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The week’s exploration centers on how a small organization or firm can successfully compete with a larger corporation.  Three substantial advantages associated with economies of scale naturally fall to a large and established firm.  These are ability to amortize sunk costs over a large customer base, the possession of a larger and more specialized workforce, and leverage in buying goods and services.  With all these advantages, how can smaller business ever hope to survive let alone compete?  And, as a corollary question, how come large firms don’t grow unboundedly?

The simple answer is that firms also suffer from a host of disadvantages, called diseconomies of scale, that grow larger as the size of the firm goes.  Initially, these disadvantages are not active in smaller firms.  But at some point, above a critical size, they turn on and begin to offset the economy of scale advantages.

There are two primary areas where diseconomies of scale present themselves: delegation of authority, span of control, and the principal agent problem; and poor communication, coordination, and standardization.

Let’s start with the first broad category which covers problems associated with delegation of authority, span of control, and the principal agent problem.  Collectively, these problems describe the down side of the principle behind comparative advantage.  No matter how talented and dedicated the original founders and staff of a firm are, they are limited in the amount they can do based simply on the number of hours in a day.  For the firm to grow, additional staff needs to be hired to not only perform the basic functions (manufacturing, delivery of services, etc.) but also manage the growth.

In this process, a vast amount of control and authority has to be delegated to new staff and this is always accompanied by growing pains.  Friction between the old guard and the young turks is natural even under the best of circumstances.  When rapid growth occurs in a firm it is usually due to a highly motivated core group (e.g. the owners of the company).  These individuals obviously have strong notions about what works and what doesn’t.  In addition, they want go-getters just like themselves and they tend to hire people who are just as opinionated and strong willed as they are themselves.  I’ve experienced the tremendous clash that happens next.  The new blood yells about micromanagement and rigid and inflexible approaches of the existing management, who can’t delegate and reduce their span of control.  The original staff can’t understand why there is a sudden rush to change the culture that has been so successful.  Harsh words are exchanged, people quit or get fired and, meanwhile, the business of the firm is left fallow.

As bad as this is, an even worse circumstance occurs when the new blood has designs on the existing corporate structure for their own purposes.  They may see a niche area left undeveloped or may want to move the company in a direction more suited to their personal liking.  In some cases, they may even be dishonorable people looking to exploit the existing cash cow with some scheme or another.  This is the principal-agent problem.  Central to this situation is a difference in the amount of knowledge the two parties possess.  The principal is the term used to describe the existing management/ownership.  In hiring the new staff, which are called the agents, the principal must trust the agent and delegate some ability for the agent to make decisions on behalf of the principal.  Both the principal and the agent have their own self-interest, but while the principal has the advantage in authority, the agent has the advantage in terms of information.  In all cases, the agent is required to report back to the principal (even if the reporting is a token report) and all agents filter the information at their disposal before sending it on to the principal.  The larger the firm the more likely it is that at least one of its agents is using this asymmetry for this own ends at the expense of the firm.

The second broad category of diseconomies of scale includes problems with communication, coordination, and standardization.   Overall, I tend to refer to these problems collectively as the Dinosaur Problem.  The organization in question has the same issues that the Jurassic behemoths had.   Small organizations can comfortably handle peer-to-peer interactions since the number of people involved is relatively small.  Once the size exceeds a critical threshold it is more efficient for interactions to happen through a central location, a manager who facilitates the activities of a whole.  As the numbers continue to grow more managers come on board and the interaction between them may be handle by peer-to-peer even though the employee interactions are not.  At some point, however, the number of managers becomes too large and a new layer of management is conceived and implemented.  This layering continues until some point where the right-hand no longer knows what the left hand is doing.

Along the way, such a firm begins to exhibit all the tell-tale signs of being too large.  The implementation of a one-size-fits all strategy to avoid liabilities.  Having meetings about how to have meetings or for the sake of having meetings.  An emphasis on fairness rather than performance and other idiocies to numerous to mention follow.

I've lived through many of these types of insanities.  One of the firms where I worked had a supply requisition form on which one could order refills for X-Acto knives (this was for the actual paper-and-glue version of cutting and pasting) but not the knives themselves.  I was issued a corporate American Express card with the very explicit admonition to only use it for business travel and not for personal use.  A scant 6 years later I received a letter from legal saying that they were going to revoke my American Express card because I had failed to 'live up to' my promise on the amount of expected use of the card.  All told, I had never wanted the card in the first place and I was sent on only two business trips in those 6 years.  I’ve been required to attend a meeting about how to have meetings.

All of this factors contribute to limiting the practical size of a firm.  In the economic lingo, the economies and diseconomies of scale are best summarized on an average cost diagram.

On the x-axis is the number of units of some good or service produced by the firm, which is taken as a measure of the firm’s size.  On the y-axis is the cost to produce a unit of the good.  The optimum occurs at the place where the benefits from the economies of scale balance the diseconomies.  It is important to note that as business factors change, what once contributed to a cost savings can turn around and cause an increase in cost.

So it isn't remarkable that the small business Davids can take down the big business Goliaths.  It also isn't remarkable that today’s Goliaths were yesterday’s Davids and tomorrow’s has-beens.  That is the nature of the creative destruction of the free market economy. It also isn't remarkable that economies of scale one day can become diseconomies of scale on another as society evolves.  What is remarkable is how many people refuse to accept this dynamic.

There is a curious unasked question that serves as a back drop to much of the media’s reporting on the economy.  If big business is so powerful, why is it that most people in the private sector of the United States work in small and medium businesses?  Surely both the power that big businesses yield (lobbying, political, and resources) and the economy of scale they enjoy would allow them to outperform and outlast their competitors in the smaller firms.  Asked differently, why isn’t the world dominated by huge multinational corporations?

This idea of the dominance of big business is certainly common fare in the daily fiction that passes in movies and TV.  Many tales come out every year featuring the evil, predatory practices and near omnipotent power of big business, and yet the small and medium rebellion continues unabated every year.

Now, to be clear, I am neither suggesting that big business is benevolent nor that it exercises its power gently.  Businesses, large or small, have a right and perhaps an obligation to aggressively protect their market share and to continue to grow.  In addition, crony capitalism and political favoritism tends to give the larger firms political concessions that the smaller firms lack.  What I am suggesting, or at least exploring, is the notion that smaller can be better, and that we tend to remember economies of scale and forget about diseconomies of scale.

To better understand the staying power of small and medium business, consider some elementary statistics.

Small businesses make the bulk of the US economy, both in terms of the number of firms and in terms of the number of employees.  According to statistics provided by the Census Bureau, 61% of the firms in the country are sized between 1-4 employees, and 99.6% of the firms have fewer than 500 employees.  Nearly 50% of the employees in the economy work in this segment.

The wages these employees make, in aggregate, are comparable to the wages earned by their big business counterparts. Although a more detailed analysis by labor segment (e.g. secretary to secretary) in addition to size of firm is needed to make clear conclusions, there doesn’t seem to be obvious evidence that being in a big business significantly increases wages.

The table below, adapted from 2007 data from the Census Bureau, shows the details:

Now let’s talk a little about all the advantages enjoyed by big business (say, more than 1000 employees) that are either available to a lesser degree for smaller firms or unavailable entirely.  This discussion will focus only on the legitimate advantages afforded to these firms from economy of scale effects and will ignore additional, unfair, advantages due to lobbying and crony capitalism.

As a reminder, an economy of scale is the term that is used to describe any effect that allows the cost per unit of production to lower as the number of units produced grows. Large firms generally have three areas that provide them with economy of scale advantages.

The first is in the form of non-reoccurring costs or what is sometimes known as sunk costs.  This category covers all the initial investment in the production capital, such as factories and specialized machinery.  A milling machine comes with a fixed price tag whether it is used to produce 1 unit of goods or 100.  In the latter case, the initial outlay for the machine can be recouped over a large customer base and so allows the cost per unit to be reduced.  Similar advantages occur for advertising and marketing, where the price passed onto consumers is smaller per good the larger the number of consumers, and for shipping, where it is cheaper to have a truck that ships 200 goods than to have two smaller trucks that ship 100 goods each.  Finally, a large firm typically has greater financial resources and can bear the risk associated with research and development of new goods and services more easily than smaller ones.

The second advantage of larger firms comes in the form of the workforce.  Employees at larger firms can more easily specialize, leading to production.  The prototypical example of this is given in Adam Smiths ‘The Wealth of Nations’.  Smith examined how straight pins were made, and identified 18 distinct tasks.  A single worker performing each of these 18 tasks might be able to produce 20 pins in a day.  By dividing up the tasks amongst several workers so that one worker performed only 1 or 2 of them, Smith estimated that a group of 10 workers could produce 48,000 pieces in the same time.  Division of labor and specialization enabled each worker to increase his output by over a factor of 200.  Large-firm employees also enjoy a larger community from which to learn, and an environment filled with greater intellectual capital and corporate knowledge.

The third advantage is the leverage that big businesses have in procuring goods and services.  They can bulk-buy from suppliers and vendors and receive a discount that is out of reach for the smaller firms.  They can also command better terms and concessions on loans and related financial instruments that can be used to increase their production.

So, having enumerated all these great advantages, how can small firms ever compete?  And yet, they not only compete; they also dethrone the giants of yesterday.  Not so long ago, IBM was the unassailable provider of computers and business machines.  Within two or three decades, Microsoft had supplanted IBM.  As time progresses there is mounting evidence of Microsoft losing ground to both Apple and Google.  Other examples from every enterprise and industry can be found where yesterday’s giants are today’s has-beens; simply look at Abercrombie & Fitch, or Nokia, or Borders, or… well, you get the picture.

In next week’s column, I’ll discuss how the Davids of the economy can defeat the Goliaths.  Stay tuned.

As I geared up for this week’s column, a variety of forces interfered with my peace of mind.  I found myself perpetually starting on an idea only to find that another idea shot in from an unseen direction to wreak havoc on my concentration.  I pondered this state of affairs for a while and realized that my mental state was in some sense reflecting the state of country and the economy as a whole.  It was at this point that it seemed most prudent to take up blog space this week to rant about the many little things weighing on my mind and on the nation’s recovery.

Since this is going to be a rant, I’ll excuse myself from the usual rule of trying to produce a logical flow and a clean narrative.  Who knows perhaps it will work better.  It may even make me feel better, but I doubt it.

First let me point out that the state of the economy is hardly in recovery mode.  A recent trip to a nearby mall left me feeling depressed and deeply concerned.  The mall in question contains about 200 separate slots for storefronts.  Despite being relatively upscale, it was, in my estimation, doing quite poorly.  As I walked up and down in front of the various shops I noticed that a large number of storefronts were vacant. By the time this observation had wormed its way into my conscious mind I was conveniently at one end of the building.  I decided to turn around and make a careful count of the vacancies.  When I reached the other end, my tally was 18 store fronts boarded up and idle, corresponding to about a 9 percent vacancy.

A short trip later found me at a strip mall a notch or two down the glamor ladder from my previous visit.  Even this bastion of thriftiness was not left unmolested by this so-called recovery.  Of the 30 storefronts, about 4 were vacant and the local RadioShack was sporting banners reading “Store Closing!” and “Everything Must Go!”, all in an attempt to lure shoppers in to take advantage of the liquidation.

The next set of ‘good news’ came in the form of a seemingly never-ending set of statistics being pushed at my face, some correctly interpreted and worrisome, some poorly interpreted and annoying.

On the worrisome front, all indications on the horizon showed that the April jobs numbers were going to be disappointing.  This news comes hard on the heels of a March report that showed that job growth failed to match population growth.  It seems that period of time in which job creation was out-pacing population growth in the fall and early winter has evaporated and the new trend is the same old jobless recovery we've seen for the prior 5 years.

In addition, both IMF Chairman Christine Lagarde and Federal Reserve Chairman Janet Yellen and spoke at length of the risks that still face the economy in this post fiscal-crisis world at a joint conference at the Institute for New Economic Thinking on May 6, 2015.  Lagarde warned of continued distortions in the incentives for the financial markets that focus on short-term profits over sustainable gains. A few rays of sunshine did poke through from this discussion, including Yellen’s assertion that improvements in the financial markets, mostly occurring before the start of the financial crisis in 2008, were mostly aimed at helping the poor.  But mostly it was the same type of ‘doom and gloom’ about stability, liquidity, and ‘too big to fail’ that we’ve been hearing over the past 6 years.

On the poorly interpreted and annoying statistics front, society, as a whole, and journalists, in particular, can’t seem to get over the hump in their understanding to realize that correlations in data don’t imply causation – no matter how fervently they want it to.  Just to frame the frustration I feel on this point consider the following two statistical statements.

First is a statistic about America’s energy usage, courtesy of Washington State University, that states:

The message being conveyed is that American’s consume profligately and waste so many resources that could be used by the poor.  However, this message is only supported by the statistic itself and not with any of the usual machinery by which we make inferences.  That is not to say that America doesn’t ‘waste’ energy – if by waste we mean that we leave lights on when they could be turned off, that we are casual with our energy consumption because the cost of energy is relatively cheap.  But it also needs to be recognized that we consume more energy than the rest of the planet because we are more productive.  On the same page, the anonymous compiler of statistics points out that each American uses the same energy as two Japanese.  But Japan has about 1/3 the population of the United States, implying that the per capita usage of the average Japanese citizen is about 1.25 times more energy than the average US citizen.  So much for this statistic.

Equally interesting, is what is missing from the WSU statistical diatribe against the very country this so-called academic calls home.  In his audio lectures entitled ‘The History of Moral Thought’, theologian Peter Kreeft notes the following statistic.

This per capita wealth of lawyers doesn't seem to even raise an eyebrow in the academic circles.  But if the common belief that the economy is a zero-sum game is true, then surely we in the United States have taken lawyers from other, less fortunate people.  I say, let’s give them back.

Sigh…

In a column some months back, I presented the basic concept behind the Prisoner’s Dilemma and talked about some of the most common applications in economic circles.  In this column I will discuss a somewhat discouraging application of these concepts to the relationship between business and workers (or firm and employee or management and labor, etc., as you prefer).

The particular type of business I will be talking about is a government contractor in the technical sector.  Businesses like these depend on a highly-trained and technically savvy work force to be able to bid on and win new work.  Central to the ability to credibly bid on new work is the idea that the firm and/or its workforce can set itself apart from its competitors in one or more of three distinct ways: 1) offering equal technical competency for a lower cost, 2) offering structured processes that lower risk and ensure delivery on cost and schedule, or 3) offering innovative solutions that enable new technology or a new opportunities.  The application I will deal with is the last case, but the attentive reader can adapt this example to the other two.

Typically the ability to innovate new technology on government contracts is limited by two factors.  The first is that government contracts with a specific research and development (R&D) focus are rare and becoming even rarer as federal spending on basic research drops.  Second, unless otherwise negotiated, the intellectual property for any research done on a federal contract is typically owned by the government.  Even in those cases where rights are granted for commercialization, the government retains limited ownership and exercising the ability to commercialize may be hard to do.

As a result, the general idea is to own the intellectual property itself and to leverage the intellectual property into increased profits.  And therein lies the rub – who owns the intellectual property and who benefits from the increased profits?

From management’s point-of-view, the firm wants to produce a body of intellectual property by engaging the employees’ talents in creating innovative technologies for the good of the firm.  The business: 1) provides the work environment in which the employee can tackle interesting problems, 2) actively pursues new business, 3) insulates the employee from the day-to-day hassle of running an enterprise, and 4) maintains the employee’s wage level even when profits decrease or disappear (‘sticky wages’).

Since the continued existence of the worker’s job is predicated on the health of the business, it is natural for management to expect that the worker will contribute to the overall health of the firm by shouldering some of the burden of making the company competitive.  How then does the business encourage the worker to apply his talent to creating intellectual property that the business can own?

Likewise, an employee wants to produce his own intellectual property for continued advancement and increasing wages and compensation.  The two main components of this capital are the technical skills required to perform the jobs in his sector and the external recognition that he can muster these skills to bring a complicated piece of work to fruition.  The employee provides: 1) the technical expertise and education need to be able to innovate, 2) the dedicated time needed to concentrate on a problem and deliver solutions and 3) the perseverance and intellectual fortitude to find these solutions.

Since the continued health of the business depends on the condition of its workforce, it is natural for the worker to expect that the business will provide opportunities for the employee to develop innovative solutions to complicated and challenging technical assignments and will support and assist the employee in generating tangible proof that he actually developed intellectual property rather than just use the fruits of someone else’s labor (e.g. patents or papers).  How then does the worker encourage the business to provide the infrastructure that benefits him?

If both sides could trust that the other will cooperate and compromise, then they each would get an attractive payoff.  The problem is that the business worries that, after all their investment in securing interesting work, the employee will either shirk his responsibilities and just collect a paycheck or that he will take all the credit and then head off to greener pastures.  Likewise the employee worries the business will keep all the intellectual property for itself and take credit for the hard work and talent that he mustered.  The situation abounds with questions of trust and with structured payoffs that are directly related to the Prisoner’s Dilemma.

Consider first the payoff matrix from the perspective of the business.  Its choices are either to trust the employee and invest in increased wages and/or improved infrastructure (e.g send the employee to a conference) or to safeguard against the employee shirking his responsibilities by keeping wages static and by avoiding infrastructure investments that benefit the employee, until the employee delivers.   The payoffs are then described by the company as:

Next consider the payoff matrix from the perspective of the employee.  His choices are to invest extra hours of his own time to develop intellectual property that he then turns over to the firm in the hopes of a reward or to perform the minimal amount of work to meet expectations, until such time as the company begins to show concern for his needs.  The payoffs are then described by the workers as:

Both of these perspectives can be combined into one common payoff matrix where, for consistency with the original language of the Prisoner’s dilemma, the word ‘cooperate’ will mean either ‘trusts’ or ‘rewards’ for business and ‘delivers’ or ‘invests’ for the employee, depending on context.  Similarly, the word ‘betray’ will mean either ‘safeguards’ or ‘ignores’ for business and ‘shirks’ or ‘meets expectations’ for the employee.  Also the payoffs will simply be given a single letter value ‘C’, ‘L’, ‘S’, and ‘M’ with the relative ranking between these of the largest payoff  (L) > cooperative payoff (C) > mutually-betrayed payoff (M) > sap payoff (S).  The payoff matrix now looks like:

Ordinarily, if the employee and the business were engaged in a one-time only deal, the equilibrium solution of this game is for both sides to betray leading to lousy payoffs (M) for both sides.  This is a well-known feature of the strategies for both players in the Prisoner’s Dilemma.

But the usual relationship between a business and an employee is one of repeatedly playing this game.  This is the iterated version of the Prisoner’s Dilemma (with no known limit of turns) and the best strategy that has been currently discovered is the tit-for-tat approach.  In this strategy, each player’s optimal response for the current turn is to perform the same action as the opposing player performed in the previous turn.

This observation then provides some insight into the employee/management scenario.  It is obvious that once one side betrays, it starts a long line of subsequent betrayals by the other side unless one side decides to unilaterally cooperate.  Thus once a business had been burned by a few bad employees it will have a tendency to not meet the goals of its employees.  They, in turn, will be less willing to innovate and both sides suffer.

There is no easy way to extricate both sides from this vicious circle without one side risking a substantial loss.  That said, there is an asymmetry between the two sides as management in these types of business are more consolidated and organized than the work force.  So it is up to management to offer the first olive branch (and perhaps many more) when the situation gets into one of these downward spirals.

Suppose I told you about a man who both favored gun control, pushing through legislation banning firearms, and who was arrested for gunrunning?  Would you conclude that the man was unstable and irrational?  Or maybe that he was simply a hypocrite?  After all, how to unite this two opposing positions?  Well, Leland Yee is just such a man and, if you give me just a bit more of your time, I think I can convince you that he is an excellent example of how opposing viewpoints can rationally unite around a common goal.

Our common ideas suggest to us that two opposites can never meet.  Hot and cold don’t exist together any more than light and dark do.  As kids in school, our teachers presented the idea of the number line with numbers greater than zero to the right and those less than zero to the left.  Upon this construction, many of us would rank opposites at extreme ends of a line – for every positive there is a negative.  Thermometers are designed this way, and we tend to think about every other situation with ideas in opposition in the same manner.

The most familiar notion of ‘opposites’, which we see daily within the political discussion that surrounds us, is the use of phrases like ‘right’ and ‘left’ to describe supposedly politically opposite points of view.  The idea is that the ‘far right’ and the ‘far left’ have nothing in common from a political perspective.  But this notion is quite wrong and it is a fairly usual occurrence that ‘right’ meets ‘left’ on matters of regulatory policy.  The conceptual model is no longer a straight line stretching indefinitely in opposite directions but more like a circle wrapping back to close on itself.

To see how ‘right’ can join ‘left’ in matters of regulation, consider the situation of those both for and against the use of alcohol during the age of Prohibition.  From the years 1920 to 1933, the United States made it illegal for anyone to produce or import, store, transport, or sale alcoholic beverages.  These restrictions, codified into the Constitution through the 18^th Amendment, were championed by a variety of religious and social welfare groups.  The American Temperance Society, the Anti-Saloon League, and the Women’s Christian Temperance Union were notable in their push for this amendment.  There was even a political party, called the Prohibition Party, which ran on a platform advocating abstinence from spirits (curiously it still exists to this day).  Collectively, these voices were known as the ‘drys’.

The idea these ‘dry’ groups had was that the use of strong alcohol spirits rotted the moral fabric of society.  Numerous problems were laid at the feet of alcohol consumption, including prostitution, domestic abuse, and declines in public health that affected the lower-class worker.  Several states experimented with the ban of the ‘demon in the bottle’, including Maine and Kansas.  Eventually the idea of federal alcohol ban caught hold, strongly backed by religious groups, predominantly comprised by the Methodists and Baptists, and women’s groups exercising their new right to vote.

Once the 18^th Amendment went into effect, Congress passed the Volstead Act to provide the legislative muscle to enforce the ban nationwide.  Rather than eliminating the ‘specter’ of alcohol once and for all from the United States, Prohibition created a new segment of the economy called bootleggers and rum runners.  These ‘entrepreneurs’ found a need they could fill, and a rich and complex black market was developed across the country.  This underground economy was populated by some of the most notorious and socially unacceptable citizens the country has ever seen – the likes of Al Capone and Dutch Schultz.  Because these criminal syndicates amassed huge fortunes providing illegal booze (often for the rich and well-placed), they also favored prohibition.

In the end, the country had two diametrically opposed groups, the moral and religious ‘drys’ and the immoral and criminal bootleggers, both on the side of Prohibition, with the rest of the ‘wets’ in the country suffering as a result.

This peculiar circumstance of opposite groups uniting around a common goal led the regulatory economist Bruce Yandle to coin the phrase Bootleggers and Baptists to describe the situation.  The idea here is that the two groups, relatively small though they may be, provide the necessary ingredients for politicians to align with each of them.  The bootleggers provide the behind-the-scenes motivation through their possession of money while the Baptists provide the moral cover that a politician needs to look like he is acting in the interest of the common good.  Done in this fashion, the two-sided coalition between these opposite extremes can be far more successful in getting laws that favor their position than either a single side or the larger but unorganized middle can. Examples of the Bootlegger and Baptist mechanism can be seen in a variety of modern regulatory positions, including debates over global warming, gambling legislation, blood donation, wine regulation, and more.

And this brings us to Leland Yee.  For those who aren’t familiar with him, Mr. Yee is a Chinese immigrant who, from the age of three, was raised in San Francisco.  By education and profession he is a child psychologist, but within about a decade after he earned his PhD he had transitioned into politics, starting with his tenure on the San Francisco School Board.  Yee then moved onto the California General Assembly and finally to the California Senate.

During his tenure in the California State Legislature, Yee used his background as a child psychologist to provide a justification for a variety of weakly-supported positions on violence and gun control.  He authored controversial pieces of legislation banning sales of ‘violent video games’ to minors even though there is no well-established link between video games and violence.   These laws were eventually ruled unconstitutional, but that didn't stop Yee from pressing the dubious connection between violence and electronic entertainment for years.

He then turned his sights on gun violence.  A strong advocate for gun control, Yee was awarded a position on the Gun Violence Prevention Honor Roll by the Brady Campaign.  In addition to his outspoken positions, Yee helped to craft two of the most restrictive gun laws at the state level in the entire country.  He even appeared on the national show Stossel on Jan. 18^th, 2013 where he firmly defended gun control saying “What is the lesson that we adults are saying to kids?  That when you are a child and you grow up, to solve your problem, carry a gun. And that is not the life lesson we ought to be teaching children.”

Shortly afterwards, on March 26, 2014, charges that Yee had engaged in a conspiracy to deal $2.5 million worth of firearms without a license and to illegally import firearms from the Philippines surfaced.  The champion of California gun control was now accused of orchestrating one of the state’s largest, uncontrolled trafficking in guns.  Yee was now simultaneously playing both gunless and gunrunner.

Many people hang the hypocrite label around Yee and dismiss his behavior as an aberration of a man whose private conduct doesn’t live up to the public standards he endorses.  While true on the surface, this trite analysis fails to take into account the rational and intelligent course of action he employed.  His behavior was a direct consequence of enormous investiture of power in regulators at the state and federal level.  Every step he followed was consistent and logical if examined from the assumption that Yee was first and foremost interested in the welfare, benefit, and position of Yee.

The lesson here is that we should take care in requiring government to regulate our economic activities and in giving that government the power to do so.  When we make legislators and regulators arbiters of economic activity we endow them with the power to be brokers for small but vocal and influential special interest groups.  Leland Yee’s rise and fall should serve as a case study for how the gunless and the gunrunners can ruin it for the rest of us.

Most people have a fixed idea about the meaning of the word ‘capital’.  They tend to think of it strictly in materialistic terms as money or goods that allow a business owner to produce products and earn a profit.  A factory filled with machines or a bank brimming with money to loan comes to mind.  Of course, there is nothing wrong with that definition as far as it goes – it simply doesn’t go far enough.

The word ‘capital’ is defined variously by Webster’s dictionary (3^rd definition) as:

• A stock of accumulated goods,
• accumulated goods devoted to the production of other goods,
• accumulated possessions calculated to bring in income,
• net worth,
• advantage or gain,
• a store of useful assets or gain,

the general theme knitting all these definitions together being that capital is a set of assets or advantages (things of net worth) that promote the accumulation of other assets or advantages of the same or different kinds.  So, the commonly held view of capital is correct but limiting.

Why does it matter how capital is defined?  It matters because, as a society, we continuously craft political structures and laws that limit what can be done with one type of capital while allowing other types of capital unfettered reign.  We are also in a better position to understand the motivations and the accompanying behavior of others if we can perceive what marketplace they are actually engaged in and what capital they are trying to accumulate.

In the rest of this post, I am going to explore the two most common types of hidden capital: reputation capital and political capital.

Reputation Capital

How familiar is the following scene?  The latest sports news comes on the radio or television and the announcer coolly states that so-and-so has just signed with some-such team for millions of dollars, making him the highest paid player at his position.  A friend of yours turns to you and says “how much money does one man need?”  Another friend responds by saying something like “It’s not about the money!  He just wants more than the other guys.  He just wants to be known as the best player in world.”  What the player in question is doing is building reputation capital.

Alex Rodriguez is a prime example of this.  His early success as a baseball player garnered him a reputation as a great ball player.  That reputation, in turn, garnered him a chance to play in bigger venues, which in turn grew his reputation.  The money was a secondary affair as his fame was really the means to the end.  It opened doors for him, the entire country talked about his contract, his lifestyle, and his legacy.

This is all innocent enough, and A-Rod’s celebrity fame and eventual infamy did not actually shape the economic or political sphere very much.  Outside of his influence on America’s pastime and popular culture, his mark will soon disappear.

Much more interesting and worthy of a skeptical eye are the so-called ‘paragons’ of society in whom is invested a lot of trust.  Journalists and scientists fall squarely into these categories.

Take the recent fall from grace of NBC’s pride and joy, Brian Williams.  Whether you call his fabrications exaggerations or outright lies, it is clear that he has played fast and loose with the truth.  But why did he do it?  I think his behavior is best explained by the model that he was trying to build his reputation as a gritty journalist.  His fantasies related to his time in Iraq or his encounters with dead corpses and armed gun men in New Orleans in the aftermath of Hurricane Katrina were meant to build capital with his viewers.  He intended his audience to regard him as an objective journalist who would back down before nothing and no one.  From such a position, he wielded great power and basked in the adoration of fans and the admiration of his colleagues.  He achieved assets and advantages that mere money could not buy.

University professors and academics engage in their own unique marketplace.  They are first and foremost tradesmen whose primary focus is to sell their ideas to each other and to society as a whole.  Journal articles, published books, and television and radio appearances are their currency, and their academic reputations are their capital.  Their wealth is measured in terms of the number of times their article is cited by peers, or how many of copies of their book were sold, or how many tweets and postings their TV appearance generated.  As their reputation grows, so does their power, even though very little in the way of money changes hands.

Political Capital

No matter where you work or volunteer, there are always a few people who are at the center of the institution.  These are the people who get things done by pulling strings, facilitating compromises, and horse-trading between one group and another.  These people engage in the marketplace of political capital, and the favors they give and receive are the currency.  They hold and wield power in the institution, and the larger the institution the greater the power, political capitalists in governmental positions being the most influential.

Political capitalists in government fall into two classes depending on whether they are elected or appointed and in the public eye (e.g., John Boehner or Samuel Alito), or they are far removed from general scrutiny (e.g., the head of the EPA).  In both cases, even though their assets and advantages are never translated into a monetary value, these people are able to buy and sell for goods and services just the same.  The public only thinks about this marketplace when an elected official grossly abuses their capital, as in the case of Bob McDonald, who was recently convicted of corruption for ‘selling access’ to his political capital in exchange for financial compensation.  In other words, the public doesn’t seem to care when the bartering is done strictly in terms of political favors – even though such bartering may lead to material gain on all sides – but only seems sensitized when political capital is turned into cash directly.

Regulating Marketplaces

As I alluded to above, the major reason to care about how capital is defined is to level the playing field when it comes to how different types of capital are accumulated, spent, or exchanged.  As a society, we tend to regulate and focus on financial or monetary capital and ignore reputation and political capital.

I’m not objecting to the capitalists that trade in either of these marketplaces, nor am I objecting to their accumulation of assets and advantages.  I do object to the thoughtless position that fears the business man and his accumulated financial wealth but embraces the celebrity and his dominating reputation.  I’m against laws that limit the modes of speech and the exchanges of ideas because they are purchased by money but leaves unfettered the speech and exchange of ideas that are bought through political favoritism.  I don’t understand why society is willing to be suspicious of one and not the others.

I’m skeptical across the board.  The accumulation of capital is not a bad thing, in and of itself, and I am willing to give the person who has acquired any type of capital the benefit of the doubt that he has earned it.  But the use of that capital is no less corrupting if it is based on reputation or political connections than if it is based on cold hard cash.

What do the terms ‘greedy capitalist’ and homo economicus have in common?  Both terms are used, albeit with different connotations and by different groups, to describe a member of a society who pursues his own rational self-interest, trying to maximize it with each decision made.  But what is rational self-interest?  How do you define it? What is being maximized? And is the pursuit of one’s own self-interest necessarily incompatible with being a good neighbor? At the crux of these questions is the definition of rational self-interest.

Traditional economic analysis tends to view self-interest solely within the material context.  Much like playing a board game, the success that you have had in maximizing your personal self-interest is completely judged by the amount of stuff you’ve accumulated.  Cars, houses, jewelry, and money are all victory points that allow a person to rank themselves.  You can declare yourself to have arrived at the good life when your house is bigger, your car more expensive, your jewelry more gaudy, and your bank account larger than the Joneses' down the street.  In this view, a rational person never fails to make a decision that increases his material wealth.  This, then, is the definition of homo economicus – an individual who tries to maximize his utility when he is a consumer, and his profit when he is a producer. You can go one step further in this description if you believe that the wealth one person enjoys is often or always at the expense of another.  In this case, you would characterize a person pursuing his self-interest as a ‘greedy capitalist’.

But is this really how people act?  It is true that we can find excellent examples of miserly, parsimonious, and bitter old men in literature.  Scrooge in Dickens’ A Christmas Carol and Old Man Potter in Frank Capra’s It’s a Wonderful Life come immediately to mind.  And certainly there are people who take materialism too far, but does that mean that the system as a whole is corrupt or corrupting?  I think not.

There is a fascinating game, in the sense of game theory, that is often used to determine the degree to which people will tend to maximize their utility by following their own rational self-interest.  It’s called the Ultimatum Game.

It works essentially like this.  The game begins when the game administrator (shown in blue below) approaches two random people with a pile of cash and invites them to play.

The rules are simple.  The administrator will randomly designate one of them as the proposer and the other as the responder.  The administrator will give the proposer the money and the proposer will decide on a split between himself and the responder.  The responder’s only move is to decide to accept the proposal or reject it.  If the responder accepts the proposal, they both get to keep the money in the proportions defined by the proposer.  If the responder rejects the proposal he and the proposer walk away empty handed.  The administrator emphasizes that the proposer gets only one chance to make an offer – there are no negotiations – and that this is the only time they will be playing this game.

Assuming that both players are homo economicus, the results of the game are easy to predict.  The proposer should keep most of the money for himself and give only a small percentage, nearly zero, to the responder, because the proposer realizes that the responder will rationally maximize his own utility and will take any money offered.  This way the responder will leave with more money than he had before the game began.  The responder may lament the fact that the mere luck of the draw separates him from the proposer, but money is money, and free money is free money, and so he accepts.

When this game is run experimentally, the results are quite different.  The responder accepts the split only when it is close to 50-50, and often rejects when the offer strays to far from an equal split.  Furthermore, the proposer, without having the benefit of playing this game before, often offers a split close to the 50-50.  Why do both participants often behave unlike homo economicus?

In practice, the experiment is done with more care and in a double blind fashion, as explained by the Foundation for Teaching Economics’ lesson plan found here.  But the results remain the same.

• The mean split is 60-40 (proposer gets 60% and responder 40%)
• Most common split is 50-50
• About 20% of the offers that fall outside the ‘fair’ range are rejected.

How does one explain the proposer’s generosity?  How does one understand why the responder ‘cuts off his nose to spite his face’ when the split is too low?  As discussed in great detail in the accompanying appendix to the lesson plan, this game has been applied in a variety of circumstances where variations in age, gender, background and other factors have been examined and controlled.  There appears to be no confounding variable that allows the administrator/experimenter to pre-determine when the participants will behave like homo economicus.  Even the amount of money has been varied. Relatively vast amounts were brought to the developing world, where people subsist on only a few dollars a day, and the results remained the same.

A much more cogent explanation is that the definition of rational self-interest needs to be expanded from the materialistic realm to consider things like reputation, human compassion and altruism, and wisdom.  And that these traits act to balance the purely materialistic instincts.

Virtue in the ancient world was defined not by a super-abundance of a trait but rather as the correct amount or a balance.  A warrior who acted reckless and drove into battle with an overly great amount of physical courage was no more lauded than the coward who sat in the corner timidly, wanting for danger to pass by.  The correct balance between caution and courage was the virtuous position.

Here in the ultimatum game, I see reflections of these ideas of virtue.  The game results provide ample evidence that a human being engaged in a free market does not necessarily become selfish.  The free exchange of goods and services is not inherently corrupting to those who participate, and they are no more likely to be preoccupied strictly with material possessions than if they had  not engaged. The free market, like any tool, can be misused and can create an injustice, but it is not intrinsically flawed.

Lord Acton is famously quoted as saying “All power tends to corrupt; absolutely power corrupts absolutely”.  I wonder what he would say about the Ultimatum Game. I’m not sure, but I like to believe that he would recognize the free marketplace as a place where people can come together to trade without the threat of coercion.

Well, the January jobs reports are in and the economy created a reported 257 thousand jobs in January.  Hurray for the US economy!  This comes hard on the heels of job growth numbers for the November and December of 423 and 329 thousand, respectively.  The news is certainly welcome and the trend is encouraging, but not all of the results are likely pleasing to either the current administration or the American public at large.

The fly in this particular batch of ointment is that the unemployment number has ticked up one tenth of one percent.  Of course this is to be expected.  As I discussed in an earlier post, when consuming the job statistics, one has to make a sharp distinction between the unemployment rate and the workforce participation rate.  Some of the folk who had dropped out of the workforce entirely are now, no doubt, coming back in as job openings become available.

Indeed, Bloomberg’s lead article on the January numbers, entitled Jobs Report Crushes It, agrees with this idea saying that

The article goes on to say that

And there is the rub.  The American people, by and large, do not understand the distinction between good and bad rises in the unemployment rate.  The public’s inability to make these distinctions is mostly due to the low economic literacy and discourse of many of the institutions that proclaim themselves as the guardians of the working man.  Primary amongst these are the media, who gush and dance in sound bite and spin, about any ‘favorable’ movement in an indicator whether or not it is actually good.  Also culpable are the schools, which employ teachers less economically literate than my butcher.  After all, public school teachers don’t have to worry about producing a product the public wants since the government will make sure the bills get paid and the lights stay on no matter how many students show up.  My butcher, on the other hand, needs to show just where the beef is.

So, the public is likely to get restless as the unemployment rate rises.  As public sentiment goes, so goes the administration, which will likely leverage political pressure of the Federal Reserve to lower unemployment.

For those who don’t know, the Federal Reserve (or the Fed, as it is affectionately known by everyone – even themselves) is charged with control of the monetary policy of the United States.  As the nation’s central bank, it has only three arrows in its quiver:

• Open Market Operations – buying or selling of bonds to basically create or delete money from the economy. Buying bonds will increase the money available in the economy and selling decreases it.
• Reserve Requirements – sets the percentage of deposits that a bank must hold in reserve. Lowering the reserve requirement frees up more money to be loaned and raising the reserves limits the amount.
• Discount Rate – fixes the interest of a loan from the Fed to a bank.

The effect of each of these is to raise or lower the interest rate that banks charge each other for bank-to-bank loans (federal funds rate), which then trickles down to the end consumer as the rate to borrow.  These three arrows are shot at two distinct targets with the intent of keeping inflation fairly constant at about 2% per year and keeping unemployment also fairly constant at about 5% per year.

The Fed has even gone to the trouble of creating a web-based video game in which the player can pretend to be the Fed Chairman.  The rules of the game are succinctly summarized when you are appointed chairman and are now in charge.

The simulation, while visually appealing, is primitive in its fidelity and doesn’t inform the player what model is used to determine how the simulated economy will respond to the changes he makes.  But considering that this is meant to be an educational tool, my guess is that the rules are really simplistic.  The following snap shows one of my attempts at managing the economy.

I suppose the Fed’s intent is to make it clear how hard it is to do their job and, perhaps, have us show a little gratitude for their steering an ocean liner successfully through troubled waters.

And maybe I should be grateful, but I can’t help but think that the Fed can’t possibly do a credible job of controlling inflation and unemployment by essentially adjusting the federal funds rate.  This particular jobs report is a perfect case in point.  One of the rules of the game states that ‘you can lower unemployment for a while and push up inflation by setting the federal funds rate close to, or even below, the inflation rate.’  That rule can only be true if something else, say the workforce participation rate, remains constant.

In this particular case, keeping the federal funds rate low, as it currently is, is actually raising the unemployment rate, and that is a good thing.  Capable people who had fled the workforce need to come back in and swell the ranks, even if they are just looking for jobs at this point.  It also isn’t a given that inflation needs to rise as these workers find jobs and begin to gather paychecks.  That point of view only makes sense if one only assumes that the output of goods and services remains low so that ‘more money is chasing few goods’.  But the recent decline in gasoline prices that has pushed inflation down (at least in practical if not statistical terms) is due to the industry of workers flooding into the energy sector.

So, what does the Fed do?  I suspect that they will coax the federal funds rate to rise and that, in the process, they will smother what is a good thing.  I mean, what else can they do when they are trying to achieve fine control using the crudest of tools?

Time is money. From our earliest years to the twilight of our lives, each of us hears that sentence over and over again. It slides across the page in print and pounds our ears in radio, film, and television. It’s usually uttered by some ruthless wolf of Wall Street or miserly business man with no heart. It’s a cruel phrase that weighs profit in one hand and people in the other and finds the human side of the equation wanting. It’s the proverbial elephant in the room that we fervently wish to be false but fear is true – that the almighty dollar rules our life, exactly as we are warned in that classic song by the O’Jays (and as brillantly portrayed in the opening sequence of the movie For Richer or Poorer).

But how many of us really understand what that sentence is all about? Is money really the evil necessity that prevailing wisdom warns us about? How might our attitude towards money be different if we simply turned that old trope around to read: Money is time?

Let’s start our discussion of what money really is by looking at its origin. It’s common knowledge that, prior to the invention of currency, bartering was the only way of trading goods and services. We've all learned that in school (at least we should have), and there is that Schoolhouse Rock song

that tries to explain how money arose from the bartering system. The song is catchy but its message is muddled. Money wasn't invented to make it easier to carry goods around or to make change. It was invented to save the most precious commodity a human has: his time.

Living with currency of all sorts (paper and electronic) makes it easy to ignore just how time consuming barter must have been. A typical scenario might have looked just like this. Let’s suppose that Charlie lives in an agrarian society where there is division of labor but no currency. Charlie raises chickens and since he can concentrate on their breeding and rearing, he can produce far more chickens in a unit of time than he could if he didn’t specialize. Having more chickens than he needs, he is willing to trade some of his for sheep that his neighbor Steve breeds. He is also willing to trade with Pam for some of her pigs or William for some of his wood but not with Fran or Harry since Charlie dislikes fish and has no use for hay.

Problems arise when Charlie wants pigs but Pam is unwilling to trade because she wants hay. Unfortunately, Harry won’t trade with her because he wants sheep. Steve, however, doesn’t want hay because he needs wood to fix his house. Steve’s willing to trade with William, but William has his mind on the nice fish tacos he could make if only he had some fish. Fran won’t trade with William, even after William has offered his finest oak lumber, because Fran is dreaming of a nice chicken sandwich but is lacking the main ingredient. By visiting each in turn, Charlie is able to piece together a plan of action, and he proceeds to make four transactions that he doesn't want to make, to finally arrive at the one he does. First he trades chicken to Fran in return for fish. Next he takes the newly acquired fish and gives them to William in exchange for some nice wood. And so on. The figure below shows the whole wacky scheme.

Charlie not only has to spend his time moving goods around this vicious circle but he also needs to spend time learning enough about all the other goods so that he knows how much his chickens are worth relative to them. Failure to know what his chickens are worth will prevent him from bringing home the bacon and, instead, will cause them to come home to roost.

Many of us don’t relate to farming unless we are playing Harvest Moon or Farmville. Fortunately for us, this idea of horse trading from A to B to C and so on is kept alive in sitcoms. My fondest memory of this kind of show is the episode of M*A*S*H entitled ‘For Want of a Boot’ in which Hawkeye tries to get a new boot by making a chain of transactions. Of course, it blows up in his face just as he’s about to achieve his goal, as the last person reneges, setting off a chain reaction that sets him back at square one with only a long useless day to show for his efforts.

Obviously, Charlie's situation would be greatly improved if there were a central entity with whom everyone could transact business and who also knew the relative worth of each person’s goods. Fortunately for our little farming village, money is such an entity.

The invention of currency allows for a single transaction between each seller and buyer, saving a lot of time. The market where the money and goods are exchanged provides the framework for determining the relative worth of each good.

The adoption of currency also allows our little group to preserve the worth of their goods in a non-perishable form. Fish may spoil and wood may rot. The chickens may die and the sheep grow old. The hay may get moldy and the pigs may get skinny. But the value of each good is secure once it is traded for currency. Money also allows for the expansion or contraction of the economy when a new member arrives (Tim with his tools) or an existing member leaves (Steve and his sheep head to greener pastures).

To summarize these benefits, we say that money:

1. Acts as a medium of exchange
2. Sets relative worth via the prices paid for each good
3. Holds the value for future use.

In all of these benefits, the aim is to provide more time for everyone involved to live life and enjoy. So, the next time you see Time is Money and you cringe, turn that expression on its head and remind yourself that the correct way to read that is Money is Time and that it is time that really counts.

See if you recognize this typical scene, played out from time to time in workplaces all around the country.  One of your co-workers is late coming to work.  Upon his arrival, he meets the office’s quizzical looks with a verbal response that amounts to something like “Yeah!  My car had problems this morning.  I think I need a new…”.  I am willing to bet that most everyone has been on both the giving and receiving end of this exchange.

The next segment in the exchange goes something like this.  Everyone gathers around and discusses the problem.  Opinions fly as to what is exactly wrong, how much to pay, where the best place is to go to get the repairs done, and how to make sure that the mechanic doesn’t cheat.  Typically, there is a lot of varying ideas about the specifics.  “Take it to the dealer”, says one.  “No! don’t go to the dealer.  I know a guy.”, responds another.  “Check the internet first”, comes yet another bit of advice, and so on.  But there are really no differences in the general goal.  Everyone involved is trying to find the best value, the best repair relative to the price.  And every one of them is engaged and has knowledge that can be put to use.

Let’s be specific and consider the case where you need a new set of brakes for your Honda Civic.  A simple internet search with the search string ‘new brakes cost honda civic’ returns as one of the top hits a link to Civic Forums, where the same type of dialog happens in the medium of the chat forum.  For this particular repair, the generally agreed upon estimate of the cost is $150.

Also note that no one suggests that the owner file a claim with their car insurance.  No one even entertains the notion, since replacing the brakes is part of the regular maintenance on a car.  Everyone recognizes that car insurance is meant to hedge the risk of an accident that damages life, limb, and property.  Most people go through life hoping that they never have to draw on their car insurance policy.

Now consider another type of regular maintenance – maintenance of the human body.  The comparison between this activity and the situation described above is quite stark in the differences.

To begin, our natural shyness about the body tends to dissuade us from talking about the standard types of treatments we all need.  Few have the same enthusiasm for discussing trips to the doctor with their co-workers as they do trips to their mechanics.  But wait, you say, here is where the internet comes into play.  A person can set up an avatar, assume a cyber-identity, and maintain his personal dignity while getting answers to some of the more delicate questions that can be posed.  And this is absolutely true.  One need only surf the World Wide Web for a while to see that people are quite willing to discuss (and display) just about any matter concerning their body with the mask of anonymity that a computer account affords.

So then, why is there so very little general knowledge about how much various medical treatments will cost?  And what questions should be asked?  And so on.  As a society, we know far more about how to be informed and savvy consumers in almost every other market that is out there, and yet we are total dunces when it comes to the medical markets.

Again to be concrete, let’s look at a specific medical maintenance issue.  Suppose you’re now of the age where your doctor wants you to get a regular colonoscopy.  Where do you go?  How much should you pay?  How good is the doctor and how much risk is involved?  All of these are valid questions, but I am willing to bet that very few know meaningful answers.  Let’s take a look at the first two questions in detail.

A simple internet search with the search string ‘colonoscopy cost’ returns as one of the top hits an article in The Health Care Blog entitled ‘How Much is My Colonoscopy Going to Cost? $600? $5400?’ by Jeanne Pinder.  As the title suggests, there is a vast range in the costs of a colonoscopy ranging, according their research, from $600 to $5400, a factor increase of 9 from the lowest value to the highest value.

Pinder lists six items in the total cost that should be examined before committing to the procedure.  These are:

However, Pinder points out that it is difficult to get straight answers for most of these items.  The doctor, anesthesiologist, lab, and facility all bill separately.  All play the shell game between listing the charged price and the paid price.  The charged price seems to be the cost that these service-providers initially ask, while the paid price is what they settle on once the haggling with the insurance company is completed.  Having so many moving parts also makes it easy for each group to avoid accountability and, indeed, their usual response, as cited in the article, is “we don’t quote prices in advance.”  Imagine going to your mechanic and being told something to the effect “we’ll let you know how much it costs when we figure it out” – you would never put up with it.

Recently I discussed the stark contrast between regular maintenance for a car and for a boy with a co-worker.  He raised the objection “do you really want to have a procedure performed by the lowest bidder?’  On the surface this may seem like a cogent argument but some reflection shows that it is inadequate.

What logical connection is there between paying more and getting better health care?  There is some truth in the old maxim “you get what you pay for”, but that really only applies to situations where the consumer is trying to get a ‘sweet deal’ by cutting corners. This maxim is utterly devoid of meaning when the consumer knows next to nothing about the goods or services he’s buying.  Perhaps a doctor who charges more for his services may be worth it.  On the other hand, he may be a shady character who talks a good game, gives poor or even dangerous service, and is putting his profits before the patient’s needs.   He may have to charge high prices to cover his malpractice claims and you just don’t know it.  It is also possible that a good doctor is one who possesses enough skill that he can diagnose your problem without groping through unnecessary and costly tests which consume your time and put you through needless pain (both physically and mentally).

There is a related objection that asks why would you want to skimp when it come to your health.  This objection is also patently fallacious.  My health depends intimately on a day-to-day basis on the condition of my brakes and tires but that doesn’t stop me from seeking the best price. By seeking the best price, I am actually conserving my resources for other things that also have a positive impact on my health, like going to the gym, or buying better food, or moving to a better neighborhood.   The word ‘skimp’ is merely a red herring that is meant to stop us from realizing that purchasing medical services is done, like every other purchase in life, in a market.

The short of it is that when it comes to car, home, or appliance maintenance, each of us is reasonably knowledgeable in the marketplace.  Each of us tries to find the best value and each of us understands what insurance covers and why.  In the medical market, few if any of us have enough knowledge or enough courage to seek the best value and to understand what the role of insurance should be.  We trust that doctors and hospital and medical practitioners will protect our interests in a way that we don’t trust mechanics.  But this trust is predicated on nothing more than the fairy tales we’ve been told on television and in the movies.  Until each of us takes responsibility for being informed health consumers the system will remain in critical condition.