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Slaves to the “Free” Market

Slaves to the “Free” Market

Editor’s Note: Clint Lee was on spring break last week, and Ted Bauman is out this week. So instead of our usual Your Money Matters video, here’s an article from Ted.

When I was a student at the University of Cape Town in the late 1980s and early 1990s, the top-scoring student in each undergraduate course received what was known as a “class medal.”

I received 21 of them — 87.5% of the undergrad courses I took at UCT.

The 12.5% of my courses where I didn’t receive top honors were all in economics.

That’s right. The field of knowledge on which I’ve based my career was the only one where I wasn’t first in class.

But that’s not because I didn’t master the material. It’s because I argued that much of what my professors were teaching was wrong.

In coursework and in final exams, I consistently pointed out that some of the key assumptions behind our course material weren’t consistent with reality.

The professors respected the quality of my arguments. But because my conclusions were not “correct,” they invariably gave me one point below the top grade. You might think I would’ve eventually learned the error of my ways…

I’m proud to say I never have.

To this day, I embrace beliefs considered heretical in the mainstream economics profession … beliefs that will continue to make tremendous stock market gains for readers of The Bauman Letter​ into the next decade.

America the Sucker

American scientists are responsible for some of the most important, most profitable inventions in the modern world.

But we lag far behind the rest of the world when it comes to turning those inventions into profits. That might sound surprising given the size of our national economy — yet it’s the truth.

Jack Kilby and Robert Noyce of Texas Instruments and Fairchild Semiconductor, respectively, patented the microchip in 1959.

Noyce went on to found Intel in 1968. Once the world’s leading microchip manufacturer, Intel is now hanging on by its fingernails. It’s considering outsourcing production to Asian factories, where nearly all of its competitors’ chips are made.

American inventor Charles Fritz created the first working solar cell in 1883. Bell Labs created the silicon solar cell, the prototype for those used all over the world, in 1954.

Today 70% of solar panels are made in China, Japan and Germany.

Since the 1970s, U.S. scientists have consistently shown innovative genius. But American business has ignored these opportunities, handing them over to foreign competitors.

All of this stems from America’s self-defeating commitment to “free” markets.

As I told my professors decades ago, they may be great at creating short-term profits … but they usually fail to capitalize on innovation.

The (Il)logic of Capitalism

My professors penalized me for my insistence that the logical consequence of profit-seeking by capitalist firms is eventual stagnation. But history proves me right.

Consider the current situation in the U.S. fossil fuels industry.

Even though it’s committed to decarbonization in the long term, the Biden administration is desperate to increase U.S. production of oil and natural gas to cope with the fallout from Russia’s invasion of Ukraine.

But upstream energy producers won’t invest in new capacity. That’s because the hedge funds, banks and other big Wall Street institutions who own their shares are unwilling to see their dividends reduced to pay for it. They want money now, regardless of the future consequences.

That’s precisely the logic that has steered so many American innovations to foreign companies.

Faced with the prospect of delaying profits to develop new technologies that might produce future gains, powerful shareholders and executives took one look at their stock options and said: “no thanks.”

By contrast, every major world economy — other than the U.S. and the U.K. — has pursued two types of policies to get them where they are today:

  • Raising the cost of things they don’t want, to discourage companies from producing them. After World War II, the governments of Japan, South Korea, Singapore and Taiwan raised taxes on companies involved in trade, to encourage their owners to shift to manufacturing. China has been doing the same since the 1980s, with spectacular results.
  • Reducing the costs of producing things they do want, to encourage companies to make them. The so-called Asian Tigers used tax and credit policy to steer companies toward specific industries with the goal of becoming world leaders in that area 10 or 20 years down the road. Their current status as economic superpowers is a result of those policies, not of the pursuit of profit at any cost.

The Opportunity of a Lifetime … if We Can Grab It

Last year, Washington watchers obsessed over the Infrastructure and Build Back Better bills. The former passed; the latter continues to languish.

But an even more important law did pass, albeit largely unnoticed: the Energy Policy Act of 2020.

The bill hugely expanded the Department of Energy’s research and development efforts. The Infrastructure and Build Back Better efforts aimed to roll out existing renewable energy technologies like solar and wind. But the Environmental Protection Agency led to three “Earth-shots” focused on new technologies needed for a carbon-free economy:

  • Reducing the production cost of hydrogen by 80%.
  • Cutting the cost of grid power storage by 90%.
  • Developing affordable ways to remove carbon from the atmosphere.

There are many companies around the world working on these things. But they’re all limited by the availability of private capital. The U.S. government, on the other hand, faces no such constraint.

That’s why my advice is to pay close attention to what’s happening at the Department of Energy. Keep an eye out for partnerships with private companies. Take careful note of breakthroughs in the above technologies.

Because eventually … if, of course, our politicians provide it … government support will produce breakthroughs that will produce profits that make today’s renewable energy returns seem like loose change.

Kind regards,


Ted Bauman
Editor, The Bauman Letter

 

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