Guest Post: "Big Idea Solution": Radically Lower The Cost Basis Of The Entire Economy

Tyler Durden's picture

Submitted byCharles Hugh Smith from Of Two Minds

"Big Idea Solution": Radically Lower The Cost Basis Of The Entire Economy

Our choice is simple: either continue on the State-cartel path of complexity and rising costs that leads to a death spiral, or re-energize the forces of the market and community.

We are constantly told all our problems are too complex to be addressed with simple "big idea" solutions. Complex problems require complex solutions, we are assured, and so the "solutions" conjured by the Central State/Cartel Status Quo are so convoluted and complex (for example, the 2,319-page Dodd-Frank Wall Street Reform and Consumer Protection Act or the 2,074-page Obamacare bill) that legislators say they must "pass the bill to see what's in it." (What If We're Beyond Mere Policy Tweaks? February 6, 2012)

The real "solution" is to see that complexity itself is the roadblock to radical reformation of failed systems. Complexity is the subterfuge the Status Quo uses to erect simulacra "reforms" while further consolidating their power behind the artificial moat of complexity.

Over the next three days, I will present three "big idea" solutions that cut through the self-serving thicket of complexity. Nature is complex, but it operates according to a set of relatively simple rules. The interactions can be complex but the guiding principles can be, and indeed, must be, simple.

Big Idea One: Radically lower the cost basis of the entire U.S. economy. The cost basis of any activity is self-evident: what are the total costs of the production of a good or service? The surplus produced is the net profit which can be spent on consumption or invested in productive assets (or squandered in mal-investments).

We can understand surplus by way of simple examples. If it costs two barrels of oil to extract one barrel of oil from a well, there is no surplus at all to this activity; rather, it is a losing proposition. If it costs $100 to plow, plant, nurture and harvest $50 of crops, there is no surplus generated by this economic activity.

Anyone pursuing these kinds of zero-surplus activity will soon go broke and be eliminated from the financial "gene pool" of investors.

Central States and cartels by definition face no market forces on their cost basis. Central States (governments) have no competition and so there are no market pressures to contain costs. As a result, governments are intrinsically incapable of radically reducing the cost basis of their activity.

Cartels (the sickcare industry, the defense industry, etc.) by definition profit by fixing prices, not by adapting to competition, and so rising costs are simply shifted to consumers, with the aid of an over-regulating, moat-building "complex" Central State.

I cover this dynamic in depth in my books Survival+: Structuring Prosperity for Yourself and the Nation and Resistance, Revolution, Liberation: A Model for Positive Change.

Unproductive layers of activity are essentially friction within the economy ( How Much of Our Economy Is Essentially Friction? September 20, 2011), and as with a machine, when the friction consumes all the surplus, the machine freezes up. Greece is an excellent example of this dynamic.

As I explain in Resistance, Revolution, Liberation, there are three fundamental forces in society: the State, the market and community (i.e. the non-market social order).

As friction from the State and its crony-capitalist partners, the various cartels, inevitably rises, the surplus left to distribute via entitlements or invest shrinks.

The State has two mechanisms to counter this decline in surplus: it raises taxes on the productive enterprises and people, and redistributes that money to less productive dependents of the State via entitlements. Secondly, it prints money and redistributes the new cash.

Both are short-term expediencies that inevitably lead to collapse. Once taxes skim the economy's surplus for consumption, there is not enough left over to invest in productive assets that increase productivity. This triggers a death-spiral (positive feedback loop): as productivity stagnates, so does the surplus generated by economic activity. This leads to lower tax revenues, so the State raises taxes on the remaining productive elements, further bleeding the economy of funds that could be invested in future productivity gains.

Printing money debases the purchasing power of the existing currency, and over time this destroys the value of the currency and the wealth of those holding the currency. As people retreat to gold and land, the liquid capital necessary to invest in new ventures dries up, adding to the death-spiral described above.

In essence, the State and its cartels raise the cost basis of getting by from $10,000 to $40,000 by letting unproductive friction absorb all the economy's surplus. Layers of bureaucracy, paperwork and outright fraud consume roughly half of the funds spent on healthcare in the U.S.--not coincidentally, this aligns with the fact that the U.S. spends twice as much per person on sickcare compared to our developed-world competititors.(The "Impossible" Healthcare Solution: Go Back to Cash July 29, 2009)

The State overcomes this by raising taxes on the productive and printing money. The State's "solution" isn't to reduce its own fiefdoms' spending or dismantle the high-friction cartels: it's to tax or print $30,000 and send this money to those making $10,000, so they can consume as much as those earning $40,000.

As noted above, consuming the nation's surplus in consumption and friction starves the nation of market-driven productive investment, which then leads to the death spirals of lower productivity and rising unproductive friction.

The only way to lower the actual cost basis of the economy is to reduce the role and power of the Central State, dismantle its favored cartels and re-empower community and the market forces of innovation and competition. The Central State and its cartels are incapable of innovation or reducing costs because they dominate the market and the community.

Community must play a central role in lowering the cost basis. The market cannot address all problems, though its ideological boosters wear blinders that demand allegiance to nothing but the market.

Community gardens are non-market social orders that enliven and empower communities and neighborhoods, yet their "market value" is negative: on a strictly cost basis, the food produced by agribusiness is cheaper on a kilocalorie/dollar basis than the food raised by community members in their garden. But this calculation is akin to reducing a human to a handful of ash and valuing that person at the market value of the calcium and other minerals in the ash.

Much of value in human life is beyond the market. Agribusiness would rather the State send money to people so they can sit at home "consuming" TV and media and then go out and buy highly profitable packaged food that sickens their bodies and spirits. That is the end result of an economy dominated by the State and cartels: a deeply and perniciously pathological society and economy.

Market forces in housing see the "solution" as wealthy Elites and corporations buying up all the housing and then renting it to recipients of State aid for high rents. Co-ops, co-housing and a host of other community housing solutions that radically lower the cost-basis of housing are rejected because they don't generate large profits. Their purpose is to lower the cost of housing while greatly enhancing its liveability and non-market value--"assets" that the market simply doesn't recognize unless they can be exploited for high profit margins.

This is why both the non-market forces of community and the market forces of efficiency and profit must share the economy if the cost basis is to be radically lowered. If people only make $10,000 in the market economy, the State's solution is to redistribute or print $30,000 so their consumption can equal that of people earning $40,000.

The solution I suggest is to radically lower the cost basis of the economy so those earning $10,000 can live simply and well on what they earn.

This solution does not compute for the Central State and its protected cartels, as they would lose their dominance over the economy. They have chosen the death-spiral for our future, and that's what we'll get until we restore some equilibrium between the State, the market and the non-market commmunity.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Upswaller's picture

Tort reform?????

Sequitur's picture

This is the least of our problems. Lawsuit costs and payouts are nothing compared to the truly gargantuan bank bailout, entitlement, soveriegn debt, and pension debt supernova which will incinerate the United States. I don't like frivolous lawsuits, and not all tort lawsuits are frivilous (look at the energy workers killed at that Massey Mine deathtrap or the disgusting Deepwater Horizon rig). But the court system is a rounding error compared to the trillions, upon trillions, upon trillions of state and federal debt a la borrowings, bank bailouts, entitlements and pensions.

greyghost's picture painful

narnia's picture

It is arguable that the patent system & related regulatory compliance structures (FDA, FTC, Dept of AG, WTO, UN) + the massive unnecessary scope of our Department of War (Defense) have lowered our standard of living more than any financial system intervention.     

PivotalTrades's picture

The Patent System really? Best laugh of the day.

narnia's picture

it comes down to a basic understanding of what wealth really is. you may want to invest some time on the link below. you might learn something. science is not a public good:

Plymster's picture

Absolutely.  Keep your eye on the ball and don't get distracted by the shiny tort reform calls, gay marriages, voter fraud false flags, War on Christmas, etc.

falak pema's picture

in one fell swoop drowning by numbers, or one cut at a time. Oops that is ghoulish. Its like that naked cannibal clown. 

Spastica Rex's picture

Was that a Peter Greenaway reference? One of my absolute favorite directors.

Ghoulish is good.

whatsinaname's picture

Regardng the cost basis for the entire global economy, nothing has contributed to global poverty and inequality as much as the inflated cost bases for the various cost inputs of the economy thanks to the ad infinitum inflation of risk assets with fiat money. We need to flatten everything and start all of it from scratch. Wonder where gold will end up at that point ?

NotApplicable's picture

Somebody's pocket. Guaranteed.

eclectic syncretist's picture

1. End Lobbying/skimming taxpayer money.  Call it what it is, bribery, and in the future send them to jail, along with any politicians who accept the bribes.  This should be done so as to, at a minimum, eliminate the financial, insurance, and legal industries business models based on lobbying to legalize skimming from taxpayer earned value.

That alone would go a long ways towards improving America's current economic model.


beaker's picture

It may be too soon to say, but if the USD/GOLD correlation today may mean that the Euro has crossed into new territory.  What would you do if your Eurodollars were in a bank with all this talk of runs on deposits? Holding your wealth in gold seems like a pretty reasonable thing.  OR maybe JPM has no further need to liquidate good assets for collateral calls.  (Or both?)

Dr. Engali's picture

Solutions don't protect the status quo. The reason the " solutions" have to be complex is to make the sheeple think it requires MBA's and PHD's to fix it.

Umh's picture

Or just to hide the simple fact that the "solution" will not fix the problem.

midtowng's picture

On the contrary. Reducing the cost basis of the economy is done in a way that protects the status quo: impoverishing the workers of America.

   This is done in two ways: 1) paying the workers less (and busting labor unions in the process), and 2) reducing taxes on the wealthy and large corporations, which in turn force cuts in services that the workers of America actually need.

   It never fixes the economy, but it certainly protects the status quo. It's what we are seeing now, and what we will continue to see.

jiggerjuice's picture

Our economy runs on FARTS. Forced ARTificial Scarcity. Good old David Wong.

Dr. Engali's picture

My point was .. It's silly to think they really want solutions. The whole premise of the post is based on a false assumption.

ITrustMyGut's picture


they are creating this destruction and even greater wealth consolidation.. they are NOT interested in logic or solutions..

Spastica Rex's picture
  • Clear Skies Act
  • Affordable Care Act
  • Race to The Top (Fed Dept of Ed)
  • etc.

It really sucks to be duped.

tarsubil's picture

My all time favorite is the Paperwork Reduction Act. All it does is create paperwork!

RiverRoad's picture

True.  End the farces.  Might as well just apply a whopping reverse-split concept to everything out there with a value or a cost in fiat currency terms.  That's where the world's headed anyway.  Water will eventually seek it's own level whether we like it or not.

Newsboy's picture

Charles specifically advocated reducing the cost basis of the economy by eliminating cartels, which parasitically drag the productive economy by pulling off fees for useless churn at every layer which they add. Helathcare is a prime example. It is all boged down by procedure and protocol and payment systems and computer systems, which change yearly. Doctors are secondary in all this, just a bridge resource until bureaucrats figure out how to get people to enter their symptoms directly into the computer and get prescriptions. Ptaients are tertiary in this, just a fluid market...

He advocates eliminating massive systemic parasitism, not squeezing the peons harder.

tarsubil's picture

I have a PhD and I have a solution. I was sitting in a file room of a Federal building yesterday thinking, "This would be so easy to fix. A little gasoline and a match. No one has to die."

Kayman's picture

The "solution" must always be complex, so theft looks like a helping hand.  You know, like the Hank Paulson thing- $700 billion for the self-designated TBTF.  How's the warm urine feel to you ?

CreativeDestructor's picture

Let Chuck Norris cut the costs!

slackrabbit's picture

They obviously missed out on the Chuck Norris postings this morning... ;-)

francis_sawyer's picture

Threadjacking alert... Todays OT comic interlude...


Zuckerberg falls off 'world's richest' list,0,5620304.story

CrashisOptimistic's picture

Rather than warning you are about to threadjack . . . why not just not threadjack and post a comment on the subject matter of the article.  There have only been 80 zillion facebook articles you could have posted on.

Oh regional Indian's picture

So many bright minds, cannot see one simple reason for the madness..

This is the end of the age of oil as we know it.

Ergo, end of the age of machinery as we know it.

All war is fought with oil and machinery (basically).

End of the age of war as we know it (Stux net et. al.)

That is the true turning point. All this financial babble is just the enabler.

The cracks are in the industrial seam (DWH, FUKU.....)..

The big question is, who is going to build the post-industrial future that does not look like Mad Max or Water world?





kengland's picture

The US is drowning in natgas. 

falak pema's picture

natgas with a depletion curve of 90%...

Marginal Call's picture

And Charles was so close to the truth when he mentioned using 2 barrels of oil to produce one.   Maybe next time.

AnAnonymous's picture

So many bright minds, cannot see one simple reason for the madness..

They see it but can not admit it.

Expansionists want one thing: expand and they do not accept the impossibility of expansion as a solution.

q99x2's picture

How bout this: Get rid of the Federal government--that criminal gang of vermin in DC.

Cognitive Dissonance's picture

This assumes that "they" want to fix our "complex" problems. I never assume this to be the case.

For example........the tax code could be greatly simplified. But then where could our dear leaders leverage the only thing they have to sell, their vote?

Oh regional Indian's picture

Bingo CD. And in a fractal world, that is true in every aspect.

The complexity is by design.


GottaBKiddn's picture

"They' have no intention whatsoever of "fixing" anything, since they designed things this way and it's working perfectly for them. They are the same people who are telling us that "we" have a problem, and that we need to send them more money to fix it.

Marco's picture

That is so 4 years ago ... sure part of "them" are still telling us we need to give them more money through printing or directly, but a significant part of them has already shifted towards the end game and are calling for austerity. Once there is nothing left unencumbered by debt or owned outright by them what the hell do they need big government for any more?

SheepDog-One's picture

Right, these guys believe theyre all just 'struggling to find a solution'...thats total BS this was all designed.

cougar_w's picture

I really don't know what ever happened to the idea that if one needs the cash then one sells their body for sex.

There is a not less mischief in common prostitution. This whore-by-proxy thing is ruinous.

Cognitive Dissonance's picture

Nice to see you around cougar_w.

How are the sisters?

cougar_w's picture

Oh the Sisters are having a wonderful time!

Fortran is in love. Everyone can relax for a while.

Diamond bitch-slaps a bunch of gold-stealing card-carrying Fascists and in the process declares open war against the entire United States Department of Internal Security. All because they totally piss her off. She's a little out of control sometimes, but what do you expect from the destroyer of the world?

EDIT: annnnnd... it's up

You got your phizz right? You got a big safe full of the shiny right? So how does it feel to be a terrorist, Al-Qaeda-boy? When The G Man comes knocking the cat is really out of the bag.

Fanakapan's picture

Cost Basis Economy would place at least 50% of the population who are stupider than the Police should allow, in a position where their inadiquacies would be self evident each and every day :)  ergo, it aint never going to happen, failing a return to the status quo of the 18th century, and how likely is that ??


Yet another, lets turn the clock back to 'Simpler' times thesis, the sort of crap that pedlars of 'Ism's' come up with on a daily basis :)

BigJim's picture

That's right!

Because if we revert back to the size of government we had back in (say) 1905, all the technology developed in the intervening years would just vanish. You'd wake up and your iPad would have turned into a mini abacus, and you'd step outside and your BMW would have transmogrified into a horse.

Fanakapan's picture

I suspect that Government wanting a Bigger Johnson is NOT a phenominon that is new ??? so its likey that the Government of 1905 was relatively Bloated ???  In any event how do you equate technological advancement with government size ? I have an idea the two are not connected in a Direct way :) 

NetDamage's picture

Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium.

Frankie Cokeupthenozza's picture

And I think complexity is a defense to criminal behavior. How you you prosecute what you can't convey or understand!