Wednesday, May 18, 2011

A Sharper GOP Field

By Jonah Goldberg

The Republican presidential logjam has finally broken.

Donald Trump, who believes not only that he would make the best president but that he could win, declined to run because making money is his true "passion." It's as if Cincinnatus loved his plow too much.

Former Arkansas governor Mike Huckabee also bowed out, with class and dignity even his friend Trump could not buy.

Ron Paul, the libertarian Harold Stassen, is in for another go, presumably on the mistaken assumption that America has turned into Tea Party Nation. (If only!)

And then there's Newt Gingrich.

On NBC's Meet the Press, the former House speaker - a man who has spent much of the last decade declaring the need for radical transformations of this, that, and the other thing - denounced Paul Ryan's Medicare proposals as too "radical" and nothing less than "right-wing social engineering." He also came out in favor of an individual mandate for health insurance.

This last bit of news was no doubt greeted with jubilation in the Mitt Romney camp, given that Romney had only days earlier given a speech defending his own landmark achievement: a state-based individual mandate that helped inspire Obamacare. By my count, Romney's speech bombed with nine out of ten conservatives (the tenth being influential conservative talk-show host Hugh Hewitt).

To have Gingrich out there defending the mandate - and by extension Romney - had to have the former Massachusetts governor jumping for joy so high that his hair might actually have moved.

By midday Monday, however, Gingrich was reversing himself in response to a deluge of criticism. But the damage was done. The simple fact is that despite Gingrich's immense talents and achievements, Ryan - who's not even in the race - is more popular than Gingrich among conservatives. It's hard to throw someone under the bus when it's not your bus. More to the point, Gingrich reinforced the impression that his mouth deserves a patent as a perpetual motion machine.

Still, the real significance of the last week or so is not the breaking up of the political logjam of candidates but of the policy logjam.

Not only did Romney and Gingrich blur the lines between the GOP and Barack Obama, they also sharpened the distinctions between themselves and the rest of the GOP field.

In this, they were playing catch-up with Mitch Daniels, Indiana's extremely effective governor and putative front-runner among conservative policy wonks, the Bush family, and insomniacs. Daniels yanked away collective-bargaining rights for public workers years ago, without the Sturm und Drang that accompanied Wisconsin governor Scott Walker's more tepid reforms. Just this month, Daniels successfully withdrew all state funding of Planned Parenthood, a holy grail for social conservatives.

Daniels, however, also steadfastly refuses to sign anti-tax activist Grover Norquist's pledge to never raise taxes. He famously called for a "truce" on social issues, which social conservatives translate as "surrender" to the Left since they rightly believe that the Left is the aggressor in the culture war. And last week he playfully suggested that he might tap former secretary of state Condoleezza Rice as his running mate. Floating a pro-choice veep is not the way to reassure social conservatives.

For those paying attention, these should be fascinating developments given the perennial claims that the GOP base is too right-wing, extremist, and closed-minded to tolerate such philosophical diversity. (And with the exception of Gingrich and Paul, there are no Southerner candidates in a party allegedly captured by the South.)

Does all this mean that the GOP has re-embraced its Nelson Rockefeller roots? Of course not.

But it does hint that this year's primary season won't involve a replay of the dreadful 2008 debates in which the candidates auditioned to play the part of Ronald Reagan in the school play.

It also suggests that the front-runners - a group that includes former Minnesota governor Tim Pawlenty - might be ahead of the rank-and-file of the GOP.

Come November, it is very unlikely that conservative voters will stay home. So, barring a truly fringe GOP nominee, they will vote against Obama no matter what. Already, the conversation on the right is moving toward the all-important question of "electability" - i.e., which candidate can peel off the handful of moderates and independents needed to win in an election that will be a referendum on Obama and his record.

Plentiful Fuel

Plentiful Fuel

By John Stossel

I just learned I'm going to save money! My apartment building in New York will switch from heating oil to cleaner natural gas. Gas is much cheaper than oil now because energy companies found ways to get more of it out of the ground.

Even more astounding is that by using this technique, America won't run out of natural gas for 100 years or more! Time to break out the Champagne?

Not so fast, say environmentalists. To get gas out of the ground, companies use pressurized chemicals to blow up rock. It's called hydraulic fracturing -- fracking. An Oscar-nominated movie, "Gasland," says that fracking contaminates our water supply with chemicals. In the movie, some homeowners set their tap water on fire.

That got my attention. I've seen Michael Moore's movies and environmental documentaries, which I thought were nonsense. But "Gasland" is more convincing.

Unfortunately, "Gasland" producer Josh Fox turned down my interview requests, as did representatives of the big national environmental groups that oppose fracking. I think I know why. The movie and the left's arguments against fracking are deceitful.

First, the movie implies that nasty chemicals get into the water table. That seems logical, since they shoot them down into gas wells. But it turns out that the shale gas wells are thousands of feet below the water table. Do the chemicals flow up -- against gravity?

But then what's the explanation for the most dramatic part of the movie: tap water so laden with gas that people can set it on fire?

It turns out that has little to do with fracking. In many parts of America, there is enough methane in the ground to leak into people's well water. The best fire scene in the movie was shot in Colorado, where the filmmaker is in the kitchen of a man who lights his faucet. But Colorado investigators went to that man's house, checked out his well and found that fracking had nothing to do with his water catching fire. His well-digger had drilled into a naturally occurring methane pocket.

"There are lots of ... naturally causing effects that occur," says Matthew Brouillette of the Commonwealth Foundation, a think tank in Pennsylvania -- where much of the film was shot. "It's really no surprise. We find that 40 percent of the wells in Pennsylvania have some sort of naturally occurring methane gas and other types of things."

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The Brainwashed Refrain: “Ron Paul Is Crazy”

The Brainwashed Refrain: “Ron Paul Is Crazy”

What they really mean, of course, is that Ron Paul defies political categories and takes positions outside the continuum from Hillary Clinton to Mitt Romney, and people whose minds have been formed in the ideological prison camps we call public schools cannot abide unapproved opinions. Tax me 35% or tax me 40%, but don’t raise the possibility that taxation itself may be a moral issue rather than just a matter of numbers. Either bomb or starve that poor country, but don’t tell me there might be a third option. The Fed should loosen or the Fed should tighten, but don’t tell me our money supply doesn’t need to be supervised by a central planner.

Meanwhile, those who accuse Ron Paul of being “crazy” hold a whole slew of positions that I think qualify as crazy, but the word crazy isn’t employed to refer to them because those positions happen to be politically mainstream.

Read Glenn Greenwald on the bipartisan, Orwellian phenomenon of calling people “crazy” because they step outside the three-inch area the establishment has set out for us to occupy.

What America Needs to Know About George Soros

What America Needs to Know About George Soros

Here are resource materials on billionaire financier George Soros

As we are now in the 2012 election cycle, it is very important to understand how certain news stories about politics “seem” to take on nationwide importance and others seem to wither and die. The voice of the “right” is endangered, outnumbered and outspent. The conscientious conservative will need to work harder to find the truth, and will need to be directly involved in getting the facts circulated to the public. We need to do our own “mass media” distribution. It is time now for “angel” donors who are concerned about this country to step up and donate to independent blogs and websites which tell the truth. When you read the following about the millions of dollars that leftist, anti-American, anti-Semite George Soros is pumping into at least 30 media organizations, you should be very, very worried. You need to question what you hear in the “mainstream media,” because Soros is directly or indirectly involved in deciding the news agenda, the candidates, and the future of this country.

Here is hours of reading on George Soros, which is provided for your reference:

Pamela Geller at Atlas Shrugs links:

“Chances are you or folks you know have been brainwashed and conned by, arguably, one of the most evil men to walk the earth. Soros is hardcore; a nazi at 12, he assisted in the round-ups and confiscation of Jewish property. He was mentored by and was a longtime associate of Francois Genoud, Hitler’s and Hitler’s ally at the time, Mufti al-Husseini’s (leader of the Muslim world) banker.

Since then, Soros — convicted in France for insider trading — has his wicked hand in every evil thing: the legalization of drugs and prostitution; betting against America and making millions by making what he called “a good call against the dollar”; violating the U.N.’s neutrality by funneling money through its Development Program to Georgia’s President. He was financier of guilty terror lawyer Lynne Stewart’s defense fund; and was involved via his stooges at America Coming Together in election fraud and, via his investment in WellCare, in Medicare irregularities.”

Cliff Kincaid of Accuracy in Media reports on the latest Soros-inspired attack on House Speaker John Boehner, using a “fake” Soros-funded Catholic group which fed a story to the Washington Post.

Soros, Beck, and the Holocaust on American Thinker

George Soros’ manipulations of sponsors is behind Glenn Beck’s departure from Fox News. This series by Beck is what infuriated Soros

President Obama's War on Fun

President Obama's War on Fun

by Gene Healy

Sans Serif

Share with your friends:


It's a high-pressure job, the presidency. Think about how badly the bin Laden raid could have gone. The worst case scenario -- Navy SEALs trapped in a firefight with Pakistani forces -- could have made "Black Hawk Down" look like a cakewalk.

Yet the night after he gave the "go" order, President Obama hit the White House Correspondents' Dinner and had to grin his way through canned laugh lines working over "the Donald."

Stressful! You couldn't blame the guy if he wanted to take the edge off with a smoke. Alas, he quit a year ago. It was "a personal challenge for him," the first lady explained recently, and she never "poked and prodded."

You're not a real president until you fight a metaphorical 'war' on a social problem.

Of course not. It's obnoxious to hector your loved ones. "Poking and prodding" is what good government does to perfect strangers. And that's what the Obama administration has been doing, with unusual zeal, for the past 2 1/2 years.

You're not a real president until you fight a metaphorical "war" on a social problem. So, to LBJ's "War on Poverty" and Reagan's "War on Drugs," add Obama's "War on Fun." Like the "War on Terror," it's being fought on many fronts:

Smoking: Last fall, the killjoy crusaders at Obama's Food and Drug Administration released proposed "graphic warning labels" on cigarettes, including "one showing a toe tag on a corpse" and another where "a mother blows smoke on her baby." In December, a federal court rebuffed the administration's plan to squelch "e-cigarettes," which allow smokers to ingest nicotine vapor without carcinogens or secondhand smoke. But the president's lifestyle cops stand ready to regulate menthols, because, like clove cigarettes (banned in 2009), they taste good, so people might like them.

Alcohol: Similar logic drove the FDA's November ban on caffeinated malt liquors. Capitalizing on a minor moral panic over "Four Loko," which packs less punch than the ever-popular Red Bull and vodka, the agency threatened four companies with "seizure of the products" on the dubious grounds that caffeine becomes an "unsafe food additive" when combined with alcohol.

Poker: Last month, the Department of Justice shut down five major online poker sites, seizing their domain names, issuing arrest warrants for executives and seeking billions of dollars in asset forfeiture. One defendant faces jail time of up to 65 years for helping people play cards over the Internet.

Food: A year ago, Obama's FDA announced its plan to "adjust the American palate to a less salty diet," ratcheting down the amount of sodium allowed in processed foods. It's "a 10-year program," an agency source said, designed to change "embedded tastes in a whole generation of people." But even "real food" aficionados who shun Cheetos aren't safe from the reformers' zeal. On April 20, FDA agents and federal marshals carried out a 5 a.m. raid on an Amish farm in Pennsylvania, the culmination of a yearlong sting operation aimed at wiping out the scourge of unpasteurized milk. "It is the FDA's position that raw milk should never be consumed," an agency spokeswoman insisted.

C.S. Lewis once wrote that "of all tyrannies, a tyranny exercised for the good of its victims may be the most oppressive." Rulers who just want to exploit us may relax once their greed's sated.

But "those who torment us for our own good will torment us without end, for they do so with the approval of their own conscience," Lewis said.

On the whole, I prefer House Speaker John Boehner's attitude. When Fox News' Chris Wallace asked the Ohio Republican, "Why don't you stop smoking?" Boehner replied, "It's a legal product. I choose to smoke. Leave me alone.

The world’s banking industry

Chained but untamed

The world’s banking industry faces massive upheaval as post-crisis reforms start to bite. They may make it only a little safer but much less profitable, says Jonathan Rosenthal

THE NEAR-COLLAPSE of the world’s banking system two-and-a-half years ago has prompted a fundamental reassessment of the industry. Perhaps the biggest casualty of the crisis has been the idea that financial markets are inherently self-correcting and best left to their own devices. After decades of deregulation in most rich countries, finance is entering a new age of reregulation. This special report will focus on these regulatory changes, which will be the main determinant of the banks’ profitability over the next few years.

Start with the additional capital that banks around the world will have to hold. Bigger capital cushions will make the system somewhat safer, but they may also reduce banks’ profitability by as much as a third. In addition, they may push up borrowing costs and slow economic growth. Worse, higher capital requirements for banks may drive risk into the darker corners of financial markets where it may cause even greater harm.

Supervisors and regulators almost everywhere are still trying to find ways to deal with banks that have become too big or too interconnected to be allowed to fail. If anything, the crisis has exacerbated this problem. Some of those banks have become even bigger or more interconnected. And governments made good on the implicit guarantees offered to banks, encouraging them to take even bigger risks.

In America the rules to implement the Dodd-Frank act are beginning to take shape. Passed last year, the law runs to 2,319 pages, but it is little more than a statement of intent. Before it can take effect, 11 different agencies have to write the detailed regulations. These will redefine much of the industry in America and around the world, reversing decades of deregulation in finance in the world’s biggest economy.

One key provision is the separation of investment banking from commercial banking, known as the Volcker rule. It will restore some elements of the Depression-era regulatory regime that was meant to ensure that commercial banks did not “speculate” with protected deposits by forbidding them from trading securities. Other regulations in America will set the fees that some of the world’s biggest retail banks can charge when one of their customers swipes a debit card. These make no pretence to making banking safer, but reflect politicians’ anger at banks and suspicions of those who run them.

Britain, for long the most enthusiastic champion of financial deregulation, is going further still, pondering whether banks’ retail arms should be so tightly regulated that they become little more than public utilities. Mervyn King, the governor of the Bank of England, in a recent speech in New York wondered aloud whether the use of deposits to fund loans should be outlawed. In essence, he was questioning a basic building block of modern banking. In April a government-appointed commission said that Britain’s banks should wall off their retail arms so they could be salvaged if the rest of the business were to collapse. It is also trying to devise resolution regimes and living wills to reduce the harm done when banks collapse, and it wants more competition in retail banking.

Britain is not alone in reacting strongly. Switzerland, which grew rich as its buccaneering international banks sailed the tides of capital flowing around the world, is now downsizing its global banking ambitions. It plans to impose such strict capital standards on its biggest banks that their investment-banking arms will be forced to shrink or leave the country.

The wave of new regulation comes as many banks are still struggling to regain their footing after the crisis. Across much of Europe, bad debts held by banks are impairing the balance-sheets of their governments. Ireland and Spain are trying to convince bondholders that they can and will repay their national debts, despite the losses incurred by their bankers. Doubts about those two countries’ creditworthiness, as well as that of Greece and Portugal, are spreading across the continent’s banks, raising borrowing costs and unsettling markets everywhere.

In America big banks are healthier, having largely rebuilt their balance sheets. Yet not all have recovered. The country’s smaller regional and community banks include some 800 troubled institutions at risk of being seized by regulators if their capital ratios fall. In both America and Britain households are deeply indebted. For banks, growth in these markets, as across much of the rest of the rich world, is likely to be slow. In Japan banks are well into their second decade of a slow-motion crisis, while in China officials fret that banks are growing too quickly.

There is much that regulators around the world are doing well, yet many of their actions have been piecemeal. As a result, they tend to shuffle risk around from one country to the next instead of reducing it across the global financial system. In some ways they have exacerbated the dangers. Dodd-Frank, in its zeal to prevent any more taxpayer-funded bank bail-outs, has curbed the Federal Reserve’s ability to provide cash to banks that are fundamentally sound but suffering a shortage of liquidity. That has made it harder for the central bank to act as a lender of last resort, a principle of central banking established almost 140 years ago by Walter Bagehot, a former editor of this newspaper.

The unwelcome consequences of some of the other new rules now being introduced may be greater yet. For example, the European Commission’s decision to regulate bankers’ bonuses in a bid to limit risk-taking may have the perverse effect of driving up banks’ costs and making their earnings more volatile.

The bright spots

Banks in emerging markets face different and far more exciting challenges. They need to grow quickly enough to keep pace with economies racing ahead at breakneck speed and to reach the legions of potential customers in villages and slums who are hungry for banking. Rapid growth and the spread of computing and communications technologies have turned these markets into huge laboratories of innovation. This special report will argue that banks in countries such as India and Kenya have much to teach those in the rich world. These lessons could come in handy, for the torrent of reregulation in developed countries will soon be raising banks’ costs, trimming their profits and forcing some of their customers to look for cheaper banking services.

Internet companies are booming again

Internet businesses

Another digital gold rush

Internet companies are booming again. Does that mean it is time to buy or to sell?

PIER 38 is a vast, hangar-like structure, perched on San Francisco’s waterfront. Once a place where Chinese immigrants landed with picks and shovels, ready to build railways during California’s Gold Rush, the pier is now home to a host of entrepreneurs with smartphones and computers engaged in a race for internet riches. From their open-plan offices, the young people running start-ups with fashionably odd names such as NoiseToys, Adility and Trazzler can gaze at the fancy yachts moored nearby when they aren’t furiously tapping out lines of code.

“The speed of innovation is unlike anything we’ve seen before,” says Ryan Spoon, who runs Dogpatch Labs, an arm of a venture-capital firm that rents space to young companies at Pier 38. Like many other entrepreneurs, the tenants would love to follow firms such as Facebook and Zynga, a maker of hugely popular online games including Farmville, that have been thrust into the internet limelight in the space of a few short years.

Some of the most prominent start-ups are preparing for stockmarket listings or are being bought by big firms with deep pockets. On May 9th LinkedIn, a social network for professionals that took in revenue of $243m last year, set the terms of its imminent initial public offering (IPO) on the New York Stock Exchange (NYSE), which value it at up to $3.3 billion. The next day Microsoft said it was buying Skype, an internet calling and video service, for $8.5 billion (see article).

Other firms such as Groupon, which provides online coupons to its subscribers, are likely to go public soon. The return of big internet IPOs, rarities since a bubble in telecoms and internet stocks burst in 2000, and the resurgence of large mergers and acquisitions among technology firms is dividing opinion in the industry. Some veterans see a new bubble forming in the valuations of start-ups and a handful of more mature firms such as Twitter, which is still hunting for a satisfactory business model five years after the first tweet. More sanguine voices retort that many young companies have exciting prospects and that there are plenty of corporate buyers, such as Microsoft, with the money and confidence to snap up older internet firms still in private hands.

Technology, finance and China

Yet both sides agree that the internet world is being transformed by a number of powerful forces, three of which stand out. First, technological progress has made it much simpler and cheaper to try out myriad bright ideas for online businesses. Second, a new breed of rich investors has been keen to back those ideas. And, third, this boom is much more global than the last one; Chinese internet firms are causing as much excitement as American ones.

Start with technology. Moore’s law, which holds that the number of transistors that can be put on a single computer chip doubles roughly every 18 months, has continued to work its magic, leading to the proliferation of ever more capable and affordable consumer devices. Some of today’s tablet computers and smartphones are more powerful than personal computers were a decade ago. IDC, a research firm, estimates that around 450m smartphones will be shipped worldwide this year, up from 303m in 2010.

Moore’s law also underpins the growth of “cloud” services, such as Apple’s iTunes music store, which can be reached from almost any device, almost anywhere. Such services are hosted in data centres, the factories of the cloud, which are crammed with hundreds of thousands of servers, whose price has plunged as their processing power has soared. Everything is connected ever faster, with ever fewer wires.

These technological trends have given rise to new “platforms”—computing bases on which other companies can build services. Examples include operating systems for smartphones and social networks such as Facebook and LinkedIn. Some of them are used by hundreds of millions of people. And the platforms are generating oceans of data from smartphones, sensors and other devices.

These platforms are vast spaces of digital opportunity. Perhaps the most striking example of the innovation they have sparked is the outpouring of downloadable software applications, or “apps”, for smartphones and computers. Apple’s App Store, a mere three years old, offers more than 300,000 of them. Users of Facebook are installing them at a rate of 20m a day. Services such as Skype have also benefited from the spread of smart devices and lightning-fast connectivity.

Some excited people have likened this technological upheaval to the Cambrian explosion 500m years ago, when evolution on Earth speeded up in part because the cell had been perfected and standardised. They may be exaggerating. Even so, creating a web firm has become much easier. By tapping into cheap cloud-computing capacity and by using platforms to reach millions of potential customers, a company can be up and running for thousands of dollars rather than the millions needed in the 1990s.

Guardian angels

Thanks to the boom’s second driving force, finance, these companies have no shortage of eager backers. Although too small to interest many venture-capital firms, they are being fought over by wealthy individual investors, or “angels” in the venture industry’s jargon. Many of these financiers made their fortunes during the 1990s bubble and are eager to put their know-how and cash behind today’s tiny companies.

Some “super angels”, such as Aydin Senkut, a former Google employee who runs Felicis Ventures, and Mike Maples, a software entrepreneur who oversees a firm called Floodgate, are occasionally making bets comparable to those of conventional venture funds, which gather and invest money from a wide range of institutional investors. Individual investments of up to $1m are not uncommon. Sometimes angels are clubbing together to provide young firms with even larger sums.

Their cumulative impact is staggering. According to the Centre for Venture Research at the University of New Hampshire, angel investors in America pumped about $20 billion into young firms last year, up from $17.6 billion in 2009. That is not far off the $22 billion that America’s National Venture Capital Association says its members invested in 2010. Much of the angels’ money has gone to consumer-internet firms and makers of software apps.

The financing of more mature tech start-ups has also changed. Elite venture-capital firms such as Andreessen Horowitz and Kleiner Perkins Caufield & Byers have raised billions of dollars in new funds in the past year or so. Some of this money has been pumped into “late-stage” investments (eg, in Twitter and Skype), allowing companies to remain private and independent for longer than used to be the norm.

Venture firms are not the only ones with internet companies in their sights. Some would argue that it was DST, a Russian holding company now renamed, and a related investment fund, DST Global, that set off the boom. In 2009, when most investors in America were sitting on their hands, both poured hundreds of millions of dollars into fast-growing prospects there such as Facebook and Groupon. Those investments seem likely to pay off handsomely.

American hedge funds, private-equity firms and even some mutual funds have followed, falling over one another in pursuit of the shares of popular internet companies. Investment banks including Goldman Sachs and JPMorgan Chase have also set up funds to help rich clients buy stakes.

Their task has been made easier by the advent of secondary markets in America, such as SharesPost and SecondMarket, that allow professional investors to trade the equity of private companies more efficiently. They have also made it simpler for employees and angel investors to offload some shares—and have enabled the world at large to observe a remarkable rise in valuations (see chart 1).

American consumer-internet companies have not been the only beneficiaries of this flood of cash. The boom’s third driving force is the rapid globalisation of the industry. Europe, which has at long last developed an entrepreneurial ecosystem worthy of the name, is home to several impressive firms. These include Spotify, an Anglo-Swedish music-streaming service with more than 10m registered users, and Vente PrivĂ©e, a French clothing discounter with annual revenue of some $1 billion.

Much more striking, however, is that the latest round of euphoria involves emerging markets that were mere spectators during the last one, above all China. The country boasts not only the world’s biggest online population, but also its fastest-growing. The number of internet users there will rise from 457m last year to more than 700m in 2015, according to the Boston Consulting Group (BCG). And the Chinese are no longer mostly playing games, but are diving into lots of other online activities, notably shopping. Between 2010 and 2015, predicts BCG, China’s e-commerce market will more than quadruple, from $71 billion to $305 billion—which could make it the world’s largest.

Such forecasts have stimulated plenty of venture capital, both foreign and domestic. Albeit with a dip in 2009, the amount raised by Chinese venture funds has grown sharply, rising from nearly $4 billion in 2006 to more than $11 billion in 2010 according to Zero2IPO, a research firm. The sum invested increased from $1.8 billion to nearly $5.4 billion. Much of this went into internet start-ups.

Investors have also been desperate for shares in Chinese companies listed on American stock exchanges (see table). Since the start of the year the share prices of the biggest of these firms have risen by more than a third, according to iChina Stock, a website. Baidu, China’s largest search engine, has seen its share price climb from about $60 to $150 in the past 12 months, taking its market capitalisation to nearly $50 billion. Tencent, which makes most of its money from online games, is worth about the same. Both are among the world’s top five internet firms by stockmarket value. The ten biggest Chinese companies have a combined worth of $150 billion, not much less than Google’s.

They tend to sparkle on their debuts. When Youku, China’s largest online-video company, listed its shares on December 8th its stock jumped by 161%, the biggest gain by a newcomer to the NYSE for five years. The share price of Dangdang, an online retailer floated on the same day, almost doubled. And on May 4th Renren, a social network, saw its share price rise by 29% on the first day of trading, though it has fallen back almost to where it started.

The experience of Chinese firms in America has encouraged other emerging-market internet companies to consider IPOs there. On the day LinkedIn revealed the terms of its offering, Yandex, a Russian search engine, said it would soon raise $1.1 billion by listing its shares on the tech-heavy NASDAQ stockmarket.

Those who think that talk of a new tech bubble is misleading point out that firms such as LinkedIn and Renren have proven business models and healthy revenues. Many internet firms that went public in the late 1990s could not say the same. Moreover, the price-earnings multiples at which other public companies in the technology sector are trading are nowhere near as frothy as they were before the last bubble burst in 2000. That should limit excesses in valuing private firms.

Bubble in the making?

This has led some venture capitalists to argue that 2011 may be more like 1995 than 1999: if a bubble is inflating, it is a long way from popping. So investors who shun internet firms now may be missing a great chance to mint money. Jeffrey Bussgang of Flybridge Capital Partners, a venture firm, notes that venture funds raised between 1995 and 1997 enjoyed stellar returns.

Others point to signs of bubbliness. For instance, some start-up firms are dangling multi-million-dollar pay packages in order to tempt star programmers from Google, Microsoft and other big companies. They are chasing scarce skills when the broader technology industry is on a roll. The NASDAQ index may be far below the heights of March 2000, but it has bounced back from the global downturn; and the Federal Reserve Bank of San Francisco’s Tech Pulse Index, which measures the vibrancy of America’s tech industry, is near its peak of 11 years ago (see chart 2).

There are also signs of irrational exuberance among some investors. Color, a photo-sharing and social-networking start-up, has been reportedly valued at around $100m by venture firms, even though it has an untested product in a crowded market. Competition among angel investors has helped drive up valuations of social-media start-ups by more than 50% in the past 12 months. Financiers are sometimes skimping on due diligence in the scramble to win deals. In China, too, the purported worth of young firms has risen breathtakingly fast—to an average of $15m-20m in first-round venture financings, which is expensive even by Silicon Valley’s standards.

The danger in all this is that investors lose sight of the risks to the value of internet companies. These are greatest in China. Competition there is intense and users are fickle. Moreover, Chinese firms must wrestle with thorny regulatory and political issues. The government has yet to shut down a listed web company and firms are usually masters of self-censorship. But any move against them could have broad repercussions for all Chinese internet stocks.

European and American internet start-ups do not face a similar threat. But they are still vulnerable to inflated expectations. “Every bubble is a game of musical chairs,” says Steve Blank, a former serial entrepreneur who teaches at Stanford. The trick is to sell or float companies just before the music stops and the bubble bursts. If some of the hopefuls of Pier 38 can do just that, they may one day be able to afford a yacht or two of their own.

Spreading infection

Europe's economies

Spreading infection

by The Economist online

THE fear that Greece's sovereign-debt crisis might presage similar episodes elsewhere in the euro zone has been borne out. In November, Ireland joined Greece in intensive care, becoming the first euro-zone country to apply for funds from the rescue scheme agreed in May 2010 in concert with the IMF, and in April this year Portugal became the third country to require a rescue. Sovereign-bond spreads (the extra interest compared with bonds issued by Germany, the safest credit) are now much higher in all three of the bailed-out countries then they were in May 2010. Promises to tackle budget deficits through public spending cuts and tax increases have offered little reassurance to bondholders, who know that austerity will take its toll on growth.

The interactive graphic above (updated May 17th 2011) illustrates some of the problems that the European economy faces. GDP picked up in most countries through 2010 but there were marked differences in performance. Germany was especially sprightly: its economy expanded by almost 5% in the year to the first quarter of 2011. But GDP in Greece has crashed under the weight of austerity; Ireland contracted sharply in late 2010; and Spain’s economy is barely growing.

In many countries unemployment has not gone up by as much as one might expect given the depth of the crisis. Germany now has lower unemployment than before the crisis, thanks in part to a short-time working scheme and flexible time arrangements in its manufacturing sector. The worst-affected countries include Ireland and Spain, where a collapse in construction has swollen the dole queues. Britain has fared better because its tight planning laws limited the growth of its construction sector during the global housing boom.

Weak growth and high unemployment spell particular trouble for countries that already have high levels of public debt. That explains why Greece was first to lose the confidence of the markets with a public-debt-to-GDP ratio of 127% and a budget deficit of 15.4% IN 2009, making it the euro zone's outlier country. Both Ireland and Spain had low public debt coming into the crisis, but a combination of recession and big housing busts blew a hole in their tax revenues. Ireland was, in the end, undone by fears that the state could not backstop its banks. Others are pruning before the markets exert real pressure: Britain's debt has the longest maturity of any EU member but it is still aiming to get its finances in order within four brutal years.

AUDIO: Our correspondents on why struggling euro-zone economies should restructure their debt sooner rather than later.

No he Kahn’t (updated)

The arrest of Dominique Strauss-Kahn

No he Kahn’t (updated)

by S.P. and Z.B. | PARIS and WASHINGTON, DC

EVERYTHING was in place to enable Dominique Strauss-Kahn, the IMF head, to declare next month his candidacy for the Socialist primary, ahead of French presidential elections next year. Polls consistently showed that he was the most popular Socialist candidate, and the best placed to beat President Nicolas Sarkozy in a run-off. But Mr Strauss-Kahn’s arrest on May 14th in New York, for an alleged sexual assault, has thrown all those plans in the air, and looks almost certain to wreck his political future.

Mr Strauss-Kahn was arrested when he was already aboard an Air France plane at Kennedy International Airport, just minutes before it was due to take off. New York police said he was charged with “a criminal sexual act, attempted rape, and an unlawful imprisonment in connection with a sexual assault” on a chambermaid in a Manhattan hotel. Reports suggested that Mr Strauss-Kahn had left his hotel room in a hurry. His lawyer, Benjamin Brafman, told Reuters that his client would plead not guilty.

The news has rocked the political class in Paris. Martine Aubry, the Socialist Party leader, called it a “thunderbolt”. Others talked of a “cataclysm”. Even were Mr Strauss-Kahn to be cleared eventually of the charges, the prospect of a court case and the intense scrutiny of his private life would make it virtually impossible for him to return to France to fight a primary. Already, in 2008, he faced an internal IMF investigation into an affair with a fellow member of staff. In the end, the fund concluded that Mr Strauss-Kahn had not abused his position, but he accepted their view that he had made “a serious error of judgment”. His wife, Anne Sinclair, a popular and well-known French television journalist, stood by him. The Fund's decision then to keep him on now looks timid and ill-judged.

Even before this latest shock, it was becoming clear that the French presidential campaign was set to be a nasty exercise in low politics. Over the past week or so, doubtless fed by the political right, the French media has been filled with reports about Mr Strauss-Kahn’s lifestyle, complete with photographs of his pad in Marrakech and swanky Paris flats. A picture of him getting into a Porsche, belonging to an adviser, set off a fierce and tortured French debate about whether it is possible to be left-wing and rich.

All of this, however, pales in comparison with news of the charges of sexual aggression. The French are well-known for shrugging their shoulders at their politicians’ private lives, and consider affairs to be de rigeur rigueur for political leaders. But sexual violence is an altogether different matter. If the charges are proved correct, the tragedy is that Mr Strauss-Kahn was in all other ways a strong and attractive candidate, with the international standing and economic authority needed to challenge Mr Sarkozy in 2012. Now, it looks likely that either Ms Aubry, or François Hollande, the party’s ex-leader, will secure the Socialist nomination, after a vote by party supporters this autumn. Without Mr Strauss-Kahn, the French Socialists’ chances of winning next year’s presidential election, for the first time since 1988, have not collapsed—but the race suddenly looks far more open.

Whatever the fall-out on French politics, Mr Strauss-Kahn's arrest has left the IMF reeling. One insider called it a “disaster”. Although he had been expected to leave within a couple of months, Mr Strauss-Kahn, unless quickly exonerated, will now presumably be forced out far sooner.

That leaves the fund without a political heavyweight at the top in the midst of important negotiations with European policymakers over Greece’s debt crisis. Mr Strauss-Kahn was due to meet with Germany’s Chancellor Angela Merkel today and attend a crucial meeting of Euro group finance ministers on May 16th. At those meetings the fund’s boss was to make clear that the IMF would not go along with more dithering or fudges over Greece’s debt mess. Europe would have to come up with more money for Greece fast, or its debt will need to be reprofiled. Even if the fund sends another messenger, its heft in the euro debt mess is significantly diminished without a heavyweight at the top.

If Mr Strauss-Kahn goes, the fund’s first deputy managing director, John Lipsky, would take charge. Not only does Mr Lipsky lack Mr Strauss-Kahn’s (erstwhile) political stature, he is himself a bit of lame-duck: only three days ago, on May 12th, Mr Lipsky announced that he planned to leave in August. In a short statement released on May 15th, the IMF’s spokeswoman had no comment on Mr Strauss-Kahn’s arrest, but said that “The IMF remains fully functioning and operational.” That may be true. But there are going to be some gaping holes at the top.

UPDATE May 16th 17:50 GMT Mr Strauss-Kahn has been remanded in custody until his next appearance in court, scheduled for May 20th. A New York judge denied him bail on the grounds that he posed a flight risk. Meanwhile, French radio has reported that Mr Strauss-Kahn's lawyers plan to mount a defence based on evidence showing that their client was having lunch with his daughter when the attempted rape is alleged to have taken place. But there have also been reports that the New York police now say the incident took place earlier than was originally reported.

Another troubling development for Mr Strauss-Kahn is the possible revival of an earlier sexual-assault claim. David Koubbi, a lawyer for Tristane Banon, a 31-year-old French writer, says she may file a criminal complaint against Mr Strauss-Kahn relating to an alleged incident in 2002. At first Ms Banon supposedly did not press charges on the advice of her mother; Mr Koubbi says she now believes her case will be taken more seriously.

Mises on Action

Mises on Action

Mises Daily: by

In my previous article, "Mises on Mind and Method," I organized Ludwig von Mises's epistemological doctrines, drawing from several of his works, into a single exposition. In the present article, I do the same with Mises's teachings on the most fundamental praxeological insights. Those insights are threaded throughout Mises's great work, Human Action. Herein, I gather them together and attempt to explain them and how they interrelate, using the technique of "Crusoe Economics."


"Man is a social animal": thus Aristotle's famous dictum is often translated. Ludwig von Mises believed that man could not have acquired the ability to act had his forebears lived in complete isolation. And John Donne said, "No man is an island."

Society is so central to the human condition that writers have, for millennia, used isolation as a dramatic Herculean challenge for their heroes to overcome. From the ancient Egyptian Story of the Shipwrecked Sailor, to the Arabian Sinbad, to Robinson Crusoe, to Tom Hanks's character in the movie Castaway, the idea of island isolation has horrified and fascinated us. In the hands of the economist, it has also come to instruct us.

It makes sense that the notion of an isolated individual can be instructive for economic reasoning. As propounded by Mises, sound economic reasoning is the discovery of necessary truths about special modes of action, by deducing the logical implications of both (a) our a priori[1] understanding of the meaning of action (purposeful behavior) and (b) the conditions that characterize the special modes of action in question.

The special modes of action that actually occur in the real world are so complex and inaccessible to inquiry that it is impossible for the human mind to apprehend them fully enough to derive any general economic laws from them.

Instead, the economist must consider modes of action simple enough for his finite mind to grasp. Since such simple sets of conditions do not occur in the real world, the economist must conceive them in his mind. He must formulate imaginary constructions (or "thought experiments"), in which the modes of action are defined by assumptions. These assumptions are chosen for the purpose of describing the essential effects of factors that in real life are too hidden amid the static and din of the effects of other factors, but that in the mind can be isolated and described.

The specific method of economics is the method of imaginary constructions. … The main formula for designing of imaginary constructions is to abstract from the operation of some conditions present in actual action. Then we are in a position to grasp the hypothetical consequences of the absence of these conditions and to conceive the effects of their existence.[2]

Since economics is by definition about human action, the simplest imaginary construction in economics is that of a single, isolated human actor: a "Robinson Crusoe."[3] A key merit of "Crusoe praxeology" is that by simplifying things to the extreme, the praxeologist can get at what is logically necessary about all human action. He can do this by "assuming away" (or "abstracting from") conditions until he gets to a point where assuming away anything more will result in something that can no longer be considered action.

Thus we conceive the category of action by constructing the image of a state in which there is no action.[4]

The praxeologist can then discover more specific praxeological laws by progressively adding more assumptions.

Let us see what Crusoe can teach us about action.

The Actor

But first, do we even need Crusoe, or anyone else in our imaginary construction? Can one even conceive of action without an actor? If not, then one must consider the existence of an actor to be a necessary prerequisite of action.


Let us say Crusoe awakens, stranded on an island after having floated unconscious onto the shore on a piece of flotsam. The first thing that enters his consciousness is a sharp pain in his hand, which is being caused by a large splinter. He wants to alleviate the pain, and prevent any infection the splinter might cause. The matter is especially urgent, because he feels he is about to pass out in a few moments, and he is worried that infection could set in while he is unconscious.

The incentive that impels a man to act is always some uneasiness.[5]

In this case, Crusoe has an uneasiness concerning the pain that he feels and the damage his body might suffer.

An important distinction is that the praxeological uneasiness is not the pain itself. Praxeology is not psychology, and economics does not posit acting man as necessarily a purely hedonistic (pleasure-pursuing and pain-avoiding) creature. It is conceivable that a person with a splinter in his hand is a masochist and that he feels pain but no uneasiness about the presence of that pain and thus no desire to remove the splinter.

By assumption, Crusoe happens not to be a masochist, and the pain involved happens to be one of the factors (along with the possible damage involved) that causes him to be uneasy about the splinter. But, whatever the cause may be, what is important for praxeology is that Crusoe regards the state of affairs involving the splinter in his hand as imperfect.

It is easy to imagine action without pain, but is it even possible to coherently imagine action without prior uneasiness? No, argued Mises:

A man perfectly content with the state of his affairs would have no incentive to change things. He would have neither wishes nor desires; he would be perfectly happy. He would not act; he would simply live free from care.[6]

It is inconceivable for a being to intervene in a state of affairs that he already regards as perfect. Intervention implies perceived imperfection. Uneasiness, therefore, is a necessary prerequisite of action.[7] The presence of an uneasiness can also be referred to as a want or desire, and the removal of an uneasiness can be referred to as the satisfaction of a want or desire.


Crusoe now has a goal in mind (an end): to relieve (remove) his uneasiness concerning the splinter's deleterious effects.

The end, goal, or aim of any action is always the relief from a felt uneasiness.[8]

An end is the most obvious prerequisite of action (purposeful behavior), because "end-seeking" is synonymous with "purposeful."

Already processes have begun in Crusoe's body that may alleviate the deleterious effects of the splinter. For example, the flesh of his hand around the splinter has become inflamed, which is part of the human body's healing process. This process can be seen to have a biological "quasi purpose." And Crusoe may find this process to be advantageous regarding his conscious purposes. But the biological process is not truly "end-seeking."

Conscious or purposeful behavior is in sharp contrast to unconscious behavior, i.e., the reflexes and the involuntary responses of the body's cells and nerves to stimuli.[9]

Image of a More Satisfactory State of Affairs

Crusoe imagines himself in a future in which, by virtue of his own intervention, he has no splinter in his hand. He considers that future to be more satisfactory than the future that would eventuate without any intervention on his part, because it would achieve his end: i.e., to remove the uneasiness he has about the splinter's deleterious effects.

Acting man is eager to substitute a more satisfactory state of affairs for a less satisfactory. His mind imagines conditions which suit him better.[10]

Try to imagine an action in which the actor does not have any "image of a more satisfactory state."[11] It is inconceivable. Without such an image, an actor would have no idea as to why his action would remedy his uneasiness.

The Action Itself

Crusoe can relieve his uneasiness by carefully removing the splinter using his other hand.


For Crusoe to try to pull the splinter out, it is necessary for him to anticipate the possibility of the action being successful.

[T]he expectation that purposeful behavior has the power to remove or at least to alleviate the felt uneasiness. In the absence of this condition no action is feasible. Man must yield to the inevitable. He must submit to destiny.[12]

Hope, therefore, is a universal implication of action.


This action would involve the expenditure of Crusoe's personal energy, which is the means Crusoe would use toward the end of relieving the uneasiness associated with his pain.

A means is what serves to the attainment of any end, goal, or aim.[13]

A means can also be referred to as a good.

Try to imagine action with only an end, but no means by which the end is achieved. It cannot be done.


Crusoe's forethought regarding pulling out the splinter, and his actual pulling out of the splinter, is future-oriented (however immediate that future may be), and thus involves the passing of time.

The idea of time is a praxeological category.

Action is always directed toward the future; it is essentially and necessarily always a planning and acting for a better future. Its aim is always to render future conditions more satisfactory than they would be without the interference of action. The uneasiness that impels a man to act is caused by a dissatisfaction with expected future conditions as they would probably develop if nothing were done to alter them. In any case action can influence only the future, never the present that with every infinitesimal fraction of a second sinks down into the past.[14]

Crusoe must use time to remove the splinter. Time is a necessary means for any action.


Removing the splinter is not the only thing Crusoe could expend his personal energy on in his few remaining moments of consciousness. He could also conceivably just lie there, try to ignore the pain, and rest. However, he cannot do both at the same time. His personal energy and time are scarce with regard to his ends.

There are elements in Crusoe's environment that contribute to his welfare but which are not now scarce with regard to his ends. Nonscarcity is also called "superabundance."

For example, the air he breathes contributes to his welfare. But it is immediately available to him in such abundance that he does not need to take any action with regard to it.

However, this was not the case an hour ago, when, immediately after his shipwreck, he was drowning. At that time, air was not abundant. It was scarce. So he had to take action with regard to it. He had to purposefully swim to the surface of the water and take hold of a piece of flotsam in order to get air. At that time air was an object of action.

But now on the island, air is superabundant (nonscarce), and so it requires no action. Therefore, it is not a means (good). Superabundant things are "not the object of any action. They are general conditions of human welfare."[15]

However, Crusoe's personal energy and time are scarce, and therefore they are means (goods) and objects of human action.

Means are necessarily always limited, i.e., scarce with regard to the services for which man wants to use them. If this were not the case, there would not be any action with regard to them. Where man is not restrained by the insufficient quantity of things available, there is no need for any action.[16]

The hypothetical scenario of general superabundance (nonscarcity) is frequently referred to by Mises as the "land of Cockaigne," which, according to Wikipedia,

is a medieval mythical land of plenty, an imaginary place of extreme luxury and ease where physical comforts and pleasures are always immediately at hand and where the harshness of medieval peasant life does not exist.[17]


Crusoe can conceivably devote his personal energy in his remaining conscious moments toward pulling out the splinter or resting, but not both. In undertaking one alternative, he is implicitly renouncing the others.

Action always involves a scarcity of means with regard to ends. Thus, there are multiple possible ends to which an actor can dedicate any single means. Therefore, action always involves alternatives.

The undertaking of one alternative is an implicit renunciation of another. Thus, action always involves choices and decisions, even when they are "no-brainer" or "snap" decisions. Choice regarding the dedication of scarce means to some ends, and not to others, is called economization. Another way of saying this is that economization is the selective allocation of scarce means to ends. Furthermore, to choose one alternative and renounce another is to prefer one over the other. Thus, action always involves preference.

Acting man chooses between various opportunities offered for choice. He prefers one alternative to others.[18]

Now Crusoe becomes aware of another uneasiness. He feels a sharp pain in his back, because he is lying on a sharp rock. Besides the pain, he is also concerned that if he were to pass out while lying on the rock, his spine could become damaged. There is now even more scarcity of means with regard to his ends, because he cannot expend his personal energy on dragging himself off the rock, removing the splinter, and resting at the same time. In fact, he anticipates he only has time to do one of the three things before he passes out.

Let us say Crusoe chooses to roll off the rock, and thus renounces the opportunity to pull out the splinter or to rest. By doing so, he would be demonstrating that the wants satisfied by rolling off the rock are more urgent than the wants satisfied by either of the other two alternatives. This is necessarily true, because action is always undertaken for the achievement of ends (relief of uneasiness, satisfaction of wants).

The only kind of preference praxeology is concerned with is demonstrated preference: preferences demonstrated by action, not merely expressed in speech or considered in reflective thought.

For example, Crusoe might prefer not to be stranded on an island at all. He may prefer to be magically whisked back home. But as long as this preference has no bearing on action, it is not an object of praxeology.

Action is not simply giving preference. Man also shows preference in situations in which things and events are unavoidable or are believed to be so. Thus a man may prefer sunshine to rain and may wish that the sun would dispel the clouds. He who only wishes and hopes does not interfere actively with the course of events and with the shaping of his own destiny. But acting man chooses, determines, and tries to reach an end. Of two things both of which he cannot have together he selects one and gives up the other. Action therefore always involves both taking and renunciation.[19]

Furthermore, Crusoe may think to himself that he prefers to rest. But if his actions belie that thought, and he actually rolls off of the rock instead of resting, then, to the praxeologist, he did not really prefer to rest.

To express wishes and hopes and to announce planned action may be forms of action in so far as they aim in themselves at the realization of a certain purpose. But they must not be confused with the actions to which they refer. They are not identical with the actions they announce, recommend, or reject. Action is a real thing. What counts is a man's total behavior, and not his talk about planned but not realized acts.[20]

A choice observed by an economic historian in real life only demonstrates that which is chosen, and it does not demonstrate with certainty what was renounced. However, in an imaginary construction (thought experiment), a praxeologist can make assumptions in order to work out the logical implications of those assumptions. And so a praxeologist can assume what alternative would have been chosen had the top alternative not been available. Furthermore, he can assume what alternative would have been chosen had the top two alternatives not been available, and so on.

For example, we can assume that if there had been no rock in his back, Crusoe would have instead devoted his personal energy to removing the splinter, and that if there had been no rock or splinter, he would have rested. These assumptions can be visualized in a list of the actor's alternatives, in order of descending preference.

  1. Rolling off the rock
  2. Removing the splinter
  3. Resting

To prefer one alternative over another is to value one alternative more highly than another. Thus, the above ranking can be called a scale of values. Implied in the above assumptions is that the wants satisfied by removing the rock are more urgent than the wants satisfied by removing the splinter, which are in turn more urgent than the wants satisfied by resting.

Thus the above assumptions can also be visualized in a "scale of wants," a list of the actor's wants ranked in the order of descending urgency. In the example above, the following would be Crusoe's scale of wants:

  1. Avoiding the deleterious effects of the rock.
  2. Avoiding the deleterious effects of the splinter.
  3. The salutary effects of resting.

Since an alternative is evaluated according to the ends it serves, an alternative's ranking in an actor's scale of values is determined by the relative urgency of the wants it would satisfy, as visualized in the actor's scale of wants.

But this requires a reminder about the reality of action:

one must not forget that the scale of values or wants manifests itself only in the reality of action. These scales have no independent existence apart from the actual behavior of individuals. … Every action is always in perfect agreement with the scale of values or wants because these scales are nothing but an instrument for the interpretation of a man's acting.[21]

Psychic Yield/Cost and Psychic Profit/Loss

If Crusoe is successful in rolling off of the rock, he has attained the result he sought. The perceived benefit involved in attaining his goal can be called the psychic yield of the action.

Every action involves a choice. And as explained above, and to quote St. Thomas Aquinas, "every choice is a renunciation." That which is given up (renounced) for the sake of another thing is the psychic cost of the thing.

Mises Academy: David Gordon teaches Libertarianism and Modern Philosophers

Is Crusoe's personal energy the psychic cost of avoiding the deleterious effects of the rock on his back? No, his personal energy is a means, not an end in itself. What he is really giving up is the opportunity to use his personal energy for alternative ends: either removing the splinter or resting. For praxeology, all psychic costs are thus opportunity costs. His psychic cost is the alternative want-satisfaction he is implicitly giving up when he makes his choice.

So, then, does the opportunity cost of his action consist of giving up the want-satisfaction of both removing the splinter and resting? No, compounding the renounced alternatives in this way does not make sense. If he could not roll off of the rock, he would not then be able to both remove the splinter and rest. He would only be able to undertake the one alternative that satisfies the want that had previously been second highest on his scale of wants: removing the splinter. The want-satisfaction associated with removing the splinter is what he is truly giving up, and therefore represents his opportunity cost.

Costs are the value attached to the most valuable want-satisfaction which remains unsatisfied because the means required for its satisfaction are employed for that want-satisfaction the cost of which we are dealing with.[22]

When Crusoe awakens, he may momentarily reflect on the outcome of his action (rolling off of the rock). Perhaps he succeeded in getting off of the rock, and thus succeeded in protecting his spine. Fortunately, his splinter did not cause an infection, although its continued presence has caused him to wake up in a great deal of pain.

He is, on balance, pleased with his choice. Another way of saying this is that he considers the psychic yield (the benefit of rolling off of the rock) to be superior to the psychic cost (the foregone benefit of removing the splinter) of the action. We can then say he has made a psychic profit.

Counterfactually, perhaps either he did not have sufficient energy to get off the rock — and so his spine was damaged anyway — or a deadly infection did set in because of his splinter.

In either of these unfortunate cases, he may very well regret his action. This is to say that he considers the psychic yield to be inferior to the psychic cost of the action. Such a situation could be characterized as a psychic loss.

Profit, in a broader sense, is the gain derived from action; it is the increase in satisfaction (decrease in uneasiness) brought about; it is the difference between the higher value attached to the result attained and the lower value attached to the sacrifices made for its attainment; it, in other words, yield minus costs. To make profit is invariably the aim sought by any action. If an action fails to attain the ends sought, yield either does not exceed costs or lags behind costs. In the latter case the outcome means a loss, a decrease in satisfaction.[23]

Mises here uses words that convey a sense of quantifiability ("increase," "decrease," "difference," "minus," etc). But he meant them in a figurative sense only. They can easily be replaced by ordinal terms (as with my use of "superior"/"inferior" instead of "more"/"less"). Mises was careful to avoid any literal interpretation of these words by making the following important point:

Profit and loss in this original sense are psychic phenomena and as such not open to measurement and a mode of expression which could convey to other people precise information concerning their intensity. A man can tell a fellow man that a suits him better than b; but he cannot communicate to another man, except in vague and indistinct terms, how much the satisfaction derived from a exceeds that derived from b.[24]

The psychic profit and loss that is present in even simple isolated action can only ever be ordinal, unmeasurable, and incalculable phenomena. "Profit" and "loss" in the usual sense (which is distinct from, although ultimately derived from, psychic profit and loss) as cardinal, measurable, and calculable phenomena is only present in the reckoning of a individual member of a market economy utilizing money prices.

Praxeology and Economics

A crucial insight of Mises's is that the social system of production known as the market economy (or capitalism) is only possible with, and is characterized by, the existence of economic calculation, which in turn depends on the existence of cardinal and calculable profit and loss, which in turn depends on the existence of money prices.

Mises regards economics proper (or "catallactics") to be the subfield of praxeology that deals with the market economy, which again is distinguished by the existence of calculable action.

The field of catallactics or of economics in the narrower sense is the analysis of the market phenomena. This is tantamount to the statement: Catallactics is the analysis of those actions which are conducted on the basis of monetary calculation.[25]

Therefore, Crusoe "economics" and the study of barter exchanges (which can only ever be ad hoc, and never be an integrated part of a social system of production) are not really part of economics, in the strict Misesian sense (which again is the study of the market economy), but instead are part of praxeology in general.

Some Austrian scholars and students prefer Murray Rothbard's distinction between praxeology and economics, which preserves the status of barter analysis as part of economics.[26] However, as always, Mises's distinctions are not to be lightly cast aside. Mises eloquently explained why the distinction between noncalculable and calculable action is the most important distinction in the science of human action.

Every action can make use of ordinal numbers. For the application of cardinal numbers and for the arithmetical computation based on them special conditions are required. These conditions emerged in the historical evolution of the contractual society. Thus the way was opened for computation and calculation in the planning of future action and in establishing the effects achieved by past action. Cardinal numbers and their use in arithmetical operations are also eternal and immutable categories of the human mind. But their applicability to premeditation and the recording of action depends on certain conditions which were not given in the early state of human affairs, which appeared only later, and which could possibly disappear again.

It was cognition of what is going on within a world in which action is computable and calculable that led men to the elaboration of the sciences of praxeology and economics. Economics is essentially a theory of that scope of action in which calculation is applied or can be applied if certain conditions are realized. No other distinction is of greater significance, both for human life and for the study of human action, than that between calculable action and noncalculable action. Modern civilization is above all characterized by the fact that it has elaborated a method which makes the use of arithmetic possible in a broad field of activities.[27]

What has been the primary concern of economists since the earliest days of the science has been the elucidation of market phenomena. And, because of its paramount importance described by Mises above, and its distinct scientific challenges, if anything deserves to be ascribed a subscience of its own, it is the momentous realm of calculable action.


The possibility of Crusoe suffering a psychic loss exemplifies the ever-present reality of uncertainty in the realm of action. Uncertainty too is a necessary prerequisite of action.

The uncertainty of the future is already implied in the very notion of action ….to acting man the future is hidden. If man knew the future, he would not have to choose and would not act. He would be like an automaton, reacting to stimuli without any will of his own.[28]

Action as Exchange

To give up (renounce) one thing for the purpose of acquiring another can be characterized, in a manner of speaking, as an exchange. Therefore, since every action is a choice, and every choice is a renunciation, every action is also an exchange.

Action always is essentially the exchange of one state of affairs for another state of affairs. If the action is performed by an individual without any reference to cooperation with other individuals, we may call it autistic exchange.[29]

Time Preference

Other things being equal, satisfaction is preferred sooner rather than later. This universal feature of acting man is called "time preference." Time preference can even be seen in the behavior of children, as in the seminal "marshmallow experiment" conducted at Stanford University.

As reported in the New Yorker,

In the late nineteen-sixties, Carolyn Weisz, a four-year-old with long brown hair, was invited into a "game room" at the Bing Nursery School, on the campus of Stanford University. The room was little more than a large closet, containing a desk and a chair. Carolyn was asked to sit down in the chair and pick a treat from a tray of marshmallows, cookies, and pretzel sticks. Carolyn chose the marshmallow. Although she's now forty-four, Carolyn still has a weakness for those air-puffed balls of corn syrup and gelatine. "I know I shouldn't like them," she says. "But they're just so delicious!" A researcher then made Carolyn an offer: she could either eat one marshmallow right away or, if she was willing to wait while he stepped out for a few minutes, she could have two marshmallows when he returned. He said that if she rang a bell on the desk while he was away he would come running back, and she could eat one marshmallow but would forfeit the second. Then he left the room. …

Most of the children were like Craig. They struggled to resist the treat and held out for an average of less than three minutes. "A few kids ate the marshmallow right away," Walter Mischel, the Stanford professor of psychology in charge of the experiment, remembers. "They didn't even bother ringing the bell. Other kids would stare directly at the marshmallow and then ring the bell thirty seconds later." About thirty per cent of the children, however, were like Carolyn. They successfully delayed gratification until the researcher returned, some fifteen minutes later. These kids wrestled with temptation but found a way to resist.

In struggling with "temptation," these children were actually deliberating over an "autistic exchange." (Obviously the researchers would not really count as interested "parties" in the exchange.) They were deciding over an exchange concerning two different goods: a present good (the one treat laid out before them) in exchange for a quantitatively greater future good (two treats in 15 minutes).

By virtue of their closeness in time, present goods always have a premium in relation to future goods, other things being equal. This premium is called time preference, and it varies from person to person. Another way of saying the same thing is that, by virtue of their remoteness in time, future goods always have a discount in relation to present goods, and this discount varies from person to person.

Craig and the other children who did not wait exhibited a higher time preference than Carolyn and the other children who did wait. In other words, they placed a higher premium on "now," or a higher discount on "later."

Going back to Crusoe, the fact that resting now would involve satisfaction that is immediate gives that alternative a slight additional appeal, while the fact that removing the rock or splinter mostly provides more remote satisfaction (enjoying the benefits of living without an injured back or hand after he wakes up) slightly lessens the appeal of those options. Of course, for everyone aside from the most ridiculous procrastinators, the degree to which the appeal of avoiding injury would be lessened by time preference in such a situation would be extremely negligible, and would not make any difference in his choice.

However, in daily life, time preference is a major factor in decisions. And, whether it "tips the scales" of a particular choice or not, time preference is nonetheless always present.

Time preference is a categorial requisite of human action. No mode of action can be thought of in which satisfaction within a nearer period of the future is not — other things being equal — preferred to that in a later period. The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.

Not only the first step toward want-satisfaction, but also any further step is guided by time preference. Once the desire a to which the scale of values assigns the rank 1 is satisfied, one must choose between the desire b to which the rank 2 is assigned and c that desire of tomorrow to which — in the absence of time preference — the rank 1 would have been assigned. If b is preferred to c, the choice clearly involves time preference. Purposive striving after want-satisfaction must needs be guided by a preference for satisfaction in the nearer future over that in a remoter future.[30]

Action as Production

If Crusoe succeeds in pulling the splinter out, he can be said to have produced the new state of affairs in which his ends (removing the deleterious effects of the splinter) are achieved.

Focusing on the cause-and-effect aspect of action, all action can be seen as production.

Action, if successful, attains the end sought. It produces the product.[31]

To analyze Crusoe's actions as production, let us present him with a new challenge. Let us say Crusoe chose to drag himself off the rock. He then passed out, and when he woke up, he removed the splinter. Fortunately he did not get an infection. Then he relaxes for a few moments. While relaxing, another want (uneasiness) arises. He feels a sharp hunger in his belly. And so Crusoe has another end he wants to achieve: to eat.

In the prior thought experiments, Crusoe only had to use, as a means, his own personal energy to satisfy his most pressing wants (most urgent uneasinesses). But to alleviate his hunger, he would need to use means from outside of himself.

Fortunately he sees a coconut on the beach. This coconut is a good (a means).

It is important to note that praxeology (and economics) concerns the meaning that the mind of man gives to the world around him, not to the intrinsic properties of the outside world itself. The day before Crusoe's shipwreck, the coconut laying on the island was not a good. It was just a thing. For an outside scientific observer studying the scenario on the island, it was an object of botany and topography, but not of economics. It was only when Crusoe cast his eyes upon it and judged it to be potentially useful for achieving his ends that it became a good. In other words, the coconut derives its character as a good ("goods-character")[32] from its perceived usefulness in achieving ends.

Praxeological reality is not the physical universe, but man's conscious reaction to the given state of this universe. Economics is not about things and tangible material objects; it is about men, their meanings and actions. Goods, commodities, and wealth and all the other notions of conduct are not elements of nature; they are elements of human meaning and conduct. He who wants to deal with them must not look at the external world; he must search for them in the meaning of acting men.[33]

The coconut happens to have somehow been smashed open and is inches away from his face. Crusoe can just shove his face into the coconut and start eating immediately. The open coconut is directly serviceable for Crusoe. Directly serviceable means are called consumers' goods, or goods of the first order.

Unfortunately, the coconut has very little meat, and so afterward he is still ravenously hungry.

But Crusoe sees another coconut. However, this one is not busted open. It is not directly serviceable. He thinks about trying to rip it open with his bare hands. Only after opening it would the coconut be a consumers' good. While it is still unopened, it is not directly serviceable. It is only potentially indirectly serviceable, because Crusoe can use the unopened coconut in combination with his personal energy (ripping it open) to produce an open coconut.

Indirectly serviceable means are called factors of production or producers' goods. Producers' goods that directly produce consumers' goods (goods of the first order) are called goods of the second order. Producers' goods that directly produce goods of the second order are called goods of the third order, and so on. As we progress in this manner, we move from lower-order goods to higher-order goods.

Crusoe does not need to produce the unopened coconut; he just found it in nature. Such factors of production that are themselves not produced, but are instead taken directly out of nature, are often called land.

Personal energy used as a factor of production is called labor.

Since neither land nor labor is "produced" in the usual sense of the word, they are often termed "original factors of production."

So combining land (the unopened coconut) and labor (his own effort) Crusoe can try to produce a consumers' good (the opened coconut).

However, Crusoe finds that he is too weak to rip open the coconut with his bare hands. But he has the idea of using a nearby flint rock to smash open the coconut. The flint rock is a good now too (a factor of production), and since it was found in nature it would be characterized as land.

The flint rock's goods-character is derived from the goods-character of the open coconut it helps produce, just as the open coconut in turn derives its goods-character from the satisfaction it provides.

Unfortunately, Crusoe finds that the rock, the unopened coconut, and his labor are still not enough to produce the opened coconut: the coconut husk is just too solid.

So he has another idea: using a cobblestone to break off flakes from the flint rock to make it sharp, and then using the sharp rock to cleave open the coconut.[34]

He uses the cobblestone, labor, and the dull flint rock to produce something new: a sharp flint rock.

This sharp flint rock is not land, because it was not simply found in nature; it was produced. But it is still a factor of production (not a consumers' good), since it is only indirectly serviceable (via creating the open coconut). It is a produced factor of production. Produced factors of production are often called capital goods.

The cobblestone derives its goods-character from the sharp rock, the sharp rock from the opened coconut it helps produce, and the open coconut from the satisfaction it provides.

Thus we have the classical triad of factors of production: land, labor, and capital goods.

It is important to note that Mises did not think the land, labor, and capital triad was useful for value and price theory, and thus he downplayed the importance of the land/labor (original factors of production) vs. capital good (produced factor of production) distinction, especially as less important than the "orders of goods" scheme.[35]

So let us analyze Crusoe's situation using that scheme.

The desired open coconut is a good of the first order. The sharp flint rock used to open the coconut is a good of the second order. And the cobblestone used to sharpen the rock is a good of the third order. Analyzed physically, higher-order goods cause lower-order goods. But analyzed teleologically, causation flows in the reverse direction (backward through time in the mind of the individual): the goods-character of lower-order goods cause the goods-character of higher-order goods.

The goods-character of a good is directly derived from the good(s) of the next-lower order it directly helps to produce. But the goods-character of every good is ultimately derived from the first-order good(s) it indirectly (or directly) helps produce. This is true of even the most lengthy chains of production.


In the above hypothetical acts of coconut production, Crusoe had to deploy factors of production according to certain methods in order to try to produce a consumers' good. The technical knowledge of such methods of deployment are called recipes. All production requires recipes.

Producer and Consumer as Functions

Since even before Adam Smith, functional analysis has been a crucial method in economic science. This method reached maturity in the "functional distribution" approach of John Bates Clark,[36] which was adopted and perfected by Mises.

The underlying notion of functional distribution goes back to Aristotle, who explains the concept quite well: "a man who is a doctor might cure himself. Nevertheless it is not in so far as he is a patient that he possesses the art of medicine: it merely has happened that the same man is doctor and patient."[37]

In other words a doctor who obeys the call to "heal thyself" cures in his capacity as a doctor ("qua doctor"), and is cured in his capacity as a patient ("qua patient").

Taking this approach, there are two ways of looking at Crusoe with regard to his action regarding the coconut. There is the aspect of Crusoe as a possessor of ends to be accomplished, a felt uneasiness that is to be removed. This is Crusoe in his function as a consumer.

There is also the aspect of Crusoe as a deployer of means (factors of production). This is Crusoe in his function as a producer.

Just as means are always deployed for the sake of ends, production is always for the sake of consumption, and never the other way around. "Crusoe the coconut opener" is always (and by definition) at the service of "Crusoe the eater," so to speak. "Crusoe the consumer" is "sovereign" over "Crusoe the producer."

This "consumer sovereignty" (a term coined by William H. Hutt[38] and adopted by Mises) is not just present in autistic exchange. As can be discovered in an exploration of economics proper, it also carries over into barter exchange and into even the most complex market economy. Through social cooperation, the means-ends coordination present in the actions of an individual isolated actor is extended to the market society as a whole.

However, the way in which this occurs involves complicated and subtle processes. This complexity and subtlety sufficiently confuses many people to the extent that, based on their confusion, they propose fundamentally absurd economic doctrines.

For example, there are the syndicalist and corporativist fallacies,[39] which in effect try to make consumption for the sake of production.

Mises Academy: Robert Murphy teaches Keynes, Krugman, and the Crisis

And there are the Keynesian and other underconsumptionist fallacies, which, at bottom, are just as absurd as thinking that Crusoe could become richer in consumers' goods by consuming more in order to stimulate his own production. There is a great deal that Mr. Crusoe could teach Mr. Krugman, if the arch-Keynesian would only deign to spend some quality time with him.

As the great Frederic Bastiat wrote, "How happy will nations be when they see clearly how and why what we find false and what we find true of man in isolation continue to be false or true of man in society!"[40]

To fully spell out why most of the economic doctrines that dominate present-day policy are absurd and destructive, we must eventually leave our little island. However, the path toward economic understanding can be followed much more easily if we walk the first mile in Crusoe's sea-soaked shoes.

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