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In a December 15, 2008 issue of the American Conservative, the director of the Manufacturing Policy Project Pat Choate made an impassionate plea for a speedy and massive bailout of the auto industry. Among other things, he took nations such as Japan and Korea to task for being too protectionist (I am sympathetic to his arguments) and Germany for allegedly subsidizing car exports and discouraging car imports through the predatory use of the infamous value added tax or the VAT. Writes Choate:

When a German automaker exports a vehicle into the U.S. that costs $50,000, for instance, it receives from the German government a 19 percent VAT export rebate, worth about $9,500. But when one of the Big Three exports a $50,000 vehicle to Germany, it must pay the German government a 19 percent, $9,500 VAT-equivalent tax at the dock. Thus the Big Three products are price disadvantaged in both markets. Moreover, these discriminatory VAT rules provide a powerful incentive to outsource production from the United States. In the Tokyo, Uruguay, and Doha trade negotiations, the U.S. Congress instructed American trade negotiators to eliminate this tax disadvantage, but other governments refused to discuss the issue.

If true, this verily is a blatant violation of free trade principles and an example of naked protectionism. However, as we shall see a little later, these claims are misleading.

What sort of a beast is this VAT thing?

Since there is no VAT in America, many Americans have a very vague idea of what the VAT is and how it works. So, let’s do a VAT primer, shall we? Just like the sales tax, the VAT is levied at a retail level. Unlike the sales tax, it is also levied at the wholesale level and is usually reclaimable for all but the ultimate buyer. For calculation simplicity, let’s assume a VAT rate of 10%.

Transaction 1. A manufacturer sells a widget to a wholesaler for u20AC40 (Euros) plus 10% VAT. The wholesaler pays u20AC44 in total. The u20AC4 VAT is collected by the manufacturer for and on behalf of the government and is transferred to a government account. The wholesaler puts the u20AC4 VAT it paid on its books as a current asset (since it is reclaimable).

Transaction 2. The wholesaler resells the widget to a retailer for u20AC50 plus 10% VAT. The wholesaler collects u20AC5 in VAT from the retailer. How much does the wholesaler pay to the government? Those who think u20AC5 are incorrect. But we know better — it’s only u20AC1. The calculation is simple: VAT collected — VAT reclaimable = VAT payable to the government or u20AC5 — u20AC4 = u20AC1. By the way, the retailer now has u20AC5 sitting in its VAT reclaimable current asset account.

Transaction 3. The retailer sells the widget to an individual customer for u20AC80 plus 10% VAT. The hapless individual pays u20AC88 in total. How much is due the government by the retailer? The answer is u20AC8 — u20AC5 = u20AC3.

Let’s take a look at how much VAT was paid to the government at every stage. The manufacturer paid u20AC4, the wholesaler u20AC1, and the retailer u20AC3, u20AC10 in total. This is why it is called the value added tax — every link in a chain of exchange pays the VAT only on the value it creates. It’s also extremely important to note that the whole VAT burden is borne by the ultimate customer, since all previous links generally get to reclaim it (although the other actors realized losses due to the time value of money and accounting and compliance costs; some VAT may also not be reclaimable). The VAT conforms to the adage about taxes being paid by individuals, not companies. For companies, the VAT is a pass-it-on tax, the buck stops at the individual.

So, why not just levy a sales tax? There are several reasons including the government getting money sooner and fewer opportunities for tax evasion.

Even though this discussion was somewhat lengthy and technical, we are now well equipped to examine Pat Choate’s arguments in detail.

So, is there a subsidy or not?

Let’s consider importing and exporting separately.

Case A. An American company exports a car to Europe. Let’s assume its customs declared value is u20AC40,000. During a customs clearing process, an importer pays u20AC4000 in the so-called import VAT. After that, the car is sold to a European buyer for u20AC50,000 plus the VAT. The final buyer’s VAT bill is u20AC5,000, but an importer now pays only u20AC1000, since the u20AC4000 customs VAT is fully reclaimable. A similarly priced European car would have the same percentage of VAT levied on it and it would also be fully borne by the ultimate buyer! No unfair penalty there, just equalization of taxation. It’s the hapless European customer who pays the full VAT in either case.

Case B. A European company exports a car to the U.S. Remember, the VAT is ultimately a tax on the final buyer, but in America there is no VAT, so the final buyer cannot be charged with it. If there is no final payer of VAT in the export destination country, then a European exporter would have had to pay the VAT on exports out of its own hide. It could try and raise its retail price in America, but that would put it at a tremendous competitive disadvantage (19% is a huge difference!). Again, no VAT on exports is an equalizer, not an unfair advantage! In Pat Choate’s example, the government does not issue a $9,500 subsidy on a $50,000 exported car; rather, an exported car is exempt from the $9,500 VAT charge.

A European exporter would get to claim the VAT reclaimable on its exported vehicle, but remember that it is just a return of its own previously paid money, not a tax subsidy! Granted, an American manufacturer gets no VAT refund on vehicles sold in America, but then it doesn’t have to pay the VAT on inputs in the first place.

Final thoughts

The discussion above is not meant to be a praise of the VAT. I dislike it on many levels. As a consumer, I hated the fact that the VAT made nearly everything so much more expensive (imagine a sales tax of 19%). As a comptroller, I was keenly aware that although straightforward in principle, in reality the VAT had many subtleties and potential minefields. Incorrect VAT accounting can and does lead to ruinous tax penalties.

On the other hand, the above discussion is meant to question the protectionists’ arguments. Levying VAT on imports and exempting exports is an exercise in tax burden equalization, not unfair subsidization or protectionism. If VAT is not charged on imports, domestic VAT paying producers suffer unfairly. If a (substantial) VAT is charged on exports to non-VAT countries like the U.S., exports become essentially impossible. The protectionists’ VAT arguments plainly and simply do not hold water.

Sergei Boukhonine [send him mail] writes out of Austin TX.

Sergei Boukhonine Archives

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Kids ask the darnedest questions! A few weeks ago I was driving my eight-year-old daughter to a tutor when a big sign "Going out of Business Sales" caught my eye. The Albertson’s grocery chain was leaving Austin. Now, I love a bargain as much as the next guy and, since we had time to spare, I decided to check it out. Everything was marked 60% off and I got a few bargains such as vitamin supplements. My daughter ran around the mostly empty store managing to find a few knickknacks she really, really wanted (e.g. she really likes flashlights).

When we walked out of the store with a feeling of deep satisfaction that only buying something (necessary or not) for half-price could provide, my daughter started asking questions. It went approximately as follows:

Dad, why was this store so empty?

Well, they are going out of business.

But what does it mean?

They are closing for good in a few days.

But why?

Probably because they couldn’t compete successfully.

Who do they compete with?

Well, we usually go to HEB, other people go to Wal-Mart or Costco. But those stores also want Albertson’s customers, so they compete with Albertson’s.

But why do they do that?

Hmm, I didn’t really have a ready answer suitable for the situation at hand. An explanation such as "competition maximizes efficiency of resource allocation" might work just fine in a graduate seminar, but would it work with an eight-year-old? Meanwhile, the evening commute was getting heavy and driving demanded my undivided attention. So, without further ado, I blurted out the following gem:

They compete because they are greedy!

Ah-oh, that didn’t go too well. "Greedy!!!" — screamed my daughter — "That’s not very nice!" The traffic was getting heavier and since I was at a loss for words, I decided to follow my grandma’s favorite tactic — when you have no good argument, keep quiet at all costs "like a Communist tortured by Fascists!" The last phrase must have come from some old Soviet movie… In any case, didn’t my wife and I tell our daughter countless times not to be greedy and selfish and share her toys??? And in her elementary school, doesn’t everyone get a prize of some sort even when they finish dead last? With my unfortunate slip of tongue, didn’t I just smear competition and even capitalism itself as brutish and nasty? With luck, I thought, she would forget this conversation very soon!

We still had a few minutes left, so I took my daughter to a gelato and coffee shop where I got her two scoops of gelato in a nice wafer cone. Yum! As she was enjoying her treat, she looked around and said: "Dad, will this place go out of business?"

I looked around… good location in a busy strip mall… nice gelato and coffee… a suburb full of young professionals and UT students… "No" — said I — "this place will stay open." And here is when my daughter administered the coup de grace. In a triumphant voice, she announced her alternative explanation: "Yes, they will stay open because they are not GREEDY!!!"

The Agony of Defeat and My Search for Lessons on Competition

As you may imagine, I felt humbled, perhaps even humiliated. I always thought of myself as a good instructor and supervisor who could explain things patiently and creatively to even the dimmest students and employees. My teaching evaluations supported this opinion. But here I failed my own child! So I started searching for ways to explain capitalism to children. Here are a few scenarios. All are based on an imaginary visit to an ice cream parlor.

Price competition: imagine that there are two ice cream places within the same distance from our house. They sell the exact same ice cream. One charges two dollars per scoop, the other — three dollars. Which place would you go to?

Superior service: imagine that there are two ice cream places within the same distance from our house. They sell the exact same ice cream and charge the same amount. The lady at the first place always smiles and serves ice cream very fast. The lady at the second place is slow and never smiles. Which place would you go to?

Superior selection: imagine that there are two ice cream places within the same distance from our house. They charge the same amount but the first place has ten flavors while the second place has only five. Which place would you go to?

OK, these scenarios are pretty simple (or, as my wife put it, dumb). More complex scenarios would involve tradeoffs — price versus service versus selection versus distance from home etc. These would demonstrate that competition provides us with a variety of choices. Because of the competition, everyone, from a spendthrift to a profligate spender can find what they want — as it should be.

Before I finish this article (or perhaps abandon it as articles and books are never truly finished), I would like to ask the gentle readers for their input. Maybe someone could write a children’s book explaining competition (two feline friends going for ice cream?). Maybe such books are already out there — please let me know what are they. In any case, child development experts assert that childhood memories and impressions are lasting and formative — let’s help the kids regard competition as a beneficial force it is!

Sergei Boukhonine [send him mail] writes out of Austin TX.

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Libertarians agree that government is the root cause of ills of the human society. They also tend to agree that government should be either abolished outright or at the very least drastically reduced in size and scope. Hence, the "what should not be" part of the libertarian thinking is clear-cut and obvious. The "what should be" part is likewise clear — a self-governing society based upon private property rights. What is NOT clear or easy is the "how do we get there" part.

The "how do we get there" problem is primarily twofold. First, tens of millions of people are directly dependent on government for their livelihoods. These include retirees drawing on social security, assorted "public servants," education workers, police, employees of corporations primarily or partially working on government contracts, etc. These people are fully pro-government, although they differ on details; "law and order" types favor public funding for jails and more cops on the beat, while "liberal" types want more spending on education and welfare. Second, even those Americans who are not directly dependent on public spending are used to the status quo and see little need to change it in a fundamental way. Instead, they prefer tweaking on the edges, perhaps lowering a tax here or introducing some marginal legislation there. In addition, this group may feel that while public education in its current form is dysfunctional or, at the very least, imperfect, it can be improved through accountability programs such as No Child Left Behind and/or more public spending.

The first group will not give up their entitlements willingly or easily. Instead, they will fight tooth and nail for what is "rightfully" theirs. Witness the resistance put up by the teachers’ unions against school vouchers proposals. Many libertarians argue that public financing of public schools will offer only marginal improvements over the status quo — as the adage goes, he who pays the fiddler calls the tune. Nevertheless, even such a mild and limited challenge to the government monopoly invokes fierce resistance.

Since human beings are naturally wary of the unknown, the second group is unlikely to support radical upheaval of the existing system. In addition, they may feel that one day they too will have to rely on Social Security, Medicare, and other entitlements for their livelihoods. They may also place their faith in government protection services such as police and the military. Let’s put it bluntly — most people in the United States lead generally good lives, at least in the material sense. Their level of material well-being is the highest in history. Many genuinely believe that this well-being is due to the government, at least partially. As the French say, "le mieux est l’ennemi du bien," i.e. the best is the enemy of good. Why risk your current comfortable life by choosing an uncertain alternative? Or, as Herman said in Pushkin’s Queen of Spades about gambling, I cannot risk the essential by trying to acquire the superfluous.

All this reasoning brings us to an inevitable conclusion — a transition to libertarianism would represent nothing short of a revolution and, in order to embrace libertarianism, the society must feel that the status quo is untenable. In Lenin’s words, a "revolutionary situation" must exist. According to Lenin’s theory of revolutionary situation (“those on top can’t, those on bottom wouldn’t”) three conditions must be present for a revolution to be successful: (1) profound crisis of powers that be ("the tops cannot govern"); and no, possible Democrat victory in 2008 isn’t that (2) unusual hardships suffered by the working people — make it middle class ("the bottoms wouldn’t put up with it anymore") and (3) a sharp spike in social unrest and political involvement by the masses. Needless to say, these conditions are not there. Only desperate people create revolutions and the American middle class isn’t desperate (at least not yet). Before you dismiss Lenin’s theories outright, please bear in mind that he instigated and carried out a successful revolution — he was not an ivory tower theoretician.

Will a revolutionary situation rife for a libertarian revolution ever arise? I don’t have all the answers, but maybe you do! A confluence of aging population, Social security and Medicare crises, ballooning public debt, and a host of other factors may one day make the status quo untenable. Whether it will lead to an emergence of a libertarian society or something else entirely is impossible to predict. What seems obvious is that it will take a long time to develop. So, the question arises — why even bother? Why do people such as Rothbard and Lew Rockwell devoted their lives to the libertarian cause? Why do we even bother reading LRC?

Let’s turn back to Lenin. The revolutionary situation is necessary but not sufficient for the success of a revolution. Also needed is a small but dedicated, cohesive, and well-organized cadre of professional revolutionaries (for Lenin, it was the communist party — the "vanguard of the working class"). Similarly, a libertarian revolution will require a large nucleus of intellectuals and educators who will show the libertarian way out of the "perfect crisis." Absent that nucleus, the libertarian revolution is unlikely to succeed.

(Disclaimer: Lenin worked for a profoundly wrong cause, but it doesn’t mean that everything he did was stupid or useless or unworthy of emulation!)

Sergei Boukhonine [send him mail] writes out of Austin TX.

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In early 1998
I had a very long (about four hours) business lunch with a vice-president
of a major Moscow bank (now defunct). My interlocutor was a young
and bright Armenian guy, born and educated in Yerevan (Armenia's
capital). Unsurprisingly, he invited me to a fancy Armenian restaurant.
The meal was delectable — a never-ending procession of meats, vegetables,
cheeses, rice, etc., all washed down with copious amounts of fine
Armenian brandy. Armenian cuisine in particular and Caucasian
cuisine in general is outstanding — try it if you have a chance.
At one point, we were served a plate of delicious dolma.
Ah, said I, I know this dish — it's Azeri — the mother of an Azeri
acquaintance cooked it once. At that point, my lunch (dinner?) companion
suddenly became livid. No, said he, it's Armenian through and through.
Azeris and Turks may cook it, but they are just usurpers who stole
this and many other recipes from Armenians! Moreover, added he,
Armenians are the original Caucasians, while Azeris are invaders
and newcomers.

At that point
I became confused. OK, so they are newcomers… how long have they
been around the Caucasus?
The answer is around a thousand years, give or take a century. To
be sure, Urartu
(Armenia's ancient name) is an extremely old civilization which
originated over 3000 years ago! But "newcomers" after
a thousand years??? Hmm… it is often said that people in the Middle
East have long memories; this is but one confirming example.

This and many
other examples strongly tempt me to agree with Henry Ford's assessment
of history as bunk. To be sure, "history is bunk" is an
inappropriate and oversimplified generalization per se, but
Ford did not put it quite so bluntly. Instead, he
said the following:

“History
is more or less bunk. It’s tradition. We don’t want tradition.
We want to live in the present, and the only history that is worth
a tinker’s damn is the history that we make today.” (Chicago
Tribune, 1916).

This paragraph
is still an oversimplification, but a more nuanced one. It's about
thinking about the present and the future rather than dwelling in
the past. But
here is a further quotation from Ford:

As a young
man, I was very interested in how people lived in earlier times;
how they got from place to place, lighted their homes, cooked
their meals and so on. So I went to the history books. Well, I
could find out all about kings and presidents; but I could learn
nothing of their everyday lives. So I decided that history is
bunk. (1935).

Now, this is
a great observation! Many of us remember having to memorize historic
dates and how pointless it was. It is also a known historical fact
that the politicians who blundered into the WWI were students of
history, but look how much good did their historical expertise do
to them or millions of victims!

Human beings
naturally try to use historical knowledge to predict the future,
often with disastrous results. Forecasters should rely on a priori
knowledge created by praxeology more than on contextual historical
experience. But historical experience is still a valid forecasting
base, since all human experience is historical in nature. See my
article about predictions.

What I find
really bothersome and disturbing are attempts to inspire and
justify future actions relying on historic grievances. Look
what history did to former Yugoslavia. For over six centuries, Serbs
remembered the Battle
of Kosovo, which marked the end of their independence and centuries
of the brutal Ottoman Turkish rule (or misrule). Serbs remembered
that the Turks converted Bosnian and Albanian Christians to Islam.
Serbs also remembered that Croatian Ustashi allied with Nazi Germany
exterminated hundreds of thousands of Serbs. Here
is Wikipedia:

According
to the Simon Wiesenthal Center (citing the Encyclopedia of the
Holocaust): “Ustasa terrorists killed 500,000 Serbs, expelled
250,000 and forced 250,000 to convert to Catholicism. They murdered
thousands of Jews and Gypsies.”

Now, history
unequivocally proves that Serbs suffered terribly. So, based on
their knowledge of it, Serbs decided to strike first, to remedy
the past wrongs and prevent the future ones. As a result, thousands
and thousands of people died and hundreds of thousands were ethically
cleansed. Kosovo and Kraina
are all but lost to the Serbs. The economy is in ruins. Much good
did history do to them!

But what if
the Serbs actually had prevailed? Albanians and Croats would then
have had a martyr history of their own, calling for action and revenge
(well, they actually do have that history). Sooner or later, they
would have stricken back.

The former
Yugoslavia is but one example of history stoking the flames of hatred
and vengeance around the world. If this is all history is useful
(or used) for, then it is indeed bunk (or worse)! Let's stop using
history as a trumpet call for revenge. "Vengeance is mine"
says the Lord and "do not be overcome with evil, but overcome
evil with good." I agree that the guilty should be punished,
but their children and grandchildren? Even Stalin said that a son
is not responsible for his father. Should we be more bloodthirsty
than this tyrant?

So let's treat
history as it should be treated — the past. It's gone forever (unless
you reject the linearity of time). Let the dead bury their dead.
Even tragic history should be a matter of quiet meditation, but
never a call for a vendetta.

April
19, 2007

Sergei
Boukhonine [send him mail]
writes out of Austin TX.

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In 1990 or
thereabouts, I was a student at the Moscow
Linguistic University, studying English, translation and interpretation.
Our teachers encouraged us to freelance, especially take jobs as
interpreters for Westerners visiting the Soviet Union. It was regarded
as a good way to brush up on your language skills as well as make
a little money on the side.

Since it was
still the centrally planned economy (albeit dying), most jobs were
available through state organizations such as the Soviet Peace Committee,
the Intourist (the official foreign travel company of the USSR),
the Union of Soviet Journalists, etc. One of my favorites was the
Union
of the Soviet Writers. They often had extremely interesting
visitors — writers, literary critics, college professors, etc.

For those of
you who may not know it, the Union of the Soviet Writers was a very
important and influential organization. Unless you were a member,
your chances of publishing a book were slim to none. Also, you had
to be a member in order to claim writing as your occupation — this
needs some explaining. Every adult male in the USSR had to hold
an officially recognized job. Otherwise, one could be convicted
of "goldbricking" (тунеядство).
Married females were exempt — housewife (домохозяйка)
was considered to be a valid occupation. In practice, it meant that
a great writer (e.g. Solzhenitsyn) could be convicted and imprisoned
if he (a) was not a member of the Union of the Soviet Writers or
(b) did not hold any other job. Hence, many dissident writers held
day jobs as janitors, custodians, etc. — anything that would keep
one out of jail as well as leave plenty of time for writing.

But I digress.
Once, I worked as interpreter for a group of American literary critics.
Our group had a meeting at the Union. After the meeting ended, we
ran into Vladimir Karpov, a well-known Soviet writer. At the time,
he was an important functionary in the Writers Union (I think he
was the chairman but I am not completely sure). He was a WWII hero,
a reconnaissance officer. His teams' specialty was to cross the
front line under the cover of darkness and capture a German soldier,
or, preferably, an officer. These captured Germans were known as
"tongues" since they were interrogated to obtain tactical
information. Karpov was reportedly involved in capturing over seventy
"tongues." For his valor, Karpov received numerous military
awards. After the war, Karpov wrote an autobiographical novel titled
"The Fate of the Reconnaissance Officer" (Судьба
разведчика)
which was a big success. He went on to write numerous other books
and had a successful career as a functionary; however, his other
books are mostly forgotten.

Our meeting
was brief. Karpov said a few commonplace sentences about peace and
international friendship; soon thereafter, he pointed to a button
on his jacket and said that he was a deputy of the Supreme Soviet
(Council) of the USSR and had to go to an important meeting. I have
never seen him again.

The next time
I was at the Union, I asked lady clerks working in the international
department about Karpov. We all agreed that The Fate of the Reconnaissance
Officer was a good book — not because it was a great novel per
se, but because Karpov really had a wealth of fascinating war
experiences and he shared those in his best book. We also quietly
agreed that his other books were just glorified propaganda… those
ladies may not have held important positions, but they certainly
knew their literature!

During out
conversation, one lady shared a simple yet profound thought. In
a nutshell, she said that most anyone can write one good book, or
at least a few interesting and insightful articles. Most of us have
quite a few interesting experiences under our belts.

The problem
they often encountered at the Writers Union was a "been there,
done that" person who had written an autobiographical book,
which had some success, and then decided that he or she was a true
writer. All too often, a person had enough interesting stuff to
fill one book… but no more than one. Subsequent manuscripts would
more often than not contain no original material. Of course, once
a person decides she is writer, she is extremely difficult to dissuade.
Unfavorable reviews and rejections would trigger (it being the Soviet
Union) complaints to the Central Committee of the Communist Party,
accusations of surrender to capitalism, etc.

At the time,
I didn't appreciate this revelation, but I haven't forgotten it
either. The point is that while most of us will never rise to the
level of Shakespeare or Dostoyevsky, we still have a few interesting
ideas and/or experiences to share. So don't just let your stories
simmer inside your head and eventually die with you — share them
with the world! Write a blog or, better yet, send them to a respected
Web site such as LRC! If Lew chooses to publish your story, you
will gain instant visibility; many intelligent and thinking individuals
will read it. You will experience the sense of pride (as I did)
of seeing your work published alongside illustrious LRC contributors.
You will receive insightful responses from thoughtful readers and
the feel the incomparable satisfaction of knowing that you made
a contribution (although perhaps a tiny one) to the cause of human
freedom and dignity. Even if all you do is amuse and entertain the
reader, it's a worthy contribution too!

Even if Lew
rejects your article, it's no cause for despair. He may give you
some valuable hints. Perhaps, it needs a little more work. Perhaps,
LRC is not the right outlet for it, but it might be a great fit
somewhere else. But the most important thing is to remember that,
for the first time in human history, the voice of a common person
can truly be heard. The Internet has no Union of the Soviet Writers
presiding over it. Nor is it controlled by the wealthy mass media
owners, such as those who own major newspapers and TV networks,
pushing their special agendas. Find a place that is good for you
and make the world hear your voice. For millennia, hundreds of millions
lived and died without leaving a trace of their minds and souls.
In this day and age, we can finally reverse this unfortunate trend!

April
2, 2007

Sergei
Boukhonine [send him mail]
writes out of Austin TX.

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Every day,
LRC contributors weigh and consider serious issues facing both this
country and the world at large. Against this backdrop, it is almost
embarrassing to bring up the dog issue. However, it is a myriad
little things that can either make life pleasant or ruin one's day.
Just consider a few examples.

It's springtime
in Texas and the weather is mild and nearly perfect. We like to
keep the windows open at night and enjoy a cool night breeze. It's
really great. We sleep soundly and wake up refreshed and well rested…except
that today I had to close the windows at 5AM because of an incessant
barking. It was not a bark of warning, it sounded very methodical
and mechanical, every three seconds or so. And this is not an isolated
accident — neighborhood dogs love to bark and howl and the nighttime
is their favorite. I guess it has to be the moon. In any case, if
I put a boombox outside every night blaring hard rock or polka (or
Mozart for that matter), the neighbors would be justifiably upset
and call the police — the same neighbors who love their Fidos and
let them outside to bark the night away.

In 1994 we
rented an apartment in Moscow next to a nice little park. I started
jogging but stopped a couple of weeks later. Again, it involved
"the man's best friends." Loving owners hated to keep
Sharik (fur ball) on a leash since, after all, every dog has a right
to a good run in the park. Unfortunately, this right does not seem
to extend to humans. Dogs regard running people as a prey; their
natural instinct is to give chase. Every time I saw a dog chasing
after me, I had to stop and wait until its owner had a chance to
approach, apologize (sometimes), and tell me that it doesn't bite!
Yeah, right!!! Tell that to the mailman! So I quit jogging before
Sharik had a chance to taste me and I had to experience the wonders
of the Russian medicine.

But back to
Texas. On our front yard, there are a few trees and the local dogs
simply love to do their business under them. Often, proud owners
are standing by. And no, they don't always pick after them. Now,
imagine (or don't, it's too disgusting) a grown man taking a dump
on the front yard of these dog owners. Police, or maybe a shotgun
immediately come to mind.

Let's summarize.
Dog bites are a serious problem in the pooch-loving world — there
are reportedly 5
million (!) victims of dog bit in the U.S. every year. Most
of the victims are children. While their bites are probably worse
than their barks, barking is extremely annoying (noise pollution)
and so is the dog poop, especially when you accidentally step on
it.

Mind you, I
don't really blame the dogs for any of these things (so please no
hate mail!). Many dog bites are
partially or fully the fault of the victims. It's the dogs'
natural instinct to chase after runners as is barking and lifting
a leg under a tree. A pit bull is vicious because of breeding and
owners — it's obviously not his fault.

So, dogs are
not the blame, but the owners certainly are. Owners should recognize
that little kids are not mature enough to know better than to pet
a strange dog and are also the most susceptible to serious injuries
or death caused by a dog attack. Owners should realize that joggers
have a right not to be chased by their pets (have you ever seen
a jogger chasing a rottweiler?). If Rover likes to bark at night
and you do not live on a secluded farm, keep him inside. And please,
pick up after him — the dog poop is not a good fertilizer!

Now, I am sure
that most dog owners are decent individuals who approach their care-giving
role responsibly. However, there are and always will be some who
don't. This hardy bunch will let their charges bite, bark, poop
and chase to their hearts' content, never mind the moralizing or
even lawsuits. What should be the libertarian response to this challenge?

Unfortunately,
I don't have all the answers, but maybe you do! However, here is
one suggestion — abolish public parks! As all public programs, public
parks are a means of redistribution of wealth, in this case from
people who prefer the indoors to the outdoorsy types. If you like
to hike and bike — fine, more power to you, but why should couch
potatoes support your habit? (disclaimer: I love the outdoors).
Also, public parks are shared by the dog owners and the dog-less
(dog free?) individuals. Just as all involuntarily shared facilities,
public parks are an arena of the tug of war between dog owners and
folks who shun the company of the man's best friend. Irrespective
of which group gains the upper hand, some individuals' rights are
threatened. I remember there was an excellent article by Lew Rockwell
describing the forcible sharing phenomenon; in particular, why we
fight so viciously over public schools (it's a win-lose game) while
there are plenty of restaurants offering all kinds of food without
any political fighting.

If we had no
public parks, private parks would undoubtedly spring up to take
their place. Some of them could be the domain of Fidos and dog owners.
Other would be completely dog free. Joggers would run without fear
and without a chance on stepping on fresh poop. Dog owners would
find peace among the like-minded individuals. Everybody would be
happier, no more hateful stares. There could even be mixed parks
— for dog-less folks who like being around dogs.

But why stop
at the parks? Perhaps, one day we will see "dog friendly"
streets and "dog free" streets or subdivisions? After
all, some apartment complexes advertise themselves as either "pet
friendly," or "pet free." How about "cat people"
communities complete with catnip, rugs to scratch and mice to catch?
Would any one want to live in one? The possibilities are truly endless!

March
26, 2007

Sergei
Boukhonine [send him mail]
writes out of Austin TX.

DIGG THIS

It is always
fascinating (albeit a little sad) to watch a venerable old technology
fall into obsolescence. Remember vinyl discs and LPs? They dominated
the recording industry for decades. Then compact
cassettes dealt them as serious blow in the 1970s and compact
discs delivered the coup de grce in the 1980s. Of course, LPs
and turntables did not physically disappear — there are still quite
a few diehard LP fans out there who praise their analog sound as
more natural and soulful than anything digital devices are capable
of producing. Nonetheless, LPs are now a niche technology.

We live in
an era when the speed of technological obsolescence accelerated
dramatically. Quite a few venerable and perfectly usable technologies
suddenly became overshadowed by hot newcomers. Just as with LPs,
old technologies did not suddenly stop working. There are still
capable of producing decent results; more importantly, they are
now quite inexpensive if not downright dirt-cheap!

Andrew S. Fischer
recently
argued that with judicious spending even people on modest income
could afford dignified living. If one doesn't mind using newly obsolete
technologies, living on the cheap becomes a more realistic proposition.
Let's consider a few examples.

CRT Television
Sets. Amazingly enough, the cathode ray tube technology
was invented
in 1897 (!!!) and dominated the television market until three
or four years ago. Projection TVs were around for quite a while,
but had a small market share. Suddenly, LCD and plasma TVs came
of age. With their prices falling, CRT TVs are in their last throes.
What does this mean to a price-conscious consumer on a budget? Great
deals! After just five minutes of browsing, I found several excellent
used TV deals e.g. a Magnavox 27-inch color TV in excellent condition
for $100 or a Magnavox 19-inch TV for $15! When I was a poor MBA
student in 1991, an affluent and generous friend sold me his 9-inch
color TV for $100 — it was a great deal at the time. These CRT TVs
still function just fine but can be had for a song now! In the future,
their prices are likely to plummet even further as more and more
people buy LCD and plasma sets. The increased availability of high-definition
programming is likely push prices of conventional TVs even lower.

CRT Computer
Monitors. These cousins of CRT TVs shared their fate. Here
is an ad for a Samsung
19-inch monitor for $20! This thing would set you back $400–500
just a few years ago. And it is still capable of quality equal or
exceeding that of an LCD monitor of the same size. Better still,
you can get 15- or 17-inch CRT monitors for free without too much
effort.

Desktop
Computers. Even the best computer monitor is of no use without
a computer. Personal computers always had huge depreciation rates.
It's even worse now for desktops as many folks discovered that good
laptops can serve as perfectly adequate "desktop replacements."
Personally, I like my ThinkPad so much that the very idea of going
back to a desktop is painful. So, a price-conscious consumer can
find terrific deals on used and new desktops alike. Here is a Pentium
II IBM system for $45 or best offer. While this system is not
a speed demon, it is adequate for Internet browsing, chat, and productivity
tools such as Word or Excel. Unfortunately, it will not work that
great for the latest games…

Older
Game Consoles. OK, so your $45 computer cannot handle the
latest hot game. Here are a few gadgets that can and they don't
cost an arm and a leg. The advent of Playstation 3 and Nintendo
Wii means that prices of older consoles dropped like a stone. A
used PS2 with games can be had for less than $100. So far PS3 has
earned mixed reviews; more importantly, there are still not that
many of them shipped to customers. This means that software companies
will keep producing new games for PS2 for years to come. Mind you,
PS2 is still relatively pricy. For real rock bottom prices for both
hardware and software, check out Sega Geneses, Gamecube, Nintendo
64, PS1, original Xbox, and others.

VCRs.
When tired of active and physically challenging entertainment such
as video games, why not relax in front of you new old TV and watch
a movie? A VCR may come in handy. It would have to be an older movie
since most studios stopped releasing films on video cassettes two
or three years ago. This is unfortunate but, on the other hand,
both VCRs and video tapes are dirt cheap. Here is a VCR
for $10; you could find one for $5 or probably even for free.
Video cassettes can often be had for a dollar or less. And older
movies are sometimes pretty good, even better (horrors!) then the
new ones.

DVD Players.
OK, so you categorically refuse to watch older movies on tapes.
You are in luck! DVD players might have slain the VCR dragon, but
are on the verge of obsolescence themselves. Regular DVD players
do not support true high-definition video. For this, you need new
technologies such as Blue-ray
or HD DVD. As
a result, while already cheap (starting at around $20–25 new),
standard DVD players are likely to become extremely cheap very soon
down the road. Similar fate awaits standard DVD recorders and standard
DVDs.

Old Still
Cameras. If you are not satisfied with just watching stuff
created by others, you can unleash your own creative powers by using
old cameras. A fine used 35mm film camera can be purchased for $10–20
dollars (here is a fine point-and-shoot
for $6). A roll of film can be had for a dollar if you buy a
set of four at a local Wal-Mart. Processing and printing can be
done for $5–6. For a couple bucks more, you will also get a
photo CD. If you are not a shutterbug, film photography represents
an amazing bargain. If you want to plunge into digital photography,
a used 2-megapixel camera could be found for $30–40 dollars.
This is more than enough for printing 4 by 6 snapshots; you can
even print 8 by 10 pictures. If you absolutely want a new digital
camera, you could buy one with 4 and even 5 megapixels for less
than $100.

Old Video
Cameras. If still pictures are not your thing, there are
several options. First, most still digital cameras (except SLRs)
take videos (granted, the quality is usually not that good). Second,
used non-digital camcorders can be found for much less than $100.
With some tweaking, their output could be digitized. But, the analog
format works just fine; all you lose is some editing and file-sharing
capabilities. At any rate, if you insist on having a nice new digital
camcorder, a non-HD one can had for less than $200 and a used one
even for less.

Miscellaneous
Music Gadgets. An audiophile on a budget can find various
bargains including CD and cassette players, boomboxes, component
stereo systems (receiver, cassette deck, tuner, equalizer, amplifier,
etc.), etc. Many of these things produce beautiful sound and/or
enough noise to make neighbors unhappy.

As we can see,
there are lots of opportunities out there. Granted, you need Internet
access to find most of them. But (a) broadband Internet access is
getting cheaper and (b) if you do not have it, public libraries
everywhere in the U.S. offer free Internet access (yes, libertarians
do not like "free" things such as public libraries, but
as long as they exist, why not use them?). When experts talk about
"digital divide," they usually distinguish between physical
access to Internet and skills required to benefit from it. Physical
access is not such a problem these days. Young people, for the most
part, have sufficient skills to use it. Older folks may have more
difficult time with technology, but there are many resources which
could help with training (libraries, community colleges, etc.).

Two final points:
first, don't be afraid to haggle. The asking price is often not
the final price even when people don't mention OBO. Some folks may
be offended by "lowball" offers, but others will lower
their prices. Second, to summarize this article, in order to spend
less, do not be an early adopter of technology, but rather a late
one.

(Disclaimer:
having grown up in the former Soviet Union, the author has first-hand
familiarity with living in reduced circumstances, without many gadgets,
and occasionally going to bed hungry. As Tevye the milkman said
in Fiddler
on the Roof, poverty is not a vice. Besides, I really like
old technologies!)

January
29, 2007

Sergei
Boukhonine [send him mail]
writes out of Austin TX.

DIGG THIS

Many of us
have hobbies that make our lives a little better. Mine is collecting
old film cameras. Yes, digital photography is great and getting
better, but there is something inherently satisfying in those old
optical-mechanical marvels. The first time you use an old camera
is especially fascinating. It takes time to figure out its idiosyncrasies
and you never know whether it's a champ or a chump until a film
is processed and pictures are printed.

Due to digital
photography, collecting film cameras has become incomparably cheaper.
With the exception of cult cameras like Leicas, used film cameras
in good shape are three, four, five, or even ten times cheaper than
only a few years ago.

I used to go
to eBay a lot, but now I stopped. The main reason for it is that
it's tough to find a real bargain on eBay. Since I am on a budget,
it's hard to justify spending much on old junk, some of it pretty
useless (like my new old Argus C3 — it works, but boy, it's a real
pain…).

Here is a short
taxonomy of eBay film camera sellers:

Experts.
These usually provide fine and accurate descriptions of their wares,
but charge top dollar (although usually don't overcharge). Too bad.

"Power
sellers" who happen to come across an old camera accidentally.
Provide short descriptions and sell "as-is." On a positive
side, offer low starting bids and usually do not a have a "reserve"
price. These folks are true capitalists.

Occasional
or accidental sellers who stumble across an old piece of equipment
(e.g. at a garage sale). These are usually the worst. They often
exaggerate the camera condition, but wash their hands with lame
excuses such as "I have no battery and/or film to test this
camera so it's sold as-is." Yeah, right! Some occasional sellers
have an "I can't be bothered with questions" attitude.
Some want a top price; others do not care too much… It is a motley
group.

Sellers
of personal equipment — the "I moved on to digital but need
to find a nice new home for my baby" crowd. Often have
irrational price expectations and exaggerate the camera condition.
Display "anchoring"
or "loss
aversion" — "I paid $900 for it 8 years ago and now
you have the gall to offer me a stinky 100???" The weirdest
example was "…I paid $500 for it in 1985 and now, taking inflation
into account, it's got to be worth at least $800!" Hello, this
not gold we are talking about, but a piece of technology
about to go the way of dinosaurs and slide
rules! You moved on to digital, but so did millions of others.

The only "sure"
way to get a working camera in good condition is to buy from experts.
Alas, these cameras are unlikely to be bargains. When buying from
"power sellers" or accidental sellers, it's possible to
bag a bargain sometimes, but it's really a lottery; most likely
their cameras will require a CLA (cleaning, lubrication, adjustment)
or even more serious repair. With CLA prices starting in the $80–100
range, only truly special cameras are worth the price or effort.
In my book, $20 spent on a photo dog is $20 lost since I want my
cameras to work rather than just be interior decoration pieces.

The overall
mark of eBay is its extreme efficiency. Cult cameras or well-described
cameras in good condition will attract multiple bids and will be
sold at the market price. Like any other market, eBay takes uncertainty
(risk) into account. Non-cult cameras sold by non-experts are unlikely
to command high prices, usually with good reason.

This efficiency
means that cameras which I'd like to buy are usually too expensive
for my budget. So I left eBay and started using Craig's list. Craig's
list is totally unlike eBay. Search capabilities are minimal. There
are no "histories" associated with sellers and buyers.
There are no services like PAYPAL. Most importantly, it is organized
geographically, so you deal with locals.

Dealing with
locals has several advantages: there are no shipping costs, you
can avoid some scams by dealing face to face, and you can check
out the merchandize before you buy. The last advantage is key. Once
in a while, you can get a working camera in good condition for a
song and you don't waste your money on broken junk.

Now for the
disadvantages: it's not as well-organized as eBay, it has fewer
offerings, and, more importantly, it is dominated by occasional
and personal equipment sellers, i.e., amateurs and novices as far
as selling is concerned (experts and power sellers tend to stay
away). Many have unreasonable expectations anchored in the purchase
price. E.g., a seller wants to sell a used lens for $300. A new
lens like that costs $150. I point out this fact to him and suggest
that a price around $100 could be more reasonable. No, answers the
seller, I paid $400 for it. $300 is my price and I won't budge.
Here is another example: a lady has a camera and lens for sale.
What's the camera and lens model, I ask. Just give me your offer,
she replies and don't bother me with questions…

Overall, Craig's
list isn't terribly efficient. On average, its sellers are less
professional and sophisticated than those on eBay. Yet, this is
what makes a source of occasional incredible bargains. Some Craig's
list sellers seem to have an easy attitude — I don't need this,
let me just give it to someone who can make use of it!

So, there you
have it. Granted, these impressions are based on the used film photography
market; it would be interesting to compare it with other product
categories. The general advise is this: a decent old camera on eBay
will more often than not sell for the fair price — the one that
the market is willing to bear! If you want serendipity, use Craig's
list but be prepared to deal with some unreasonable and even downright
weird people.

(Disclaimer:
the author is fully aware that anyone is free to ask any price they
want for their property. And, to be sure, psychological costs of
selling something "too cheap" may far exceed the economic
opportunity cost of holding on to it).

December
4, 2006

Sergei
Boukhonine [send him mail]
writes out of Austin TX.

DIGG THIS

Predicting
the future is extremely difficult. Even the most famous and intelligent
people often make notoriously
bad predictions. In 1932, Einstein did not believe that nuclear
power was obtainable. H. M. Warner of Warner Brothers famously asked
in 1927 “Who
the hell wants to hear actors talk?” Irving Fisher, professor
of economics at Yale, said in 1929 that “…stocks
have reached what looks like a permanently high plateau.” Darwin
wrote in The Origin of Species
"…I see no good reasons why the views given in this volume
should shock the religious sensibilities of anyone." Famous
generals dismissed airplanes as toys. This list could go on an on
for hundreds of pages.

Yet, people
continue making predictions and listening to experts, pundits, futurists,
fortune tellers, and weathermen. Why? Partly out of curiosity, but
mostly because we perceive that correct predictions will allow us
to take action and increase satisfaction with our circumstances.
Without prediction, human action would be pretty much impossible.
When thirsty, we drink water because we predict that drinking it
will diminish our thirst. When we need groceries, we head to a supermarket
because we predict that it will have what we need in stock. When
weather forecasters predict rain, we take an umbrella. When, stock
market analysts predict a bull market, we may act on their predictions
and buy growth stocks. We believe/predict that higher education
will help our children so we steer them to colleges rather than
vocational schools.

Companies are
no less dependent on predictions than individuals. They predict
demand and plan production accordingly. Designers predict future
fashion trends. Farmers need long range rain forecasts; casket makers
need expected mortality…

It is self-evident
that some predictions are relatively easy and risk-free and will
come true most of the time. Water usually quenches thirst. When
we go to a supermarket, we usually find it well stocked with food
and beverages (unless we are in North Korea). A bank will usually
work during business hours (unless there is a holdup). Sometimes,
otherwise easy predictions fail. In 2005, three days before Rita
was scheduled to strike Houston, I went to a Walmart Supercenter
only to find its shelves bare.

Other types
of predictions are more difficult. As a rule, far future is more
difficult to predict than near future. It is usually easier to predict
behavior of simple systems than complex systems. In other words,
more variables make for tougher predictions. Finally, it is easier
to predict natural events rather than socially constructed ones.
After all, social systems are comprised of human beings capable
of independent human action (check out Human Action and The
Ultimate Foundation of Economic Science by Mises).

There is a
difference between predicting and acting. When I watched the 2006
World Cup, I made many predictions, some of them successful. However,
I did not act on them i.e. didn't place any bets. Many fans around
the world did, with varying results…

After this
somewhat lengthy preamble, let's consider the difference between
individuals and private companies on the one hand and governments
on the other. Both private entities and governments make predictions;
both win some and loose some. So what is the difference? Let's consider
three examples: an individual investor, a large company, and a government.

An individual
investor has a choice of advisors and analysts to listen to, both
bearish and bullish. Upon deciding who is correct (i.e. making a
prediction of her own), our investor may decide to buy stocks, invest
in real estate in California and/or Florida, buy gold, etc. While
she may prove right or wrong, her success or failure can only directly
affect relatively few people. Since it's her money, if her investment
choice proves incorrect, at some point she is likely to pull her
money out and do something else. Finally, there is no coercion involved
since all investments are voluntary.

Let's now look
at corporations. Before the gas price hikes, the Big Three American
automakers bet heavily on popularity of trucks. The
Big Three sold more trucks than cars. This strategy worked just
fine in the 1990s. Nowadays, with consumers spooked by high gas
prices and staying away from large trucks and SUVs, the Big Three
are embracing change (albeit reluctantly). They are making plans
to slash truck production and build more cars. As in the above example,
the damage is limited. People who are hurting, i.e. investors and
autoworkers, are directly and voluntarily associated with
the Big Three. Rather than persisting in their folly, upon realizing
that the situation changed and they had made mistakes, the
Big Three are trying hard to readjust. Finally, other automakers,
such as Toyota, chose strategy emphasizing fuel-efficient cars over
gas-guzzlers. Hence, consumers have a choice of what to buy.

Now, let's
look at a government example. The
British government has embraced a new report with stark warnings
on global warming. Now, I am not a climate scientist and have
no idea whether global warming is a man-made phenomenon and what
effects it's likely to entail. Climatologists do not seem to agree
on these issues either, so it seems that the jury is still out.
However, based on our preceding discussion of predictions, we can
safely make these observations:

1. Global climate
   system is very complex. Behavior of complex systems is
   difficult to predict.
2. Global warming
   effects will/will not be realized over a long period of time.
   Far future is notoriously difficult to predict.
3. Global ecosystem
   is comprised of both natural and social components. Social
   components' behavior are extremely difficult to predict since
   humans are capable of independent action (possess free will if
   you will). E.g. humans can and do change their energy habits.
4. New technologies,
   perhaps unthinkable today, could be developed. These technologies
   could dramatically change the energy game.

By their very
nature, climate predictions are extremely shaky. Yet, the British
government wants to act upon them. There are several differences
which distinguish government acting on predictions from individuals
and private companies:

1. It is not
   voluntary. There is no opting out, selling out, or resigning.
   On the other hand, an investor can freely sell off stocks. An
   autoworker at Ford can take a retirement or retraining package.
   A company director questioning corporate strategy may resign in
   protest.
2. It is not
   limited. In fact, it is monopolistic. Every resident of the U.K.
   will be directly affected.
3. It is not
   easily correctable. A private company or an individual can pursue
   a wrong course of action only for so long before going bankrupt
   or readjusting. A government can tax or use the printing press
   to pursue its policies in perpetuity.

So, what is
the solution? Upon reading this article, a friend of Lew Rockwell
noted that it was simple: "…if government allows the free market
to work unimpeded, the problem of government action based on controversial
predictions is avoided."

We have friends
who are seriously concerned about the environment. Some take direct
action by driving hybrids and bio diesel cars. Maybe they are right
or maybe not. In any case, I say more power to them since they do
it voluntarily and exercise their freedom of choice. When individuals
act on shaky predictions, it's their own business. When governments
do it, it affects us all.

November
6, 2006

Sergei
Boukhonine [send him mail]
writes out of Austin TX.

In the 1960s,
the Soviet people were slowly introduced to the new Western counterculture
personified by the Beatles, Rolling Stones, and Elvis Presley. These
musicians offered new seductive and subversive rhythms, rhymes,
and appearances. They sported long hair and wore blue jeans.

The Soviet
authorities went ballistic. They had a tradition of being wary of
foreign influences. In the 1920s, there was a slogan: today he listens
to jazz, tomorrow he'll sell out the motherland. The 1960s' reaction
was no less strong. The long hair, hip shaking, and blue jeans were
declared to be alien and incompatible with the "moral profile
of a builder of communism." A true builder of communism had
to sport a crew cut, dance waltz or polka, and wear traditional
style, well-ironed pants. LewRockwell.com's readers are smart and
know that the forbidden fruit is sweet. To be sure, young people
around Russia embraced the new Western "abominations."
There was a problem though. You can always grow long hair and whiskers
(unless you have strict parents or are in the army). Almost anyone
can shake hips. But… not too many of us could make our own blue
jeans, especially if there is no denim for sale.

As time went
on, blue jeans became less a statement of rebellion and more a status
symbol. The Soviet government would neither manufacture, nor import
them. But the blue jeans would still trickle into the "Evil
Empire." Some were brought in by Soviet diplomats, sailors,
or military advisers to Arab regimes such as Egypt or Syria. Some
were smuggled in by foreigners. Blue jeans gave life to "fartsovshchiki,"
a special kind of black market "profiteers." Those would
buy jeans and other stuff from foreigners in exchange for traditional
Russian wares, such as fur hats and caviar.

Blue jeans
were very expensive. They sold for anywhere from 150 to 250 rubles.
As a reference point, an average monthly salary was under 200 rubles
and you could buy regular pants for 10 to 20 rubles.

Now, you may
be thinking: OK, this is all good and well, but what's your point?
In fact, I have two. First, even the dimmest Soviet citizen could
follow this line of thinking:

1. Blue jeans
   are expensive and prestigious; they make girls like those who
   wear them.
2. Blue jeans
   come from the West; the best come from America (Levi's, Calvin
   Klein, Jordache, etc.).
3. The West
   is good; America is the best
4. Why can't
   we make blue jeans??? Forget the space stations and Russian
   ballet!

Second, the
blue jeans were the best counterargument against the Soviet propaganda,
much more effective than the Voice of America. Consider the following.
When the Soviet TV showed the West and especially the United States,
it didn't so much lie as did not tell the whole truth. The Soviet
TV showed poor people in urban ghettos, student protesters, trade
union strikes, etc. (rather than suburban soccer moms and country
clubs). All these people were angry at the capitalist system, or
life, or whatever. The Soviet people were supposed to watch and
become more confident about the superiority of the socialist system.
However, there was a small but crucial problem… you guessed it —
blue jeans! All poor urban folks and union marchers wore the coveted
blue jeans!!! Even the homeless people in the West wore them. So,
the wheels of Soviet minds turned, these people couldn't be all
that poor and miserable if they all wore the pants which we couldn't
afford!

So the blue
jeans were triumphant. In fairness, they were not blue only anymore.
They were black, brown, white, stone-washed, etc. They outlived
the Soviet communism and became the favorite attire of Russians,
Ukrainians, and other former Soviet people.

In the pantheon
of objects that brought down the Soviet communism, blue jeans have
a very special place, second to none. However, I do have my favorite
runner-up. It is the (former) champion of consumer electronics —
the radio cassette recorder, aka a boombox. Why the boombox?

First, the
cassette (and tape) recorders allowed the Soviet people to listen
to the subversive Western sounds. People-to-people copying of recordings
was the only way to listen to the underground Soviet rock bands
(at least for those of us who didn't live in Moscow or Leningrad
— the hotbeds of the Soviet rock-n-roll). Ah, the magic of copying!
The Soviet government kept a very tight lid on photocopying technology
lest the Soviet people start copying the works of the dissidents…
yet the communist party forgot that popular music is no less potent
a weapon! When I was a college student, we put our money together
and bought vinyl discs (LPs) on the black market. We then copied
them to tapes and cassettes; then we traded our LPs for new ones.
Ultimately, one disc could generate hundreds or thousands of copies.

Second, Soviet
consumer electronics were always so much behind the times! It was
a different case from the blue jeans; with the jeans, the communist
party simply could never understand what all the fuss was about.
However, the Soviet government did consider electronics to be important
consumer goods, but the centrally planned economy cannot react quickly
— it messes up the planning (the ideal centrally planned economy
is prison or the military — everybody eats the same stuff, wears
the same clothes, etc.). As it happened, the Soviet industry produced
four and eight track tape recorders in the 1970s and 1980s when
the rest of the world switched to cassette recorders. When the Soviet
industry finally started mass-producing cassette recorders in the
1980s, the rest of the world started switching to CD players. For
the Soviet people, boomboxes were another example of how glorious
the West was — all the best, sleekest, and loudest came from there
after all! One of the happiest days of my life was when my parents
finally got me a foreign boombox in 1986.

Of course,
there were other objects of desire. Since the socialist economy
can manufacture consumer goods which are either of low quality and
out of fashion or just out of fashion (it gets the quality right
occasionally), most desired objects came from abroad. Austrian and
Italian shoes, boots, and clothes, mohair scarves and sweaters from
Scotland and India, Japanese electronics — the list goes on and
on. All these things exposed the Soviet communism for the fraud
it was — bit by bit, step by step, year by year.

Finally, some
musings about the US Cuban policy (perhaps a non sequitur?).
The US government maintains strict controls on travel to Cuba as
well as other commercial activities with the communist "Freedom
Island." The ostensible rationale is that by traveling and/or
engaging in commerce with Cuba, US nationals provide Fidel Castro's
government with much needed foreign currency.

No doubt, tourists
and businessmen do provide Castro with funds just as foreign tourists
and businessmen provided funds to the erstwhile Soviet Union. However,
foreign tourists, usually unintentionally, subverted the Soviet
regime with their dollars, jeans, LPs, etc. The resulting damage
to the Soviet system far exceeded any utility from the obtained
foreign exchange. In the same way, foreign tourists and trade subvert
the Castro regime far more effectively than any government propaganda
effort ever could. Foreign exchange is nothing in comparison. The
blue jeans clad Cubans with dollars in their pockets, Miami music
booming from their mp3 players, and American soaps playing on their
DVD systems have no use for communism. Unleash the power of consumerism
and popular culture on the last Stalinist bastion in the Western
hemisphere and watch it work its magic!

July
20, 2006

Sergei
Boukhonine [send him mail]
is a native of Ukraine. After getting an MBA from the Rochester
Institute of Technology, he worked as a CFO in Moscow for seven
years. Currently, he is a PhD candidate at the University of Houston
in management information systems.

However, one
question remains: Why did the USSR break up when it did, in 1991?
Why not during the 1960s or, perhaps, in 2001? After all, while
the fall of communism is inevitable, it could still endure for a
while.

Here is a joke
from the beginning of the 1990s: The year is 2020 or thereabouts.
In heaven, President Reagan asks a newly arrived politician about
his old political acquaintances. How's Margaret Thatcher doing?
Dead. Gorbachev? Also dead. Helmut Kohl? Dead as well. How about
Fidel Castro? Well, he is still in power but the CIA say they'll
definitely get him next year!

While fundamental
causes of the fall of communism are well understood, there
is less consensus on the immediate causes of the Soviet collapse.
Here is an incomplete summary of hypotheses:

• War
  in Afghanistan. Undoubtedly, it played a certain role,
  but could hardly be all that significant. Although over 15,000
  Soviet troops died, little true news from Afghanistan reached
  the Soviet populace. There were no terrorist attacks in Soviet
  cities. The overall effect of the war was limited. In comparison,
  the wars in Chechnya have been much bloodier,
  better publicized, and marked by bloody terrorist attacks. Yet
  the new, weaker Russia has managed to live through them intact
  (at least so far).

• American
  military buildup under President Reagan and the Strategic
  Defense Initiative. True, initially it gave the Soviet
  government quite a scare, but the SDI proved to be an idea far
  before its time. After a while, Soviet analysts figured out
  that much of the American high tech weaponry could be inexpensively
  thwarted by "asymmetric
  responses." While many Americans have claimed that
  Perestroika was caused by the American military buildup, many
  in both Russia and America vehemently
  disagree. I am not an expert on this issue; it might have
  played a more major role than I think, but most likely was not
  decisive.

• The
  democratic Solidarity movement in Poland, the dissidents, Pope
  John Paul II, etc. These are all valid reasons, albeit minor.
  The totalitarian Soviet state was quite effective at insulating
  its citizens from democratic propaganda.

So, if the
reasons above are all valid, but not decisive, what did bury
the USSR?

Here are my
favorites. They each reflect bad decisions made by the Soviet government
and the communist party and collectively known as Perestroika
(restructuring).

• The semi-prohibition
  of alcohol in summer of 1985. Designed to fight widespread
  alcoholism, it became an unmitigated disaster in many different
  ways. Here is how Wikipedia characterizes it:

  The reform
  did not have any significant effect on the alcoholism
  in the country, but economically it was a serious blow to
  the state budget (a loss of approximately 100 billion rubles
  according to Alexander
  Yakovlev) after alcohol production migrated to black
  market economy. Alcohol reform was one of the initial
  triggers that caused a chain of events that ended with the
  collapse of the Soviet
  Union and deep economical crisis in the newly formed CIS
  six years later

This
is fine description, but what did it mean in reality?

First, there
was an immediate surge in inflation. Since all prices were fixed,
Russian inflation really meant widespread shortages and two to
three-hour lines for staples and other goods. Infuriating stuff.

Second, there
was an immediate and tremendous shortage of sugar; enterprising
and thirsty people used sugar to make homemade alcohol, a kind
of Russian moonshine. Sugar was very important for Russian women
— they used it to make prodigious amounts of preserves and jams
to guarantee supplies for the long winter. Women were unhappy.
Incidentally, sugar confection and other sweets disappeared soon
thereafter, also good for making moonshine.

Third, it
became very difficult, expensive, and time-consuming to buy vodka.
Russian men were very, very angry and, suddenly, sober! In desperation,
some resorted to drinking any liquids containing alcohol like
perfumes and eau-de-colognes.

In summary:
The semi-prohibition of alcohol in Russia caused inflation, shortages,
black market activities, angry women, and angry, sober men. The
communist party was in big trouble!

• Glasnost
  or openness. Gorbachev believed that lack of transparency
  was hurting the Soviet economy and society. So he allowed limited
  discussion of previously taboo topics, such as Stalin's atrocities.
  While transparency truly helps if you have a market economy,
  transparency and openness are incompatible with communism, which
  is based on lies. Something had to give.

• Permission
  of some private enterprise in the form of Individual Labor Activity
  (1987) and Cooperatives (1988). This was done primarily
  to fight inflation and shortages by providing more consumer
  goods to the people. It worked to a limited extent. However,
  unintended consequences were immense. I will not bore you with
  details; suffice it to say that the combination of the predominant
  state economy and some market economy created unbelievable opportunities
  for the enterprising and well-connected to strike it rich overnight.
  Shrewd people exploited these opportunities and became instant
  millionaires (think Mikhail Khodarkovsky).

New wealth
also caused more inflation and increased the disparity between
rich and poor. These disparities were very traumatic to the population
accustomed to economic equality.

In summary,
free enterprise was like a cancer eating away at the planned economy.

• Permission
  of semi-free travel first to socialist countries and then to the
  West (1987–1988). This had both psychological and economic
  consequences. Psychologically, the Soviet people got a chance
  to compare their life with life abroad and found their life wanting.
  They were exposed to new ideas. Economically, free travel spawned
  active private international trade, which exploited price disparities,
  creating more private wealth. Obviously, people who do well economically
  have no reason to love socialism.

A question
arises: why did they (the Politbureau) do all those things? Did
they do it on purpose or were they just amazingly ignorant? Take
the anti-alcohol campaign. Marx and Lenin themselves would have
cautioned against it. After all, these theorists believed in the
tabula rasa (blank slate) theory: Human beings are completely
shaped by their environment. Marx believed all human vices were
"birthmarks" of capitalism. Consequently, Marx proposed
that in order to create a "new man," children should be
taken away from parents and raised by government ideologues. Marx
and Lenin did not believe in teaching new tricks to old dogs; hence
the mass extermination of non-proletarians — bourgeoisie, educated
people, prosperous peasants (kulaks), etc. Duke Vladimir of Kiev
said that drinking was the joy of Russia; it was a thousand years
ago. In either arrogance or naïveté, Gorbachev and his
Politbureau buddies decided they could snuff out a thousands-year
old habit in a few years!

Why did they
do it? After WWII, Soviet communism was increasingly becoming a
religion. General secretaries probably felt they were gods, or at
least godlike. Gods R Us. Consider the following (I am not trying
to be sacrilegious here and am aghast at these terrible practices):

• There is
  a Soviet communist trinity — Marx, Engels, and Lenin.

• Marx is
  the god father. He authored the classic theory of capitalism
  (Das Kapital) and the Communist Manifesto. If you don't believe
  me, consider Lenin's own words "… the teaching of Marx
  is omnipotent, because it is true" (учение
  Маркса всесильно,
  потому что
  оно верно).
  For the believers, God is omnipotent; for communists — Karl
  Marx.

• Lenin is
  god the son. He extended Marxism and "explained
  away" its botched predictions. He turned Marxism into
  Marxism-Leninism (do you see a parallel with the Bible?). "Lenin
  is always alive, Lenin is always with you,… Lenin is in you
  and me" went a Soviet
  song. In other words, Lenin died and yet lives on. Young
  children were made to recite the following pledge: "Lenin
  lived, Lenin lives, Lenin will live!"

• There were
  (and some still remain) Marxist-Leninist temples all over the
  former USSR. The main temple is the Mausoleum on the Red Square
  — the heart of Russia. Communist believers and curiosity seekers
  still flock there to see Lenin's mummy. Then there were "museums
  of Marxism-Leninism" in every city in Russia etc. Children,
  in particular, were continuously inculcated with communist propaganda.

• While in
  life Lenin was not a choir boy (he had a mistress and believed
  by many to have died of syphilis), he was turned into a virtual
  saint, a paragon of perfection. From the age of four or five,
  all children had to learn about Grandpa Lenin; how kind he was,
  and how he liked little kids, cats, and dogs.

• The Secretary
  General of the communist party was a communist Peter — the vicar
  of Lenin on earth. Although not a god himself, he possessed
  unlimited power. He could make rivers turn and run back or change
  the souls of men at his whim.

• OK, it's
  tough to argue that Engels is a good analogue of the Holy Ghost,
  but other than that Soviet communism is indeed a religion, not
  science. For more discussion look here
  and here.

The difference
between Lenin and people such as Brezhnev and Gorbachev was their
educational background. Lenin was a well-educated man who could
read several European languages. He was well-read in philosophy,
economics, and political theory. Later Soviet communist rulers were
a product of a system where deception and self-deception were the
rule. We cannot know for sure, but it is not unlikely that as godlike
figures General Secretaries truly believed that they were above
the laws of nature and God.

So what finally
killed the USSR? It was the fall of the Soviet communist religion!
Until 1988, the communist trinity was off-limits. Vicars (general
secretaries) could be criticized, but not the communist troika.
Afterwards, Marx and even Lenin himself became fair game. Due to
the results of the disastrous government policies listed above,
people were angry and frustrated. Increasingly, they blamed the
communist party in general, not just a concrete minister or apparatchik.
The communists could not deliver economically. The communist trinity
was proven to be made up of false gods. Socialism had no reason
to exist any longer. Without socialism, only the threat of force
was holding Ukrainians, Estonians, Georgians, Lithuanians, and others
together. But with socialism gone, there was no real will to use
it. Again, here
is Wikipedia:

…the
August
Coup — an attempted coup
d’état against Mikhail Gorbachev by conservative members
of the Communist Party, referred to as “Hardliners” by the Western
media. After the coup collapsed, Yeltsin came out as a hero while
Gorbachev’s power was effectively ended. The balance of power
tipped significantly towards the republics. Latvia, Estonia and
Lithuania immediately asserted their independence, while the other
12 republics continued discussing new, increasingly looser, models
of the Union. On December
8, 1991
Presidents of Russia, Ukraine
and Belarus
signed Belavezha
Accords which declared the Union dissolved and established
the Commonwealth
of Independent States — CIS, in its place.

On December
25, 1991 Gorbachev resigned and declared his office extinct. The
great communist empire was no more — "not
with a bang but a whimper."

July
14, 2006

Sergei
Boukhonine [send him mail]
is a native of Ukraine. After getting an MBA from the Rochester
Institute of Technology, he worked as a CFO in Moscow for seven
years. Currently, he is a PhD candidate at the University of Houston
in management information systems.

Let's consider
the economic issues first. Granted, Europe is generally more socialistic
than America, but it is not the case in professional team sports.
Here are just a few distinctions:

1. Revenue
   sharing and salary caps. Both are essentially wealth redistribution
   programs aimed at guaranteeing similar outcomes. Imagine Toyota
   and GM sharing revenues with Ford and Nissan! The latter example
   would be unthinkable in most industries yet it is the norm in
   football. On the other hand, there is no revenue sharing in European
   soccer. The most profitable soccer teams in the world, such as
   Manchester United, Real Madrid, and Milan, do not share revenues
   with soccer minnows. Nor are there any salary or spending caps.
   Russian billionaire Roman Abramovich purchased Chelsea, a middle
   of the road English soccer club, and proceeded to turn it into
   a European powerhouse by spending prodigious amounts of money
   on star players such as Frank Lampard, Didier Drogba of Ivory
   Coast, Michael Ballack of Germany, and Andei Shevchenko of Ukraine.
   Many in England complained bitterly and still do, but as long
   as Mr. Abramovich has cash to spend no one can do anything to
   stop him.
2. Draft.
   Another program aimed at equalizing outcomes. In football, as
   well as in other American team sports, weaker teams are subsidized
   by allowing them to sign up the best young players at below market
   prices. Think Vince Young, LeBron James, etc. There is no draft
   in soccer. Any club is welcome to join in the bidding for any
   player it wants and jack up the price — the sky is the limit.
   Not so in American sports. Consider the following example: It
   is reported that Cleveland is prepared to offer LeBron 75 million
   dollars for five years, which is the maximum allowed amount. Just
   imagine if there were no salary caps and any team could offer
   LeBron any amount it saw fit. A hundred million, anyone? Two hundred
   perhaps? Instead, the current system subsidizes team owners at
   the players' expense (yes, I know that LeBron plays basketball,
   not football, but the system is similar).
3. Promotion/relegation.
   Team owners in the NFL belong to a very exclusive, private club.
   To gain entry, one must not only be very rich but get the members'
   consent as well. It is much easier to become a team owner in soccer.
   First, since there is no revenue sharing, small market teams cost
   many times less than big market ones. Second, there is the promotion/relegation
   mechanism. This is how it works. There is usually more than one
   soccer league in any country (there are four in England). Every
   year, a few top lower-league teams (usually two) are promoted
   to a higher-league, while the same number of bottom higher-league
   teams are relegated to the lower-league. Lower-league teams are
   much, much cheaper than higher-league teams. One can buy a lower-league
   team, hire a good coach, invest money and eventually see it promoted
   to the top league. Since it is easier to become an owner of a
   soccer team, there is more competition than in football — does
   this sound socialist to you?

Other issues:

1. Soccer
   is a European sport. Soccer is not just European. The top
   dog in soccer is Brazil. Soccer has been the sport of Latin America
   for a long time. It is also the top sport in Africa. Ghana just
   beat the Czech Republic and the U.S. at the 2006 World Cup in
   Germany. The African dream nowadays is to become a star soccer
   player, move to Europe and make a lot of money. Many fine African
   players now star at top clubs in England, Spain, France, Italy,
   and virtually everywhere else in Europe. Soccer is on the rise
   in Asia and even the U.S. It is the only true world team sport.
2. Football
   is a democratic sport. First, there is much coaching in football
   during games. Since offence and defense are played by different
   players, coaches have many chances to direct the game. Soccer
   is more fluid. Coaches have fewer chances to influence the game.
   There is only one break and the game has no long pauses. Second,
   a quarterback calls every offensive play in football. There is
   no such top-down management in soccer.
3. Soccer
   is boring. I agree with Jack Kemp up to a point. Yes, soccer
   is boring to a novice since it is indeed a slow and low-scoring
   game. But, to an avid fan, there are many other things worth looking
   at. On-the-ball skills, dribbling, deft passing, fearless tackling,
   movement of players without the ball — a thousand little things.
   Soccer is boring to many Americans for the simple reason — lack
   of understanding of subtleties. If you invest time and effort
   in figuring out these little things, soccer will amply reward
   you.

June
24, 2006

Sergei
Boukhonine [send him mail]
is a native of Ukraine. After getting an MBA from the Rochester
Institute of Technology, he worked as a CFO in Moscow for seven
years. Currently, he is a PhD candidate at the University of Houston
in management information systems.