An Economics of Single Transactions

I recently read Thomas Sowell's Classical Economics Reconsidered and it struck me that the classical treatment of supply and demand is not adequate when dealing with the real world of price, value, and cost. Consumers don't face a large market of many suppliers. For a real consumer there are many constraints on geography, time, and resources that nearly completely block any kind of decision-making in what might resemble the supply and demand curves of classical microeconomics. 

I'd written on a framework that I put together in 1993 and 1994 that I called "nanoeconomics" ("nano"). I presented a paper on it at a Department of Defense cost analysis symposium in 1994. At the time I was still in need of reading more of the literature, so after working out the basic influences that can be captured in a single transaction framework, I set it aside. I published a blog post in 2011 outlining the basic ideas. Now that I had Sowell's overview in hand, it was clear that the nano framework was not only useful but necessary for understanding decisions in real marketplaces.

If you look back 1000, 2000, or 300 years, or pick almost any point in human history, you will find that humans have traded goods and done so rather enthusiastically. Marketplaces exist because all participants profit from the transaction. However, ever since the dawn of the Industrial Age the rapid growth in production and resources has changed the complexion of the marketplace. It has induced some like Marx and his followers to attempt a reformulation of basic economics, to declare that "cost equals value" or that labor cost equals value. It seems rather drastic to discard the entirety of market economics just because of bruised feelings. The nano framework is necessary to provide a foundational vocabulary and to put the questions of transactions into a robust framework. 

The basic problem is determining a price for a transaction. Note that we've already assumed a medium of exchange (money) in which we can measure costs, marginal utility (opportunity cost), and of course, price. As indicated in the diagram, producer costs must be below the consumer's private value of the good or the net effect of the transaction is to destroy net societal resources. 

Clearly both sides must be motivated to make the trade, or no trade is likely to occur. This is resolved by splitting the profit. In a modern, competitive economy or in a robust town market there will be multiple suppliers. Although the consumer has an "ultimate" value which is the cost of doing without any transaction, the consumer's negotiating value is the price of the next-best deal, or the price of the next higher offer.

The situation is slightly different for unique goods, or those offered by a monopolist or bought by a monopsonist. Now the supplier and customer must exchange information and negotiate, at first just to discover that a trade is possible, then to explore possible trading prices. Often the customer has the information advantage, because their ultimate value is what sets the limit on price and profit, and this ultimate value is usually private information that is costly for the seller to discover (at least until Google and Internet ad tracking systems made it possible to read the minds of internet users): 

One might argue that splitting such profits is "fair" if the price establishes a geometric ratio such that each party's gain is proportional with the same factor. In such cases, consumers still make bigger profits on an absolute basis.

The nano framework gives some rather precise definitions of words that are frequently confused or problematic in debates of classical economics. Cost is the suppliers costs; often this will be private information, except for most government contracting. Value is usually private to the consumer, but since it is subject to rapid change, the consumer may not be fully informed themselves. Consumers have strategies for protecting themselves from this variability, and these mechanisms also contribute to the "buffer" often required by a consumer that tends to increase average realized consumer profit. 

But isn't this just like classical microeconomics? Isn't the single transaction "thermometer" diagram a slice out of the supply and demand diagram?

It turns that it is not. One must make some very large and unusual assumptions to establish a supply/demand analysis. In the real world, consumers very rarely face such efficient markets.

In the real world, people walk through a continually moving "bubble" of opportunity costs. Movement between prospective transactions is costly. If you are at a local corner grocery store, you cannot immediately reach out and take advantage of prices at Costco or a supermarket. Comparison of prices itself involves effort, at finding prices on items, remembering them from elsewhere, and comparing sizes and quality and unit prices. In short, although the supply and demand curve graphic represents the general conceptual landscape faced by the consumer, in practice the demand curve is constantly changing in shape and magnitude, shifting back and forth in response to changes of location, competition for attention, and the immediacy of basic needs.

To fully understand what drives "ultimate" value, we would need to analyze the dynamics of decision-making within the consumer. Some have called this "neuroeconomics", others might put it under the label of behavioral economics.

It's useful to have some background on philosophy of ethics and morals. Goals for comfort, survival, and reproduction come into play. The most fundamental influences are very practical, involving food, water, temperature regulation, social interaction. Although clearly this will invoke most of the human sciences (psychology, anthropology, sociology, cultural evolution) we are getting closer. We at least know now whether the boundaries are, and that certain economic questions can be resolved very directly into organism-level analysis. Furthermore, we have some sense that actual market data, such as the price of a hot dog at a market, supermarket, convenience store, convention, and in the middle of a desert will all be useful in calibrating numerically the effects of organism-level goals and drives.

A Small Cap-Based Disproof of the Efficient Market Theory (EMT)

I have a puzzle to pose to those of you who have slightly more training than the common investor. 

I found this graph at a Fundrise page for an innovation venture fund.

I am contending that the data on this graph effectively disproves EMT. Can you explain why I am making this claim?

If it is not evident, I can give you a hint. It is: What if you consider the Stocks, Bonds, Bills, and Inflation results versus this graph?

If the answer is still not at hand, then let me give you a second clue: consider the material presented on this Fundrise page about private equity. 

The EMT Problem

The first important clue to the puzzle is that the small cap ROR shown above is below that of mid cap and large cap equities. We should generally expect that riskier investments have higher rates of return, but somehow that has not been the case from 1984 to 2015. The volatility is in the right direction, but not ROR. Mid cap equities have both higher return and higher volatility, as we would expect. 

A parallel problem is that non-U.S. equities have much higher volatility, but lower ROR than any of the U.S. equity categories. 

Another important clue: Buyout funds have higher ROR and lower volatility than any of the equity classes. 

A Thesis about Why Small Caps have Under-performed

An important point made in the Fundrise page is that tech companies have been remaining private longer. Some of them emerge from their IPOs as mid caps or large caps. Private capital is capturing more of the gains of early stage companies. That leads us to the conclusion:

Private equity is skimming off the best small cap companies from the public markets.

But if the market were efficient, then their attempts to "skim" would for naught, as any attempt to buy the "best" small cap stocks would be countered by higher small cap prices in the public markets prior to acquisition. The way to get a reduction of the small cap ROR from the SBBI results (which include 1926 to 1984 as well as the more recent years) is for private equity to have a "stock picker's edge" in selecting small cap stocks.

This edge can also be seen in the high ROR for buyout funds.

Not all small caps were bought by private equity funds. Some were bought by other public companies, including public companies that had an edge in buying their small cap competitors. The FAANGM have bought and eaten hundreds of small cap companies over the last 20 years, and it wouldn't surprise anyone if the people running those companies had an inside edge on which public (or non-public) small cap companies were worth buying. Or you could think of the FAANGM as being venture or mutual funds in themselves. Then the excess return one would typically associate with a small cap instead would show up as enhanced return of the tech large cap stocks. This certainly feels plausible, as the FAANGM cluster has done inordinately well over the past 10 to 12 years.

Entanglements with SBBI

This presents problems for those who rely (such as we did in our advice on outperforming professional investors) on SBBI results to prospect for future returns. If the future small cap candidate pool will have been cherry-picked by private equity, then what does that say about the future of SBBI and small cap index funds?

What could account for this outcome? SBBI only dates back to the early 1970s. As the SBBI results became more widely believed (perhaps in the mid-1980s?), private equity became an increasingly large force in the overall marketplace for equity. We might think that there were forces tending to make the market efficient, and this is reflected in how private equity has been scooping superior small caps from the market. If there had not been a small cap premium, there wouldn't be opportunities for capturing the excess that fed private equity.

One piece is missing: Many would argue that a strong component of private equity performance is the additional management expertise, aligned with capital, that can be brought to a deal. Then a small cap equity returning 12% in the public market could in theory return perhaps 13% or 14% or more under alternate ownership. This in turn means that public small cap stocks that would "naturally" return less than 12% could also be bought out and it would be more efficient for private equity to buy them and manage them than if they were publicly owned. An 11% stock with a 2% gain due to private ownership then becomes a 13% return; better than public ROR, and better than if the private acquirer were to only hold a partial stake in the company as publicly owned. This in turn would then explain the gap in the graph above. Only below average small caps would remain in the market after private equity had cherry-picked the better performers.

Other Theories About Small Business Formation

If business formation is substandard to past eras, then the supply of small business could be less than the long term historical norms. I have not made a systematic study of this, but this chart seems to show that U.S. business formation has been declining.

We also have anecdotes like the "flying cars" comment by Peter Thiel that expresses this sentiment. Government regulation has increased over the last 30+ years as well. The economy has shifted from rewarding physical work to intellectual work, starting in the early 1970s, which raises both the entrance requirements for building the average new business and the stakes involved.

If we assume that the efficient market theory applies to privately owned small businesses all the way down to sole proprietorships and companies employing less than 15 people, then this graph is not something that can be overcome by "boosting" small businesses via Small Business Development Centers, government programs, special grants to disadvantaged entrepreneurs, and similar interventions. Special programs that favor women-owned, minority-owned, and Native American-owned businesses in Federal Government contracting are rampant and have been in place for a long time, so there are more opportunities for entrepreneurs, not fewer.

It could also be that the costs of being a public company are higher than before. Increased regulation would also cause this to happen. If so, then the founder of a private company would tend to hold onto it longer before selling shares to the public, and therefore could potentially collect more of the superior returns available inherently in the business while it is growing rapidly. This also matches what Fundrise's second chart shows:

(Considering the current moral climate of the country, I feel it worth mentioning that having the founder "skim" from his own company by delaying when he takes his company public is completely fair. It is ridiculous to suggest otherwise; no owner "owes" it to others to take a company public sooner. Before 2020 I would not have written those sentences; now I feel that such needs to be said because there are many people who will automatically assume that founders have a duty to work harder than everyone else, take the risks on themselves, and then deliver the resulting profits to the public for free.)

If there is a shortage of small caps, then the value generated by a good new small business will be captured faster than it was before. So, from the perspective of an investor who is also willing to be an active investor, this era calls for angel investments and personal entrepreneurship as active and increasing percentages of the total investment portfolio. It is certainly the case that a great business will reward the owner far beyond the SBBI averages. If you can maintain a 20% to 30% ROE, then your money is better placed on the liabilities side of the general ledger of a small business you run yourself, because that's your return, 20% to 30%.

In some circles it might be common to write poetic lamentations about how people have lost their fire, their passion for new ventures. I scarcely think that is relevant; it is just emoting. If we believe America's SBDC and their 8/2/2022 blog entry, business formation is not suffering from any lack of enthusiasm:

"2021 broke a record year for entrepreneurship with five million new businesses started."

Capitalism is Pro-Market and Pro-Consumer, All at Once

Every once in a while I learn something new. Actually, I try to learn something new every day, but I am talking about learning something unexpectedly. Today I noticed in an opinion piece by Stephen L. Carter that he used a phrase in an unexpected way:

"...I wrote in praise of Luigi Zingales’s book, “A Capitalism for the People.” At that time, I examined his call for elevating pro-market values over pro- business values."

What caught me off-guard was his use of "pro-market" and "pro-business" in a way that indicated they were completely different.

Being born an American, having read John Locke and Adam Smith, Stewart Brand, "The Discipline of Market Leaders", several Warren Buffett biographies, several textbooks on economics, Ayn Rand, and many, many newspapers over the years, among other sources, I was sure that I understood what the phrase "pro-business" meant.  Clearly, it means "favoring open markets and open competition by reducing barriers to trade and facilitating information flow by marketplace mechanisms." Right?

Then what does "pro-market" mean? Doesn't it mean "favoring open markets and open competition by reducing barriers to trade and facilitating information flow by marketplace mechanisms?"

You can see my dilemma. If "pro-market" and "pro-business" mean exactly the same thing, then how could you "elevate" one over the other?

The solution to the mystery is strictly perception. When Carter (and Zingale?) use the phrase "pro-business", they don't mean "open markets." They literally mean, "favoring business over consumers." This is a quite a surprise, as few hardcore capitalists would ever have considered that meaning. No true capitalist thinks that government should favor business over consumers. It is all about the markets. This is an absolute, with no room for negotiation on the meaning.

It looks like there is a cultural divide over the use of an economics term.  Pro-consumer groups use the phrase "pro-business" in a way that makes them look Marxist from the perspective of the capitalists. When a pro-consumer person like Carter says "pro-market is better" the response of the capitalist is "now you are finally starting to be correct in your thinking"(!). Which I am sure would shock Carter, though he shouldn't be.

So if both capitalists and pro-consumer advocates believe in pro-market policies, what the heck does "pro-business" mean? I have to conclude that a pro-business government, which chooses to support businesses over consumers, is either fascist or communist, but it is certainly authoritarian or a corrupt oligarchy. (If you squint, you might just see modern China in that definition, though that would be too harsh a judgment.) It is a very short stride from "pro-business" to state-controlled businesses that are held as sancrosanct because their output serves the people as a whole, not some little individual "consumer brat."

Government didn't build that

There are a lot of Government employees and elected officials who draw paychecks. Many of them attribute their positions of privilege and power to their own intelligence and correct political beliefs. But their seemingly justifiable perches over the people is an illusion. There are a lot of smart citizens out there. Let me tell you something, there are a whole bunch of hard working entrepreneurs and skilled workers in America.

If you were elected to office, a lot of people along the line gave you a lot of help. There was a businessman or inventor somewhere in your life. Somebody helped to create this unbelievable American engine of production and commerce that thrived despite Government intervention. All of the money that Government spent on roads and bridges, that came from hard working people and entreprenuers. Contractors with expertise and skills built them, the Government didn't. If you are in a local, or state, or the national Government, you didn't build that. The PEOPLE and BUSINESS made that happen.

Students Put Into Debt by Government Aid Part 2

Here is more evidence that gains of a college education are captured by the college itself, not its graduates, and therefore students loans from the Government causes a net transfer of money from students to the universities.

Trapped by $50K Degree in Low-Paying Job

Some of the motivation for the Occupy Wall Street protesters is the phenomenon where society and the university promise a good job upon graduation, and an even better job upon finishing graduate school, then don't deliver.

http://www.bloomberg.com/news/2011-12-07/trapped-by-50-000-degree-in-low-paying-job-is-increasing-lament.html

What? You say that better jobs aren't promised? Yes, they do promise. I'll quote the article:

Debra Stewart, president of the Washington-based Council of Graduate Schools, said advanced schooling is still the “pathway to success in the modern economy.”

“The more education you have, the more highly regarded you are going to be in the workplace,” she said.

There isn't a single person on this planet who doesn't translate "highly regarded" as "better pay."

College Costs Are Rising Faster Than Cost Of Living, Medical Expenses

This article features several graphs of prices relative to 1978 levels for medical care, college costs, and the general cost of living.

http://www.huffingtonpost.com/2011/10/28/college-costs-are-rising-_n_1063617.html

Rent-Seeking

I've put this link in not because it pertains specifically to tuition, but as general background education in the economics of rent-seeking behavior:

http://en.wikipedia.org/wiki/Rent-seeking

Some useful passages from the Wikipedia article on rent-seeking:

"From a theoretical standpoint, the moral hazard of rent-seeking can be considerable."

"Rent-seeking may be initiated by...firms that stand to gain from having special economic privileges, which opens up the possibility of exploitation of the consumer."

On Stranded Capital

There are significant differences between what the current economy feels like, especially as reported by the media, and its underlying strengths and weaknesses.

The cause of the current malaise is the necessary adjustment period after a boom. The current recession was not caused by the financial crisis of 2008. The financial crisis was driven by the boom of 2003 to 2006. During the boom years, optimism for increasing housing prices caused people to spend and invest more than they otherwise would have. As a result, they stranded their capital on a deserted island.

When you over-invest, you take a risk of stranding your capital in an unproductive place. A classic example of an investment is a house: You need a house, so buying one might be a good investment, as it may reduce your costs of housing yourself over rent. Suppose that you are so impressed by the good returns on your first house that you buy a second one. Whether this second investment pays off depends on the external market. If no one wants to buy your second house from you, then all the money you poured into it is stranded until such future time as the market comes back and decides once again that it wants to buy your house. In the meantime, all of that money is tied up in concrete, wood, nails, flooring, roofing, electrical cabling, appliances, and all of the labor that was required to put those items into the shape of a house. You can do nothing with that money because it has been converted into goods. It is stranded. Presuming that the rental market too is down along with the housing market, the house is a stranded investment, providing no payback.

If the entire economy contains a significant amount of stranded capital, then the economy will show the same signs of stress that the owner of the second house is under. Of course, this example is extremely close to what actually did happen in the mid-2000s, and our current situation continues to reflect stranded capital sitting in houses that are not returning any value to their owners or society.

The solution to the current recession is then quite clear: Wait long enough for there to be enough people that those houses can be useful and occupied, or long enough that the capital that was stranded is small compared to the new capital generated by all of the country's other useful pursuits. Any other attempted solution potentially ignores the fundamental problem of the stranded capital, and therefore will not repair the problem.

Students Put Into Debt by Government Aid

Judith Lynn Clayton reports in the NY Times piece Student Loan Debt: Who Are the 1%? on the state of student loans.

http://finance.yahoo.com/news/student-loan-debt-1-130033806.html

Along the way, she mentions a New Yorker article by James Surowiecki about student debt. Upon reading this, it struck me that some people ascribe too much credit to the "rational human" model of economics. The way Surowiecki puts it, you would think that students were making their own choices about how much tuition to pay:

"...the college wage premium—how much more a college graduate makes than someone without a degree—is at an all-time high. In fact, the spiralling cost of education has to some degree tracked the rising wage premium; as college has, in relative terms, become more valuable economically, people have become willing to pay more for it."

http://www.newyorker.com/talk/financial/2011/11/21/111121ta_talk_surowiecki

What Surowiecki is glossing over is that college tuition in this case isn't behaving like a commodity good. It is acting like a monopoly good. Colleges determine the advantages a degree will currently confer, then they carefully set their prices to capture most of that advantage. The student must take it or leave it. Loyalty and brand name count for more among universities than almost any product on the planet. If you have your heart set on getting into Princeton, you pay what they ask, and there are no discount holiday sales or outlet stores for a Princeton degree or a Princeton undergraduate experience.

The intent of Government aid is obvious: Make it easier to pay these onerous bills. But the net effect of Government aid is to cause an offset increase in tuition rates, since the universities will charge what the market will bear, and with Government aid in place the market is suddenly able to pay more, in total, than before.

The effect of Government aid for college is therefore to raise tuition and increase the number of students with outrageous student loans. There may be some studies that show that aid causes a shift of costs from less affluent to more affluent students, but along the way there will be some students who simply wind up paying more money overall.

Expanding the Vorpal Charter

I've been making a few changes to the Vorpal Trade blog, including changing graphics, coloring, and the description. When I started this blog several years ago I intended to comment on investing and equity trading primarily. Over time, I am finding that I'm writing a lot more about economics and frugality, especially as they relate to our current and future economic states. I see a lot of traction in writing about this, but as I do so I also see that a lot of these topics involve what my university referred to as "the humanities": psychology, economics, history, politics, and anthropology. These are intimately connected with business and the marketplace, and of course, government decisions that impact the economy.

So rather than re-title or create a new blog, I am going to purposely blur the charter, as reflected in the new subtitle Art, science, and economics of the human condition. I think that the net effect will be that I am covering the same material, but in much greater depth.

It should also be more fun. I will be adding some reviews of literature, music, and other arts, and with luck these articles will also come full circle and lead to new insights in business, investing, and economics.

Everything is an investment

The principal cause of recessions and depressions is lack of capital. Reduced capital stocks induce businesses and consumers to curtail their expenditures, in order to conserve their scarce stock of money.

What causes lack of capital? Poor return on investment is the primary culprit. During the preceding boom, consumers and business, and probably government as well, make what turn out to be poor investments. When capital and revenues are plentiful, people are less concerned with making the highest quality choices.

When I use the word "investment" here, I mean the allocation of any resource to any activity. We all think of stocks, bonds, money market funds, and real estate as investments, but what about time, purchases of durable goods, selections of educational topics, development of new skills? Home budgeting wisdom separates expenses from savings, but both come from the same income pool, and both have the capacity to return future gains.

Most expenses don't return cash, but they may return convenience, time, life satisfaction, and help you avoid costs. If you buy a reliable car instead of a flashy car, you may save thousands of dollars in maintenance over the life of the vehicle and spend dozens to hundreds of hours less time. Then again, if flashiness is supremely important, then buying a flashy car may return life satisfaction well in excess of any additional maintenance expense, or could induce you to extend your car maintenance skills, resulting in personal satisfaction and lower car repair bills.

If you don't think about which corn flakes to buy, you might buy the more expensive box, or the one with less quality per dollar. By not thinking, you lose money. When you don't pay attention, your resources go to the wrong place, and reinforce the wrong behavior in others.

These decisions get less consideration in boom times. If real estate is booming, people may worry less about what would happen if future prices fall than they otherwise would. The idea is that during bubbles the quality of many decisions about where to put capital may be reduced in quality. The result is a mis-allocation of resources, followed by substandard returns on those investments, further resulting in a reduced capital stock.

Hence, it isn't the lack of "animal spirits" that causes recessions, it the presence of "animal thinking" during the booms that causes capital to be allocated badly.

With this insight, the way out of a recession is clearer. Any policy or inducement for people to shortcut their thinking will make the capital deficit worse. Allowing people to sharpen the quality of their investments, to be frugal, insist on quality, and so on, directly adds to capital and immediately rewards those who are making the best efforts to allocate their capital.

Suppose burger chain A and burger chain B sell roughly equivalent value meals. Chain A sells theirs for $5.50. Chain B sells theirs for $4.00. If we assume that the psychological satisfaction of the two meals is roughly the same, the food has the same number of calories, the same quality, and same taste, then which chain is the better investment vehicle? Shareholders of Chain A might be better rewarded in the short term, but let's analyze what happens to society as a whole.

Say that Chain A "gets away with" selling its meals for $5.50. Over time, its employees might come to feel entitled to that $5.50. Or the price may reflect their higher costs, they may let costs rise because the price gives the company less impetus to cut their costs. In the long term, society gets fewer meals from Chain A for the same number of dollars.

Chain B, on the other hand, is generating more meals per dollar. Its customers have money left over, and their employees have succeeded at running the business on a leaner and meaner basis, which makes it more robust to economic shocks. In the long term, society gets more meals from Chain B for the same number of dollars.

In an economic boom, customers flush with extra cash may feel that they are able to show off their wealth by deliberating indulging in a meal from Chain A. Members of the opposite sex will be impressed: "Oh, he can afford the expensive burger! I want him to ask me out! Not that cheap Chain B guy!" Customers are then rewarding the less-efficient business, and making poor investment decisions because they get less for their dollars.

Society benefits from nurturing organizations that can produce and achieve more with fewer resources. Boom thinking, with conspicuous consumption, anti-frugality tendencies, and the success of even inefficient companies, is bad for the long term economy.

I hope that the point of the title of this posting is now clear. Even though a hamburger purchase may not feel like an investment, thousands of decisions to buy off the dollar menu are nevertheless the kind of capital allocation that sets the stage for long-term national economic growth.

Economic Cycles as a Form of Spiritual "Payback"

Governments strive to keep their economies as healthy as possible, usually paying special attention to maintaining the fullest level of employment possible. But full employment has its own costs:

- Government stimulus programs result in higher taxes, putting a drag on economic activity
- lack of austerity reduces the incentive to maintain high standards for return on invested capital
- decreased appetite risk necessary for new ventures, since maintaining the status quo is adequate; result is that fewer new ventures are created

Deep recessions can creates a groundswell of sharp, tough decision-making among consumers that raises the bar for marketplace products, which has the effect of requiring lower prices and higher quality among businesses competing for a share of scarcer dollars. On the consumption side, having fewer dollars to spend tends to automatically enforce a higher consumption productivity, in which the same utility is generated from fewer expended dollars.

The hazard is pernicious: If the recovery from recession is too easy, consumers forget their tough, high return-on-investment habits and begin to make sloppier decisions. The right way to recover from recession is to have the recovery driven by the higher productivity of consumption and investment decisions among consumers and businesses, respectively. That is, as frugality is practiced more and more it becomes a habit and more ingrained. This frugality causes a national natural productivity boost, which then shows up in an expanding marketplace as consumers then find new surpluses at their disposal.

The converse also occurs: In boom times consumers feel that money flows to them easily. They get careless, and don't police their expenditures as much, or fail to shun higher-priced, less efficient services and products. Marginally inefficient activity fails to be curtailed during the boom, but then this leads to small decreases in the capital stock as resources are squandered and wasted and consumers fail to reward the good businesses and punish the bad businesses.

In the global scheme of things, a recession is a school lesson. It occurs because the nation forgot that it was supposed to be on good behavior. Once in the recession, the nation learns the good way, the right way, and these practices then lead to the recovery.

So the business cycle is payback: It is carrot and stick, rewarding you (economic expansion) for good habits (frugality) and punishing you (economic contraction) for bad habits (overspending or buying badly). It is a natural cycle, supplying invaluable feedback.

Stimulus interferes with this learning process. Supply enough stimulus, and the nation will forget how to invest in itself appropriately, and the lessons of frugality will be lost.