Oh, forgot to mention in the last post. I wrote a new book too. Actually we wrote a book–I was assisted by my daughter Elizabeth, who edited the book (and got me to finish it.) She is the real warrior on this project. Now that it’s done, she gets to sleep for about a month. Daughters Katie and Jessica also worked on the project, as did Pamela (who works on every project.)
It’s called Lessons from a Road Warrior. It is an attempt to lay out the analytical framework that I use to thing about the global economy, about financial markets, and about investing. It does so by describing the things I learned that changed my thinking from a mild-mannered professor in the early ’70s who believed (most of) the things in the textbooks to the recent work I have been doing at the Chinese Academy of Sciences using non-equilibrium thermodynamics, network theory and neuroscience. My goal has been to replace standard macroeconomics and finance theory with something simpler to understand and use that actually works. Pretty radical, huh?
The book will be available on Amazon in a few weeks. Until then, it is available directly from us at the Rutledge Capital website for $19.95 plus shipping. Or send us an email for bulk order terms at JR’s email address, jr@rutledgecapital.com.
The central idea in the book is very simple. All economic activity is made up of work. To a physicist, work is a transformation of energy–in particular solar energy. Economic activity, then, is comprised of people’s efforts to transform current and stored solar energy into goods and services. Instead of GDP, we should be measuring GNW, Gross National Work.
In physics, energy transformations are driven by energy gradients–temperature differences, pressure differences, etc.–according to the laws of thermodynamics. In economics, work is driven by price, wage and return gradients. We call it arbitrage or simply market behavior. Equilibrium happens when prices, wages or returns on capital have been driven together so there is no longer a differential to exploit by moving resources. Non-equilibrium is where all the interesting things happen.
A market economy accomplishes this work using a vast parallel-processing information network where prices are used to transmit information about relative wants and scarcities, in the spirit of Friedrich von Hayek. Recessions, depressions, panics and bubbles happen when the information network experiences an abrupt and temporary blackout which network theory refers to as a cascading network failure. Today’s mortgage market crisis is an example of such a blackout. It will end only when asset markets are able to clear again.
In this framework, policy works by creating gradients, driving wedges between prices, wages and returns, which then lead to resource flows as investors engage in arbitrage activities. Investors who are able to anticipate those gradients can earn above-normal returns by allocating capital ahead of the disturbances. This leads to a weather-map metaphor for investing, which is described in the book. The storm systems that should be on every investor’s weather map today include energy, tax policy, protectionism, China, and political and social instability.
I hope that you enjoy reading the book.
JR
I am in Shenyang tonight. Gave a lecture to 700 students and faculty at Liaoning University here today. It is the 60th anniversary of the founding of the university celebration, which is appropriate since I just had the 60th anniversary of my personal founding last month.
After the conference I had dinner with some great State Dept. guys here. They told me a wonderful story about some North Koreans I’d like to pass along to you. Next week I am going to North Korea myself–tell you all about it when I return.
Year before last a group of North Korean people sneaked across the border by swimming across the Yalu River at night. The next day they showed up at the South Korean Embassy in Shenyang asking for political asylum. While the South Koreans were talking it over the North Koreans went outside and climbed over the wall to gain entry to the US Consulate which is just next door. Now what?
The US guys allowed them to stay at the Consulate while our government tried to figure out how to handle it. They ended up living in the cafeteria for more than a year. During this time two of the people, a 21 year old boy and a 23 year old girl, fell in love. Finally, the US government made an arrangement with the Chinese government to fly them all to the US as political refugees. The 2 sweethearts wanted to go together so my friend Bill found a host family in Louisville, Kentucky who would take them both in.
They are still in Louisville today. They are still in love.
Maybe there is hope for the world after all.
JR
I’ve just added a new section to the website dedicated to Tara’s Kids, a foundation I started while in China. The foundation tries to help bring education to those Chinese children who need it the most through providing the books and writing materials necessary for learning.
In our first project, a donation of $5,000 created an entire library of 3,000 books for an orphanage of handicapped children in Tibet, and provided several $50 scholarships for children to cover school fees for an entire year. It’s a really important cause and it has been incredible to see how much of a difference each penny makes in the lives of these children.
Check out our new page on the website to read about our efforts to bring education to China, and to see pictures of some of the children that have benefited so far here. I have also included some text from the site below:
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Inspired by a statue of Tara, the Goddess of Compassion, Dr. John Rutledge started Tara’s Kids to help school age children who do not have the books or writing materials necessary to learn to read and write. Tara’s Kids works with friends in the U.S. and in China to identify elementary-age children, schools and orphanages in rural areas of China and Tibet where they can establish libraries full of books, writing materials and give small scholarships to pay for school fees. Many children are unable to attend school because their families do not have the resources to send them.
The first library was established in an orphanage for handicapped children in Tibet. A group of student volunteers from the Agricultural University in Beijing selected and packed the books and then carried them personally on the 47 hours train ride to Tibet so that they would not have to spend any of the money on shipping. The students stayed with the children in the orphanage for a month, organizing the books, setting up the library and spending time teaching the children.
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Visit Tara’s Kids online.
Interesting article in today’s Khaleej Times, Dubai World launches Web site in Chinese. Investors from China and Gulf countries are getting acquainted because there is a real resource complementarity between the regions. And because both have been repelled by the U.S. authorities in recent attempts to invest their vast stocks of dollars. I think the U.S. has triggered the dollar selloff not by increasing the supply of dollars (the monetary base and bank reserves have each grown less than 2% in the last year), but by eroding the demand for dollar assets by showing investors that they will not be allowed to use the dollars to buy assets.
JR
(March 28, 2008) – This is important. India has crossed the 250 million mark with the addition of 8.53 million mobile phone subscribers in February. India will become the second largest wireless network in the world after China in the first half of April 2008. (Hint: That makes the U.S. #3.) Click here to read the full article in the Economic Times.
Future growth of income, productivity and jobs will depend on who has the best information and communications technology, because high-speed communications allows the economy to perform as a massive parallel-processing information network. Hats off to China and India for making R&D and investment in new networks a priority. Wouldn’t hurt if the U.S. government were a positive force for investment here too.
JR
(March 26, 2008) – An article in the current issue of the New England Journal of Medicine titled Cardiac Plasticity is worth thinking about. The concept of plasticity–especially neural plasticity–plays an important role in recent microbiology research. I think there are important applications in economics, finance, and policy that may help us to avoid, or mitigate, future conflicts among cultures and nations.
(March 26, 2008) – My friend Adam Thierer at the Progress and Freedom Institute has just released a new report on Parental Controls & Online Child Protection Report. It is a great review of the market for parental control tools, rating schemes, education efforts, and initiatives aimed at promoting online child safety. You can read the full report by clicking here.
JR
(March 24, 2008) – An interesting article in the current issue of the journal Neuroscience shows that if you want to keep your mouse happy, you have to give him coffee all the time. Read the abstract here: Neuroscience : Chronic but not acute treatment with caffeine attenuates traumatic brain injury in the mouse cortical impact model
I show you this article only half in jest. I am convinced that cognitive science has more to offer than any other field over the next 20 years. I am especially interested in the way brains encode repeated doses of fear and how that plays into conflict. If you want a sneak preview read Wexler’s Brain and Culture.
JR
Here’s a great article to read on Easter weekend. The Secret to Happiness? Giving. It reports a recent study by social psychologist Elizabeth Dunn of the University of British Columbia showing that people who donate their dollars to charities or splurge on gifts for others are more content than those who squander all the dough on themselves.
The real question is why this is such a hard lesson for all of us to learn–and remember. I know it’s true for myself. When people ask what I did last year that gave me the most joy, the answer is easy. 1) Being with my daughter Manda the day she had her first child and meeting granddaughter, Isabela for the first time, and 2) helping a group of student build a library in a school for disabled orphans in Llasa, Tibet. (I will write more on both later.) Good days in the market and fancy dinners don’t seem to hold their value.
This is good because there is so much work to do to help other people, both at home and far away from home.
I have been reading a lot of articles in Behavioral (or experimental) Economics and Evolutionary Economics, as well as Cognitive Science, System Theory and Nonequilibrium Thermodynamics. All are much more interesting than so-called modern economics and finance (the neoclassical synthesis). Economics has largely become a church to worship increasingly irrelevant equilibrium theorems rather than challenge old ideas.
JR
(March 21, 2008) – There is a cool article in today’s ScienceDaily reporting a successful attempt to prevent Menkes Disease by reversing a genetic defect before birth. You can read the full article by clicking here, Deadly Genetic Disease Prevented Before Birth In Zebrafish.
JR
