#118 Scriptural Specialization & Vladimir Putin
The Bible tells us to specialize so we can better serve our neighbors. The current Russian leader does not understand this basic principle of economics.
Nike doesn’t make shoes, Apple does not make iPhones, and Ford only assembles cars, they don’t make them. Tesla DOES make their own cars, but I agree with this Wall Street Journal article that encourages them to outsource it.
The world’s largest taxi company owns no taxis: Uber.
The largest accommodation provider owns no real estate: Airbnb.
The world’s most valuable retailer has no inventory: Alibaba
The most popular media owner creates no content: Facebook
The world’s largest movie house owns no cinemas: Netflix
The largest software vendors don’t write the apps: Apple & Google
The point: You don’t have to own nor control resources to create value. Vladimir Putin does not understand this basic, 21st-century principle. He’s stuck in the medieval thinking that controlling land and nations makes a country richer. He should have learned via his tragic experience with the Soviet Union that it does not. Trying to control people who desire freedom is really expensive: In manpower and lives.
In a recent WSJ article, titled Putin’s Vertical Empire Will Fall, Andy Kessler points out, You don’t invade countries anymore because after the smoke clears, you have to fix their plumbing and heating and cell service. Instead, you hire them.
Russia should supply to the world the commodities in which it has what David Ricardo called comparative advantage: Oil & gas, maybe coal, steel, and nickel. It’s a simple rule of economics: Do what you do best, and outsource the rest. President Putin wants to control it all. That’s a huge mistake, politically, militarily, morally, and most of all economically.
Outsourcing & Off-shoring
My daughter and her husband met while they were both managers of Cheesecake Factory restaurants. One evening, I asked them “Who do you write your biggest checks to?” There was a meat supplier, a fish supplier, a vegetable supplier, two uniform suppliers. They even outsourced the care of the plants and the floormats. I concluded, “So all you do is prepare food and serve it?” That’s about it. I’m not in the restaurant industry, but I’ve heard that food commodities should represent about 25% of the total check paid by a consumer. That means, they take $25 worth of food and change it into $100 in about 12 minutes. Okay, I know, there are many other expenses involved in the building and labor and other expenses. But the stockholders of the Cheesecake Factory have noticed that they make a gross profit of 400% in 12 minutes. So they tell the Cheesecake managers, “Do more of that. Anything that falls below a 400% gross return, outsource that to someone else.”
Out-sourcing is finding someone else to perform a certain function that you’re not good at. Off-shoring is simply doing it in another country. I’ve pointed out in many of my podcasts that I can’t find a scripture that tells us to discriminate against Canadians, Mexicans, nor Chinese. Now, if they are using the economic gain from the trade, to enslave their own people or threaten the world, as China may be doing, certainly we need to rethink our trade relations with that country. Or, if like Russia, they use the economic benefit from their oil sales to attack a peaceful, democratic neighbor, as they have in Ukraine, we need to rethink our trade patterns. But the point of today’s podcast is not about those exceptions. It is about the scriptural exhortation to do what we do best, and how that is applied as specialization in personal economics, and comparative advantage in international economics.
Both the Trump and Biden administrations have wanted to bring manufacturing back to the US. That’s a bad idea. I’ve often suggested to my students, “If the General Motors plant in Arlington, TX offers you $50K and the Microsoft division in Irving offers you $70K, take the $70.” They don’t need much encouragement from me. But the Trump and Biden administrations are encouraging them to take the $50 from GM. Now, if GM offers $75K, take it! The economics rule is very simple, “Do what creates the greatest value.” In scriptural terms, we say “Do what serves your neighbor best. Your neighbor’s offer of $50k or $70K is an indication of how much value you will create for them. Money is too often seen as a negative in Biblical terms. As a Christian Economist, I don’t see it that way. I see it as a measure of how much value you are creating for your neighbors. In Biblical Economic Policy, Sergiy Saydometov and I wrote, “If you love your neighbor, you will provide products and services she demands. If you love yourself, you will make a profit while doing so.”
Specialization is Scriptural
Ephesians 4:11 encourages specialization when it says, “He gave some to be apostles; and some, prophets; and some, evangelists; and some, pastors and teachers.”
When I ask students how many degrees they are seeking, they give me that “Are you crazy?” look. They have limited resources, so they are seeking the ONE degree that fits them best, based on their God-given talents. It’s hard to cite a two-sport athlete. Kyler Murray played football and baseball for the University of Oklahoma and actually played against our team at DBU a couple of times. But he is an extreme outlier. And, in the pros, he only plays football.
Mr. Putin may be worth $100 billion via hidden holdings in Gazprom, Russia’s state-owned energy company. But Jeff Bezos and Bill Gates are worth more and they don’t control any tanks. Mr. Putin’s attempt to re-create the Soviet Union’s vertical empire is doomed to fail.
It’s doomed to fail because it’s morally wrong and economically foolish. Controlling resources is not efficient. Renting specialists is. One of the DBU baseball opponents refused to play the last game of a four-game series because they had run out of pitchers. “Huh?” I asked. They don’t have any players who can throw the ball 60-feet 6-inches? Now, actually, we had beat them pretty badly in the first three games, and their loss in the fourth game was very likely, so they simply chickened out. But think about it: What made them think that not having a specialist was a reason for canceling a game? That’s just an indication of how well-accepted the idea of specialization is.
Ginger works in the Renal drug industry. The medical doctors she works with, first have to earn a Medical Doctor’s degree, then a specialization in internal medicine, and THEN the second specialization in kidney care. They get paid a lot more than a general practitioner. That’s true in all industries: The more specialization, the higher the value that’s created for their neighbors, and the higher pay they receive.
Vertical vs Horizontal Diversification
The other course I teach at Dallas Baptist University is Strategic Management. We study diversification, which answers the question, “What business shall we be in?” Almost all diversification these days is horizontal. A bank buys a bank, and an oil company buys an oil company and an airline buys an airline. They stay in their area of specialization and expand their market power. When they get TOO much market power, consumer surplus crosses the line into producer surplus, and that’s an improper exercise of power. I unpack the Christian worldview of that in podcast #89 Antitrust and the Fallen Nature.
After many years of predicting that General Electric would break up, they finally have. They are now in the process of streamlining from about seven different industries to three. Do you want another prediction? Amazon will split. You may have wondered how they deliver that stuff to your door the next day while making a profit. They don’t. They are losing money in the delivery business and making it up in their other sectors. Some day, a shareholder activist will force them to return to their area of specialization. It always happens. And, it will happen to Vladimir Putin in Russia. He’s about to learn an important economics lesson about specialization.
Comparative Advantage Brings World Peace
In podcast #47, titled Economics and World Peace, I tell the story of Ginger and I standing at the gates of a fort on the island of Martinique. The tour guide explained how control of the island had changed from Dutch to British, to French, and how it went back and forth multiple times. I turned to Ginger and asked, “Why did the violence end?” Humans are still fallen, and they still covet what others have. Why don’t they knock off the country next door? The short answer is because those fallen humans have figured out they can have economic gains without the hassle of controlling land or the people on it. Except for Vladimir Putin. He has not figured it out. But he will soon.
Quoting Mr. Kessler’s Wall Street Journal article again, “It’s a shame Mr. Putin has petroleum-fogged vision. Apple, Microsoft, Google and Amazon all have market caps greater than Russia’s GDP” Or, as I showed my class this week, three states: California, New York, and Texas have GDPs larger than Russia. Florida’s GDP is slightly less than Russia’s.
His medieval invasion techniques don’t work in the modern world.
In my little book Economics and the Christian Worldview, I make the summary statement, Policies that Promotion Production is all that separates rich from poor nations. Mr. Kessler makes the same point in his article this week, when he writes, Productivity drives progress. This will be true in the future for cloud computing, machine learning, and autonomous vehicles. But staying on top requires constant innovation. Despite all the talent in Russia, Mr. Putin never understood this. I’m not always convinced U.S. leadership does either.”
Mr. Kessler is correct: Politicians are seldom very good economists. That’s because they have specialized in politics, not economics.
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