Episode #88 - Do Corporations Pay Taxes? Economic Puzzles and Paradoxes

Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.

–Justice Learned Hand

The Incidence of Taxation

It is well known that corporations, buildings, automobiles, goods and services don’t pay taxes; only people pay taxes (who else is there?).

There are two fundamental principles of tax-incidence in any economy:

1. Inelastic agents bear the burden of taxation. Elastic agents tend to escape the burden of taxation.

2. Burden of taxation eventually falls upon Individuals.

Economists don’t look at who’s legally responsible to pay the tax, they look at who bears the burden. Most Americans are familiar enough with withholdings to know instinctively that you can bear the burden of taxes without ever writing a check to the government.

Corporate taxes fall on three major groups of stakeholders: Shareholders, Workers, and/or customers.

If businesses can pass along taxes in their prices, they will. However, only those businesses with more relative inelastic demand curves can achieve this. The consensus seems to be that workers bear the largest burden, then shareholders.

Kevin A. Hassett, Director of Economic Policy Studies and StateFarm James Q. Wilson Chair at the American Enterprise Institute (AEI), testified before the House Ways and Means Committee on February 2, 1016, discussing tax reforms. Hassett believes that over 90% of corporate tax burden falls on workers.

Also, check out Aparna Marthur’s article, from AEI, The bad and the bad of US corporate income taxes.

For a contrarian view that corporate taxes fall on shareholders, not workers, see the blog post from the Tax Justice Network: Corporate tax: the great incidence hoax.

Listener Questions

From Bryce:

Ron and Ed,

I've listened to several episodes of your show now where you guys attack the idea of professional licenses (for doctors, lawyers, etc.) because they impede innovation and decrease competition.

And you've slowly gotten me to agree with you.

Then the other day was talking about the immigration debate with a friend and realized something. Is requiring citizenship or a visa to the US to work here not the same basic problem as requiring certain professional licenses?

Are the same arguments for tighter immigration policies not the same as those for the "need" for licenses in the professions? Couldn't you then argue that citizenship requirements have the same ill affects on our economy (slowing innovation and decreasing competition)?

Perhaps this is something that's already been discussed. Your thoughts?

Bryce

Two Questions from BJ:

"How is it that no one gets paid on the Starship Enterprise?"

Answer from our friend, Robert Wood:

There isn't money per se in the Federation. You do your job because it's for the greater good. Captain Picard says "The economics of the future is somewhat different. You see, money doesn't exist in the 24th century... The acquisition of wealth is no longer the driving force in our lives. We work to better ourselves and the rest of Humanity." in Star Trek: First Contact (Yes I had to google to find the exact quote) However, there is still money it just seems the Federation doesn't use it. In Star Trek: Voyager, they discuss that the economy of Earth changed in the late 22nd century but didn't explain how. Basically it's a socialist utopia. There is talk at one point of energy credits for using transporters and replicators. But I don't recall Federation credits being explained very well. Theoretically this is a post scarcity economy since these technologies exist. There is currency though. The Ferengi use gold-pressed latinum, whatever that is, which also appears to be the currency for cross cultural trading.

"Is there a term for the double-thank you effect?"

There is now. Ed has coined: Dankenzweite which means "Second thanks" in German.

From Geir:

Hi Ron and Ed,

I'm listening to your podcast about "risk". It's a very interesting topic and you and Ed are discussing this in a brilliant way. Lots of examples and references. Your show notes are very useful also. My list of books to read gets longer and longer after every podcast. Puh! When will I have or take the time to read them? I really don't know!

Could you make a podcast on "witch great thinkers you should follow in years to come". Today, changes happen fast. New business models evolve over night. Where and how can we keep up on knowledge concerning innovation, tech, new business thinking, etc. The Soul of Enterprise is one source. Are there any others to recommend?

Cheers,

Geir

Answers: George Gilder, Deirdre McCloskey, Clayton Christensen, Gary Hamel, Don Tapscott, Daniel and Richard Susskind. Also, follow IBM’s Watson, and the entire Artificial Intelligence/Deep Learning movement.

Check out our interview with Deirdre McCloskey, George Gilder, and Daniel Susskind.

Episode #86 - Second Interview with Rabbi Daniel Lapin

Ed and I were honored to interview Rabbi Daniel Lapin for the second time (our first guest to make an appearance twice). Ron has been a big fan of the Rabbi, listening to his radio show, and reading his books, for over a decade.

We only had the Rabbi on for about 30 minutes, so we ran without commercials for the first half of the show.

We covered the following topics with him:

• His 2/6/16 Podcast on The Blaze Radio Network: “There Are No Poor People in America.”

• His thought experiment about paying $20 to prevent suicides, and the three Biblical punishments (Capital, Restitution, and Lashes), and why Rabbi supports all three.

• We discussed Father Sirico’s statement: “I value the truth more than my freedom.” Rabbi didn’t agree. This will be discussed more in the future.

• Does he think taxation is theft? Rabbi, “No, I don’t.”

Biography

Rabbi Daniel Lapin, known world-wide as America's Rabbi, is a noted rabbinic scholar, best-selling author and host of the Rabbi Daniel Lapin Podcast on The Blaze Radio Network. He is one of America’s most eloquent speakers and his ability to extract life principles from the Bible and transmit them in an entertaining manner has brought countless numbers of Jews and Christians closer to their respective faiths. In 2007 Newsweek magazine included him in its list of America’s fifty most influential rabbis. 

Before immigrating to the United States in 1973, Rabbi Daniel Lapin studied Torah, physics, economics and mathematics in Johannesburg, London and Jerusalem. He quickly became persuaded that God continues to smile on the United States of America and he became a naturalized citizen on what he describes as the proudest day of his life.

Rabbi Daniel Lapin was the founding rabbi of Pacific Jewish Center, a now legendary Orthodox synagogue in Venice, California. He implanted the community’s mission of demonstrating the relevance of traditional Faith to modern life.

Pacific Jewish Center, synagogue in Venice, CA, est. 1978 with Michael Medved, served as rabbi for 15 years

Books 

America’s Real War: An Orthodox Rabbi Insists that Judeo-Christian Values are Vital for Our Nation’s Survival (1999)

Buried Treasure: Secrets for Living from the Lord’s Language (2001)

Thou Shall Prosper: Ten Commandments for Making Money (2009)

Business Secrets from the Bible: Spiritual Success Strategies for Financial Abundance (2014)

Other Resources and Readings

Ron’s review of Thou Shall Prosper

Rabbi Lapin’s website: www.youneedarabbi.com and www.rabbidaniellapin.com, where you can subscribe to his weekly Thought Tools column, which contain Biblical principles on family, finance, faith, marriage, and relationships.

Rabbi Lapin’s Podcast on The Blaze Radio Network

Ed mentioned the article, A Plea for Culinary Modernism:  Why We Should Love New, Fast, Processed Food (pdf).  Gastronomica I (February 2001), 36-44.

Ed’s blog post on his grandfather, who used to sit on the porch and say, “I wonder what the poor people are doing?”

Episode #85 - Free-rider Friday - March 2016

Ron’s Topics

Netflix Reinvented HR

Article from HBR Jan-Feb 2014, “How Netflix Reinvented HR.”

Reed Hastings, CEO, 5 tenets to approaching talent:

Hire, Reward, and Tolerate Only Fully Formed Adults—don’t hire the problem 3% in the first place

Tell the Truth about performance—Building a bureaucracy and elaborate rituals around measuring performance usually doesn’t improve it. 360 feedback went from anonymous to signed, then to face-to-face

Managers own the job of creating great teams—no performance bonuses. Market-based pay. Let employee select % of equity, no vesting (no golden handcuffs)

Leaders own the job of creating the company culture

Good talent managers think like businesspeople and innovators first, and like HR people last: I’ve never seen an HR initiative that improves morale!

“There’s no reason the HR team can’t be innovative too.” Ron’s question: is this asking for a barking cat?

And from the Feb 20, 2016 The Economist, Schumpeter columnist in “The measure of a man,” argues that the death of performance appraisals is greatly exaggerated.

Kevin Murphy at Colorado State Univ: “Performance reviews are “an expensive and complex way of making people unhappy.”

IBM, Accenture, Adobe, Deloitte, GE, Microsoft and Netflix have all scrapped annual performance appraisals.

Uber for Trucking

From The Economist, March 5, 2016, “The appy trucker.”

The top 5 airlines in the USA account for 90% of the industry’s revenues. In contrast, the top 5 logistic firms account for 20%. Trucking is much more fragmented (much lower barriers to entry).

Trucking is a $700B per year industry in the USA, projected to grow at 3% per year for the next decade. Yet trucks drive empty 50B miles per year, 28% of the total (25% in Europe). This is incredibly inefficient.

Brokers charge 45% to arrange a haul, but the process is really inefficient. Startup Apps like Cargomatic, in Los Angeles, lists jobs, pings nearby drivers, and arranges payment. So does Transfix out of New York, which charges a 10% commission.

Amazon is working “On My Way,” whereby anyone can get paid for delivering packages.

Economist Russ Robersts, on his EconTalk podcast, recently interviewed Marina Krakovsky, author of The Middleman Economy, where she lays 6 value-added roles that middleman play:

• Concierge

• Insulator

• Enforcer

• Risk-bearer

• The Bridge

• The Certifier

Marina claims that the middleman, far from being disintermediated by the internet, have grown, and that we are all, in a sense, a middleman. Examples of web-based middlemen:

• OpenTable

• Powersellers on eBay are 4% of sellers and 50% of sales

• Craig’s List sellers

• CarLotz, flat fee, takes car on consignment, connects buyers and sellers

The End of Moore’s Law?

From The Economist, March 12, 2016, Technology Quarterly, “After Moore’s Law.”

Moore’s Law has had a glorious 50 Years: “Computer power doubles every two years at the same cost.”

Peter Lee, VP, Microsoft Research: “The number of people predicting the death of Moore’s law doubles every two years.”

In 1971, the Intel 4004 had 2,300 tiny transistors, each the size of a red blood cell, which could be counted by a kid with a decent microscope.

Today’s Intel’s Skylake has 1.75B transistors (size: 100 atoms across), at 400,000 times the power. If cars and skyscrapers improved at same rate, cars would be capable of traveling at 1/10th the speed of light, and the tallest building would reach ½ way to Moon.

Three ways computers will continue to become more powerful, but in different and varied ways:

• More clever software (AlphaGo, Watson, Deep learning, AI, etc.)

• The cloud—30% growth last yr, projected to remain until 2018

• Specialized chips for particular jobs

The industry is at an “inflection point”: It needs a replacement for silicon, such as:

• Silicon-germanium alloy

• Graphene

• Electronic blood: provide energy and regulate the temperature

HP, Google, IBM, Microsoft are all entering chip-design business. There will be new tradeoffs on the three key metrics of power, performance, and cost.

Remember: computer firms are not, fundamentally, in it to make ever-smaller transistors. They’re in it to produce useful products, and to make money.” Amd consumers don’t care about Moore’s Law.

Google’s AlphaGo Beats World’s Best Go Player

From The Economist, March 12, 2016, “Showdown.”

Google’s AlphaGo AI beats Lee Sedol 4-1 in Go Series, from The Verge.
(Ed)itors note: Go and Othello are NOT the same game. 

Ed’s Topics

Lobby for Driverless Cars

From The Huffington Post, Google testifies before Congress to allow driverless cars.

Can Ethereum Restore Online Freedom?

From ReasonTV:

Uber Saves Lives

Ed’s friend had a heart situation, and rather than calling for an ambulance, he called Uber. Hospital said it probably saved his life.

Episode #84 - Interview with Paul Kennedy: The OBK Story

Paul Kennedy’s Biography

Paul Kennedy and Paul O’Byrne experienced just about every practice management course put on in the UK and are graduates of the Accountants Boot Camp, and many Ron Baker seminars. They implemented many in their firm, O’Byrne and Kennedy, Chartered Accountants.

They are candid about the traumas faced in abandoning timesheets and introducing fixed price agreements for all clients – and why they are so glad they did!

Since meeting Ron Baker in March 2000, Paul and Paul have challenged and argued with Ron’s views until they found it easier to go along with (most of) it. Since then they have preached – and practiced what they preached – the lessons in The Professional’s Guide to Value Pricing and The Firm of the Future. They come with first-hand experience and examples of how the message can be explained in a practice setting and the effects it has within the firm, to clients and prospects, and to fellow professionals. They have a core competency in sacking clients, having disposed of 80% of their clients between 1997 and 1999. Their story of this and trashing timesheets are included in three of Ron’s books, two for the ACCA and Implementing Value Pricing, and in the www.verasage.com website in the Trailblazers case studies.

Their firm now has less than one-third of its growing income from compliance work, and negative lock-up (work in progress and debtors).

Taking the lesson of intellectual capital, in 2003 they created the “GOBS MBA” course. This is a year-long, ten three-hour session course of modules that O’Byrne and Kennedy clients (owner-managers of businesses) should have been taught if only they’d been taught it.

A proud father of two and still a keen soccer player, Paul is married to a fitness instructor and won’t have that slice of cake, thank you. He has enjoyed traveling to New York and New Zealand as well as old Australia speaking on VeraSage matters and has initiated course on accountant to consultant as well as designing the VeraTrak software for a professional firm to operate in a timesheet-free zone.

The OBK Story

Paul explains his history of meeting Paul O’Byrne, and how they worked in the same firm, before going out on their own on October 1, 1987. Sadly, Paul O'Byrne passed away in November 2008.

He then explains the firm’s pivot to Business Advisory services and away from compliance services. Mostly this happened because Paul O’Byrne was “bored” with traditional accounting services.

In 1997, they attended the Results Accountants’ Boot Camp, conducted by Paul Dunn and Ric Payne. They realized they had too many customers—around 500. They first fired their largest (audit) customer.

They ended up firing over 450 customers over 2-3 years, freeing up capacity to move into more business advisory services. They developed a “core competency in firing customers. They did it professionally, keeping their reputation in the community intact.

Firing a customer is similar to breaking up: “It’s not you, it’s me, I’ve changed.” They also found them a replacement firm to make the landing softer. They also ended up selling some customers to another firm.

They also lost some team members due to this pivot. Today, the firm has 8 team members.

They developed many consulting protocols and products, and developed a rigorous customer selection criteria. Paul O’Byrne was no longer bored!

Then they met Ron, in March 2000. They thought he was crazy at first, especially Paul O’Byrne who continuously debated with Ron for three years about the concept of eliminating timesheets.

The firm did immediately implement Value Pricing, OBK says the firm became the “Ron Baker laboratory.” The firm didn’t eliminate timesheets until July 1, 2003, that’s how long it took Ron to convince them.

In fact, Paul Kennedy wrote what Ron considers is one of the most powerful arguments for eliminating timesheets, in his essay on timesheets. You can read the entire essay here. 

Paul discusses the effect no timesheets has had on his team, and how the firm works. You become obsessed with value. Also, their website says OBK is a “teaching and learning organization.” Ed observes that most firms would not put this on their website, as it makes them vulnerable. Paul answers, “But it’s true, isn’t it, Ed? Why would we be afraid of the truth?”

What makes OBK one of the most innovative accounting firms on the planet?

The OBK MBA. The firm’s internal University offers an MBA to customers and potential customers. This is an intense program, teaching strategy, finance, positioning, pricing, and other facets of executive education, including each student preparing and presenting a case study. Check out the video on the MBA at their website.

VivaTrak. This is the firm’s internal project management program, which they developed internally. It translates the fixed price agreement into milestones, tracking deadlines to the customer, and value earned based on those milestones.

After Action Reviews. The firm diligently does AARs on all work, and Paul says AARs are one of the most transformative processes they have ever implemented. They have also introduced AARs to customers. AARs drive out fear, and develops a culture where people aren’t afraid to admit errors.

Paul points out that AARs can’t just be negative. You have to focus on what went well so you can replicate it.

Renewing Your Vows. “We don’t own these people.” OBK puts every single customer at risk at the end of each contract period. They have a conversation where the first item on the agenda is if they should continue the relationship. Sometimes, the firm wants out; other times, customers want out.

OBK doesn’t want people to stay from apathy. They only want to work with people who they can add tremendous value to. The firm’s success is a direct by-product of how it creates value for other people. Here are some of the questions they ask:

•             How are we doing?

•             How is this working for you?

•             Are you getting value from our work?

•             What can we do to create more value?

•             Do you still think we are the right firm for you?

Paul wants his entire team to think they are on the last chance with every customer. This enables them to perform at the highest level, to exceed customer expectations and constantly deliver more value (it’s like a value guarantee on steroids).

This scares most firms to death!

Last Questions for Paul

What’s the number one issue facing the profession?

Lack of focus. We try to be all things to all people, and we need to narrow our focus. We can’t be all things to all people. Paul quotes Zig Ziglar: “You need to move from being a wondering generality to becoming a meaningful specific.” Figure out what you’re good at and stick with it.

What’s your advice to any firm out there that’s thinking about making some of the transitions you have?

Take a holistic view of your business. Become focused. Saying no, turning work away. Be comfortable with other accounting firms doing work for your customers. And get rid of your timesheets, as it detracts focus from what your customers care about.

Other Resources

Episode #83 - Interview with John Jantsch

Ed and Ron interviewed John Jantsch, a marketing consultant, speaker and best-selling author of Duct Tape Marketing, Duct Tape Selling, The Commitment Engine and The Referral Engine. He is the creator of the Duct Tape Marketing System and Duct Tape Marketing Consulting Network that trains and licenses small business marketing consultants around the world. He frequently consults with small and mid-sized businesses helping them create marketing plans and organized marketing systems that smooth the way for steady growth.

Questions Ed Asked John

You are the author of near 3500 blog posts in total. When did you start blogging?

Is the Blog still the “absolute starting point?”

What is marketing? Get someone who has a need to know, like and trust you?

How do you define marketing strategy? How does it differ from tactics? Objectives? Goals? Mission?

Your TedxKC talk is about purpose, how does that tie into marketing strategy?

How do you feel about the idea that strategy is more about what will you say “No” to?

Talk about the marketing hourglass and how it replaces the marketing funnel?

Why do so many businesses, especially professionals, believe the are in a commodity business?

Please expand upon you belief that, "Price is a function of value!”

Why is pricing so often take out of the hands of marketing?

What is “the perfect referral?”

Who are some of your major business heroes?

Who is a non-business hero of yours?

Questions Ron Asked John

John's reaction to Peter Drucker's statements:

“Because its purpose is to create a customer, the business enterprise has two––and only these two––basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.”

“If marketing were done perfectly, selling would be unnecessary. Marketing and selling are not complementary and might even be adversarial.”

Reaction to Tim William's statement: "The default purpose of marketing is not to increase sales but rather to increase profit."

Is there a correlation between market share and profitability?

What’s your advice with respect to business models?

How do you market risk?

How do you de-commodotize a product or service with marketing?

Why do you think most companies don’t offer a guarantee?

Which companies do you admire from a marketing perspective? John answered REI and Patagonia.

What’s your advice on RFPs? Don't do them!

Who are your business mentors/thinkers/authors? Peter Drucker, Michael Gerber, Seth Godin.

John also recommended the books Dealstorming and Love is the Killer App, both by Tim Sanders.

Episode #82 - Profiling Milton Friedman

Milton Friedman was born July 31, 1912 (Brooklyn, NY), and died November 16, 2006. He was married to Rose Friedman and economist in her own right. In 1976, Friedman won the  Nobel Prize and 1988 he won the Presidential Medal of Freedom. 

Books

Price Theory, 1962, 1976 - He didn’t think Frank Knights distinction between risk and uncertainty was valid. He believed in personal probability.

Monetary vs Fiscal Policy: A Dialogue, Milton Friedman, Walter W. Heller, 1969 - Money matters for nominal magnitudes, but not real output over the long-term. Money is not the only thing that matters! Technology, institutions, rule of law, etc. Interest rates are not the price of money, but the price of credit.

Why Government Is the Problem, 1993, Essays in Public Policy, Hoover Institution - If a private enterprise is a failure, it closes down—unless it can get a government subsidy to keep it going; if a government enterprise fails, it is expanded. I challenge you to find exceptions.

Reverse invisible hand: People who intend to serve only the public interest are led by an invisible hand to serve private interests which was no part of their intention.

TANSTAAFL (There ain’t no such thing as a free lunch), Robert Heinlein, The Moon Is a Harsh Mistress. Also, traced back to 19th century saloons: if you bought a beer, they gave you a free lunch. Dedication speech, Cato Building in DC: In the real economic world, there is a free lunch, an extraordinary free lunch, and that free lunch is free markets and private property.

On Liberty And Drugs: Essays on the Free Market and Prohibition, Milton Friedman and Thomas S. Szasz, 1992 - It is extraordinary that leaders of medicine should proclaim publicly that they and their colleagues must be paid to be ethical. And if it were so, I doubt that the price would have any limit. There seems little correlation between poverty and honesty.

As I once said to a Republican Club of students at Stanford, I am a libertarian with a small l and a Republican with a capital R. And I am a Republican with a capital R on grounds of expediency, not on principle.

Prohibition (1920-1933) passed during World War I because men were in France and the majority of women voted for it.

From the Founding until 1914, trade in drugs was free. George Washington grew “hemp.”

We don’t say legalize, implies that the government gives us a permission to do these things. Are rights are inalienable.

Milton Friedman on Economics: Selected Papers, 1976 - Contains his Nobel lecture. Rejected that economics was a branch of philosophy. Thought of it as a social science, with tentative hypotheses that can never be proved but can only fail to be rejected. Falsified the Phillips curve—tradeoff between inflation and unemployment.

Friedman didn’t draw distinction between micro and macro economics. He    started with individual choice. First major publication, Income from Independent Professional Practice (NBER, 1945), with Simon Kuznets, his Columbia dissertation:

• Introduced concept of permanent income

• An early human capital analysis of returns to education

• First quantitative study of union restrictions on entry into occupations and of the effect of unions on earnings

• Publication was held up five years, so was Friedman’s PhD, because a board member of the bureau (a Pharma Exec, C. Reinhold Noyes) objected to this conclusion and analysis of the American Medical Association’s behavior. Friedman didn’t budge, finally published with irrelevant comment by the objecting board member.

• Explained 1/3 by which average income of doctors exceeded dentists. Only ½ due to natural supply/demand, the rest was ease of entry to dentistry back then

Friedman in China, 1990 - Visited in 1980 and 1988. China invented paper money.

The Essence of Friedman, edited by Kurt R. Leube, 1987 - More lives lost because of Das Kapital, so why no warning label on it such as with cigarettes?

“The Social Responsibility of Business is to Increase its Profits,” The New York Times Magazine, September 13, 1970 - Road to hell paved with good intentions. He often quoted Pierre S. du Pont, to the French National Assembly:

Gentlemen, it’s a disagreeable custom to which one is too easily led by the harshness of the discussions, to assume evil intentions. It’s necessary to be gracious as to intentions; one should believe them good, and apparently they are; but we do not have to be gracious at all to inconsistent logic or to absurd reasoning. Bad logicians have committed more involuntary crimes than bad men have done intentionally.

He did favor a “real gold standard” but not a “pseudo gold standard,” whereby government fixes the price of gold. He did think the gold standard was consistent with liberty.

Bright Promises, Dismal Performance: An Economist’s Protest, 1983 - 70 Essays from Newsweek, 1972-1982. He wrote 300+ columns over 18 years. Contains Playboy interview from 1973. “The preservation of liberty, not the promotion of efficiency, is the primary justification for private property.”

Milton Friedman: A Biography, Lanny Ebenstein, 2007 - Fanatically religious phase until 12yrs old, by time of his bar mitzvah at 13, complete agnosticism. Received his introduction to libertarian thought at Rutgers from John Stuart Mill’s On Liberty, which he read as freshman or sophomore.

Teacher Henry Simons (U. Chicago) taught that an objective, critical examination of a man’s ideas is a truer tribute than slavish repetition of his formulas. Thinks he voted for FDR in 1936, went to Chicago as a Norman Thomas-type socialist. Rose dated others, Milton didn’t. “He couldn’t afford it,” says Rose.

From Fall 1941 – March 1943, was one of the top 10 aides to Secretary of the Treasury, Henry Morgenthau; he helped devise income tax withholding. Indirectly involved with the Manhattan project, designed a statistical procedure to ensure that the detonator for the atom bomb worked, though he didn’t know it. Helped designed the trigger for the atom bomb!

He believed that “almost all important contributions of a scientist are made in the first ten years after he enters the discipline.” Only one valid criterion for acceptance or rejection of a theory: its capacity to predict. He joked: “so happily blessed with critics that I have been forced to adopt the general rule of not replying to them.”

A Monetary History of the US and A Theory of the Consumption Function constitutes his critiques of Keynes. The Great Depression caused by inappropriate monetary policy, 1/3 contraction of money supply between 1929-1933. Thought the New Deal with a the wrong cure for the wrong disease

He thought Capitalism and Freedom was his best work for a popular audience, and better than Free to Choose, more philosophical and abstract, and hence more fundamental. Great arguer, and people said they loved to argue with Milton—when he wasn’t there! His two most terrifying questions: How do you know? So What?

I would rather government spend one trillion dollars with a deficit of half a trillion that have government spend two trillion dollars with no deficit. Government spending is the price of government, not deficits! Advantage of flat tax get rid of all the unpaid bookkeeping we are forced to engage in, and free up human talent of accountants and lawyers for more productive work.

Congressional testimony, All-Volunteer Commission, Nixon, General William Westmoreland, commander of American troops in Vietnam said, “he did not want to command an army of mercenaries.”

Friedman: General, would you rather command an army of slaves?

Westmoreland: I don’t like to hear our patriotic draftees referred to as slaves.

Friedman: I don’t like to hear our patriotic volunteers referred to as mercenaries.

Was protested for visiting Chile in March 1975, but not for visiting China, certainly an evil government?  “There is nothing so permanent as a temporary government program."

As so often is the case, what everyone knows is not so. Anyone who is converted in an evening isn’t worth converting. The next person of opposite views… will unconvert him.

He saw past two and quarter centuries by three intellectual tides:

• The rise of Laissez-Faire (the Adam Smith Tide)

• The Rise of the Welfare State (the Fabian Tide)

• The Resurgence of the Free Market (the Hayek Tide)

“Ideas are important, but they take a long time and are not important in and of themselves. Something else has to come along that provides fertile ground for those ideas.”

He was pro-abortion, but thought government shouldn’t pay for it. He Opposed Gulf War 1991 and Iraq in 2003. Epitaph: Inflation is always and everywhere a monetary phenomenon (too much money chasing too few goods).

Arnold Schwarzenegger: “I have often said that the two people who have most profoundly impacted my thinking on economics are Milton Friedman and Adam Smith.” [As a resident of California who lived through the Schwarzenegger administration, this is nonsense!].

Lawrence Summers: As for Milton Friedman, he was the devil figure in my youth. Only with time have I come to have large amounts of grudging respect. And with time, increasingly ungrudging respect.”

Money Mischief, 1992

Famous story of the island of stone money.

Hugh Rockoff (1990) paper argues Frank Baum’s The Wonderful Wizard of Oz was actually a sophisticated commentary on the political and economic debates of the Populist Era. The Land of OZ is the East, where the gold standard reigns supreme. Wicked Witch of the East, Grover Cleveland, the gold Democrat who, as president, led the successful repeal of the Sherman Silver Purchase Act of 1893

Capitalism & Freedom, 1962 - Abolish corporate tax, but undistributed earnings should be assigned to individual shareholder returns, so corporation only keeps when it can earn higher ROI than shareholder

Free to Choose: A Personal Statement, 1980 - Dedicated to Ricki and Patri. See videos below. 

Tyranny of the Status Quo, 1984 - Points out that harder to make good changes in our system than in parliamentary system, also harder to make bad changes. UK moved much quicker to welfare state because of this structure. IRS was chief obstacle to implementation of withholding tax. Government since 1897 has Board of Tea-Tasters, $125,000/year, still existed in 1984! It was finally shut down on March 25, 1996.

Two Lucky People: Milton and Rose Friedman Memoirs, 1998 - 2 children, 4 grandchildren, 59 years married. Second child, David Director Friedman, born Feb 12, 1945, degree in physics. Milton’s natural father died when Milton was 15. Intended major in mathematics, only work was as an actuary; took some exams, passed some, failed others—most difficult exams ever taken! Milton met Rose in Economics 301, Price and Distribution Theory, Univ. Chicago, taught by Jacob Viner.

First law of bureaucracy: the only feasible way of doing anything is the way it is being done. Established the Milton and Rose D. Friedman Foundation, vouchers, etc. Says calling for a state conventional would be most effective way to get Congress to act on balanced-budget, tax-limitation amendments. “Barking Cats” (2/19/73) one of his best columns ever written: page 362-3.

Decided testifying before congressional committees was a waste of time. Thought Nobel prize may do more harm than good, gives people importance utterly unjustified. Wanted his work judged 25-50 years after his death. “Judged by practice, we have been, despite some successes, mostly on the losing side. Judged by ideas, we have been on the winning side. We are in the mainstream of thought, not, as we were fifty years ago, members of a derided minority.”

The Making of Modern Economics, Mark Skousen

To keep the fish that they carried on long journeys lively and fresh, sea captains used to introduce an eel into the barrel. In the economics profession, Milton Friedman is that eel. —Paul Samuelson

Karl Marx, the phrenologist; then came Stanley Jevons, the astrologer, who was followed by Maynard Keynes, the palm reader. Now we have Milton Friedman, the handwriting analyst!

In the late 1960s, Friedman was invited to debate strident Keynesian Leon Keyserling at the University of Wisconsin. Keyserling read the list of fourteen items Friedman highlighted as “unjustified” government activities in Capitalism and Freedom. Protesters made fun of the points as he read them, hoping to win the debate. Point 11 called for the elimination of military conscription during peacetime. Friedman’s opposition to the draft brought ardent applause and won him the debate.

Thomas Sowell said Friedman was a tough grader—he got one of only two B’s in his price-theory class. He gave no A’s.

Friedman’s Big Ideas

• Education vouchers

• Negative Income Tax

• Flexible exchange rates (1940, adopted in 1970s)

• Repealing the Draft

• Natural rate of unemployment, 1967 AEA address, so goal of 0% unemployment is not realizable

Friedman Videos

Episode #81 - Free-Rider Friday - February 2016

Ed’s Topics

Frank Kless, Ed’s Dad, would have turned 73 today. He taught Latin part-time and instilled in Ed a fascination with etymologies. Ed shared a story about the word - mortgage.

Ed and Ron will be at the Libertarian Party Presidential Debate in San Antonio, April 8th, which will air on VoiceAmerica’s Live channel. Follow along on Twitter at #LPDEBATE.

Article by Steven Landsburg on how Republican party faces a classic prisoners dilemma with Donald Trump.

Economist Donald Bordreaux asks the following: How much money would it take for you to live back in 1916?

The Apple vs. FBI imbroglio was discussed. Should Apple be forced to create a back door to access its iPhones? Both Ed and Ron say no, but don’t dispute the government’s ability to get what it wants.

Speaking of iPhones, the first person to hack an iPhone, George Hotz, is now working on a driverless car, as explained in this article from Bloomberg, and be sure to watch the accompanying video, it’s truly amazing.

Ron’s Topics

Is Twitter flat lining? From The Economist, “Clunky Dorsey,” February 13, 2014.

From an article in The Economist’s The World in 2016, they are predicting a backlash over fees charged by law firms, and more accounting scandals, possibly in the tech industry.

From The Economist, January 2, 2016, “Prediction 2016.” Prediction markets go back to 1820s, when punters made public wagers on candidates. The losers who couldn’t pay were subject to public humiliation, such as rolling peanuts up and down streets with toothpicks, eating crow, etc. 11 of 12 elections between 1884 and 1940 were correctly predicted.

PredictIt.org, sponsored by Victoria University of Wellington, NZ, has an $850 wager cap, authorized by America’s Commodity Futures Trading Commission, as does Iowa’s Electronic Markets.

Are the Chinese becoming supply-side economists? Check out “Reagan’s Chinese echo” from the January 2, 2016 issue of The Economist.

Episode #80 - The Future of the Legal Profession

Ed and Ron were honored to interview three Australian lawyers, two who practice, and one consultant to the profession. The topic was the future of the legal profession, as set forth in the Richard and Daniel Susskind book, The Future of the Professions.

David Wells is Managing Principal of Moores. David is an Accredited Specialist of the Law Institute of Victoria in Commercial Litigation and is a Law Institute of Victoria Approved Mediator. He has acted in commercial dispute resolution in all Court jurisdictions for over 20 years. David’s expertise is in resolving major commercial disputes and managing complex legal issues for medium to large sized corporations, local government and industry bodies.

As a director of View Legal, Matthew Burgess specializes in trusts, tax, superannuation, asset protection, estate and succession planning and related areas, and has been recognized in the ‘Best Lawyers’ list since 2014 in relation to trusts and estates. He has enjoyed developing a number of innovative legal products for advisers and their clients, including establishing what is generally regarded as Australia's first virtual law firm. He speaks for many industry associations, accounting firms, financial advisers and commercial businesses, on a variety of specialist legal topics. Since 2010, he has increasingly provided assistance to other professional service firms in re-engineering their business models. In early 2006 he gave away the family television (effectively replicating for his 4 daughters the TV free upbringing he had). He’s published a collection of illustrated children’s stories in addition to his multiple published law related books and business book “The Dream Enabler.”

John Chisholm is a third generation lawyer who prior to establishing John Chisholm Consulting in 2005, has held senior executive positions in leading Australian legal and accounting firms for more than 17 years, transforming them into market leaders in their fields. He is recognized for his management, leadership and visionary skills, as well as his ability to think outside the square. As part of his consultancy practice John was part-time Executive Chairman of the Melbourne practice of PKF Chartered Accountants & Business Advisors (Now BDO Australia) from 2006-2008, guiding them through a full financial integration with PKF Sydney and Brisbane. John was admitted to practice as a Barrister & Solicitor in 1979, and practiced principally in commercial and property law. He is a member of the Law Council of Australia, the Law Institute of Victoria, the Australian Legal Practice Management Association and also a senior fellow of the VeraSage Institute, an international think tank devoted to professional firm pricing, leadership and strategy.

We discussed the following questions: 

• Do you agree with the book’s overall premise of entering a post-professional society?

• What struck you most about the book, or convinced you of its premise?

• How are you advising your professional customers?

• How are your firms adapting to these changes?

• In our interview with Daniel Susskind he discussed the concept of Latent demand. When John and I spoke with Chief Justice Wayne Martin (Perth, WA), he was also concerned about access and the increasingly cost of justice? Lawyers have offered a Rolls Royce and everyone else is walking.

• What did you disagree with in the book?

• What do you think about judges being replaced by an IBM Watson-type system?

• Are you optimistic or pessimistic about the future of the legal profession?

Episode #78: Why Is Movie Theater Popcorn So Expensive? Economic Puzzles and Paradoxes

. . . [M]en are fond of paradoxes, and of appearing to understand what surpasses the comprehension of ordinary people . . .

—Adam Smith 

Why is movie theater popcorn so expensive?

Why don’t we observe movie popcorn price wars, similar to what other industries engage in from time to time? When asked this question, the overwhelming majority of businesspeople will answer, Because there is no competition—the movie theater has a captive audience. Other common explanations include:

• Limited selling time

• High fixed cost of operating concession stand

• It is how the theater owner makes a profit

• Higher clean-up costs imposed by snack eaters

• Tastes and smells better than you can make at home

• Part of the experience of seeing a movie

• Because people will pay for it

At first glance, all of these answers appear reasonable, except to an economist. The most popular response—captive audience—leads to the question of why there are no pay toilets in the theater? You are certainly a captive audience in that regard, but perhaps theater owners understand that if they installed pay toilets they would lose at the box office what they made from the bathrooms.

The high fixed costs, in terms of scarce square footage, equipment, fixtures, clean-up costs, and required employees, is certainly a plausible reason, but does not really account for the large premium price of popcorn. To say it is where the theater owners make their profits is definitely true, but begs the question of why they do not make the profits from ticket sales and sell more popcorn at closer to cost?

Eating popcorn is certainly part of the experience of going to the movies, and people will pay for it, yet this explanation is still incomplete.

Assuming theater owners want to maximize their profits, what do the theater owners know the rest of us, perhaps, do not. The consummate economist Steven Landsburg provides the answer in his book The Armchair Economist:

I believe he knows this: some moviegoers like popcorn more than others. Cheap popcorn attracts popcorn lovers and makes them willing to pay a high price at the door. But to take advantage of that willingness, the owner must raise ticket prices so high that he drives away those who come only to see the movie. If there are enough nonsnackers, the strategy of cheap popcorn can backfire.

The purpose of expensive popcorn is not to extract a lot of money from customers. That purpose would be better served by cheap popcorn and expensive movie tickets. Instead, the purpose of expensive popcorn is to extract different sums from different customers. Popcorn lovers, who have more fun at the movies, pay more for their additional pleasure.

This answer is more precise, since the important point is that “some moviegoers like popcorn more than others,” and the theater owner cannot separate these customers when they are outside queuing up for the movie. A method was needed to separate the snack eaters from those who just want to watch the movie, which the concession stand provides since it allows customers to divide and self-identify themselves.

This may seem a subtle point, but it is highly profitable, since segmenting different types of customers allows the theater owners to charge them varying prices depending on the value received.

Students, children, and people with large families are usually more price sensitive, and not likely candidates to spend money on snacks. The theater owner does not want to turn these customers away, and hence keeps the box office price lower by charging higher prices to snack eaters.

What you are really buying when you purchase a movie ticket is an opportunity set—a chance to enjoy the movie, or to enjoy it with popcorn. Economists call this a two-part tariff, defined as a pricing strategy in which the customer must pay a fee in exchange for the right to purchase the product. Examples abound of this strategy: country clubs charging membership fees and monthly dues; Gilette charging for the razor then the blades; amusement parks charging an entrance price followed by a price for each ride.

Some people recoil at the thought of price discrimination—charging different prices to different customers—claiming the practice is blatantly unfair and should be illegal. But what would happen if the practice were outlawed? Theater owners, airlines, restaurants, and myriad other businesses would have to increase prices for the very customers who are least able to afford a higher price—children, students, large families, senior citizens, and so on.

By engaging in price discrimination, businesses are actually increasing social welfare and making more products and services available to the poorest members of society. This is not to imply that price discrimination is based on race, gender, religion, or ethnicity, but rather is based on ability and willingness to pay.

If you found this answer for why movie theater popcorn is so expensive thought provoking, welcome to price theory. The German poet Goethe thought double entry bookkeeping “among the loveliest inventions of the human mind.” One should say the same about price theory, as it truly is “one of the great products of the human mind,” as economist Donald (now Deirdre) McCloskey explains in his textbook, The Applied Theory of Price:

The theory of price is one among the larger intellectual achievements of the nineteenth century, such as the theory of heat engines, the decipherment of hieroglyphics, the professionalization of history, the invention of abstract algebras, and the theory of evolution. Price theory explains much human behavior.

Since price theory offers tremendous insight into human behavior, it is worth the time and effort to study it in greater depth. It is sometimes said that economics is nothing but refined common sense, which is certainly true. Yet many myths about this crown jewel of the social sciences persist, even among businesspeople.

Therefore, when trying to answer some of the puzzles and paradoxes Ed and I will present in this series, it’s useful to use the economists’ toolbox in thinking about the issue at a deep level, including:

• Price Theory

• The assumption of rationality

• The subjective theory of value

• Behavioral economics, and irrationality

Here are some of the other questions we posited on the show.

Why do laundries charge less for men’s shirts than for women’s?

For example, $4.00 for men; $9.00 for women. Is it because when you move the buttons from right to left it costs more?

Is it because women’s blouses are made of more delicate fabrics? But then why not just charge different prices for different fabrics?

Is it because women demand higher-quality work, and require more re-works?

Is it because men’s shirts are machine pressed, whereas women’s are hand pressed? Then why not different prices for different types of pressing?

Why discriminate against women, not men? Men care less, and thus more likely togo without clean shirts? Women could as easily do their own laundry.

Dry cleaners next to each other, if all earning high profits from women, why none specialize in just women (e.g., charge $8 across board to get all womens business, and none of the mens). Yet none have done this? Hence, women’s clothes can’t be much more profitable

Could be due to customer loyalty? To a dry cleaner?

The more competitive an industry, the less price discrimination usually seen (farmers don’t give senior citizen discounts); likewise gas stations—sell at one price to everyone.

Either there is price discrimination, or women’s clothes are more expensive to clean and press, and it’s a cost explanation.

Do companies really plan for obsolescence?

Ed's Light Bulb stash

Ann Landers use to rail against pantyhose and light bulbs, arguing that companies deliberately made them subject to ruin so they could charge more.

But this is ridiculous. If you have to spend $5 twice a month for pantyhose (or approximately $120 per year for pantyhose), any company would want to engage in only transaction for $120, or even a bit less, then 24 transactions generating the same revenue. It’s the same with light bulbs.

Because most women don’t want to spend $120 for hose they might lose in the laundry, or don’t have $120 in cash now. Thus, the company is actually insuring your risk and/or providing a loan.

If your odds of winning the lottery are approximately the same if you purchase a ticket and if you don’t, why is it rational for people to play the lottery?

Well, it might not be rational. But a lottery ticket is a cheap price to pay for a fantasy.

There’s something to the Endowment Effect here, too. When the lottery was up to $75 million years ago, I asked audience members who had purchased tickets to sell me theirs at 50 times what they paid. There were no takers.

Why do men spend less on medical care than women?

Probably because men are more likely to die violently, and die sooner. Also, women tend to be sick more and more likely to seek medical care. Giving birth is also a factor.

Why is milk sold in rectangular containers, while soft drinks are sold in round ones?

Another excellent book that contains puzzles and paradoxes is Robert Frank’s The Natural Economist: In Search of Explanations for Everyday Enigmas.

The book is a summary of questions posed by his economic students, and then the essays they wrote to answer the enigmas using economics. This question is from the book.

Rectangular containers use less shelf space, which is more valuable and costly since it’s refrigerated for milk, whereas Coke can be sold on open shelves.

Also, Coke is easier to hold, since its often consumed from the container.

Economist Russ Roberts interviewed Robert Frank on his podcast EconTalk, where they discussed some more of these economic puzzles.

One of the others they discussed was why the Nigerian Prince email scandal continues to this day, even with all the spelling mistakes.

It’s essentially a targeting device: only the naïve are going to fall for it at this point. It still traps some, so this weeding out is effective.

Episode #77 - Free-Rider Friday - January 2016

Ron’s Topics

Value Pricing in Tanzania

From Kenneth Morrison, CPA, CA, at Provision Accounting Group in Richmond, British Columbia, an excellent example of culturally-adjusted Value Pricing from Tanzania.

Here’s some excerpts from his letter to us:

Value pricing lessons from Africa

Nancy and I just returned from a three-week trip to Tanzania and I saw two pricing options that should make Ron proud. 

Value Pricing lesson 1 - Dodoma Dental Clinic

The dental clinic in Dodoma caters to all income levels but the real objective is provide low or no cost dental care to those most in need and least able to pay. However the dentist in charge, quite a remarkable man, is also required as best he can to bring the clinic to a cash flow breakeven position.

He has three-pronged pricing option available as there are three prices available for the same procedure. The strategy is also brilliant in that it has not only three pricing options, his strategy also takes into account the different high value points during the process.

The prices are very differing amounts for exactly the same procedure:

Premium (or fast track as he calls it)                                    $1,000

Regular                                                                                   $500

Free, based on financial capability (Tip Clause)                    $000

Premium is double the price of regular service and is available 24/ 7 because of the “importance” and “busy schedule” of the patients. These patients are ushered directly into the chair through a side entrance, not only is there no waiting there is no need to be seen as taking advantage of their status. The high value point, either because of pain or ego is at this point, price is almost no object. This is of course very profitable for the clinic.

Regular is in most cases for the insurance based client who is not troubled by waiting a reasonable time and wants to take full advantage of a health insurance policy so rarely will they select the premium service. This regular price is based on the maximum price of most insurance schedules. This price is also profitable for the clinic.

Free, after a financial resources review, is for those the clinic really wishes to help who otherwise would have no access to dental care. (One dentist for 170,000 people in East Africa according to the World Health Organization). However upon leaving the clinic after the “free” treatment, problem solved and pain free, the patient encounters a donation box on the wall and is encouraged to make a contribution (an extremely high value point, pain free and happy). For returning patients they are aware of the “tip” box and regular contributions are made.

The multilevel pricing allows an individual choice and the patients with the ability to pay almost always taking the most expensive option and which is presented to them at the high value point.

The clinic is presently in a positive cash flow and serving a significant needy population. The premium service is a tax on the rich happily paid to subsidize dental care for the poor.        

Pricing Lesson 2 - College Dorm Rooms

Education is very prized in Tanzania and many students and their families struggle to pay the costs of tuition, materials and room board.

One university has a very creative structure in place for accommodation. This pricing structure, as with the first example, has been done taking into account the culture in the country, as crowded accommodation is the norm.

Each room contains two bunk beds, (sleeping room for four) two fairly large tables and two closets

The accommodation is priced as follows:

One person per room                                                             $1,000 per person

Two people per room                                                               $600 per person

Four people per room                                                               $480 per person

This is perfectly priced to maximize the return for the university while keeping the parents who are writing the checks also happy.

Firstly no parent (in this culture or any other, I would hope) will agree to $1,000.00 amount

Some parents may agree to the second choice of $600.00 however now the total revenue for the university is $1,200.00 so everyone is still happy. 

Most parents will insist on the third option which maximizes the return for the university at $1,920.00, almost double option one and yet all stakeholders are pleased except the student, although in this culture the student likely has more space than at home and is probably ecstatic to be away.   The costs for the university are virtually the same in any of the three options as the fee is for accommodation only.

The interesting point is that both these pricing strategies work because of the cultural context. I suspect for a variety of reasons, including spoiling our children, they might not work as well for our culture.

Our firm formed a charitable foundation, Provision Charitable Foundation, and since 2009 have been involved in projects in Tanzania. We are very proud of having graduated our first three medical doctors this year and have a variety of other projects underway. However we have also begun the process of out sourcing basic accounting work to an office that we have opened in Kampala, Uganda. As a result we are providing well-paying white collar jobs that are desperately needed while increasing our own profitability.   

If you have are curious about what we do in Tanzania please visit our website or call and we would be pleased to discuss.

Regards

Kenneth A Morrison CPA CA

Cuban Baseball Crisis

From The Economist, December 19, 2015. 

Of the number of Latin Americans playing Major League Baseball (MLB) before 1959, two-thirds were Cuban, even though many were black and banned from MLB, until the color barrier was broken in 1947.

In2007, ten Cubans played MLB, and 27 today, earning $100 million annual salary. This has created an elaborate infrastructure of smugglers to get athletes out of Cuba, and they take a 30% cut.

Raul Castro, president since 2013, wants a “normalized” system, whereby the players travel freely, and returns to Cuba in the off-season. He also wants to impose a 20% tax (at least it’s less than the smugglers!).

The problem is the trade embargo with Cuba can only be lifted by Congress, and it precludes a tax on foreign earnings. The Economist claims MLB has much in common with Cuban socialism in its $9 billion per year business—it levies a tax on teams with high payrolls, etc.

However, Cuban players over 23 years oldwith at least five years in the National Series are exempt from the salary cap and can auction to highest bidder, which of course reduces team owner profits.

So, MLB is likely advocate a tightly controlled system of acquiring Cuban players, rather than a free-for-all.

Seems to be there’s two bootleggers and no Baptists!

Ed adds: Coincidentally, this week the New York Mets reached a contract agreement with Cuban native and slugger Yoenis Cespedes. The contract has an innovative structure in that it is a $75 million deal, front loaded with $27.5 million in the first and includes an opt out clause after that first year. At first pass is seems a bit odd, but as it has been analyzed it is possible that this is a bit of an innovation in megabucks sports contracts. 

$400 to Eat at Olive Garden?

Article from Money.cnn.

The interesting thing to me about this article were some of the comments. They completely understood the logic behind this pricing, and didn’t complain about “gouging,” as people tend to do with Uber’s Surge Pricing.

Ed adds: You would have to pay me to eat at the Olive Garden. 

Corporate Social Responsibility and Tax Avoidance

From The Economist, January 2, 2016, Schumpeter, “Social saints, fiscal fiends.”

Pfizer prides itself of its corporate social responsibility, but that didn’t stop it from seeking a tax inversion $160 billion takeover of Allergan, and moving its headquarters to Ireland. It would have saved $1 billion in corporate tax had it done this Companies that do most in CSR also the biggest tax avoiders, and spend more on tax lobbying

Economists says both CSR and tax avoidance is done to maximize profits. CSR also helps attract talent.

Another theory is that taxes and CSR are substitutes; the less tax a company pays the more for CSR.

Here’s a thought: How about the USA lowering the corporate income tax, the highest in the world?

Ed’s Topics

David Bowie Bonds

David Bowie was not only an innovative musician, he was also a financial wiz. In 1997 he raised $55 million by selling bonds secured by the future revenues from his music catalogue. Turns out that with the advent of Napster and iTunes, this was pure genius. 

Here is my favorite Bowie song:

Koch Brothers’ Wealth Doubles During Obama Term

Premise A: During the Obama Administration the net worth of the Koch brothers went from $19 billion in 2008 to $41 billion today.

Premise B: The Koch brothers are money grubbing bastards who will stop at nothing to increase their fortune. 

Conclusion: The Koch brothers must be about to launch a campaign to repeals the XXIV Amendment to the US Constitution to help secure a third term for POTUS. 

This is not happening so one of the premises is wrong. Listen to the episode to find out which one and why?

Bitcoin’s Blockchain

Ed’s link/article:

Ron mentioned that the SEC approved Overstock.com CEO Patrick Byrne’s plan to issue stock using blockchain technology. Overstock did issue private bonds using blockchain previously (from the Mises Wire, December 16, 2015).

The Economist calls the blockchain technology a machine for creating trust, “The trust machine,” in its October 31, 2015 issue:

The spread of blockchains is bad for anyone in the trust business—the centralized institutions and bureaucracies, such as banks, clearing houses and government authorities…

The blockchain is essentially a public ledger (sometimes called a distributed ledger). It doesn’t sound sexy, but neither did double-entry bookkeeping.

NASDAQ will start using blockchain for trades of privately held companies. Everledger uses blockchain to protect and verify luxury goods: diamonds, rare art, etc.

Russ Roberts has an excellent interview on his EconTalk podcast with Nathaniel Popper, author of the acclaimed book, Digital Gold.

CIA OSS Manual

In January 1944 the Office of Strategic Service (forerunner of the CIA) published the Simple Sabotage Field Manual. In it they make suggestions on how ordinary citizens behind enemy lines can help in the war effort. To me, part of this reads like a advisory column to folks who fill out timesheets. See pages 28-30. 

Episode #76: Lessons from the Trading Game

Peter Drucker taught that “Business is society’s change agent. All other institutions are designed to conserve if not to prevent change.” Companies exist to create wealth, no other institution can do it.

By playing the Trading Game, participants in this session will learn the subjective nature of value, and how increasing the availability of goods and services your company offers leads to prosperity, happiness, and a higher standard of living for all.

Participants will come away with a deeper understanding of how business is a serious moral enterprise—not the simplistic idea it is based on greed—and that cooperation is far more prevalent than competition.

The game begins when the participants randomly draw a card from a deck, each one containing an item they will now own (each card will contain an electrical item you’d find at Best Buy, of approximate equal price, such as an electronic gadget, Coffee Maker, memory stick, cell phone, DVDs, etc.).

The group is then divided into, say, ten groups of five participants each. They are instructed to rate how much they like their gift, using a scale of one to ten. The total score for each group is then summed.

Then the instructor allows the participants to trade only within their group of five, allowing them to exchange for a gift they value more. The gifts are then scored again, and the total score increases.

Then the instructor allows the entire class to trade, expanding the number of potential trading partners from four to forty-nine. With many more options, the complex trades that take place would make an economist proud.

We have discovered some people don’t trade after discovering their gift is very popular, but they do increase its score (the Bandwagon and Endowment Effects). Other scores may actually decrease after an exchange, as Buyer’s Remorse sets in. Overall, though, the total score goes up again.

This may be a simple game, but it does a wonderful job illustrating complex economic principles in a way that a child can understand. There are at least seven lessons to take away from this game:

1. Trading freely can add value even though the traded items remain physically unchanged.

2. The more trading partners there are, the better—wealth and happiness are increased.

3. A free exchange is a win-win game, not zero-sum.

4. The game is win-win because of the rules set up beforehand—theft and coercion are not allowed, nor does anyone have to trade if they don’t want to.

5. Scarcity is almost always real. You can’t have everything, so have to make tradeoffs.

6. Opportunity costs—that is, economics does not ask “What do you want?,” but rather “How much do you want it?” which involves making tradeoffs, not having final solutions.

7. Economic value is in the eye of the beholder.

8. People trade, not governments. The Trade Deficit is an accounting fiction that doesn’t describe the economic fact that individuals are made better off from trading.

If China invented a vaccine against cancer would you not buy it because it would increase our trade deficit?

By operating a company, you are expanding the choices available to the consumer. This is the real source of wealth in an economy—the variety of goods and services available. If it were otherwise, any country could achieve wealth simply by printing more pieces of paper money.

Perhaps this is better understood if we think of Nathan Mayer Rothschild, one of the founders of the international Rothschild banking dynasty, probably the richest man in the world at the time of his premature death in 1836 at the age of 58 from an infected abscess. Despite having the best medical care money could buy, he did not have access to antibiotics that today could be purchased from any pharmacy for a few dollars.

Would you rather have Bill Gate’s income in today’s world—with its abundance of goods and services—or during the time of Rothschild? Another way of articulating this is that the wealth of nations resides in consumer well-being, not profits.

That said, your company has to understand what customers truly value, since all economic value is in the eye of the beholder. How your firm monetizes the value it creates for customers is your business model.

Ed and Ron learned about the trading game from Jay Richard’s excellent book, Money, Greed, and God: Why Capitalism Is the Solution and Not the Problem.

You can download sample cards here.

Episode #75: Interview with Mark Koziel

Ed and I had the honor of interviewing Mark Koziel from the American Institute of Certified Public Accountants. He VP of Firm Services & Global Alliances at the AICPA.  He oversees the development, ongoing improvement and delivery of services to members in PCPS/Firm Practice Management as well as International relations with various CPA related groups. He frequently speaks on CPA issues around the country. Prior to joining the AICPA, Mark Koziel served as Director of Media Planning for a political consulting firm in East Aurora, NY serving Presidential, Senate, Congressional and Governor races around the country. 

Mark was one of the founding members of the Young CPAs committee and served as Chair for two years before being appointed to the Buffalo Chapter Board and serving as President for the 2003-2004 Fiscal Year, one of the youngest President’s in the history of the Buffalo Chapter. Mark earned a BS in Accounting from Canisius College. Mark has been named one to the Top 100 Most Influential People in Accounting by Accounting Today annually from 2008-2014.

Macro Issues in the Accounting Profession

• What are some of the major trends happening in the accounting profession?

• How about trends around the world?

• Rules vs. Principles debate?

• Big 4 Consulting revenue projected to be greater than the Big 3 (Bain, McKinsey, BCG) consulting firms.

• Auditor reform rotation in the EU.

Micro Issues

• What’s happening in firms with Value Pricing? Is it diffusing?

• What about timesheets?

• What about firm innovation?

• What about profession’s innovation?

• PWC’s HALO audit software—runs algorithms through entire data sets—no more sampling (100% of customer transactions)

We also discussed the book, The Future of the Professions: How Technology Will Transform the Work of Human Experts, and how it will impact the accounting profession.

What advice would Mark give to a young aspiring professional?

Thanks to Mark for a thought-provoking discussion, as always!

Episode #74: Interview with Daniel Susskind

Daniel Susskind is a Lecturer in Economics at Balliol College, Oxford, where he teaches and researches, and from where he has two degrees in economics. Previously, he worked for the British Government - in the Prime Minister's Strategy Unit, in the Policy Unit in 10 Downing Street, and as a Senior Policy Adviser at the Cabinet Office. He was a Kennedy Scholar at Harvard University.

Professor Richard Susskind OBE is an author, speaker, and independent adviser to international professional firms and national governments. He is President of the Society for Computers and Law, IT Adviser to the Lord Chief Justice of England, and Chair of the Advisory Board of the Oxford Internet Institute. His numerous books include the best-sellers, The End of Lawyers? (OUP, 2008) and Tomorrow's Lawyers (OUP, 2013), his work has been translated into more than 10 languages, and he has been invited to speak in over 40 countries.

We were honored to be able to interview Daniel Susskind about his book (co-authored with his father, Richard Susskind), The Future of the Professions: How Technology Will Transform the Work of Human Experts. 

The book is based on:

• 8 Professions (Doctors, lawyers, accountants, auditors, architects, journalists, teachers, clergy)

• 100 Interviews

• 800+ sources

It lays out two futures for the professions:

1. Technology streamlines the “print-based” industrial society

2. Technology based internet society, with increasingly capable machines, displacing the work of professionals

They believe that gradually scenario #2 will dismantle scenario #1

How long will this take? Daniel says: "We say that we think that will happen in the 'long run' but we do not commit to timing. This is for an important reason -- the pace of change is not in our hands!

They write the professions are increasingly:

• Unaffordable

• Antiquated

• Opaque

• Underperforming

The future of the professions is too important to leave to professionals.

Folks, we can’t recommend this book highly enough. Without a doubt, it is the most important book written on the professions in decades.

Episode #73: Business Lessons from A Christmas Carol

A Christmas Carol (Dover Thrift Editions)

$2.25

By Charles Dickens

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On this episode, Ron and Ed explore the business lessons from one of the most recognized and beloved stories shared during the holidays, Charles Dickens’ novella, A Christmas Carol. While many of you know the story and seen one or more of the adaptations, many fewer of you have read the original work which, like most of Dickens, an absolute joy to read and has much to say about business practices.

“It is so good,” says Ron, “that you want to read it more slowly to savor it, like a fine wine.”

Ed is also a long time fan as is his daughter as you can see from this video clip.

Episode #72 - Free-Rider Friday - December 2015

Ed's Topics

Sent in from our listener, Hector Garcia: Netflix's paid maternity leave, along with a clip from John Oliver's show on the topic, and a TED talk that also makes the case for paid maternity leave.

Texas bans Teledoc App. Here's a Cato Institute podcast that discusses.

IBM Watson Trend App, which highlights tech, toys, and health.

"Netflix Should Ditch its Unlimited Vacation Policy," from the Huffington Post.

Manhattan DA Pushes for Lawful Backdoor Into Encrypted Phones, from NBC News.

Ron's Topics

Harvard Blog Post, "To Get More Creative, Become Less Productive."

From The Economist, "The heirs of Al Capone," discussing Meth labs v alcohol, and a classic "Bootleggers and Baptists" alliance whereby meth labs might argue for reinstating Prohibition!

The Wall Street Journal article, "Winning the Right to Save Your Own Life," by Darcy Olsen, President of the Goldwater Institute, on right-to-try laws passed by 24 states, giving terminally ill patients access to drugs.

From The Economist "Keep calm and click on: Google Books in court," discussing how a group of authors lost the case to prohibit Google Books from digitizing books because it violated copyright laws.

We also discussed Bitcoin's Blockchain technology, which some folks believe is revolutionary technology in the same way as double-entry bookkeeping. The Economist writes: "Simply put, it is a machine for creating trust."

See "The trust machine," and "The great chain of being sure about things," from The Economist, October 31, 2015,

Episode #71 - Best Business Books of 2015

Ed's Choice

Humans Are Underrated: What High Achievers Know That Brilliant Machines Never Will

$16.63

By Geoff Colvin

Buy on Amazon

Humans Are Underrated: What High Achievers Know That Brilliant Machines Never Will, by Geoff Colvin.

"Figuring out what computers will never do is an exceedingly perilous route to determining how humans can remain valuable."

Better strategy is to ask: "What are the activities that we humans, driven by our deepest nature or by the realities of daily life, will simply insist be performed by other humans, regardless of what computers can do.?"

Honorable Mentions

Uncontainable: How Passion, Commitment, and Conscious Capitalism Built a Business Where Everyone Thrives, by Kip Tindell.

A More Beautiful Question: The Power of Inquiry to Spark Breakthrough Ideas, by Warren Berger.

Uncommon Sense, Common Nonsense, by Jules Goddard and Tony Eccles.

We interviewed Jules Goddard on the January 16, 2015 show.

Ron' Choice

The Future of the Professions: How Technology Will Transform the Work of Human Experts

$24.98

By Richard Susskind, Daniel Susskind

Buy on Amazon

The Future of the Professions: How Technology Will Transform the Work of Human Experts, by Richard and Daniel Susskind.

"This book is about the professions and the systems and people that will replace them. Technology will be the main driver of this change. ...in the long run, we will neither need or want professionals to work in the way that they did in the twentieth century and before. We are advancing into a post-professional society."

We are interviewing Daniel Susskind on the show, which will run on January 8, 2016.

During the conversation Ed mentioned that his son's baseball team (10U) uses an application called GameChanger. In addition to scoring the game and tracking stats as well as performance trends, the system produces a story about each game which is Powered by Narrative Science, a company mention in the book. 

Here is a sample of one story:

Hudson Z's effort not enough to carry the Royals past the Cardinals, 4-3 

Hudson Z. held up his end of the bargain, but he couldn't guide the Royals past the Cardinals as the Royals lost 4-3 in four innings on Thursday. 

The Cardinals had no answer for Hudson, who kept runners off the basepaths in his appearance. The Cardinals managed just one hit off of Z, who allowed no earned runs, walked none and struck out none during his 1 1/3 innings of work. 

The Royals jumped out to an early 2-0 lead in the top of the first. The Royals attack began with a single from Ethan M. The Royals then tacked on more runs when Narit C scored on an RBI single by M. 

The Cardinals stayed on top until the final out after taking the lead in the second, scoring four runs on an error and three singles.

Honorable Mentions

The Great Ulcer War, by William S. Hughes, M.D.

13 Things Mentally Strong People Don't Do, by Amy Morin.

Leadership BS: Fixing Workplaces and Careers One Truth at a Time, by Jeffrey Pfeiffer.

The Forgotten Depression: 1921: The Crash That Cured Itself, James Grant.

Sage Contest Winner

Bust Out!: Ignite Your Inner Entrepreneur

$20.00

By David Cohen

Buy on Amazon

The winner of the Sage Small Business of the Year Contest, in Canada, was David Cohen, Author, speaker, coach, lover of jazz, coffee bars, good conversation and baseball.

We interview David at the bottom of the hour.

Learn more about David at Theboomerbusinesscoach.com.

Episode #70 - Live from the VeraSage Symposium Boston

As you may know Ron Baker is a founder of the VeraSage Institute, a think tank for professional firms; and that Ed Kless is a senior fellow.

The Institute holds a biennial conference during which the fellows and some friends are invited to gather share their knowledge in a symposium atmosphere. 

The latest of these events took place in Boston in October 2015. This episode is a recording of a session during which Ron and Ed as well as VeraSage Fellows, Kirk Bowman and John Chisholm, had a conversation about the future of the professional firm. In addition, they took questions from other Fellows and Friends. 

We hope you enjoy this peak into the gathering.