Essay: Sharks and Free Markets

I like sharks. By far the most exciting thing I’ve ever done in my life was to feed sharks in the Bahamas. It’s an amazing experience but it only takes a matter of seconds under water with them to realize you’re not the top of the food chain anymore. Also shark related, I like the TV show Shark Tank, perhaps for the same reason: in the shark tank, you’re not the top of the food chain. And when you’re not on top of the food chain, you’d better be paying attention to the rules.

One of the first lessons you learn when feeding actual sharks is that when (not if) a shark bites your arm you need to just relax and let your arm go limp. Our natural tendency is to fight, but you’ve got to remember that it’s their tendencies, not ours, that matter 50’ underwater.  Sharks (usually) aren’t interested in eating our arms, particularly when covered in a chain-metal sleeve. Fighting the shark can lead it to believe that your arm is a fish, and that scenario doesn’t end well for your arm. You need to know the rules.

As I listened to our president and the speaker of the house talk about our debt and economy on national TV the other night, I couldn’t help but think that they just don’t understand the rules. In the coming paragraphs I’m going to make a case for not just cutting government spending but cutting them out of our economy almost altogether. And before you call me a right wing capitalist, I’m going to reference an Obama supporter and NPR to support my case, so stick with me. Along the way, I hope to provide a basic lesson in economics, supported by sharks.

One of the common themes I’ve picked up from the Shark Tank TV show is that of this little thing called “sales.” Rarely do the “sharks” (investors) go in depth with questions about the technical specs or manufacturing processes of a given product.  But I have yet to see theme pass up an opportunity to discuss sales numbers. To survive in the shark tank you have to prove more than an idea, you have to show them that you can actually sell it. The sharks understand that business exists to sell products, not just create them. They, unlike government, understand that good business occurs because of a value proposition, not just good ideas. Everybody has a good idea for an invention, or a movie script for Hollywood, or whatever.  But few know how to sell it.

Government believes in economic stimulation through innovation; Obama even referred to it by mentioning "job creating investments" in his speach. In business, innovation is of course crucial and occurs because of ones ability to discover a need, such as clean energy, and fill it. But beyond innovation, businesses actually exist because that innovation can be turned into a transaction; and businesses, not innovations, are what fuel and sustain an economy. All too often entrepreneurs, educators, and government get caught up in innovation and don’t equally consider the transaction. Transactions are what separate the successes and failures. Transactions occur because of the previously mentioned value proposition: this is what happens if I do or don’t sell this innovation, or, this is how my life improves if I buy this innovation. 

I believe history supports my claim. Think about the number of stories in which the person who is given credit for the launching of a product or industry is not necessarily the one with the innovation. For example: Henry Ford did not invent the car, he just figured out how to mass produce it and sell it. The Wright Brothers weren’t the first to fly; they were just the ones to make it realistic for everyone else.  Both Ford and the Wrights were indeed innovators as we rightly give them credit for, but more importantly they bridged the gap between innovation and transaction. I would argue that their innovations were driven by the ability to create transactions not just products.

Back to our president and speaker of the house on TV the other night. Obama and Boehner played a political game by stating that the American people were sick of political games. Did you follow that? They really don’t know how to fix the economy so they have to do what they do best, play political games. If you ask me about my political viewpoints (in the area of economics) I would tell you that I am a free-market libertarian for the basic reason that we are all witnessing: economics is obviously not their strong point. They only know how to throw money around to feed the proverbial “dog that barks the loudest,” not how to create good economic practice.

As referenced above, when government interferes in the market place it’s often to fund innovation, but also to provide protection and apparently bail out failure. Government’s flawed philosophy begins with the belief that somehow innovation will lead to job creation and economic strength. They then proceed manipulate the market by changing tax structures, adjusting interest rates, or giving billions in grants and credits. When that strategy eventually fails they move into protect mode with bailouts and entitlement programs. Along the way they ask what else can we spend someone else’s money on? (Third Party spending, see blog Riches to Rags) Hence, we have earmarks and waste. No business minded person would ever operate like this. They invest poorly and in recent history they’ve been doing it since the New Deal programs of the 1930’s. Government fails to understand the value proposition that good economics is dependent upon. The inevitable result is debates in closed rooms or on national TV about who they should stop giving money to or from whom they can get more money from.

Sadly, our educational institutes get sucked into this because they get a lot of that government money for innovation. Mark my words; go ask any college department head if getting grant money is part of their job description. Ten to one they say it is. The downward spiral makes each generation more dependent on the federal government than the previous. It’s Ironic considering all that government grant money to schools has not prevented tuition from sky rocketing at a rate that puts the housing bubble to shame. Meanwhile the grads are working at chain restaurants to pay off their debt.  Housing and education, interestingly, are two areas where government has significantly intervened in the last few decades and both became massive bubbles. One burst, will the other? And what’s the next bubble? Healthcare perhaps?

Let’s go even further, NPR recently did a fascinating report about innovation and patents and showed that if you go to Silicon Valley and ask any engineer they’ll probably tell you that the incentive for innovation is basically gone. My brother is a successful engineer with multiple patents. He’s mentioned several times in the last few years that he’s considering going back to law school to study patent law because that’s where the real money is. The poorly structured government patent law structure makes it difficult for anyone but attorneys to get ahead anymore. Beyond this topic, there have been volumes written about the failure of the bailouts and entitlement programs, so I won’t spend much time there.

The bottom line is that in the end we’re in debt and unemployed, retirement is a pipe dream, we can’t afford education, and the smart kids don’t want to invent stuff for fear of getting sued. But I guess we don’t need to worry, because those to blame for all of this, our politicians, are in backroom meetings discussing plans to fix it all. Um, yeah, welcome to America 2011. 

Our president is telling us the consequences of them not being able to spend the money. "[If we don't raise the debt ceiling] More of our tax dollars will go toward paying off the interest on our loans. Businesses will be less likely to open up shop and hire workers in a country that can’t balance its books." You see the problem, their failure and inability to manage money, leads towards us collectively failing. The solution is not just cutting spending, it's changing the way we allow our governmennt to be involved in our economy. As long as our government controls the money, we all fail. 

We need to bring the value of the transaction back into economic practice, which means government needs to get out of the way. Cut spending, good first step. Then cut it more, good second step. But it’s all for nothing if we, as Americans, don’t wake up to how the system should work. Consider the value proposition, take risks and don’t look for the government to constantly provide and protect. It’s not their job and it’s inexcusable that we’ve let it get to this point. 

So if government can’t fix it, then who? Back to the sharks, I say we give them a chance. Why? Because they’ve proven themselves. Their checkbooks are balanced, they own their homes, and they employ people. The problem is that we’ve labeled them as big evil corporations and executives. Shoot, even Disney has jumped on board if you picked up on it in the latest Cars movie. I guess our kids must be warned. Sadly some of the big corporations are evil. But instead of getting out of their way, part of those little backroom political talks is about how to get more tax dollars from them. I agree with Obama, they should pay their fair share (I’m not convinced that they’re not already) but beyond that get out of the way.

I think however, the real issue is that we’re all afraid that Darwin’s theory of evolution will be proved right in economics and only the big evil corporate sharks will survive while the rest of us become their peasants. History supports this fear. Our own past and that of many societies is marked with long periods of upper class dominance and oppression. But in America, we’ve also overcome it and I guess I believe that we’ve learned enough as a nation to not revert back to the practice of industrial revolution. When the big corporations got too big, the little guys unionized and became their own powerhouse. Occasionally a power struggle would arise and while they fight it out someone else comes in and takes advantage as we saw in recent decades with the Japanese automakers and the demise of Detroit. I know I’m generalizing, but that’s life, it happens in jungles and in economics. Welcome to reality, learn from it and grow up. 

Going a bit further let me ask this question: what’s the alternative? Continue with status quo? The above is already a reality. The federal government has become exactly what we fear: a minority power that controls the money and infiltrates and controls every area of our lives. What’s the difference between that and a big evil corporation? We elected them? That makes it even worse, because that means we’re all a part of it. At least when business people take over, they do it without racking up trillions of dollars in debt that the rest of us become responsible for. I’m merely suggesting that we pull a portion of that economic power from a failing entity and give it to one that actually has a track record of success. Leave the cash in the hands of those who know what to do with it. Let business people run our economy instead of our government.  

I like what I hear from the sharks a lot more than what I heard on TV the other night from our politicians. The king of sharks, Warren Buffet (Obama supporter), recently applied a little business philosophy to fixing government and I think he’s on to something. Here’s his quote: “I could end the deficit in five minutes. You just pass a law that says anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection."  Warren gets it. That’s free market, value proposition based thought process applied to operating a government.  Imagine if we actually ran the country like a business while also letting business run like business.

Or how about another big evil corporate "shark", Apple Computers. Did you read that they actually hold more cash than the U.S. Government now?  How much debt do they have that our kids and grandkids will have to pay back? 

No matter what I or anyone else says, government will always have a role in business, especially in a global economy. They’ll always try to help spur on innovation and open new doors while also trying to protect us from the bad guys. And to a point, that’s good. But playing referee doesn’t mean changing the game. What government does in business is like giving one football team a first down every five yards instead of every ten because their fans are upset that the team is loosing and the owner isn’t able pay his mortgage on the stadium.  That’s bad practice and everyone loses in the end.

I’ll land this plane using the shark analogy again. Occasionally someone gets their arm bit off because of a bad shark or because of their own dumb mistake. So by all means our government needs to pay attention and help monitor the waters a little.  But by trying to tell the sharks and everyone else how to swim, where to swim, and at what speed to swim, we all collectively drown, or worse yet, a bigger shark comes along and eats us...maybe a Chinese shark.