The Wonderful Flaw in Capitalism

So sleep hasn’t come easily to me since I was young, but perhaps it’s both a blessing and a curse.  As I lay awake at night wishing I could fall asleep, my mind continues to problem solve.  A few months ago, I was doing my best to understand the difference between the idea of democracy, and the application of it in American politics – and effectively understand where things went sideways when 20% of the American public was able to elect someone which most of the world despised.  More recently, I’ve been focused on capitalism and more importantly, how it’s led to an unsustainable concentration of wealth.  At about 2am a couple nights ago, I woke up Siri to take a note.  That note reads:

“The fly in capitalism is the assumption that resources are scarce” 

I had said flaw, but close enough, Siri.  What I first tried to do was understand what capitalism is at its core.  My best definition was the exchange of resources for the creation of value.  Whether you’re producing a good, a service, or something in between, capitalism was there to reward you with resources to help you sustain yourself and with the goal of motivating you to create more value in the future.  Theoretically, in capitalism, those who create the most value should be rewarded with the most resources.  I don’t think that’s the case today.

As  the application of capitalism evolved, it became a heavily complex system and as with all systems, they can be taken advantage of.  For example, some businesses specifically target customers who don’t fully understand the transaction and end up paying for services they don’t need or products they can’t use – selling ice to an Eskimo.  While some examples are blatant, I suspect most are shades of grey.  Those shades of grey allow those with a greater understanding of the system to manipulate that transaction of value for resources – ultimately leaving them paying less or receiving more.  In this environment, the most significant factor in deciding who receives the most resources isn’t the ability to create value, but rather the ability to understand and play the game.

When I look across the board of the wealthiest people in the world, I don’t see a direct correlation between the wealth they’ve accumulated and the value they’ve created.  There are some, like Bill Gates, Jeff Bezos, or Larry Paige who I think should be among the wealthiest individuals in the world, but for each of them, there are dozens of wealthy individuals who have made their fortunes by extracting resources rather than creating value – casino’s come to mind.

So when I understood that, I thought that we just needed to find a way to get back to the fundamentals of capitalism.  We just needed to find a better way to ensure that there was a fair and equitable approach to the exchange of value for resources.  But wait… if resources weren’t scarce, would capitalism still motivate us to create value?

I know this is all super high level so let’s make this more tangible.  The sun currently projects more energy onto our planet than we’re capable of using – and we’re getting increasingly better at harnessing it.  99.9% of the resources ever used on this planet are still on this planet because as it turns out, matter can’t be destroyed.  That means that resources aren’t scarce, we’re just temporarily inefficient at turning used resources into usable resources.  That’s a technological issue that we’re getting increasingly better at solving – one which I expect to be largely solved within our lifetime.

So let’s be optimistic and think 100 years out.  There are solar panels everywhere.  Roads, roofs, cars, skyscrapers, and huge chunks of desserts are covered in enough solar panels to passive provide our planet with sufficient energy to both sustain and grow.  Waste conversion technologies have advanced to the point where a landfill can be broken down into synthesized raw materials.  Additive manufacturing is able to take synthesized raw materials and efficiently build just about anything that our minds can imagine.  If that ecosystem sounds familiar, it’s because that’s pretty much how our planet worked before humans came along and started trying to reinvent the wheel.  Mind you the earth did it at a much slower pace, but the fundamentals are the same.

Waste is a concept only known to humans.  In every other aspect of the known universe, it’s simply another state in which energy or matter can exist.  Once we can wrap our heads around that, it’s easier to understand that there is no scarcity in resources, simply an temporary inefficiency in turning used resources into usable resources.  That is something that I’m confident technology can solve, and it has me looking rather optimistically towards the future.

In a future where resources aren’t scarce, what would motivate someone to create value for others?  This is where the crusty capitalists might say that people are inherently lazy and it’s only through the motivation of scarcity that they’re willing to provide any level of value to others.  It’s too easy to find counter-examples for that to be entirely true, but I don’t deny that the fear of not being able to sustain yourself can motivate people to do all kinds of things.  What I also think though, is that love is a far more powerful motivator.  In this case, it would be love for what one does.  More often than not, the best computer programmers, the best musicians, the best entrepreneurs, and the best parents are those who absolutely love what they do.  Between their hardware, firmware and software, they’re totally in line with their life’s work.  They’re in their element.  They love what they do, and as a result, their drive, passion, and work ethic to create value for others far surpasses what they might have done out of fear.

That is the future I see and the future that I’m confident we’re headed towards.  We’re a few years out, and there will be plenty of stumbling blocks between now and then, but this is a logical eventuality which is simultaneously an enlightened perspective on how technology drives progress, and how progress drives ideology.  The future is bright and oh so cool.

The Future of Real Estate – Part 2 (The Solution)

In my last post, I detailed the problem with real estate – it’s too expensive.

People have been trained to want to buy real estate without understanding what makes a good real estate investment.  The system in place allows us to amplify those bad decisions by spending 5x more than we were able to save, effectively spending the next 20 years paying it back.  Because it fit into our monthly budget, we were never overly concerned with the cost.  The market has now figured that out and in many major cities, is testing our upper threshold of what we’re willing to pay.  When you test that upper limit of what people are willing to do, they start thinking outside the box.

The best recent example, which I had mentioned in the last post is how high oil prices gave rise to an environment in which Tesla could be successful.  So the fun question that we get to answer here is what high real estate prices are creating. Prices have reached a point where all kinds of businesses are coming out of the wood work with ‘alternative housing’ ideas.  Most of it is in its early stages now, but we have some very cool options in the pipeline.

3D printed homes.  If you don’t know what I’m talking about, do a quick search.  Additive manufacturing is most likely the future of manufacturing, and I can’t see why it won’t also be the future of building homes.  If I were to guess, I’d say that the future of construction is automated and the further we progress in that direction, it’ll look like a giant 3D printer.  While they’re not ready for the market yet, I’d be surprised if we didn’t see some market ready options within 10 years.

Shipping container homes.  Shipping containers are relatively inexpensive, structurally sound, and made from recycled materials.  They also apparently double as pretty cool homes.  The genius in this approach is that we’ve figured out we can build a modern, livable home out of just about anything.

Mobile homes.  Not trailer park mobile homes, just homes that are mobile.  One of the more interesting designs that I’ve seen was of micro suites which could easily be moved from building to building.  For individuals who like to move around, their suite would just move with them from city to city.  For others mobile homes are about getting off the grid.  One of the coolest ideas in the pipeline are self-sustaining, modern, smart, mobile homes.  Everything from solar panels to water filtration would be built into the home itself, allowing for you to put your home down on any piece of land you’d like.

Modular homes.  While 3D printed homes certainly don’t qualify, almost every other new style of alternative housing falls under the category of modular (including container and mobile homes).  Modular homes are such a broad category because it’s really referencing the production process rather than the final product.  With modular homes, each section of your home is manufactured centrally, then shipped out to your location to be installed.  That’s a big deal.

Right now, an average home is built like a Rolls Royce: with hand tools and a 6 month wait-time.  What we need is an effective assembly line for homes and that’s what modular housing is looking to tackle.  By building in modules, fabrication can be done centrally and then shipped out to the buyer for installation.  That central, and streamlined fabrication process means that a home can be built in a couple weeks and with far fewer resources.  We’re quite possibly looking at a genuine disruption in how homes are constructed, especially when the build time and cost are a fraction of our current options.

What about the land though?  Real estate is always a two part conversation because land is pretty useless without a house to put on it and a house is pretty useless without land it put it on.  It’s very possible that as houses become less and less expensive to build, people are just going to charge more for land, effectively providing the same end price.  Again, this is what happens when we understand the price of something but not its value.  That’s ok though, because I see a solution on the horizon for the cost of land as well.

Land is not unlimited, but we are not even close to using up what we have.  What’s really limited is land near urban centers.  Urban centers tend to have the most desirable jobs so people move to the city.  There’s more people who want to live there than land available so demand exceeds supply and the price goes up.  The solution thus far has been densification – finding ways to put more people in the same area and large residential towers are the result.  The problem with densification is that the city’s infrastructure rarely keeps up and we simply end up with congestion.  Yes you get to live in the city, but good luck getting around and doing things.

There’s more than one way to solve this problem though.  Rather than trying to accommodate more people in the city, why not motivate them to leave the city?

The first way you do that is by making the commute more tolerable and I think driverless cars are going to help that in a big way.  For most people, driverless cars are likely to cut down on commuting times significantly.  Second, commuting takes on an entirely different meaning when you’re not driving.  What we think of as a 2 hour commute today, could very easily become an hour in your mobile office a decade from now.  Some will still prefer to be within walking distance of their job.  For others, a cool modular home, on a quiet lake just outside of town for a fraction of the price will be the more attractive option.

The other way to get people to leave the city is by providing job opportunities outside the city.  It was the industrial revolution which created this population shift, but it was really the evolution of technology.  Farming techniques had evolved to the point where fewer farmers were needed, just as factories were being introduced and manufacturing jobs in the cities were booming.  If I were to guess, it will be technology which brings people back out to the country – and I’m thinking it’s going to be telecommuting.  Telecommuting is basically working from home, but with the power of the internet and the way the job market has evolved, it’s becoming more and more feasible.  Perhaps one of the biggest transitions will be when coding becomes a primary trade.

When I think of successes like Uber and AirBnB, I see a trend of decentralization.  It’s taking a look at the resources we already have access to and simply using them more efficiently.  My biggest issue with real estate is that it represents a remarkable inefficiency.  We have more than enough land to share, but we’re willing to commit decades of our income to securing a small piece.  Every dollar that we spend on a house is a dollar we don’t spend on all the other things our economy produces, yet we’re encouraged to spend 5x more than what we’re able to save.  And without understanding these dynamics, we haven’t been motivated to challenge the status quo – until now.

The Future of Real Estate – Part 1 (The Problem)

 

Real Estate has long since been a frustration for me. Growing up, I heard the same thing that everyone else did… You should own your home because if you lose everything, at least you’ll have your home.  Paying a mortgage is better than paying rent because it’s pretty much like paying yourself instead of paying someone else.  Real estate is a safe investment because everyone needs a place to live.

As I developed my investment skillset, my perspective on real estate began to shift.  Not only did I lack any emotional attachment to owning my own home, Now I also had a much clearer understanding for how real estate behaved as an asset within its markets.  What I’ve also realized is the unfortunate reality that while your average real estate professional is aware of these dynamics, they don’t entirely understand them, and will only mention them when it helps to close a sale.  If a market is overpriced, you’re more likely to hear your realtor tell you that you’ll make your money back eventually, than to wait for prices to come down.

While we’re going to dive into what the real issues around real estate are and how I think they could be solved, I think it’s important to mention that my perspective on real estate has been shaped by growing up in a city which became one of the world’s hottest real estate markets.  While I have the funds necessary to own my own home, I do not.  It’s frustrating because I’d like to, but my understanding of the dynamics at work prevent me from making that decision.  While I’m confident in my patience, paying rent is still far from ideal.

There are several issues with real estate, and I think they all start to come undone quite nicely when we start asking why real estate is so expensive.  Consider this, if we didn’t have the option to borrow hundreds of thousands of dollars that would take us decades to pay off, how much would a home cost?  What if we could only spend what we had saved up?

The problem with a mortgage is that it inflates purchasing power.  If you saved 100K, you can now go spend 500k on a house.  Saved 200k, go spend a million.  The lenders know how hard it was for you to save that first 20% as well, which is why they’ll give you between 20 and 30 years to pay it off the last 80%.  Yes you’ll have a place to live, you’ll spend most of your working life paying it off.  Am I the only one who thinks this sounds like financial slavery? If we all simply said no, I won’t take on a debt which will take 20+ years to pay off, we’ve set the terms on what we’re willing to pay.  They can only sell at the price at which we’re willing to pay.  Unfortunately we haven’t figured that out yet and we’re too used to the upper threshold of what we can afford to pay.

So what is a home worth?  Not price but value.  Price is what you pay, value is what you get.  Well traditionally, there’s 2 parts.  First you buy the land, then you build a house on it.  We often find land to be expensive, but why?  If I were to buy a business that produced widgets, it would have value because I could take those widgets to market and sell them.  If I bought a farm, it would have value because I could take the crops to market and sell them.  If I owned a plot of land, which did nothing, would it have value? Well it would be worth whatever someone was willing to pay me for it right?  If the land carries no inherent value, why would someone pay me for it?

In effect, what we’re really paying for when we buy land is a reduced travel time between home and work.  With a limited supply of land within the city center and a seemingly unlimited demand of people who want to live there, the markets set the current price.

The second piece of this puzzle is the cost of building an actual house.  Right now, an average house takes about 6 months to because it’s treated like an individual project, and done primarily with manual labour and hand tools.  Sounds like the timeline and process for a Rolls Royce.

So this is where I leave you hanging.  We’re keen on city centers now, but will that always be the case?  And what happens when we can start building houses like we currently build cars?  Well that’s not going to happen… is it?  The real question is why it hasn’t happened already.  Here’s my final thought:  When oil prices were low, nobody cared about electric cars.  When oil prices were high, electric vehicles became a more realistic alternative.  When oil prices peaked, Tesla walked into a market waiting with open arms.  High oil prices delivered Tesla.

What will high real estate prices deliver?

 

The Economic Case for Universal Health Care

So with health care being top of mind for a lot of people right now, I’ve been giving the system some thought as well.  In the states, generally speaking, conservatives think healthcare should be left to the private sector and that people should should be able to source their own coverage.  Liberals, generally speaking, think health care is a basic right and the government should assist in making sure everyone is covered.

The frustrating thing about politics for me is that these aren’t conversations about the most efficient way forward, these debates simply an arena where governing parties fight for power and control.  I say this with confidence because if you think about it carefully, both sides are right but they can’t see it.  Rather than working together and coming up with a solution that accommodates the priorities of both sides, those involved seem more interested in obstructing their opposition.

Healthcare should be privatized because privatization isn’t an evil word.  In fact, all it really means is opening that business opportunity up to the public.  As it turns out, the general population is filled with awesome ideas and great entrepreneurs who can bring them to market.  Add in some competition with one another and we’ll find some pretty fantastic ways to deliver healthcare to those who need it.

People should be able to source their own coverage.  Why?  For the same reason we should be able to choose our own internet provider, streaming subscription, or gym membership.  Where we choose to spend money reflects our preferences and our preferences let our providers know where they should be competing hardest.

All that said, health care should absolutely be a basic human right and the government should absolutely have a hand in providing health care to those without the means to provide it to themselves.  I’ll even explain why with basic economic theory.

So I have this theory that right and wrong are human constructs which are actually based in efficiency (I’ll explore that more in another post once I’ve refined the theory a bit more). Effectively, the most efficient manner of accomplishing long-term progress is perceived to be both the most moral and ethical way forward. This is because for it to be the most efficient path forward, it must take all variables into consideration and deliver us to our end goal with the least amount of effort and time.

The next concept that needs to be touched on is comparative advantage. It’s a basic economic theory which essentially says that we’re all built a little differently, and that if we’re able to figure out what we do really well, we should do the hell out of it. Everyone produces what they’re absolutely best at, and trade helps goods and services end up where they should.

Most republicans and economists recognize comparative advantage to be fundamental to the free market – and for good reason. But for people to reach the peak of their comparative advantage, they require favourable circumstances. People on welfare, working minimum wage jobs, etc. are unlikely to be producing at their highest levels (AKA maximum utility) and without more favourable circumstances, never will. I get the classic conservative approach of taking it upon yourself to create your own favourable circumstances – I often tell people to be the change that they seek, but it’s not always in the cards.  For you hold’em players out there, let’s use a poker analogy. Would you rather have pocket aces and hit nothing on the board or a 7/2 off-suit and hit nothing on the board? Most people will choose the aces, but statistically, both are losing hands. I think the best thing the government can do for itself and for its people is help the person holding aces to a hand where they flop the other two aces and the 7/2 to a flop with the other three 7s.

If we can do that, the entire country transforms and becomes an unparalleled powerhouse of production, delivering levels of value that we didn’t even realize were possible. Cost of universal health care in that scenario? Negligible.

I know, I know, what does comparative advantage and maximum utility have to do with healthcare? Stephen Hawking. He’s said on multiple occasions that he would likely be dead without access to the NHS, Britain’s public healthcare system. If that’s true, what if he had been born in the US? He’s one of my favourite examples of someone who was dealt a 7/2 offset, but because he existed in a system which wanted to give him every opportunity to reach his maximum utility, he was given the chance to make his contribution.

Would you agree that the value Hawking has provided to the world has exceeded the health care services he has provided? Perhaps my biggest point here is that everyone *should have* the opportunity to make their greatest contribution to society. Some of us are able to earn it, but as circumstance would have it, for those like Hawking it must be given.  Healthcare included.