tale of old power reacting to new power,” said an expert on the indigenous population from Cambridge University.

Japan is not Guyana. It has few natural resources. Nor does Switzerland — which doesn’t even have much farmland. Yet both countries are very rich — thanks to the division of labor that allows them to specialize in what they do best and sell their products throughout the world.

Another good example is Hong Kong. Who would have thought that this barren rock — set like a skin blemish on the side of the worlds’ largest (in population) and one of its poorest countries — would become one of the richest cities? It is rich because it makes full use of its ability to specialize…to divide the labor of life into smaller and smaller units.

Rome was a commercial success because its armies conquered much of the known world — and forced upon its colonies a Pax Romana, which allowed people to specialize and trade.

Famines were reduced — because a drought in one area could be offset by a bumper crop in another. Also, as archeologists tell us, a person living in a remote colony — such as Britain — could enjoy products from all over the empire. Roman architecture, fashions and organization spread its blessings widely. People got rich.

But contrarians had their day, too — eventually. Edward Gibbon, who failed as a member of Parliament and decided to spend his life on the shores of Lake Geneva, tells all the many reasons why Rome collapsed. Barbarians — held at bay as long as the empire remained vigorous, came in hordes, like busloads of tourists with battle axes, after the empire declined. They spread throughout France, Italy, Spain and even North Africa — killing, stealing and enslaving.

Thus began a Dark Age. It was dark because the division of labor went into reverse. Trade ceased. Bridges collapsed. Roads fell into disrepair. (Incidentally, a Roman road runs right next to my house near Poitiers. These old roads were so well made that they have lasted for centuries.)

Increasing specialization, which marked the progress of the Roman era, stopped…and then went backwards. Towns became more isolated. They had to make more of their own things — usually of a lower quality and a higher real price.

People became poorer, in other words. The “wealth effect” was negative.

By the dawn of the 20th century, the division of labor was once again in full flower. Britain and the other European powers had recovered from the Dark Ages. New technology had been put into service. Almost the entire world had been colonized and brought under a new Pax Europeana. A man in London could pick up the phone and order specialized products from all over the globe – – tea from Malaysia, tobacco from Virginia, rugs from Persia, gold from South Africa.

But there were still barbarians. There were people who…like Mr. Dillon of the Ecumenical Coalition, Mr. Joy of Sun Microsystems and the Guyana tribal leaders …were fearful of technology and distrustful of the increasing division of labor. And there were plenty of politicians who, like Pat Buchanan and Hillary Clinton today, want to exercise more control over how people conduct their lives.

The division of labor requires trade. You can’t get oranges from Florida to New York unless the growers are free to sell them…and the buyers are free to buy them. And no one steals them in Georgia or taxes them too heavily in North Carolina. Free trade between the states — which has permitted an increasing division of labor – – is one of the things that made America so economically successful. It is what Europe is now trying to imitate with the European Union. Judging by the trucks going up and down the A20 highway — with license plates from every country from Poland to Portugal — the program is working.

But free trade produces uncontrolled results. Farmers in France are upset because they cannot compete with farmers elsewhere. They are used to fat subsidies and do not want to give them up. Manufacturers, too, are wary of competition from other parts of the new empire — where wages and regulatory costs are lower.

People like order. They like to know where they stand. They like to know that things are under control, the way they’ve always been.

Yet free trade and more labor specialization cannot be easily controlled. Individuals get rich for no other reason than luck and pluck. The established order is threatened. Creative destruction, which Schumpeter described as the driving force of capitalism, is a scary thing to many people — especially when it seems to be destroying more wealth than it is creating.

World War I was the most destructive war the world had ever seen — thanks to the awesome new power of modern technology. It shook the minds of European intellectuals and broke their faith in the evolving, bourgeois, Liberal (in the classic sense…the Jeffersonian sense) society that dominated the continent.

“How could 2,000 years of culture,” asks the hero of Remarque’s “All Quiet on the Western Front, “have produced such a disaster?”

The destruction was so vast that it not only sent millions of people to their graves and destroyed the wealth of millions more — it also cracked the cages and let the barbarians — the dogs of war — loose upon the land.

These barbarians then proceeded to make war on the Liberal order in Europe. A book by German writer Ernst Nolte described it as a “European civil war that lasted from 1917 to 1945.” But the last major barbarian political system — the Soviet Union — lasted until 1990.

The barbarians were socialists — of two major branches. There were the National Socialists — the Nazis, Mussolini’s fascists…and to some much lesser extent perhaps Franco’s fascists in Spain, too. The other major branch of socialism was communism, led by the Bolsheviks who gained power with a coup d’etat in Russia in 1917.

All of these barbarians had a common goal — to stop the Liberal order…the spontaneously specializing division of labor…and replace it with a controlled society.

Both strains were murderous. As early as 1918, Grigori Zinoviev estimated that it would be necessary to exterminate 10 million Russians in order to consolidate the revolution. In fact, the total proved much higher.

By 1945, the European civil wars were over. America had become the center of power in the world — and imposed a Pax Americana on Western Europe. Eastern Europe, though, was forced to live under barbarian rule for another 45 years. But gradually…the division of labor has reasserted itself. The oranges come from Spain or Morocco. The phones come from Finland. Shoes seem be be made in Italy or Poland. Progress continues…and now people ask: What happened?

More to come…

From your ever-curious correspondent,

Bill Bonner

Paris, France March 29, 2000

P.S. You may have noticed that today’s title has little to do with the subject matter. It comes from a poster I saw in the subway — in which an attractive, but sinister, woman is putting on a big pair of rubber gloves. I believe it is a promotion for a band. It may not be exactly on point — but it is a good title and I didn’t know if I would ever get a chance to use it otherwise.

*** How’s it all going to end? The bubble, I mean. And when? Well, so far, guessing has been a losing proposition. So I’m not going to guess today. I’m just going to watch.

*** Abby Joseph Cohen was blamed for spooking the market yesterday. The celebrated bullmistress decided it was time to lighten up on stocks generally, and on tech stocks specifically. She reduced her exposure to equities by 5% — and put the money in cash.

*** It is surely a measure of the giddiness of the times that that anyone would care was Ms. Cohen says. She predicted, for example, that the S&P 500 would rise 8% to 10% this year. No serious investor would say such a thing. It’s pure nonsense and guesswork.

*** Whether it was Abby’s comments…or whatever…the Dow dropped back 89 points yesterday. The S&P lost 16.

*** And there were once again more falling stocks than rising ones – 1,654 to 1,353. There were also more new lows than new highs — 62 to 53. So yesterday’s action was at least consistent with my view that the market is in the midst of a long, confused, noisy topping out. But we’ll see…the market’s main pleasure in life is making fools of those who try to make sense of it.

*** The Nasdaq settled down after a particularly manic period. We will see now whether this bipolar personality enters a depressive stage. The index fell 124 points yesterday. The Nasdaq 100, which has been hitting records almost daily, fell 121 points.

*** Where’s the money? Dr. Richebacher (see ad below) has asked the question several times. Huge investments in information technology are supposed to be making companies more productive and more efficient. How come they aren’t making any money? Corporate profits in America have been stagnant for the last two years. In many areas — manufacturing, durable goods, electronics, non-durable goods — profits have actually gone down. Not just the rate of profit growth — the actual level of profits in dollars. Overall, domestic industries made $717 billion in 1997. In 1999, the figure had risen a piddling $2 billion to $719 billion.

*** Dr. Richebacher believes America is not only exporting inflation — it is exporting profits, too. The biggest single expense of business is labor. U.S. businesses pay salaries. The employees take the money and spend a rising proportion of it on foreign goods. This money, now a shortfall of about $1 billion a day, is lost to the U.S. economy — thus keeping inflation in check. But it’s lost to the employers, too…it doesn’t come back as revenue from selling products.

*** “Wheat acreage,” reports Doug Casey (http://www.douglascasey.com), “is now the lowest in 27 years…Meanwhile, foreign wheat reserves are forecast to be at their lowest since 1973.” Also, “foreign soybean reserves stand at 32 days, the lowest level in history.”

“With July wheat trading around $2.68,” Doug opines,” it impresses me as having lots of upside and little downside.”

*** The price of gold fell below $280. So much for the “Bull Market in Gold” idea.

*** Cisco, now No.1 in market cap, is thought to be worth $555 billion. Last year it had revenues of $17.4 billion. So the company is selling for 32 times revenue. More power to it.

*** An e-mail message, in French, this morning warns of another computer virus that is “more powerful than Melissa” and for which “there is no known cure.” It’s called Woobler and it is said to be circulating in a message called “How to give a cat a colonic.”

*** Meanwhile, the world’s computer hackers are getting together in Tel Aviv to discuss how to hack for fun and profit. “We have nothing to hide,” said a spokesman for Berlin’s Chaos Computer Club. The hackers believe they serve a useful function — revealing the weak links in data-flow systems. One admitted to engaging in a little mischief, however, saying he had intercepted a colleague’s resume and added unflattering information before it reached its destination.

*** Both of these items reminded me of Dan Denning’s investment recommendation — a little company specializing in the security of electronic systems. https://www.dailyreckoning.com/virusreport/index.html They also reminded me that every technological innovation has a dark side. We have not seen how much damage can be done by passing out “bad” information over the Internet — yet. The hackers in Tel Aviv said that a “denial of service” attack, such as the one mounted recently against a few major websites, would be pretty easy to set up. Once an economy becomes reliant upon the Internet — how hard would it be to shut it down…denying service to just about everyone?

*** Bill Joy, head scientist at Sun Microsystems, says that we should “relinquish” research into certain technological areas. He fears what will happen when machines process information faster than humans…and “The Future Doesn’t Need Us.” He should relax. A free calculator can already do math faster than I can. But “processing information” is infinitely complex. Just as more information is not necessarily better — neither is processing more of it faster necessarily an advantage.

The Daily Reckoning