Resolution of Yair Lapid’s “The Real Crisis” of nonprofits in Israel

In the 28.11.2008 issue of “7 Days”, the Saturday supplement of Yediot Aharonot, Yair Lapid wrote about “The Real Crisis”.  It is about the financial crisis facing several nonprofits, which live on donations from well to do people, and which perform various services in behalf of people at need. Eventually, this financial crisis could adversely affect several vulnerable people.

The crisis is due to the drying up of the donations due to the financial/economic crisis happening now. Yair Lapid’s conclusion is that the Government should provide for those services rather than relying upon nonprofits.

I would like to offer another solution to the problem.

At times of economic depression, traditional economic doctrine calls upon governments to pump money into the economy.  Usually this is done by make work projects, infrastructure investments, etc.

I suggest that in addition to the above measures, the Government hand out stimulus money also to the above nonprofits, in proportion to the amount they got from donations in previous years.  Only nonprofits, which meet the criteria for proper management practices, would qualify for this.

My reasoning is that such monetary infusion will help keep employed people with special skills, so eloquently listed by Yair Lapid.  Also, since it can be assumed that people vet on nonprofits before making donations, the Government money will be almost well-spent as the monies of the private donors during previous years.

How to get capitalism to regulate itself?

In This is not the end of capitalism, Mark Shuttleworth (of Ubuntu fame) points out the need for capitalism with regulation. The regulators – those people who would regulate businesses – would need to have extraordinary personal qualities of resourcefulness, wisdom and incorruptibility. In other words, they need to have caliber like E.E. “Doc” Smith’s Lensmen (the qualities required by Lensmen include intelligence, utter incorruptibility, a high drive to succeed, and the highest drive to fight evil).

However, like Santa Claus, such people exist only in fiction. Therefore another solution is needed. A practical solution would, by necessity, be based upon a system, in which imperfect and corruptible people would nevertheless do almost as good job as incorruptible ones.

Fortunately, there is a precedent for systems obviating the need for supermen. The 18th century political philosophers faced a similar problem. They were faced with the problem of designing a regime, in which people will enjoy freedom, even though they are governed by other imperfect people. The solution was to devise a system of checks and balances. It was embodied in the constitution of USA and worked well for several years.

Therefore, a possible solution to the problem of regulating capitalism is likely to come from a system of checks and balances. In the following I’ll try to sketch a possible design for such a system.

A business operating in an industry, which needs to be regulated, has to answer to the following stakeholders:

  • Shareholders
  • Employees
  • Business partners (customers and suppliers)
  • Environment

Regulation, when it is enforced, aims at restoration of balance of the interests of all those stakeholders. Regulation has to be enacted when money fails to work as a means to motivate the business to serve its stakeholders in a balanced way.

Let’s try to set up a feedback loop, in which bad regulation translates into loss of profits. This can be accomplished by nominating people, who act like the historical kings or modern Benevolent Dictators For Life (BDFLs). Each BDFL will be responsible for regulating all businesses in a particular geographical area. Every business in the region will pay the BDFL 1% of its profits. On the other hand, the BDFL will be subjected to lawsuits from any stakeholder, who believes to have been wronged by a business under the BDFL’s responsibility.

Thus, the BDFL will have an interest at ensuring that the businesses in his area will prosper in a balanced way. Since small businesses have larger growth potential than big businesses, the BDFL will tend to favor small businesses. The BDFL will balance the interests of businesses with those of the other stakeholders when formulating regulations, so that the business will thrive and the BDFL won’t lose too much money to lawsuits.

This proposal is incomplete, and leaves out answers to several questions such as:

  1. What happens if a business operating in a geographical area gets to be so large that the BDFL of that area will profit more from favoring it than from nurturing other businesses?
  2. Is the BDFL only to regulate businesses, or also develop infrastructure (like kings)?
  3. How to select BDFLs from among candidates?
  4. When and how to replace BDFLs, who do not do good work?
  5. How to preserve the sovereignity of the people in a BDFL-controlled area?

Socialism – 1830 style

At 1830 there were riots in England, which were caused by bad policies, which seem to have counterparts in today’s social and immigration practices.

  • People were paid subsistence salaries, with supplemental income paid by the local government from the parish fund, which was financed by a special tax – the Poor Rate. The modern counterpart (at least in Israel) is the practice of paying people at low-skill professions salaries below the legal minimum rate, and having them supplement their income by “hashlamat hachnasa” – complementary income. This practice discourages employers from paying those people salaries which would let them support themselves (and from the effort to train those people so that their productivity will be high enough to justify reasonable salaries).
  • The Poor Rate’s modern counterpart is the National Insurance (known in USA as Social Security) fee.
  • Today as at 1830, social policies created the notorious poverty trap, from which people could not escape without extraordinary measures.
  • People could not move from parish to another parish unless the original parish certified that it would take them back if they cannot support themselves in other parishes. The modern counterpart is that of countries requiring people arriving from other countries to have means to support themselves and travel back to their country of origin.

Musings About Definition of Wealth and its Practical Consequences

The mercantilistic definition of wealth is that the more gold bullions (or equivalent) you have, you are wealthier. The modern consumerist definition of wealth by possessions is similar.

Buckminister Fuller and Robert Kiyosaki define wealth in terms of the time you can survive without having to work.

A country is wealthier if it has better infrastructure (more capital invested in it), its workforce is more productive, its resources are efficiently allocated (by market forces and where they fail, by well-thought out regulations), and its leaders have the know-how to lead it.

The question about definition of wealth has practical consequences for young people, who have to decide about the moneymaking aspect of their future.  The mercantilistic definition leads to legal and otherwise means of acquiring wealth, lacking considration of other people and of the environment.  Viewing wealth merely as survival time ignores risks which could wipe out part or all wealth, encouraging people to take big economic risks, which eventually ruin several of them.

Once someone has enough wealth to sustain him indefinitely, the useful definition of wealth for him changes from one of accumulation into one of reducing as much as possible the likelihood of losing it due to misfortune or natural disasters.

Thus, once someone has enough wealth to sustain him indefinitely, he had better start working on converting his wealth into environmentally sustainable one.  He should also put some of his wealth towards insuring the rest of it – by taking out insurance, by acquiring an home in another country and investing there, by diversifying his investments – according to their risk profiles – even when this causes reduction of return on his investments.

In his personal life, he can start training in survival skills.

Similarly, a developed (wealthy) country can start protecting its residents against natural disasters.  Its residents can start training in whatever skills required for quick recovery from disasters.  Infrastructures can be upgraded to prepare better for natural disasters, including whatever is required for speedy and relatively painless recovery in the aftermath of such disasters.  Infrastructures, which are vulnerable to natural disasters (such as dams), can gradually be decommissioned.

This is an answer to the question what should someone, who already has all the wealth he needs in the world, do with his “excess” wealth.  It also answers questions about the future economic path a developed country should take to keep its residents gainfully employed.

Ethical implication of advancing medical know-how

In the past, there was a limit to the expenses, which could be incurred by medical treatment of people needing medical attention. Usually the requisite know-how ran out before money. In other words, people died when their physicians no longer knew what to do.

Nowadays, there are more and more cases, in which the constraint is monetary rather than know-how. In other words, there are more and more cases, in which patients die not because physicians do not know how to treat them, but because money is not available to pay for known treatments.

Another factor, which did not exist in the past, is the ability of technology to keep the bodies of brain-dead people alive, by means of intravenous feeding and heart-lung machines. Such a treatment, of course, costs a lot of money, and could last for several years.

This change leads to an ethical dilemma, which did not exist in the past.

In the past, families could commit to treating a sick family member at any expense, and have reasonable expectation that he’ll either get well or die before the entire family is driven into abject poverty.

Nowadays, families are more and more confronted with the dilemma when to stop financing treatment of a sick family member. The sick family member could be elderly, needing care due to an age-related malaise. Or he could be a young child with congenital deformity or childhood cancer.

Another aspect of the dilemma is how to allocate financial means among family members, usually elderly, who need to be taken care of – and other family members, usually young, who need money for tuition, downpayment on dwelling place, and other expenses which will help get them ahead in their lives.

Top 25 Censored Stories of 2007

Top 25 Censored Stories of 2007
Some of the stories are startling. For example:
#2 Halliburton Charged with Selling Nuclear Technologies to Iran
#11 Dangers of Genetically Modified Food Confirmed

The information is slanted against Israel – see:
#9 The World Bank Funds Israel-Palestine Wall
On the other hand, the story of Palestinian terror acts, before the Wall’s construction was started, is not widely known outside of Israel and is not in the list.

Absolute vs. Relative Poverty Line

Economists and politicians routinely argue in favor of basing social assistance programs upon relative poverty lines. Such programs have the effect of favoring equalization of income in a country, rather than emphasizing the idea of a safety net for that country’s residents.

Paul Graham has an interesting paragraph in his Mind the Gap article:
If I had a choice of living in a society where I was materially much better off than I am now, but was among the poorest, or in one where I was the richest, but much worse off than I am now, I’d take the first option. If I had children, it would arguably be immoral not to. It’s absolute poverty you want to avoid, not relative poverty. If, as the evidence so far implies, you have to have one or the other in your society, take relative poverty.

In light of this observation, it can be seen that each day, several people from 3rd world countries vote by their feet in favor of absolute poverty lines. They do so by immigrating to more affluent countries. They do so even if they are illegal immigrants. They do so even if they end up being in one of the lowest socioeconomic classes in the affluent country of their choice. They do so because they believe that they and their families would be better off being illegal immigrants in an affluent country rather than be legal and sometimes relatively prosperous in their country of origin.

The most interesting observation for me is that economists and politicians discuss feelings of resentment and discrimination among people who find themselves below relative poverty lines, while ignoring that those people probably value more adequate schooling and medical care for their children, which are better for the poor in affluent countries than for the middle class in 3rd world countries.

One more observation is that humans can be divided into immigrant types and non-immigrant types. The above discussion applies to immigrant types i.e. people who are willing to take a risk, immigrate to an unknown country, try to survive there without the familiar faces and patterns of life – with hope of doing better. Non-immigrant types value more stability and security, and are willing to forego opportunities in favor of this. It is possible that non-immigrants (who are usually the majority in countries without significant percentage of immigrants among their residents) are the ones who favor relative poverty lines.

A reliable way to estimate unemployment rate

Instead of using statistics of people who registered as job seekers and/or getting unemployment benefits to measure the real unemployment rate, I suggest that supermarkets and grocery shops honor coupons for giving discounts on foods and other basic needs.

According to Eric.Weblog() and Joel on Software, coupons are an effective way to segment the market into people who are well-paid and people who are poorly-paid. Those who are well-paid do not bother with coupons, and those who bother with coupons to save some money are the ones who are not well-paid and/or have too much free time on their hands.

Thus, a well-oiled socialist government should keep tabs on the rate of coupon usage and use it to switch on or off its socialist policies.

Yediot Aharonot did not read "Rich Dad, Poor Dad"

In response to the news about the anticipated $1BN tax windfall from the Iscar Metalworking Co. 80% interest sale to Buffett deal, today’s Yediot Aharonot publicized an article listing 12 ideas what to do with the $1BN.

ALL THOSE IDEAS are about spending the money in one year.

Where are the suggestions to use the money to reduce taxes and/or the national debt in various combinations?

Personally I favor the idea of using all of this windfall money to pay off government debts. This way we’ll benefit from it also in future years, by having to reserve smaller part of the yearly budget to debt payoffs (interest and capital).

Agility of small companies <i>vs.</i> inertia of big companies

It has been noticed again and again that small enterprises have agility advantages, which big and established corporations lost as they grew to their present size. Everyone realizes the advantages of small size, but seems to be unable to bring those advantages into a big corporation.

Maybe the following insight can resolve the dilemma.

Let’s consider the examples of building a small house vs. that of building a giant shopping mall.

The project of building a small house is easily-managed. There are few stakeholders to be consulted about designing the house. If plans need to be changed midway, they can easily be changed (of course, assuming that there is budget and the ROI figures are good enough).

On the other hand, when building a giant shopping mall, which involves also rerouting of roads around it, there are several stakeholders. The Electric Company needs to be involved with supplying electricity to the mall, and with re-routing electrical wires around it. Water and sewage systems need to have adequate capacity. Proper mix of shop sizes needs to be determined. Big construction loans need to be negotiated. Firefighting provisions are mandatory. You get the picture.

In the same way, small companies are agile, because they do not have a big network of external stakeholders, who need to be considered when changing corporate policies. On the other hand, if a big corporation wishes to make a small change in its policies, it is liable to find that several of the external stakeholders have an interest in the status quo, and will be damaged by the change.

My conclusion is that a big company may be able to regain the agility of a small business if it can reorganize itself to implement a business version of the Law of Demeter. Each decisionmaker and policy formulator should confine his interactions and influence to his immediate neighbors. Any policy changes should have an effect only on a small number of stakeholders. A stakeholder should be able to buffer another stakeholder, which interacts with it, from changes made by other interacting stakeholders.

If this policy is adopted, then stakeholders can be agile.

This runs against the empire building tendency of top level executives.