Capital Misallocation: Captain Philips

Of you haven’t seen Captain Phillips yet, get the bluray now. Tom Hanks does a fantastic job. Keeps you on the edge of your seat, rooting for the good guys.

The idea of a ship flying an American flag getting into trouble, then the US Navy and the SEAL special forces snipers come to the rescue seems like a success on the surface, especially compared to the Chinese Govt negotiating a $4 million ransom.

USS Bainbridge 270 soldiers USS Halyburton 226 soldiers vs 4 Somali pirates

Obviously the US government thinks this episode is quite a success. Enough that the Navy was supportive of making a film about this event, and enough that the lifeboat involved is on display at the Navy SEAL Museum.

Then I started thinking about this in more details. How much money does the US spend per year on military related applications? Officially the US spends more than $680 BILLION per year on our military, and some estimates put the number above w ell above one trillion. 4 – 8% of US GDP is military spending. Keep in mind that total manufacturing is only 12% of the economy, compared to 30% in China, 21% in Germany, and 20% in global manufacturing powerhouse Switzerland!

The American media constantly claims that America is too expensive so nothing can be made in the US, yet labor prices in Japan, Singapore, Germany and Switzerland are as high or higher than the US, yet these countries export very effectively. The fact is that US Trade Policy was designed after WWII when we needed to buy off East Asian and Western European allegiances with access to our market and technologies in exchange for support against the Soviets. Sadly, this policy has become entrenched and most people in power benefit from keeping the status-quo, even though it’s destroying the American economy. Many politicians are bought off by foreign trade lobbies. Some are bought off by big businesses who’s CEOs don’t care about the next decade, they just want their bonus next quarter. The fact is that making your workers valuable is quite easy. Save and Invest. The lower limit of wages is governed by supply of workers. The upper limit of wages is governed by how much capital has been invested, and is able to be used by those workers. Capital can build roads, bridges, ports, trains – infrastructure. Captial can well be invested directly in the machinery that makes labor more efficient. Sadly, the US hasn’t kept up with either of there for decades. Look at US freeways, airports, ferry terminals, and any other infrastructure and it’s quite obvious that the US will be doing worse every year for a long time to come. We didn’t invest when we could, we didn’t protect our technology, we didn’t protect our market, we haven’t protected our workers.

On the surface, successfully rescuing this captain instead of paying a ransom looks like a win, but the more you Peel back the onion and consider that we have finite resources and must manage them well if we want to become wealthier, if we manage resources poorly, we will become poor. Sadly, that is exactly what the USA has been doing for the last 50 years, and we’re rapidly accelerating the process.

Interestingly, Chinese netizens are critical of paying the ransom instead of heroic military action lime the United States. Perhaps another example that there is nothing magical about a majority opinion or a market for coming up with superior strategies and tactics.

In fact, a large group of people with average intelligence, finite time, finite attention span (informed by sound bites) and an evolutionary bias toward reaction will typically not be as effective as a small group of very intelligent, well informed, strategically disciplined group. Viewed from a competitive advantage perspective, the idea of a democracy composed of people with average intelligence and sound bite information sounds like quite a horrible system.

3 thoughts on “Capital Misallocation: Captain Philips”

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