Risk Free

Ain’t so. Humans have never found a way to live without risk. And our current economic system cannot provide a better than purely miserable return on your money without undertaking some risk. That’s not for want of trying, of course. And these days it seems that financial people, investors, and governments take on huge risks and blow off the possible consequences as if they were living on a permanent cloud. What has happened to sanity?

From my memory of things, as a long-time reader of business magazines and the Wall Street Journal, we started going off track back in the 1980s. Then the smartest, most persuasive of the financial people invented the “high-yield” or “non-investment-grade” or “speculative-grade” bond. This was a way—and still is, to some extent—for the largest, most solid of U.S. corporations to raise more money than would normally be possible in the financial markets.

Credit rating agencies like Standard & Poor’s, Moody’s, and Fitch Ratings exist to study the conditions under which corporations and governments raise money by selling bonds.¹ Based on the stability and strength of the entity borrowing the money, the size of its other obligations, and its history of honoring its debts, the agencies assign a rating to the bond. The scale goes from the highest, AAA, down through AA to A, then through the Bs and Cs, with pluses and minuses, just like a school grade. A rating of D indicates a debt that’s already not being repaid as promised.

These rating systems don’t try to eliminate risk, simply categorize it. If you want minimal risk, buy AAA-rated bonds like U.S. Treasurys. You won’t make much in interest, but your money is secure. The high-yield bonds, in contrast, were and still are offered under conditions and promises to pay that make them about the last thing on the borrower’s mind. If things go badly with the corporation and it has to line up its creditors in the order by which they’ll get paid, the high-yield investor is standing at the end of the line and likely can whistle for his money. The attraction of these bonds, for the buyer, is that they pay really well. With a greater risk that the bond might become just a piece of paper, the buyer expects to earn a whole lot more for taking and holding it. You expect to be paid well to hold a hot potato, too.

The magic trick that financiers in the 1980s pulled off was convincing buyers that, because of the high yield and despite the low rating, these were great deals. After all, the companies floating these bonds were all solid earners, among America’s biggest corporations, and nothing really was going to go wrong. Hey, you can trust these guys! Even though these bonds soon picked up the name “junk,” people forgot about that and snapped them up. It looked like a way to make big money without real risk.

Suddenly corporations had a lot of cash from selling junk promises to pay. Some used it wisely, but many went on buying binges, snapping up smaller companies and undertaking expansions that—in previous times and with less money in play—might not have looked so attractive. But the concepts of “debt” and “obligation” are so Puritan. The smart financial people called it “leverage”—making a little bit of your money and a lot of other people’s do the work of a long stick.²

The trouble with an environment like this is that Gresham’s law, that bad money drives out good, still operates. People who are playing fast and loose with their promises tend—over the short run—to do better than, have an advantage against, and out-compete the dullards who play it safe and won’t jump into the pool. Companies like Enron and WorldCom puffed up and suddenly became as big as, or bigger than, old established companies like Chevron, AT&T, or GM, Ford, and Chrysler. Until the bubbles burst, that is, and they disappeared.

In the mid-1990s, the smart financial people invented another couple of concepts to address risk and keep the party going: the hedge and the derivative. These are simple concepts that became incredibly complex and mysterious.

A hedge is just what it sounds like—hedging your bet. If you undertake a risky gamble on a stock going up or down, then make a simultaneous bet against that happening, or a bet on some other, inversely probable occurrence. This is like betting both red and black on the roulette wheel, or betting on both fighters in a boxing match. The bets are never exactly equal, because that would be pointless. The idea is to recoup some of your loss if the situation goes south. Very smart people work up statistical relationships and use a stunning amount of math to gauge the risks and rewards between the original investment and the hedge. A company called Long Term Capital Management was founded in 1994 to employ these strategies so that money would grow fast and without risk. The tower of complications it constructed collapsed and the company closed in 2000.

A derivative is just a form of bet. Two financial parties agree to pay each other certain sums of money based on the movement of some reference variable like a stock market index, the future value of gold or some other commodity, or any complexly dynamic phenomenon. The derivative is not an investment in the market or the gold or any underlying value; the parties are simply using it as a condition of the bet. This is not very different from betting on the order in which cards will come out of a deck.

Not surprisingly, derivatives are often used as hedges for actual investments in the market for stocks or commodities or real estate.

As noted elsewhere,³ I am not a mathematician, or statistician, or any kind of trained scientist, but I am plagued with a great deal of caution and common sense. I don’t like to jump into a pool until I know how deep it is. I don’t like to undertake an obligation unless I have a clear view to how I’m going to fulfill it. And my guts tell me you can’t avoid all risk over the long term. You can hedge a bet now and then. You can dodge the consequences of risky behavior once or twice. You can build a house of cards up to two or three levels. But sooner or later you have to come back to a ground state with respect to risk. You have to equilibrate⁴ and return to a condition of balance.

While the economy may not be a zero-sum game,⁵ every person and organization operating within it ultimately leads a zero-sum existence. You are born into this world with nothing of your own, and you will leave it the same way.⁶ Electrons absorb energy and rise from one shell level to the next, then release that energy and drop back. A person’s getting and spending ultimately equal out. A company’s stock and debts ultimately equal its assets and profits. Risks and rewards ultimately balance out. And nobody cheats the hangman.

Every speculative fever—from the tulip mania of the 1630s and the stock market boom of the 1920s, to the tech boom of the 1990s and the housing bubble of the 2000s—goes through predictable phases. From being a new thing that only the rich, the smart, and the daring will invest in, the prized commodity—whether bulbs or stocks or houses—becomes something that everyone is willing to borrow to acquire, because there’s really no risk, because the demand is infinite and the price will never go down.⁷ Sooner or later, however, risk catches up, everyone steps in a hole, and the market collapses.

It always has, and it always will. But it is our nature to believe that this time, just this once, things will be different and we can cheat the hangman. … Isn’t hope a beautiful thing?

1. A bond is nothing more than a portable form of loan. It represents a corporation’s or government’s obligation to pay back the money it borrowed. A bond differs from a simple loan in that anyone holding the bond can sell it anytime in an open market to someone else, who will eventually receive from the borrower the principal money plus interest. Depending on how people feel about the bond and its issuer at the time of sale, the price may be a bit more or less than the principal-plus-interest to be paid back. This difference establishes a “yield” for the bond.

2. Among the probably unwise uses was the “leveraged buyout.” The managers of a company would decide they didn’t like being custodians, having shareholders, and obliging themselves to meet the shareholders’ and stock analysts’ quarterly expectations. So the managers floated a lot of unusual debt, bought up shares of the company’s own stock, and ended up owning the company—plus a mountain of owed money that hung over these companies, swinging back and forth and descending over time like Poe’s pendulum.

3. See my blog Fun with Numbers from September 19, 2010.

4. To borrow a word from the sciences.

5. See The Economy as an Ecology from November 14, 2011.

6. Yes, of course, sometimes Mummy and Daddy are rich and can set you up with a lot of advantages, but you yourself are born as naked as any pauper’s child. And yes, you may leave behind a great fortune for the benefit of your heirs, but you die as penniless as any husk on the burning ghats.

7. It didn’t help that, in the latest bubbles, the U.S. Federal Reserve, which manages the country’s money supply and sets the basic rate at which money can be borrowed, has kept that rate low for reasons other than providing easy money for everyone to get drunk on. They thought low interest rates would keep inflation from taking off; instead other things took off. Managing risk is like packing a partially inflated weather balloon into a suitcase: if you push it in here, it pops out somewhere else.

Seduced by Numbers

I freely admit my addiction as a technophile. I love watching, learning about, using, and owning machines, gadgets, technical and industrial processes, and other creations of the mechanical arts.¹ Since most of these devices are rated quantitatively, with numbers, my affection would seem curious.

For the first thirty years or so of my life, I was basically “innumerant”—allergic to numbers. I did pretty well with simple arithmetic in grade school but started to slip when they introduced the method of extracting square and cube roots, which I could not easily distinguish from long division. I floundered in Algebra I and sank outright in Algebra II. I never could figure out what anyone might do with a phrase like “a²+2ab+b²” in quadratic equations.² So my schooling gravitated away from math, physics, and the higher sciences toward English literature, languages, history, and similar qualitative studies. That was difficult for a science fiction writer, and I had make up a lot of ground when I became serious about technical writing and hard-science novels. But I digress.

The first time I felt the pull of the numbers related to a machine was when I became interested in motorcycles in my late twenties. My first bike was a two-stroke Yamaha, which came in the 250 cc and 350 cc versions. I instinctively plopped for the bigger engine. When I graduated to my dream machine, a BMW, I had the choice of 500 cc, 600 cc, and 750 cc engines and again went for the biggest. In my stupid, English-major head, I couldn’t tell the difference between optimum and maximum,³ although given my six-foot-six frame and corresponding weight, a big motorcycle was the right choice for me.⁴

My second brush with machine ratings was in purchasing my first computer, an Apple II, back in 1979. Up until that time, I knew computers only as massive and unobtainable things: the IBM 360 that was leased by my university and later my corporate employer; it lived in the basement, crunched all the organization’s numbers, and was attended by a priestly class who alone knew how to communicate with the beast. But here was a thing no bigger than a portable typewriter—although married to a television set—that claimed to be a computer. It took a while for the salesman in the store to convince me that this was a real, multi-purpose computer, able to perform any function with the right programming, and not just some single-function device like a calculator or a video game. I had no real use for a computer, of course, but the notion of a machine that responded to written instructions fascinated me.

And suddenly there was the question of numbers. Did I want 32 kilobytes of RAM or the full 48 kilobytes? I naturally plopped for the larger number, thinking that a machine with open-ended capability would benefit from more of whatever a kilobyte might be. Later computers—and I bought my fair share—offered even more numbers: gigahertz of speed, megabytes of disk capacity, baud rates of connection, pixels of screen resolution. It became possible to run wild in so many dimensions.

I discovered that even with that original Apple II, there was a hunger for completeness. The computer’s motherboard⁵ offered eight slot-like connectors across the back for electronic cards that would variously increase memory, add supplementary processors, and coordinate signaling for peripherals like disk drives, printers, and modems. When I had about half of the slots filled with devices for a workable system, the remaining empty slots began preying on my mind. They represented potential capacity that I was not using. I began looking for and buying additional peripherals just to fill in those gaps. A friend of mine, who had to deal with his own peripheral addiction, called this “slot fever.”

I’ve held off buying an Apple iPad, even though I own a Kindle, a Nook, and an iPhone, because I know that I will want—insist upon—the model with the highest possible amounts of memory, connectivity, speed, resolution, and whatever other measures are appropriate to what is, essentially, the electronic analog of a sheet of paper. Full-blown capacity can practically double the price of the basic machine.

When I began handling pistols,⁶ I started with a .357 magnum revolver that my brother owned. But unless you buy the high-power loads, which are much more expensive, you are still shooting the basic .38 cartridge. That’s fun, but the .45 cartridge is bigger, more impressive, and makes a louder noise. Guess which way I progressed?

I don’t think this seduction by the numbers is just my own personal fetish. All around us are people buying cars with the most horsepower, television sets with the largest diagonal dimensions, stereo amplifiers with the highest wattage, trucks with the greatest towing capacity. If some is good, a lot is better, and “Can you get that with the 402 engine?”

You can see the urge not just at a personal level, but organizationally as well. The military is especially susceptible: The next generation of jet fighter has to reach a higher Mach number, have a stealthier radar image, carry a bigger payload, turn quicker, and land on a shorter runway. The missiles get bigger, the payloads larger. Even business organizations, where some consideration of cost versus effect might be expected, can be lured into buying bigger computers and server farms, building larger headquarters and larger factories to achieve even more growth in larger markets.

Did people always react this way? I suspect not, until machines took physical work out of the equation. If a bow with a 65-pound draw weight is right for a person of your size, do you really want one with a 200-pound draw? If four horses can pull your loaded wagon, do you really want to hitch up and try to control a team of twelve or twenty horses?

The closest analogue I can think of from pre-industrial times is the collector. It doesn’t matter what is being collected: statues, stamps, coins, butterflies, German ceramic beer steins, or race horses. More is better, and there is always one more item that will fill out your category and complete the set.⁷ Slot fever.

In the past, only the wealthy, the idle, and those with lots of spare cupboard space could satisfy the passion for collecting. But with modern machinery, you can “complete the set” in one purchase by buying the most horsepower, the biggest screen, the highest wattage. Until, of course, next year’s model comes out with an even bigger engine, larger screen, more RAM, more buttons, more of … everything. And then you just have to trade up.

It’s how we end up deep in debt and still crying for the moon: seduced by the numbers.

1. You might say the interest was bred in my genes: My father was a mechanical engineer and his father a civil engineer. I think it broke my dad’s heart that neither of his sons wanted to follow him into engineering.

2. Not until forty years later, when I began seeing it in the calculations supporting a two-dimensional matrix that combined dominant and recessive genetic traits. I still can’t solve the damned thing.

3. For those of you who are similarly impaired, remember that optimum body temperature is 98.6°F, while maximum body temperature can kill you.

4. BMW now offers its touring machines with a six-cylinder, 1600 cc engine, and I have to speak sternly with myself to keep from rushing out and buying one.

5. Today you can use a computer and never look under the hood; you might not even know what the motherboard is or where to find it. But with the Apple II, you were part-user and part-hobbyist; you popped the top off and went inside for all sorts of user-serviceable conditions.

6. Why? Because I write fiction with occasional military action and people shooting guns. It seemed important to learn a thing or two about them. You can read all the books and articles you want, but half an hour shooting on the range and observing real life, competent gun handlers (rather than actors on television) provides a unique perspective.

7. I’ve always avoided the collecting bug myself. I could see that you start off with an attachment to some class of objects—Chinese porcelains, Amazonian beetles—because you can see them as novel, clever, beautiful, or similarly attractive in some other dimension. You start with an eye for beauty that anyone can appreciate. But soon you learn more about the topic, broaden your interest, and expand the scope of your collecting. Eventually, you are bidding and paying an exorbitant price for an indifferent-looking cup or a really ugly little beetle because you know it to be unique, rare, or otherwise special. That way lies madness.

What is Strength?

As noted some weeks ago, I’m a longtime fan of Frank Herbert’s Dune books and their guiding principles.¹ I find it compelling that, of all the Imperium’s institutions and social groupings, the series’ most enduring is the Bene Gesserit. They are variously described as witches, engineers of religion, manipulators of the human bloodlines, and inheritors of human purpose from the Great Schools period. While the Fremen, the Bene Tleilax, and even the Imperium itself come and go in the series, the Bene Gesserit endure through the whole impossible history. They are the Greek chorus against which all the action plays.

The B.G., their Reverend Mothers, their acolytes, and their books and teachings contain many wise and wicked sayings, but one that has always stuck with me is from Herbert’s next-to-last novel in this universe, Heretics of Dune: “Never support weakness; always support strength.”

You might imagine that a society of women, especially those undertaking the religious education of the human race, would naturally tend to support the weak: children, other women made vulnerable by bearing children, the sick, the disadvantaged, the dispossessed. They should be following Mother Teresa into the slums of India. Supporting the strong feels all wrong. After all, the strong can take care of themselves. So, was this Herbert, a male writer, injecting an anti-feminist viewpoint into his imagined all-female society?² Or was he simply being perverse?

To understand the Bene Gesserit in this context, we have to examine what it means to be strong as a human being. And I believe this is one of the “cleavage questions”³ that can crack open and help examine much of what is troubling our society today.

We tend to think of “the strong” as those who have the advantage: a big stick, the biggest guns, the biggest bank account, the most politicians in their debt, the most laws on their side. By contrast, then, the weak are those with no weapons, no resources, no friends, and no influence. It’s a formula that speaks to the cynical adage “Might makes right.”

Why do I call that adage cynical? Because western civilization goes back to Judeo-Christian roots that totally deny it. Justice, fairness, proportion, treating people as they deserve—everything we consider to be “right”—stands apart from the kind of force a bully, a dictator, a king, or even a democratic majority can bring to bear. The Bible bristles with counter-stories of the strong brought low, from Pharaoh to Goliath to Caiaphas and Pilate. The human sense of right and wrong comes not from external circumstances of force and power, but from the heart and its capacity to observe, weigh, and decide. Right stands outside the bustle of war and politics and resides in the eye of God.

It’s clear, also, that the kind of strength we are describing in these situations comes from factors that stand outside the person wielding power. To hold the big stick, command the strongest battalions, be able to write the largest checks, influence the greatest number of politicians—these are externals. Any person can pick up the stick, take command of the troops, inherit the wealth, and compound personal influence through a pleasing smile. It takes no special intelligence nor moral goodness to wield such power.

It does take muscles, and the discipline to build them, for a man to pick up and use a stick—but in today’s society, the one who wields the bludgeon is usually not the person in actual power. It also takes a kind of self-discipline to build a personal fortune and the political connections that represent the true power in modern society. You have to work hard and forego many passing pleasures, husband your resources, invest wisely in both opportunities and people, take risks, do favors, listen to a lot of bad jokes, and eat a lot of tasteless congratulatory dinners.

Discipline and dedication are both aspects of personal strength. Yes, they can be used for bad purposes. But any person who dedicates him- or herself to a cause, and disciplines his or her mind, heart, and body to attaining it, is halfway to moral virtue. People who make such sacrifices almost never do so for petty reasons. People do not strain and strive “because I want to be a big man and have everyone at my beck and call.” Instead, people usually dedicate themselves to causes bigger than their own personal selves. You may not agree with the cause itself—the glory of God, or greater Germany, or American exceptionalism, or Marxist principles—but these things stand outside the individual and draw him or her onward.⁴ Even actors and musicians, seemingly the most vain, selfish and self-glorying of people, must reach outside themselves and provide pleasure to their audiences if they are to be successful and attain the status they desire.

In this context, the contrary quality—weakness—represents lack of effort, dedication, and discipline. The weak do not want to spend the effort to achieve anything. They will accept the terms and conditions that others impose so long as they can get a fraction of what they want or need in return. The weak want to be taken care of, carried on someone else’s credit, and appreciated for some quality other than their own contributions.⁵

It is in this sense, I believe, that the Bene Gesserit axiom is meant. It’s a truism that if you subsidize something, you will get more of it. If you support weakness—not the temporary kind, where a man may be down on his luck for reasons outside himself, but the perennial kind that wants and expects a free ride—you will get more people with their hands out waiting to be served. If you support strength—those who have a place to go and the ambition and discipline to get there—you will have more people pulling on their oars and moving civilization forward. One effort supports doers, the other begets the done-to.

If your business is the future of the human race, as it was with the Bene Gesserit, then you can see which way the land slopes and how, left to its own devices, the water will run. You build civilization up, rather than letting the forces of sloth tear it down.

And if this kind of strength is paired with a sense of morality, equity, and proportion, you get strong people who are able to care for others in their times of need. Samaritans rather than bullies. And that’s the greatest strength of all.

1. See The Dune Ethos from October 30, 2011.

2. The first Dunenovel was published in 1965, when the counterculture was breaking away from the beatnik coffee houses of San Francisco and spreading nationwide, particularly on college campuses. This was also the time that the Women’s Movement was spreading, with the publication of Betty Friedan’s The Feminine Mystique in 1963. Herbert was certainly reacting to that current, but I don’t think his Bene Gesserit were meant to parody it—certainly not through all six novels.

3. I take the term from diamond cutting. Carbon crystals are practically impenetrable by shock and hammer blows due to the interlocking nature of their hexagonal lattice. But find the right plane and apply a small amount of pressure, and the diamond splits easily. Some problems are Gordian knots with ready-made fracture lines, just waiting for a sword cut at the right angle with the right kind of question.

4. People who rise on the corporate ladder are seldom aiming for personal power over others. Instead, they are usually seeking the freedom to act, to do things for the good of the organization according to their own views—rather than following the views of their superiors—about what will be efficient and effective. The person who wants someone to polish his boots only so that he can plant them in other people’s backsides is quickly discovered and dismissed as a petty fool.

5. Think of “Sadie, Sadie, Married Lady” in the musical comedy Funny Girl: “Do for me, buy for me, lift me, carry me …”

The Economy as an Ecology

We are going into our fourth year of recession. We have a bumpy road still ahead of us. And we have no promise of ever again seeing the sort of economic growth and prosperity that seemed to be America’s birthright in the late 20th century. In the Great Recession—as in the Great Depression before this—many people today are adopting the notion that acquiring wealth and property constitutes a kind of theft. One person’s wealth robs others of the chance to make a bare living. If I am rich, then I have made you and others like you poor. What one consumes another cannot have. This notion derives from the analogy of the national economy as a great pie. And it’s simply a false analogy.¹

For one thing, a pie is static. So much exists, to be cut into so many slices, thick or thin, and then it’s gone. Pie is a zero-sum commodity. As noted in my previous blog, an economy is not a physical object. It’s a dynamic condition, a pattern of interchange between one person and another, among people and corporations and institutions. It isn’t a “thing,” at all.

Let’s, however, for a moment, consider that the economy might be a thing. If so, where did it come from? Is it the land? There is only so much land on Earth, and only a small fraction of that is immediately useful. So if I own land and you don’t, am I therefore rich and you poor, and does my ownership deprive you of a living? That proposition might work in a simple farming situation. I got the good bottomland with rich soil and plentiful water, yielding good crops and making me rich. You got the parcel with sand and rocks far from any water source. But as thrifty, scientific farmers have shown in many situations, even poor land can be made to yield with the right application of human energy and creativity. Think of Israel, northern Utah, or eastern Washington. Land left to itself just lies there.

If the economy were a thing, would it be natural resources? Certainly, nations with plentiful timber, oil and gas, and metal ores have become wealthy. As energy and raw materials, these God-given resources are the starting point for many economic transactions.² If I own land bearing these riches, I can become rich. If you own land with no resources, you might remain poor. But just like the land, resources left to themselves just sit there. The Middle East lay above an ocean of oil and remained poor for generations because no one knew how to drill for it, or finding it on the surface, how to use it. The same could be said for western Pennsylvania or the Los Angeles basin.

Land and resources are the stuff upon which an economy can do its work, just as grain is the stuff that a miller grinds. But the grain is not the grinding, and raw materials do not automatically make themselves into wealth.

Is an economy then the mines and factories, the tools of production? Now we’re getting close. If I own a factory, I can become wealthy. If you work in my factory, you might have a living, although I can see to it—through controlling your hours and wages—that you remain on the edge of poverty. But there are many factories across our landscape that became idle and were boarded up. They made goods that people no longer wanted, or made them inefficiently, or made them less efficiently than factories elsewhere. Factories and machines are no more an economy than land and materials. They are a means to the activity, not the activity itself.

So, is the economy the money flowing through it? We value everything in dollar units—land and houses, commodities, shares of stock representing ownership of factories and machines. And certainly, if I have a dollar, that’s a bill or coin you don’t have. But money is just a marker, a tally, recording the transaction. Money is a chip of wood floating on the river that shows you how fast the water is flowing. And money certainly is not finite. As we’ve discovered in the age of electronic banking and stock markets, money isn’t metal disks and printed paper—those are just physical reminders. Instead, money exists in our heads and in our computers. Money is created when an asset such as a share of Apple stock or a house in Palo Alto gains value because someone else sees it as desirable and will pay more for it than the value I see in holding onto it. Money is destroyed when someone else later sees that asset as less desirable and won’t match the money I paid out to acquire it.³

The economy is the activity that finds a use for the land, the materials, the machines of production. Money is the lubrication that raises that activity above the level of simple barter.⁴ Other people and their demand for food, goods and services, energy and housing, make it worthwhile for the farmer to plant another acre, the miner to dig another ton of ore, the factory owner to add another machine line, the developer to extend a suburb. Without demand, these things don’t happen.

Where does demand come from? As noted in my previous blog, demand comes from productive activity. If I have a job and earn money, I have the means to satisfy my needs for food, clothing, and shelter, my desire for transportation, fashion, education, and amusement, and anything else my store of value allows. If I don’t have a job—a place in the economy—I may have wants, needs, and desires, but they don’t become economic demand.

The proper analogy for an economy is an ecology. In a rich ecology, like a tide pool or a rainforest, sunlight is captured, used, and reused at many levels. Plants absorb it and grow carbohydrates. Animals eat them and produce proteins. Food chains develop with expanding niches for more animals and plants. Opportunists thrive, like the bacteria that process rotting vegetation and animal wastes. Life increases. Life makes more life. In a poor ecology, like a desert, sunlight falls without effect—only making the sand hot. Less energy is captured and traded. Niches disappear or become fiercely competitive. Life decreases. Absence of life diminishes life.

In this analogy, an economy with free markets, a robust system of banking and capital, and wide-open trading—like America’s—is a rain forest. An economy with tightly controlled markets, closely held capital, and narrowly defined trading opportunities—like Soviet Russia’s—is a desert.

But you might object that the ecology is driven by a free natural resource: sunlight. Without the sun, life ceases in either the rainforest or the desert. Where is the comparable free resource in an economy? And I answer that the free resource is human energy, creativity, and ambition. We humans want to make things. We want to define and create meaning for ourselves and our chosen group. Some will invent new products, new systems of production, and new ways of thinking that open new courses of action. Others will use their energy and ambition to make those products and follow those new paths. That’s human nature shaped by a million years of evolution.

In a free-market economy that rewards creativity and ambition, human energy is captured, used, and reused. People are able not only to secure the food, clothing, and shelter that they need but to indulge in tastes and pleasures beyond the bare necessities, or to save and invest in ways that increase their future potential. These activities create opportunities not just for the farmer, the weaver, and the carpenter, but also for the gourmet chef, the fashion designer, the cinematographer, the artist and writer, the banker and broker. Activity begets activity, and wealth creates wealth.

In a closed, command-and-control economy that ignores creativity and ambition—except for a chosen class of state bureaucrats entrusted with society’s future—the focus becomes mere survival. All the rest is sunlight falling on sand. It starts with the drive to equitably provide the basics of life to passive citizens, but people without the opportunity to dream and expand their lives meaningfully will sink into boredom, alcoholism, and mischief. Economic activity declines. Eventually the struggle over crusts consumes all human energy, like scorpions grappling in the desert.

Human nature was not designed by evolution to be static. We are not things, but dynamic beings. And we cannot be baked into a pie.

1. I wrote on this subject before, in It Isn’t a Pie from October 3, 2010. It appears to be time to expand and explain the substitute metaphor.

2. “God,” in this sentence, is a kind of shorthand, not a sign of my devotion. The deity stands as proxy for many fortuitous situations that occurred once and will not be repeated: forests of strong oak and soaring redwoods—resistant to pests and perfect for building—found along the West Coast; pools of oil and domes of gas found under ancient seabeds; veins of gold running among the granite; fields of iron oxide lying close beneath the clay. Use them once and they’re gone. The gifts of weather and soil, fossil sea life, or good geology.

3. And money also simply grows or decays over time. If my money in the bank is loaned out to build homes and factories or buy productive land, and later paid back with interest, it grows. If my dollar bills stay under the mattress, the rate of inflation makes them worth less every year.

4. Without money, the miner has to trade a bucket of ore to the farmer for an apple to eat, and the farmer has to collect a lot of buckets and then give them to the factory owner to get the tractor he needs. Money makes things go faster.

When Corporations are People Too

Some members of the political pole around which the Occupy Wall Street movement has coalesced suggest that one solution to our economic problems would be to revoke or rewrite the legal fiction under which a corporation has status as a person. Supposedly, this would remove the element of big, “faceless” corporations making decisions for the rest of us. However, like most simple solutions to complex problems, I fear this one will have unintended consequences. Bad ones.

The argument in favor of ending this artificial legal personality is that it would remove the shield protecting the living, breathing people actually making those decisions. They would be exposed to public scrutiny and could be punished for their crimes. However, laws are already in place to hold individuals responsible for the decisions they make as corporate officers. Our laws and regulations are thick with personal, human responsibility. Corporate executives and directors who break the law can be and have been prosecuted, fined, and imprisoned.

Still, one of the functions of a corporate entity is to absorb and deflect legal liability, as when there are financial losses to be borne or legal disagreements to be resolved. For example, a corporation may acquire debts beyond its capacity to pay. When the cash flow stops and creditors outnumber payers, the corporation can go bankrupt—divide its assets, pay out what it can, and in the process disappoint a number of those lenders—without impoverishing the human management and the corporation’s shareholders. A corporation may enter into agreements and, if they should become disagreements, bear the consequences of a lawsuit. The corporation can receive and defend a suit from others, or bring suit if its rights are infringed. Although people with a pulse are making decisions about this, they do so in the name of a collective, the interests of the shareholders, rather than as a matter of their own personal honor.

If this weren’t the case, then running a business or buying stock in one would be far more risky. Encounter a downturn in the market, a falloff in sales, an expansion plan gone wrong, or a customer or contractor with a grudge—and you could lose not only your livelihood or your investment but also your home, your savings, all your possessions, and still be in hock for future wages.

Maybe this is what the OWS people want. Make shareholder capitalism so risky and punitive that no one would want to play. That would be a quick route to state-sponsored socialism or communism.¹

But if your aim is to improve our free market system, rather than put a stake through its heart, ending legal personality would probably be a bad idea. Consider that under our system of laws, only a person can enter into a contract, open a bank account, acquire and own property, borrow money and pay debts (a form of contract), hire people (another contract), and function in a hundred other ways required to transact business. If the assembled owners—partners, shareholders, or some other collective with a common cause despite their individual aims and wishes—could not function in this way as a legal entity, our economics would be returned to a medieval level. All business would be personal business. The cobbler makes a pair of shoes and sells them to the farmer, who pays for them with the proceeds of his grain harvest, which he has sold to the miller, who grinds it to make flour and sells it to the baker, who makes the bread the cobbler will buy with the money from selling that pair of shoes.

It’s tidy. It’s neat. It’s personal, and everyone takes responsibility for his actions. People lived that way in Europe for almost a thousand years. They were called the Dark Ages. Business on a personal level will enable a community—a small one—to survive. But it keeps you at the productive level of a pair of shoes and now and then a violin. Try to make anything bigger and more complex, like a piano, and you need several craftsman to come together and blend their skills.

Perhaps those piano makers can all work under personal contract with the owner of the piano shop. That owner takes responsibility for the business, investing his profits when he needs to buy iron for another piano harp, wood for a case, or wire for strings. And if the market for pianos dries up, he takes the loss and goes out of business, returning his craftsmen to farming or working for the miller. This is still at the community level. Such a business cannot aspire to anything big.

Consider the automobile. In the early years of the nineteenth century, hundreds of makers of horseless carriages functioned like our imagined piano shop: garages turning out handmade vehicles, each one unique, with few parts in common. They didn’t travel very far, which was a good thing because if you drove a car made in Cleveland into Chicago, and it broke down, you would have to return to the maker’s garage to get it fixed.

The convenience we take for granted, that a Ford sedan made in Michigan can be sold and serviced in San Francisco, would be extremely difficult to achieve on the basis of such purely personal business. William Clay Ford, Jr., the great-grandson of that Henry who actually did start out in a garage workshop in Detroit, would have to buy and own factories all over the globe, borrowing the money for this from his personal friends. He would personally contract with hundreds of thousands of workers to build the cars, acquire and hold millions of tons of steel and other raw materials as his personal property, and maintain possession of those millions of vehicles until each one could be sold to an individual buyer.

Of course, the buyer of that car would have to save up and pay for it all at once, unless he knew someone with a large amount of uncommitted cash willing to make a personal loan. There would be no banks to evaluate the buyer’s creditworthiness and write a loan against the value of the car. There would be no insurance company to assume the risks of his driving this encumbered asset on the city streets. Every aspect of our lives would be carried out on the basis of the people we knew personally or could convince of our trustworthiness through their personal experience or on the basis of our smiles and winning personalities.

There was a time when such a personal approach to business was the norm, and it could achieve great things. In ancient the Roman world, there were actually corporations with an artificial personality: the societas and collegia, where people joined together and created a group—a body or corpus—that that could enter transactions and acquire debts that were not the personal liability of the members.² But these groups were still social; people came together on a first-name basis and could know and trust the other members. They were anything but the faceless creations of a legal system.

Elsewhere in Rome, however, the individual—the strength of one man’s personality and trust in his skills and judgment—was everything. Julius Caesar was the scion of a noble family and became its paternal head, but he wasn’t the president of any “Caesar Inc.” like the Fords, Hiltons, or Versaces. The family fortune—what there was of it—was his to spend. He made his way as a politician in Rome on the basis of the people for whom he could offer protection and do favors. They became his followers and, if they had personal followers of their own, those became the followers of Caesar as well.³ On the basis of this popularity and not a little personal generosity, the Roman state advanced him in the course of public offices, the cursus honorum, and in time of war gave him command of army units. But as office holder and commander he still had to win the confidence of the people under him. A general going into battle didn’t just give orders and expect his soldiers to carry them out as a matter of law and discipline—he had to make a personal speech before each engagement to whip up their enthusiasm.

Ending the fiction of the artificial legal personality in our current laws would either reduce the power and robustness of our economy to the level of a village in the Dark Ages, or give rise to an even greater emphasis on “the 1%.” These would be the people who, like ancient kings and tyrants, could command a following on the basis of their personality and their fortune. Imagine a society that did not put its trust in institutions like the Ford Motor Company or Exxon-Mobil, which today are owned by legions of shareholders, whose interests are protected by disinterested financial rating agencies like Standard & Poor’s. Instead, our economy would function at the whim of great patrons like Henry Ford or John D. Rockefeller—robber barons answerable to no auditors or committees, who could whip out their checkbooks and make any little inconveniences such as laws and competitors simply disappear.

Granting institutions the power to do business has enriched us all, enabling a level of product standardization, global convenience, and economic power unimagined by previous societies. To undo that would impoverish millions. It’s simply a bad idea.

1. Assuming, of course, that the state itself could still function as a legal entity representing the interests of its citizens, a republic, and not as the personal retinue loyal to a single individual, a king.

2. Municipal entities like the City of Rome functioned in similar fashion. And the tradition of collective ownership continued under the church in the Middle Ages, where the members of a brotherhood shared ownership of an abbey or monastery and its property. This tradition grew up with the great universities, where the student colleges were modeled on the collegia of Rome.

3. It’s no coincidence that the criminal organization shown in The Godfather—with its emphasis on favors, protection, personal loyalty, and demonstrations of respect—so closely resembles this Roman tradition.

The Dune Ethos

I have long been a fan of Frank Herbert’s Dune books. I love their incredible energy and rich technical and social detail, but mostly I have been mesmerized by their special outlook on the human condition. This is best shown in the first four books, relating to the immediate family of Paul Atreides, the rebel prophet Muad’dib, from his father Leto’s accession to the planet Arrakis to the death of his son Leto II some 3,000 years later. I’m still an avid reader, but not such a fan, of the books that followed The God-Emperor of Dune. These later books lost focus on that family and became a tangled tale of religious intrigue, hidden spice hordes, grounded no-ships, and wild-eyed faux Bene Gesserit. Good reading, but not all that insightful.¹

So what did those first four books (Dune, Dune Messiah, Children of Dune, and God-Emperor of Dune) have that the others seem to lack? I call it the Dune ethos—in the sense of the guiding beliefs that characterize a person or institution—and it’s made up of many parts.

First, there are no fools among the major characters, no easy targets.² All the villains are strong, wily, alert, self-aware, and motivated. The Imperium and its major players define a universe of caution and danger. It’s not enough that one take the normal human precautions against disease, accident, and a plunging stock market. Everyone in your play group is setting traps, sending assassins, and plotting your downfall. In addition to native wits and watchfulness, you need to prepare your own skills in self-defense, surround yourself with trusted, loyal, and capable friends—who are more like family members than servants and retainers—and reinforce their capabilities with weapons training, code words, battle language, and a stock of family atomics.

This is not a world I would particularly like to live in. Watching your back 24/7 and testing every bite of food for poison does not give one the leisure the think and dream. But the Dune ethos requires that in a dangerous environment, you prepare. You don’t wander about trusting to the kindness of strangers and hoping that your inherent inoffensiveness and soft answers will turn away wrath. I found this same sort of preparation in the face of adversity in the film of Mario Puzo’s The Godfather. “I spent my whole life trying not to be careless,” Don Corleone says. “Women and children can afford to be careless, but not men.” It’s always inspiring to see people who take their life situation seriously.

A second part of the Dune ethos is that human skill trumps technology. In the universe of the Imperium, ever-increasing mechanization and automation have already been discovered to be a trap and discarded on religious principle. When machines replace every human function, from working to walking to thinking, then humans become soft, weak, and disposable. The people of the Imperium know that humans must be strong and alert to survive in a hostile universe. And this universe has dangers far beyond mere human interaction: coriolis storms, giant sandworms, shigawire, and inkvines. You might use simple machines in your struggles, like knives and body shields, lasguns and ornithopters, but the intelligence directing them must be human and awake. This is a society that has given human development into the hands of the “Great Schools”—the Bene Gesserit, the Bene Tleilax, the Mentats, the Spacing Guild—to teach and train human senses, responses, and intellect.

I happen to be a fan of technology and automation. I believe machines free the average human from back-breaking drudgery and repetitive tasks, enabling us to think, explore, discover, and dream. But if our machines ever become so all-encompassing that they bottle-feed us, put us to bed, and regulate our oxygen supply, then it will be time for a Butlerian Jihad against them. Until then, I treasure technology and mechanical innovation as an expression of the human mind.

What I like about the notion of the Great Schools is that human potential is limitless and largely untapped. With the proper training, any human mind can access and explore abilities of analysis and calculation usually reserved for autistic savants; any human body can access the speed, grace, endurance, and energy usually exhibited by yogis, ballerinas, and karate masters. The early Dune books were composed in the 1960s, which saw the birth of the human potential movement, and they absorbed that hopeful outlook.

The third dimension of the Dune ethos is the basic decency of the Atreides. Yes, they maintain a standing army, compose propaganda film strips, and attempt to hoodwink their enemies. But Duke Leto and the Lady Jessica understand that they must show trust and offer loyalty to their retainers and subjects if they are to expect these qualities in return. They create a place of safety and certainty amid the storm. Each of their notable retainers—the sword master Duncan Idaho, the knife wielding Gurney Halleck, and the strategist Thufir Hawat—has been raised by the family from questionable circumstances to a position of personal freedom and dignity. Life among the Atreides compares very favorably with the skulking, suspicious, fear-haunted lives of Harkonnen retainers.

As someone who has worked in business organizations for forty years, I can appreciate the management lessons available in Dune. Duke Leto warns his son to give as few orders as possible, because “once you’ve given orders on a subject, you must always give orders on that subject.” In place of such micromanagement, the duke adopts and disseminates a pattern of values and establishes a sense of the way he wants things done. When his employees know what he expects of them, he can leave to their judgment how they will handle any particular situation. This approach is not only more flexible and efficient, but it builds a sense of purpose and pride into the employee. It’s better to enlist the support of fully involved human beings than try to program the actions of meat puppets.

Finally, the Dune ethos explores the limits of personal power. Paul Muad’dib is able to see the future so clearly that he can predict and avoid any trap. But in the end this prescience traps him, and he must hopelessly play out the steps of a dance which he already finds tedious. His son, Leto II, not only shares this prescience but also has access to the past lives, experiences, and wisdom of his every human ancestor going back to Agamemnon; he inhabits a massive, wormlike body covered with invulnerable scales; and he commands a galactic empire maintained by the personal loyalty of an army of fanatic female warriors. Yet he treasures the surprises that one alert human mind and opposing will can create for him. In fact, he plays against this opponent to neutralize his own superior abilities and engineer a death for himself that ensures the continuity of humankind.

I believe in human abilities and the free will to exercise them against an environment of chance and chaos. And yet I know that any single human life is inherently meaningless.³ The meaning is left for each of us to take and make our own … and yet … Learn to play Mozart, write the perfect love letter, bake the most intricate pastries—then die anyway and go to dust. You might create a moment of happiness among the people within reach of your playing, your letters, your baked goods. They too will die and go to dust. The only lasting personal monument is effort that increases human understanding and compassion, raises awareness, and advances the human species.

As an author myself, I know that the richness of feeling and experience that I call the Dune ethos is actually a product of the mind of Frank Herbert. Those early books tap into an understanding, values, and insights that cannot be simulated through clever scholarship or pasted on as an afterthought in the final edit. Through reading his books, we touch the man. That’s magical. And by touching us with his understanding and insights, Herbert transcends death and creates the only monument worth having.

1. I’ll tip my hat here to the other Dune books, written by the author’s son, Brian Herbert, and Kevin J. Anderson. These sequels to the original books are admirable works of science fiction in themselves. I sometimes feel, though, that by mining and expanding on the tidbits that Herbert used artfully to suggest a backstory, they sometimes open too many doors and light too many lamps. For example, by showing Vladimir Harkonnen as a handsome, athletic, disciplined young man who only becomes bloated through a disease inflicted on him as an act of vengeance, we lose the sense of the original: that the Baron was a greedy spider whose vanity wanted to absorb the entire world into his own flesh. Because they often fail to reproduce the original Dune ethos, I sometimes find these follow-on books to be psychologically colorless.

2. Compare this robustness to the Honored Matre “Dama” in the later books. She’s so confident of her superior intellect, abilities, and personal ruthlessness that her enemies can knock her over all too easily.

3. See my blog The Meaning of Life from October 9, 2011.

Hunger for Absolutes

It seems that something in the human mind is drawn to absolutes. Against a world that is littered with indeterminacy, half-truths, and shades of gray, we hunger for black or white, all or nothing, pure truth determined or damnable lie exposed. Examples are really too many to name, but I’ll try to examine a few.

Consider the fundamentalists in religion. Certainly, given the span of recorded history and the many different forms of public worship that have risen to prominence,¹ one would think questions of how the world was created, what constitutes a good life, and what happens at the end of it would be open to debate and question. The cults of Allah, Amon, Baal, Brahma, Buddha, Enlil, Jove, Odin, Yahweh, and Zeus contain many common elements. From these, intelligent people might come together, discuss, and define answers to the questions of the ages.

But for every ecumenical council, there are a hundred sects claiming to know the one, true, real answer for all time. In America, you find these people sporting bumper stickers that read “Jesus is Lord” and “God Said It, I Believe It, That Settles It.” In the Middle East, you find them raging in the streets and crying for the death of anyone who questions—and so insults—their religion. Under stress, these people resort to a literal interpretation of their scripture, whether it be the Torah that was blended from the four Yahwist, Elohist, Deuteronomic, and Priestly sources; the Bible that was translated at third hand from Aramaic, to Greek, and finally into King James’s English at the beginning of the seventeenth century; or the Quran that was transcribed in the original Arabic from the visions of Muhammad in the seventh century.

The quest for absolutes is not the province of religion alone. Our secular age has given rise to secular prophets like Marx, Nietzsche, Lenin, Hitler, and Mao. Each has his own book, his teachings, his maxims. Each has a vision for the future that his followers are supposed to adopt without question. Whether Communist or National Socialist, the adherents are not allowed to question or interpret. They are consumers, not apostles.

Humans crave absolutes in more than just their belief systems. Look at the early sciences, which supposedly followed principles of open-mindedness, investigation, and empiricism. Still, when we first gave up the idea of the Aristotelian, Earth-centered universe enclosed by the “perfect” celestial spheres for Nicolaus Copernicus’s Sun-centered system in 1543, the orbits of the planets were still presumed to be perfect circles. It wasn’t until a generation or two later that Johannes Kepler described them more accurately as ellipses or ovals.

In the 18th century, Carl Linnaeus developed the taxonomy by which all animals and plants were divided into genus and species. A century later Darwin described the mechanisms—if not the actual chemistry—by which species arise. For generations since, people have accepted that the distinctions between lineages were—well—lines, boundaries that could not be crossed. Among the hummingbirds of North America, the ruby-throated (Archilochus colubris) was on one side, and the rufous (Selasphorus rufus) on the other.

Certainly, the ability to interbreed and the viability and fertility of inter-species offspring are general guidelines to speciation. But we have since learned that genomic variation runs deep even within species. While the genetic variation between humans (Homo sapiens) and our closest relative, the chimpanzee (Pan troglodytes), might be as little as 2%, the variation between one human being and another due to gene copy number, mutations, short tandem repeats, and other technical differences may be as high as 5%. Analysis of human intestines and skin surfaces suggest that each of us harbors colonies of bacterial as genetically unique as we ourselves are. Recent genomic surveys of the oceans² have shown that what we once thought of as microbial species are actually genuses, with their domains changing over distances as short as twenty miles. Life at the level of our DNA is messier than anyone thought.³

Of course, this preference for perfect circles and well-defined speciation in science might be called first assumptions. As new information comes in, these assumptions are refined to a higher level of complexity. But you really can’t say the same thing for absolutes in politics.

Political and economic theories account for some of the most subtle and devious questions that human beings have to deal with and the choices they have to make. The opportunity for evoking and then suffering unintended consequences in either arena is too great to forego the need for analysis and debate. Yet people repeatedly prefer simple, absolutist solutions and platforms that can be reduced to slogans. “Fifty-Four Forty or Fight”—as if the dispute between two nations could be resolved with a straight boundary line. “No Justice, No Peace”—as if justice was simple and obvious to administer, and peace a single, unified state. And now “We Are the 99%”—as if all the greed and evil could be contained in so small a population fraction as one percent, and as if the rest of society shared unified goals and needs.⁴

Simple economic systems—which ignore or try to contain the tendency of humans to make selfish choices, operate at different levels of efficiency, and obstinately try to work around the rules—usually end up in chaos and collapse. Systems like Marxism and National Socialism delude their theorists, as well as their followers, with the notion that they can create a new kind of human being with a perfected nature. These systems work admirably so long as people can be coerced, or programmed a young age, to ignore personal interest, devotion to family, and individual levels of intelligence and energy. The systems work perfectly with either angels or robots. With humans, they fail miserably. But they have the singular advantage of being attractively simple and absolute.

People in positions of power, who must administer a set of rules and ensure compliance, too easily fall into blanket assumptions about right and wrong and issue “zero-tolerance” policies. “That cheese spreader in your Lunchables package, Priscilla, falls under the school’s definition of a knife.” “The bottle of aspirin in your backpack, Cindy, violates the campus no-drugs policy.” No rule or law can be made to fit all possible situations, but harried administrators will try.

Humans were given better minds than this. Any lawyer or judge will tell you there is more than one way to interpret a statute or a contract clause. In this country, we spend huge amounts of time, effort, and money examining individual situations, mitigating circumstances, possible motives, and mental conditions to establish what might constitute justice. Rather than an annoyance, this effort is one of the glories of our society. We try to balance personal freedom with social stability. We attempt to permit a wide latitude of personal action while ensuring predictable social interactions and fairness for all concerned. It isn’t easy.

If people didn’t hunger for absolutes, they would consistently vote for politicians who promised “I’ll try to see all sides of the question” and “I’ll do my best, under the circumstances.” But the middle of the road is a lonely place these days. We hunger for the man or woman with a perfectly simple solution that can be explained in a ten-second sound bite. We’ll follow a dictator who will cut corners, scapegoat obvious villains, promise free bread, and make the trains that run on time.

Is this human stupidity? Laziness? Inattention to detail? In some measure, perhaps. But even smart people can enthuse about absolutely dumb solutions. Look at the number of educated intellectuals who have fallen for Marx’s convoluted premises and the promise to reverse the economic equivalent of gravity and make water flow uphill.

I believe the hunger for absolutes is a sign of people who are too busy to become educated and investigate for themselves. Most of us—perhaps even 99% of us—are too busy working to put a roof over our heads and food on the table, too busy taking care of squabbling children and aging parents, too involved in the mechanics of everyday life, to give our full attention to the larger political and economic issues of the day. We want a ten-second sound bite because we don’t have the time or patience to read a ten-page proposal.

When times are good, the economy’s booming, job market’s looking up, our savings are growing, and the seven fat years are here—that is, when we have comfort and security and a sense of alternatives being available to us—then it doesn’t much matter what political and economic choices we make. When we’re in good health and fortune smiles, it doesn’t much matter what god we believe in. But when the economy slows, the opportunities fade, the ground parches with dust, and the seven lean years arrive—then there’s no time to study the issues. We want solutions. Now.

I’m not saying that complex political choices and economic solutions should be left to a cadre of experts. Heavens, no! The opinions of the leisured classes occupying legislative chambers and lecture halls are no substitute for the personal interest of an informed citizenry. But I can wish for a greater public appreciation of the complexity of the world we live in. We are all human beings with different needs, wants, desires, skills, and insights. No one from the one percent wakes up in the morning and declares himself a villain; no one among the rest of us is a saint. The universe is not run by clockwork. And no orbit anywhere is a perfect circle.

1. We won’t go into private superstitions and personal fetishes.

2. Among them the voyages of the J. Craig Venter Institute’s Sorcerer II.

3. So much for the Platonic ideal—the presumption that an animal with as many different forms as the horse must derive from one perfect specimen somewhere in the mind of God, of which the horses in our fields are all just imperfect copies. Instead, the genus Equus merely passes through the noble Arabians and the racetrack Thoroughbreds along a spectrum ranging from zebras to donkeys. Making such distinctions is the business of humans and of no concern to the horses themselves.

4. And thereby doing away with the Pareto principle, which offers as a general rule of problem solving that 80% of the effects results from 20% of the causes.