February 13, 2014

  • MONETARY POLICY EXPLAINED

    I just came up with a model so elegant that it can be explained in a few minutes to just about anyone, but so powerful that it provides a compelling explanation of just about every major macroeconomic issue: Why depressions happen, how debt works, and what causes inflation. It’s so incredibly simple I at first thought I had to be missing something… but upon reflection, I don’t think I am. We had simply blinded ourselves with unnecessary complexity.

    The model has four people in it (which you can think of as “sectors” if you like):
    A farmer (firms)
    A citizen (households)
    A banker (the financial industry)
    The mayor (the government)

    There is only one good: Apples (real GDP).

    At the start, the citizen has 1000 apples and the bank has $1000. The farmer says that he can turn her 1000 apples into 1100, if she gives him the 1000 apples and waits a year for the seeds to grow. The citizen could just loan the apples, but suppose she doesn’t want to do that. (I’ll talk about why this would be a bit later.) So instead she wants to sell the apples, for $1 each. But the farmer doesn’t have the money, so he gets out a loan from (you guessed it) the banker. The banker loans him $1000 at 10% interest.

    So here’s the farmer’s plan: Buy the 1000 apples, grow them into 1100, sell the 1100 apples back to the citizen, and repay the loan. It should work, right? 1100 apples is worth $1100.

    But here’s the problem: There isn’t $1100. There is only the $1000 in the system.

    So if the farmer makes his 1100 apples and tries to sell them, one of two things must happen:
    1. The farmer can only sell 1000 apples. This is what we call overproduction. The citizen can’t buy the 1100 apples, because she only has $1000 and the price has stayed the same.
    2. The farmer sells all 1100 apples for $1000, meaning the price has gone down to $0.91 per apple. This is what we call deflation. All 1100 apples get sold, but at a reduced price.

    Either way, the farmer now owes $1100 but only has $1000 with which to pay it. So he can’t pay it; he defaults. He may go into bankruptcy, eliminating the entire debt. But now the banker has no money either; that’s a liquidity crisis. The system freezes up; everyone’s broke; the apples get wasted; we have a recession on our hands.

    What can the mayor do? Well, one thing he can do is lower the interest rate: Make the interest rate 0% (which we basically did in 2009), and now the farmer only owes $1000 and he can pay it back. (The banker isn’t thrilled, but at least he gets paid something.) But that might not always work, because what if the harvest was bad and now there are only 900 apples? Either the price must go up (stagflation) or the farmer isn’t going to be able to repay even at 0% interest (a liquidity trap).

    A better option (better even than lowering interest rates) would be for the mayor to print more money. Print $100, give it to the citizen; she buys 1100 apples, the farmer repays his loan; the banker is solvent and makes a nice profit; everyone’s happy.

    That’s not quite what we did in 2009, though. Instead, the mayor printed money and gave it to the banker. Now the banker has $100 and the farmer owes him $1100 but only has $1000 to pay; this hasn’t solved the problem at all! It can yield a temporary solution though, which is what happened: The banker loans the new $100 out to the farmer so that the farmer can now repay $1100. What happens when that $110 comes due next year? Uh oh… And maybe that’s why there’s a business cycle. We keep failing to solve the underlying problem.

    The mayor has another option too: He could print the money and buy the extra 100 apples himself. This is what we call a fiscal stimulus; the government buys up the extra goods that the people cannot afford. Notice that this only works if the government spends more than they take in, that is, a deficit. A balanced budget would be like the mayor taking $100 from the farmer to buy the apples with; that doesn’t solve anything.

    Of course, the mayor could make a mistake and print too much money. Maybe he prints another $1000 instead of only $100. Well now there’s $2000 in the system to buy 1100 apples, and we expect those 1100 apples to somehow sell for $2000, raising the price $1.82 per apple: monetary inflation. In this simple case that wouldn’t be too bad, but it’s not hard to see why in real life it can be pretty awful; not all prices adjust at once, and everything goes out of whack.

    Obviously the real world is far more complicated than this; there are a great many citizens, a great many goods, many firms, many governments and many banks (well, actually not that many banks). But the basic rules, I think, are the same. Production increases real wealth: 1000 apples this year become 1100 apples next year. But if the money supply fails to keep up with that growth, we get a recession.

    Moreover, increasing the money supply works differently depending on how you do it. Lowering interest rates is actually really a pretty awful way of doing it; yes, it kind of works, but it’s far from ideal. Printing money and handing it to banks works temporarily, but eventually those loans come due and we’re back in the same old mess. There is really only one solution that actually works: Print money and give it to people. The $100 could be given to the citizen, keeping prices stable and making everything work. Or, second-best, it could be given to the farmer, which allows deflation but keeps the farmer solvent (GM bailout, anyone?). But really the best way, the way that leads to the best long-run outcome for everyone, is to give it to the citizen.

    What would this look like in real life? It’s pretty simple, actually. Instead of buying toxic assets from the banks, the Fed could have loaned a big chunk to the Treasury to issue refundable tax credits to the entire population. Let’s suppose we increased the money supply by the same amount we actually did: That’s a whopping $2 trillion. Each person in America would receive a check for $6500; a family of four would get $26000. The mortgages would get paid, consumer spending would go back to normal, everything would start running again.

    Alas, we didn’t do that. And the question to think about is: Why not?

    The answer Occupy leans on (and they aren’t completely wrong about it!) is regulatory capture: The banker convinced the mayor to do what is in the banker’s favor, instead of everyone else’s.

    But I think there’s a deeper reason, and it has to do with the way that people think about money in general. We think of money as if it were a thing; we say things like “that money has to come from somewhere”. No, actually, it doesn’t. Money is not like gold or granite; there is not a fixed amount of it. Money is not like wood or water, where nature produces it. It is not even like cars or computers, where we construct it from raw materials. Money is a contract. It is a promise. We can make as many or as few of those as we like. Moreover, we can make them to whomever we like. If you start making promises you can’t keep, that undermines the effectiveness of later promises: increasing the money supply too fast triggers monetary inflation. But as long as you only make promises you can keep, you can control how many you make and to whom you make them.

    What exactly are we promising when we print a dollar? We’re promising a share of the world economy. There’s a certain amount of stuff out there; you get a piece of it in proportion to how many of these tickets you have. Adding more tickets makes each ticket worth a little bit less; but that’s exactly what you want, if more stuff is being produced. If I promised you 10% of the 1000 apples, you should get 100 apples. But if I make 1100 apples and still pay you 10%, I’m actually giving you 110 apples instead. Because money isn’t automatically aligned to the value of real goods, we have to make it so; and that’s what a central bank is for.

    Now, with this in mind, why use money at all? Maybe we should go back to a barter system: you can’t have a liquidity trap in a barter system. No, but you have other problems instead. In my simple model, loaning apples would work just fine. But now think back to the real world and all the billions of people and trillions of goods that are made. Do you really want to keep track of all those exchanges in real goods? “Okay Bob, Susan will give you 2 hours of dry cleaning, for which Fred will give her a bowling ball, which I gave him for mowing my lawn; in return, I want you to make me a pair of shoes.” That would be a remarkably simple case. It’s an awful lot easier for each of those items to have a price tag on it and everyone to exchange money as necessary.

    What about gold? Wouldn’t that work like barter? Actually, no. It works like money. In fact, it is money. It’s just a weird kind of money where you let your monetary supply be set entirely by the mining companies and commodities markets. The way barter avoids liquidity problems is by having no fixed numeraire: If you have extra horses, buy things with horses. If you have extra oranges, buy things with oranges. But once you fix the numeraire (you must buy things with gold) then you’re back to all the same problems as money, except now you can’t print more if you need it. This is why the Great Depression was so bad; we were stuck with gold as our money, and that meant we were helpless to stop prices from falling and firms from going bankrupt.

January 21, 2014

  • Why didn’t we just listen to Krugman?

    JDN 2456679 PDT 18:22.

    End This Depression Now! is an excellent book, very easy to read, that gives clear and unambiguous explanations of how we could fix the economy in the US and Europe. I’ve recommended other books about the Second Depression in the past; even if you never get around to reading those ones, at least read Krugman.
    Krugman is, without a doubt, the greatest economist alive today. Nor is it a coincidence that he derives most of his ideas from the greatest economist ever, namely Lord John Maynard Keynes. Along with a select few others—Stiglitz, Kahneman, Ariely, Reich—Krugman is a beacon of sanity in an insane world; if we would simply listen to him, most of these crises could be prevented. And don’t take my word for it; studies have shown that Krugman’s economic predictions are the most accurate in the US media today. Moreover, Krugman and Stigilitz both predicted the 2008 crisis before it happened, while meanwhile Bernanke and Greenspan were cheerfully oblivious—and then Greenspan had the audacity to claim “No one saw this coming.” Actually, we did; you just weren’t listening.
    End This Depression Now! doesn’t go into a lot of detail about what caused the crash or who was responsible for it, but that’s because Krugman considers another objective far more urgent: What do we do to fix it? His answer is really quite simple: We need more government investment. Solar panels and maglevs, bridge repairs and electrical grid modernization. We need to spend trillions of dollars now, so that we don’t suffer trillions of dollars in lost productivity later.
    Won’t that put us further into debt? Yes, Krugman admits; but it’s well worth it, just as it was well worth it when we spent a comparable amount (inflation-adjusted) in World War 2. He carefully addresses the sound-byte “How can you fix debt with debt?” by pointing out that the key is always whose debt to whom; the government owing money to the American public is quite different from the American public owing money to a crime syndicate of multinational banks.
    Most of Krugman’s recommendations are surprising for how non-radical they are; in the 1960s and 1970s they were basically standard, mainstream economic policy—and they worked pretty well. Unfortunately, the people who called themselves “Keynesians” didn’t understand cost-push inflation or the OPEC cartel, so their failure to predict the Nixon stagflation discredited unrelated actual Keynesian ideas. Actually we might have avoided the whole thing if Carter had stayed in office and continued his program of investment in solar power; when OPEC jacked up the price of oil, we could have just stopped using oil and given OPEC the middle finger.
    If the book has any shortcomings, it is in being a bit too optimistic about our political system. Krugman thinks—or at least hopes—that if we just keep saying the truth often enough, people in power will begin to hear it. I fear it may take something more drastic than that.

January 19, 2014

  • Apparently I’m not the only SF author/economist.

    JDN 2456678 EDT 22:41.

    Neptune’s Brood by Charles Stross is an interesting book. It’s oddly compelling, but for reasons I can’t quite articulate. The world he builds is so odd and perverse—and yet as far as I can tell, absolutely nothing in it violates any known laws of nature. It is one of the hardest pieces of science fiction I have ever read, and yet it literally involves a mermaid being hunted by pirates as she searched for ancient treasure beneath the sea. (It makes sense in context… sort of.)

    The reason I say I must not be the only SF author/economist is that Stross fills the book with a wide array of economic in-jokes, culminating in the fact that the ancient treasure is an abstract financial instrument that basically amounts to Bitcoin. Other examples include the fact that people can buy put options on just about anything, including other people; and the fact that people are literally born into debt. I’m honestly not sure how well people who aren’t economics-savvy would appreciate its dry sense of humor.

    And people who don’t understand relativistic physics won’t appreciate it at all, which brings me to my one major problem with the book: It’s full of long sections of worldbuilding exposition that get grating after awhile and really don’t need to be there. You don’t need to give us all the details about how the nanotechnology and body modifications work. You don’t need to list the seven different types of nuclear rocket engine. The book is mostly about financial instruments (like I said, most people may not appreciate it), but even then I’m not sure we needed the level of detail we got about those financial instruments. We don’t need to know, and you probably got it wrong anyway—after all, if you knew how to make functional nanotechnology, you’d be silly to make your money writing fiction! In one of my (admittedly unfinished) novels, I simply say “nanotech bodymods”, and I figure that’s enough. What’s important is not exactly how these technologies work: It’s how they affect our lives. Great science fiction isn’t about science—it’s about the impact science has on human beings. Even robots, aliens and metahumans are really ways of commenting on the experience of humans—I write the Terlaroni not to predict some actual race of felinoids on Tau Ceti (if we found such things I’d be as shocked as anyone), but to project a different perspective on what it means to be a human on Earth.

    In short, Neptune’s Brood suffers from the problem Mark Rosenfelder noted in “If All Stories Were Written Like Science Fiction” (which is hilarious and essential reading by the way); this is why people still don’t think of SF as “great literature”, and when a book is so great that people have no choice but to recognize it as literature, they stop calling it SF—think 1984, Brave New World, Slaughterhouse-Five. This is because great literature is about the human experience, and most SF foolishly isn’t.

December 8, 2013

  • A much better Culture novel

    JDN 2456636 PDT 16:53.

    I read Player of Games on the suggestion of a friend of mine who is a big fan of the Culture novels; having been unimpressed by Consider Phlebas I was somewhat reluctant at first, but he convinced me that Player of Games would be better.
    And indeed it was; the characters are more interesting, the plot is more compelling, and we see quite a bit more of what the Culture is like from the inside. I am particularly fond of the drones. The humans are a little too normal—after thousands of years of technological innovation, we still basically function the same? The Minds are a little too vast, appearing almost as gods handing down truth from On High. Of course, that is fully intentional; the Minds are supposed to be AIs of unfathomable intelligence. The drones are a better balance; clearly different from us, more advanced; yet also with some of the same quirks and foibles.
    But still, most of the action takes place outside the Culture, in a distant interplanetary empire known as Azad. The effect is still to reinforce the sense that there are no stories to tell of utopia; once we solve the basic problems of need and pain, we don’t know what else to do or say anymore.
    This is not Iain Banks’ fault; indeed it is something I have struggled with, and I think all SF authors struggle with, when they try to imagine a utopian future. Dystopias are much easier to write; find something we’re doing wrong today, and imagine if it got vastly worse over the centuries. Carry that out to its logical conclusions and have a daring hero challenge the system (if only to fail, as in 1984), and you have a story that almost writes itself. But utopias are much more challenging; what does a perfect society really look like, or even if not perfect—the Culture surely isn’t perfect—then so very much improved that it makes our current life seem barbaric by comparison? How do you tell an interesting story when the system the hero lives in is one that he’s really quite happy with on the whole?
    Iain Banks’ solution is Contact; it seems fitting that Contact functions as the de facto government of the ostensibly anarchic Culture, because stories of Contact are the driving force behind just about every plot in the ostensibly utopian Culture novels. The novel is never really about the Culture; it’s about how other cultures interact with the Culture. One reader characterized the central message of the series succinctly, if crudely: “Don’t fuck with the Culture.”
    Is this the only way? The universe is vast—perhaps infinite—so it’s not hard to argue that once you establish utopia in a few cubic parsecs it’s time to expand it to a few more, and so on. There will always be more cubic parsecs to make utopian, won’t there? It seems quite reasonable that Contact hasn’t run out of things to do over the millennia.
    But is that all utopia is? An end goal? Is human happiness like a term paper—finish this one, move on to the next? Or is there some way to tell stories, really interesting, compelling stories, that take place within utopia itself? If there is, I’ve not yet seen it done. Player of Games is no exception.

April 16, 2014

  • Taking zombies seriously

    A review of World War Z by Max Brooks

    JDN 2456763 PDT 15:26.

    Most media about zombies is relatively frivolous; it’s just there to scare you, or tell a good story, or even make you laugh (think Zombieland or Shawn of the Dead).

    World War Z is not like that. World War Z is a very serious epistolary novel. The tale is told through a long serious of interviews with survivors of, well, “World War Z”, the war against the zombie menace. It could be called a “zombie apocalypse”, yet in its unrelenting realism, World War Z recognizes that humanity would win, eventually. It is a long series of errors and missteps that cost billions of lives before we do, however; and that is what the book is mostly about.

    These zombies are extremely tough: Only damage to the brain will kill them, and explosives are largely ineffective. I found the ineffectiveness of explosives rather implausible, honestly; yes, some explosives are designed to maim humans—claymores, frag grenades—and those wouldn’t be much good against zombies. However, other types of explosives are designed to destroy armored vehicles or structures—hellfires, bunker busters—and many of these latter will essentially annihilate a human body with only tiny fragments left. Need to destroy the brain? There you go, we’ve destroyed the brain and everything within a two-meter radius of the brain. But Max Brooks decided that this would make it too easy, so our explosives are almost completely useless, up to and including nuclear weapons. I guess he needed that in order to have the catastrophic failure at the Battle of Yonkers. A more realistic depiction of the awesome firepower of our military would have had Yonkers end with a massive airstrike and turn the tide of the war.

    I actually get the impression that Brooks has a message to send here: He thinks our awesome military power gives us a false sense of security. He may be right about that—there are plenty of threats to human security that definitely can’t be beaten with massive airstrikes, like disease, resource depletion, fanaticism, and climate change. But zombies? I’m pretty sure we could beat those with massive airstrikes.

    In any case, World War Z isn’t really about zombies. It’s about human beings, and the frailty of the human psyche. The part of the book that rings most true is about the Great Panic, the way that our fear of the zombies becomes exaggerated to the point of triggering a worldwide economic and governmental collapse. Even some of the weirder psychological stories aren’t all that implausible: A major decisionmaker becomes dissociative from the guilt after what he had to do; millions commit suicide or simply give up and die; some people even begin to act like zombies, either hoping to make the zombies leave them alone, or just due to a bizarre mental breakdown. I could easily imagine all these things happening in the face of such terror; think about what happened after 9/11, which was, after all, only 3000 people, roughly the number of people we lose to handguns or auto accidents every month. If a human opponent on the scale of thousands can cause such panic, imagine what a fundamentally inhuman opponent on the scale of millions or billions could do.

    Then again… maybe a human opponent is more terrifying after all. This may be why I was never all that interested in zombie fiction; zombies aren’t as terrifying as human beings can be. Even the robots and aliens that interest me are those who are full sapient beings, who may not think quite like us, but definitely do think. (That’s what made the new Battlestar Galactica so much better than the original.) Zombies are mindless, aimless, pure destruction. That makes it easy: You can’t negotiate, you can’t surrender; you just fight until one side is dead.

    The main fear involves the possibility of becoming one, which is certainly frightening; but when you’re dealing with human opponents there’s a far more terrifying possibility: You may already be one. Nazis and Al Qaeda are made of the same stuff as you and me; they walk like us, talk like us, are us with just a few minor changes. Facing that kind of enemy forces us to confront the fact that in their place we would have done the same. Of course we work very hard to block that out; propaganda campaigns have always tried to dehumanize the enemy. These campaigns do succeed to some extent, but they can’t succeed all the way; deep down, I think most people still feel the humanity of their enemies even as they fight them, and much of the trauma of war comes ultimately from this. A Nazi might be your uncle, your sister, your friend; and while a zombie might have been those things, you know they aren’t anymore and nothing can be done to change that. (The fact that they are currently in the process of decomposition should serve to reinforce that fact.) Unless people still clung to hope for a cure to the zombism, I don’t see how it would be difficult to disconnect all sense of empathy for the zombies and just attack them with everything you have. (This is also how I feel about the Zerg; why would we do anything besides nuke their planets into glass?)

    In all, World War Z is a compelling read with many strong characters and a lot of emotional depth, though it is not for the faint of heart or stomach. World War Z is by far the best zombie novel I’ve ever read, but when you get right down to it, it’s still a zombie novel.

March 5, 2014

  • Certainly economical

    JDN 2456722 PDT 15:29.

    A review of Economical Writing by Deirdre McCloskey

    There is a certain paradox inherent in the “style manual”: Legislating style is like legislating personality. If we all followed such manuals to the letter, we’d all sound alike, and the world would be a boring place indeed. There are on the other hand certain useful things one can say, just as there are certain personality types we can all agree are unhealthy (e.g. obsessive-compulsive, antisocial). There are certain ways of writing that clearly do not work, and it may be useful to discuss them.

    Economical Writing walks this line fairly well on the whole. Some of the advice is general enough to be applicable for almost anyone. Three suggestions that seemed particularly good are “write not so that you can be understood, but so that you cannot be misunderstood”, “revise heavily”, and “visualize your target audience”. Then again, they are nothing new; I had read them many times before and I expect to read them again in the future.

    The book is also very short, which for a style manual is especially important; the longer you spend pontificating about how other people should write, the more likely you are to collapse into the role of the curmudgeon, telling those damn kids to keep off his lawn. Languages change! Indeed, one change I’m noticing even in formal writing is that older generations are uncomfortable writing numbers as, well, numbers; they want us to use ludicrous circumlocutions like “twenty-seven point eight percent” instead of the much more readable “27.8%”. I’ve been graded down for this on occasion, and it always annoys me. (For the record, McCloskey also seems to think we should write out our numbers as words, and gives equally little justification.) Perhaps we millennials have become so accustomed to reading numerals in our text—even where it arguably doesn’t belong, like “inb4″ and “stop h8″—that it seems positively baffling to us to not use a number when a number is obviously what you mean. Obviously if I were to start writing “l8r” and “1337″ my writing would seem too informal; but what, exactly, is the problem with “27.8%”?

    Speaking of ludicrous circumlocutions, McCloskey is adamantly opposed to all Latinate vocabulary; therefore I should have apparently written this sentence as follows: “Talking about silly ways of talking your words into knots, McCloskey really doesn’t like words that come from Latin, so I guess I should have written this sentence this way:” (The above is a translated Quine.) Who sounds informal now? To be fair, there are many abuses of jargon and sesquipedalian vocabulary (should I say “five-dollar words” as McCloskey does? Is that inflation-adjusted by the way?), but those words also exist for a reason. “Five-dollar word” doesn’t actually mean quite the same thing as “sesquipedalian”, and more importantly “frequency-dependent selection” isn’t at all the same thing as “choosing that depends on commonness”. Some jargon should probably be deprecated, like “heteroskedasticity” (isn’t “non-constant variance” much more straightforward?), but other jargon should not: I wouldn’t know how to describe non-constant variance if I couldn’t say “constant” or “variance”, and “deprecate” means something very specific that “eliminate” or “get rid of” simply doesn’t say. Exempli gratia doesn’t really add much that “for example” wouldn’t, but a priori is pretty hard to get around (the best I’ve seen is simply to use “prior”, which barely cloaks the Latin).

    McCloskey also objects to two other constructions I use quite frequently, namely the parenthetical remark (like this—and this dash variant I’m sure you’ve also seen me use) and the emphatic italic. While I must admit I probably do overuse them, they are nonetheless tremendously useful. There is an HTML tag and corresponding LaTeX command just for the emphatic italic! Surely if it has a LaTeX command it cannot always be inappropriate for scientific papers. Personally I find that if I’m reading a long text and the writer never feels passionate enough to italicize something at least once every page or two, I begin to get the sense that they don’t really care about what they are saying, and if they were to lecture on the subject it would be in some kind of robotic monotone. I guess I don’t really get that impression from McCloskey, so perhaps there is a way around it… but what was so bad about italics in the first place?

    Near the end of the book McCloskey really jumps off the rails, venturing into curmudgeon territory. She takes an eliminativist stance on folk economics, which is every bit as bizarre (and every bit as aggravating) as when cognitive scientists take an eliminativist stance on folk psychology. I shall quote her at length:

    Everyone, economist or not, comes equipped with a vocabulary for the economy. It might be called Ersatz Economics. In Ersatz Economics, prices start by “skyrocketing.” When “sellers outnumber buyers” prices fall from “exorbitant” or “gouging” levels, down through “fair” and “just.” If this “vicious cycle” goes on too long, though, they fall to “unfair” and “cutthroat,” the result of “dumping.” Likewise, the woman in the street believes she knows that unions and corporations have more “bargaining power” than do their victims, and therefore can “exploit” them. A consumer can “afford” medical care, maybe only “barely afford” it, “needs” housing and views food as a “basic necessity”. Business people maintain their “profit margins”, probably “obscene” or “unwarranted,” by “passing along” a higher wage, which causes workers to demand still higher wages, in a “spiral.” The protection of the American worker’s “living wage” from “unfair competition” by “cheap foreign labor” should be high on the list of the nation’s “priorities,” as should be the “rebuilding” of our “collapsing” industrial “base.”
    To write thoughtfully in economics you must clear your mind of such cant, as to understand astronomy you must stop talking about the sun “rising.”

    Oh really, Dr. McCloskey? Is there something illegitimate about saying that housing prices “skyrocketed” in 2007, only to “plummet” in 2009? If so, what is it? And God forbid we talk about issues of fairness or justice or exploitation; economics has no place for such petty human concerns I suppose. And who really needs housing, right? Shelter is only one of the fundamental survival needs of the Maslow hierarchy. And speaking of those, what nonsense is this “basic necessity”? I mean, really, what’s the difference between taking away $10 worth of food from a child in Burkina Faso and taking $10 in taxes from Goldman Sachs? $10—excuse me, ten dollars—is obviously the proper unit of measure, and not the fact that, say, the child may starve to death and the Goldman executives may not even notice. (Shameless plug for my forthcoming paper “Markets fail to maximize utility in the presence of wealth disparity”.)

    Business owners themselves talk about “profit margins” (usually mentioned in shareholder reports), and would probably be baffled that you have a problem with the term. The WTO formally characterizes certain low-price trade practices as “dumping”. I cannot fathom in the least what your objection to “priorities” would be; economics is in some sense entirely about the prioritization of goals given resources. And did you really mean to say that unions and corporations do not have bargaining power? The entire literature on bilateral monopoly begs to differ.

    Yes, the folk knowledge does get some things wrong; the “cheap foreign labor” narrative is overly simplistic, and the “collapsing industrial base” is a wrongheaded way of looking at the transition from scarcity to post-scarcity manufacturing technology. But honestly, the way McCloskey sneers at words like fair and just makes me think that the folk understanding is on a more solid overall footing than hers.

    Also, this entire paragraph is full of sneering scare quotes, despite the fact that McCloskey specifically makes a rule against using such scare quotes (and actually in general I agree). If you don’t have someone specific to cite for your quotations… maybe you shouldn’t be quoting?

    In these paragraphs McCloskey exhibits the same error of the cognitive science eliminativists, albeit if anything more egregiously. The fact that many people believe something does not make it false—on the contrary, it is evidence that it is probably true. We evolved with a need to understand the behavior of other humans, and thus we must be able to do so, at least reasonably well; psychology and economics are actually exactly the cases in which you’d expect the folk knowledge to be accurate. Understanding the motions of the planets was not critical for our survival most of the time; understanding the distribution of scarce resources absolutely was. At least cognitive scientists have the excuse that our scientific understanding of the mind is very poor, and we are basically unable to bridge the gulf between low-level neural operations and high-level thoughts and behaviors. Of course, such a link must exist; the fact that you cannot understand it does not prevent it from being true—but it does at least explain why you’d have trouble believing it. Economists have no such excuse, for the level of abstraction required to understand the concept “supply curve” is on essentially the same level as that required to understand the concept “fairness”. Fairness is something we understand more intuitively, supply curves are something we understand more mathematically; but they are both about the interactions between human individuals or small groups; there is no deep causal gulf between them the way that there is between action potentials and beliefs.

    By the way, NASA issues precise predictions of sunrises not only on Earth but also on Mars; I think they’d be a bit confused by the assertion that real astronomers do not say the sun “rises”. What they actually say is more like this: “A sunrise is when the part of the Earth where the observer is turns to face the Sun.” This is the proper scientific attitude; we explain human experience; we do not explain it away.

February 16, 2014

  • After the Music Stopped




    JDN 2456705 PDT 12:31.





    After the Music Stopped is the most comprehensive, detailed account of the Second Depression I have read thus far—and if you’ve been following my Goodreads you know I read quite a lot of these. Blinder does an excellent job of explaining not just what happened, but why it happened; not just who did what, but what motivated them to do it. He talks about how difficult some of these decisions were, and paints a very sympathetic portrayal of most of the policymakers involved. Bernanke in particular comes off as positively heroic.


    Unlike most economists, Blinder also fully appreciates that people are irrational, and the markets they create are no better. He recognizes that "market discipline" and "self-regulation" are oxymorons. Where the hardline neoclassicists were blindsided, Blinder (along with Krugman and other good Keynesians) shakes his head: We saw this coming, why didn’t you?


    At the end of the book, Blinder offers us his recommendations for policy reform. I find it a bit gimmicky that he made them "Ten Commandments" and wrote them in King James Version style (and it gets awkward fast), but the recommendations themselves are sound: "Thou Shalt Remember That People Forget", "Thou Shalt Not Rely on Self-Regulation", "Thou Shalt Honor Thy Shareholders", "Thou Shalt Elevate the Importance of Risk Management", "Thou Shalt Use Less Leverage", "Thou Shalt Keep it Simple, Stupid", "Thou Shalt Standardize Derivatives and Trade Them on Organized Exchanges", "Thou Shalt Keep Things on the Balance Sheet", "Thou Shalt Fix Perverse Compensation Systems", and "Thou Shalt Watch Out for Ordinary Consumer-Citizens".


    The book is rather long, probably longer than it really needed to be. However, Blinder is not wasteful with this space; he fills it with a
    great deal of relevant information in terms that anyone with basic economic literacy should be able to understand. You don’t need to know what a CDO or an exchange-rate swap is in order to read this book (though it might help to at least know what
    bondsand the money supply are).


    One thing I think Blinder is missing compared to say, Krugman or Stiglitz is moral passion. He approaches the situation calmly as a technical problem, doing the cost-benefit analyses as economists are wont to do. And there is a place for that, certainly. But one thing that Krugman especially appreciates is that our financial system is broken, not just technically, but morally.Blinder talks about how people are outraged, but distantly, as though an anthropologist describing the behavior of some primitive culture. He can’t share their outrage—but Krugman can. And we must, for the people are right to be angry. Our banking system has become essentially a worldwide organized crime syndicate. Perhaps it can be reformed… but if it can’t, we must be prepared to tear the whole thing down. If we must nationalize the entire financial industry once and for all, so be it. In any case there are definitely bankers we should be taking to prison. Perhaps the whole idea of profiting off finance is wrong; certainly the basic economic arguments for how profit is supposed to work don’t apply. I like the reforms that Blinder suggests; but I think we need something more than that. We need to rethink the way our economy is structured.

January 16, 2014

  • Blunt to the point of rudeness, but that doesn’t make him wrong

    JDN 2456675 EDT 23:23.

    A review of Griftopia by Matt Taibbi

    From his writing style, Matt Taibbi seems like he’d be fun to be around if he likes you, and absolutely insufferable if he doesn’t. He is beyond blunt, and his language will make your head spin as he uses words like “fucking bullshit” and “synthetic derivative” in the same sentence—indeed he may actually say “fucking bullshit synthetic derivative” at some point. He does not hesitate to call some of our world’s most powerful leaders criminals and their corporations criminal enterprises. He despises Alan Greenspan at a level that cannot be psychologically healthy. Yet his journalism is impeccable—literally some of the best I’ve ever read in America—and his facts all check out. He calls them criminals—and then documents their crimes.
    His anger is palpable, but coming out of reading it, the question is not why Matt Taibbi is angry; the question is why everyone else isn’t. Think of everything you’ve heard Occupy Wall Street accuse banks of doing: Most of that has been documented as indisputable fact. The one I always bring up, simple because it is so blatant and terrible, is the fact that HSBC laundered money for terrorists. LAUNDERED MONEY FOR TERRORISTS. In this post-9/11 world in which our airports are fortresses and the NSA is reading this right now, one of the world’s largest banks can be caught red-handed working directly with actual terrorists and end up paying a fine.
    Maybe Matt Taibbi isn’t the best man to deliver this message—his bluntness and salty language get grating after awhile—but he is actually delivering it, which is better than I can say for most other so-called “journalists”.

November 6, 2013

  • The Logic of Collective Action

    JDN 2456594 PDT 15:55.

    The blinders neoclassicists wear are large indeed. This book was written in 1971, and the neoclassical understanding of collective action has, as far as I can tell, not been substantially advanced since then—in over 40 years, the essential conclusions haven’t changed.
    This would not be a problem, of course, if those conclusions were correct; but they aren’t. Indeed they are wrong at a fundamental level; they are almost literally reversed from the truth.

    Here is the basic argument:
    1. The interests of a group are not the same as the interests of its individual members. [This is true; moreover, I don't think it was recognized by most people before Olson. So that could be marked as the significant achievement.]
    2. Individuals act in their own self-interest. [Fundamental neoclassical assumption; and herein lies the problem.]
    3. Therefore, groups do not act in their own self-interest.

    The logic—and the title did say “logic” after all—is absolutely valid. The problem is that the argument should actually run the other way:
    ~3. Groups act in their own self-interest.
    1. The interests of a group are not the same as the interests of its individual members.
    ~2. Therefore, individuals do not act in their own self-interest.

    That answer has been staring them in the face all along… and yet even now in 2013 most economists still fail to recognize it. Humans are neither selfish nor altruistic; we are tribal. We identify ourselves with a group, defining those inside as good and those outside as bad. The definition of the group can vary a great deal; it might be Americans, or White people, or Christians, or Red Sox fans, or economists, or University of Michigan alumni; and indeed most people will identify in varying degrees with many different groups at once—and much of the conflict in our lives comes from being torn between such identifications. (The rest probably comes from conflict between the groups we identify with and that one special group that contains only ourselves.)

    Actually, even neoclassicists have been forced to accept the most extreme examples: They speak of “households” and “firms” as though they were indivisible entities, even though a household contains several individuals and a firm may literally contain millions. Why does this work? Because they are indivisible, at least in terms of their tendency to act in their own self-interest. A corporation is far more likely to act in its own self-interest than any individual human being would be. Households are also not strictly selfish, but they are at least close to it sometimes; whereas, anyone who would stop feeding their own child because they ceased to be amusing we would all immediately and rightfully recognize as a horrible and defective human being. (Yet this is how you would behave, if you actually acted in your own self-interest independent of that of your “household”, that is, your family.) True, they might be punished for it; but then again they might not (most child neglect goes unreported), and in any case, this does not factor into a normal human being’s decision process. We do not ask ourselves, “Would the police punish me if I stopped feeding my children?”; indeed, we do not even ask, “Should I feed my children?”; we simply feed our children, whenever it is possible, without hesitation. Indeed, we will go to great lengths to feed our children, even if it harms ourselves substantially.

    That makes perfect sense in terms of evolutionary psychology—indeed, it would be completely baffling if it were not true, and might force us to radically redefine our understanding of evolution. But it is completely ignored when we assume that human beings are rational self-interested economic agents.

    Olson even slips into arguing for group cooperation himself sometimes, apparently without realizing it: “[…] a more detailed analysis of the kind outlined above could help to explain the apparent tendency for large countries to bear disproportionate shares of the burdens of multinational organizations, like the United Nations and NATO,[...]” Once you start saying that The United States acts in its interests, you have already committed to an enormous scale of group cooperation. (Moreover, I also question whether he is even correct that this would be something to explain; it is not obvious to me that the disproportionately large amount of money the US gives to the UN offsets its disproportionately small amount of soldiers, for example. It could just be comparative advantage, or even the US bearing too little a share.)

    Throughout the whole book, Olson seems completely unable to fathom why anyone would every do anything for anyone other than themselves.

    He says things like “If the groups, or at least the economic groups, are often interested primarily in their own welfare, it could only be so because the individuals in these groups were primarily interested in their own welfare.” Why? In fact, that is one thing we know doesn’t work—as Olson himself goes on to say: “But if the individuals in any large group are interested in their own welfare, they will not voluntarily make any sacrifices to help their group attain its political (public or collective) objectives).” Olson goes to great lengths to prove that cooperation requires altruism, but simply dismisses the idea that altruism could actually exist.

    He likewise dismisses the notion that people have an innate instinct for cooperation as “meaningless”, when in fact it is the consensus conclusion of modern evolutionary theory. It’s even formalizable; you can actually quantify the human instinct for altruism, and it’s quite notable that the figure considerably exceeds the calculation we would get from simple kin selection, C < rB. If you're anything like me and most people, you've paid more than rB to give someone else B on many occasions in your life, and will probably continue to do so many times in the future. You probably haven't paid more than B, which would usually be bad—though some people do so, and it may not always be bad. You are probably even unlikely to pay exactly B, though at times you may. Instead, you pay pB,where p is a discount factor, functioning akin to r—but no longer equal to your genetic relatedness. Instead, it might be called your "cognitive relatedness", or to use a simpler and more evocative term, your solidarity. Usually p far exceeds r, though in some cases it might be less—e.g. if you have had a terrible falling-out with your sibling and now avoid all contact with them. I also suspect that for identical twins, even though r = 1, p < 1. Identical twins usually care about each other a great deal, but it seems unlikely that they value each other exactly equal to themselves. p = 0.99 seems like a reasonable guess.

    The reason we call it an "instinct" is of course that it is, and this has a rather precise definition in evolutionary biology—a genetically encoded, evolutionarily selected behavior pattern that is triggered in response to certain environmental conditions. We have a moral instinct in exactly—exactly—the same sense in which we have a hunger instinct and a sexual instinct. One of the more important unsolved questions in modern evolutionary psychology (and moral science generally) is how much of human moral behavior is genetic and how much can be changed by environment; but there is no serious dispute about the fact that both are important—and that means that by definition we have a moral instinct.

    Yet Olson doesn't seem to understand this instinct in the slightest, which makes him seem like he thinks all humans are psychopaths. And indeed, The Logic of Collective Action is a book about how people would behave if they were neoclassical rational agents, which is to say, omniscient psychopaths.

    Don't get me wrong, there are some useful insights in this book. It's worth studying the ways that individual and collective decisions can be at cross-purposes. There are good reasons to have enforcement mechanisms in your system of policy, just in case people are tempted to act against the interests of your group in favor of themselves (or in favor of another group!). It's worth considering the fact that many forms of cooperation, from international treaties on down to class projects, are far below their optimal levels, and trying to find ways we might fix that.

    His analysis of how the most stable groups provide both collective and non-collective goods simultaneously is also useful; it goes far to explain why churches hold bake sales and lobby politicians. His explanation of why the lobbying groups for oil companies and utility companies is so powerful is sound. His concept of "selective incentives" can be adapted, I think, to include our concepts of in-group and out-group and social belonging.

    But if we were really atomistic individuals, acting always in our own self-interest, there would be virtually no cooperation at all; even enforcement mechanisms are costly, and if we were all the psychopaths we are imagined to be, we wouldn't even be willing to punish people who do bad things, because that takes effort and time (and in a modern economy, money). In reality, of course, we are very willing to punish people, even at rather substantial cost: Heinrich et. al. (2006) "Costly punishment across human societies." Science 312(5781): 1767-1770.

    The few neoclassical economists who acknowledge this fact at all make ridiculous excuses for it, like "People enjoy punishing others for wrongdoing; they gain utility from a sense of righteousness." Okay, that may be true to some extent… I doubt it's the main motivation, but even if it is: Why is that true? Because we have a moral instinct. Yes, sometimes it feels good to do the right thing; but why does it feel good? Moral instinct. That is literally the only plausible explanation. Psychopathy is at a selective disadvantage.

    (Given that this is the case, you may wonder how there are psychopaths at all. It's probably due to frequency-dependent selection: In a world of moral individuals, it can be adaptive to be a psychopath. But a population of psychopaths would rapidly self-destruct. Under frequency-dependent selection, the two traits converge to an equilibrium where they are equally adaptive.)

    Only at the very end of the book does he acknowledge any motives other than self-interested calculation; and as neoclassicists are wont to do, he immediately declares them "irrational". I do appreciate that he at least mentions the possibility, because I've seen others who refuse to even do that.

    There are of course limits to human altruism; and that is well worth studying. Many people are apathetic in large groups, and it's worthwhile to try to figure out why that is and what can be done about it. People are not always altruistic to everyone, and they do not always do their fair share. The tension between self-interest and group interest—and between different types and scales of group—is fundamental to economics, and indeed to human nature.

    But you're never going to understand how that works if you pretend one side doesn't even exist.

October 23, 2013

  • Keynes, pedantic prognosticator

    JDN 2456589 PDT 15:46

    A review of The Economic Consequences of the Peace by John Maynard Keynes.

    The bad news: Most of the book is spectacularly boring to read, as Keynes deluges us with economic figures. I’m an aspiring economist, and even my eyes began to glaze over. Chapters IV, V, and VI can be safely skipped entirely.
    One interesting thing about the figures is how small they seem; he recommends reparation funds of only $5 billion—and thinks even this may be too high—while the figures in the treaty he considers preposterous are on the order of $10 to $20 billion (actually he says “£200 milliard” etc., because he is an early-20th-century British gentleman, but I did the conversion for you). Germany’s GDP is now $3.4 trillion, so how can $20 billion be such a burden? Well, there’s been a lot of growth and a lot of inflation since 1920. Germany’s GDP at that time was about $20 billion. (This is about the GDP of modern-day Zambia.) So Keynes’s figures are absolutely correct. The actual reparations received were only about $3 billion, which is right about what he said would happen.

    The good news: It really gets interesting when he starts making predictions. The predictions he makes are right, almost every last one of them—and they were made in an environment when everyone else was calling him mad. Reading the last few chapters, in which he predicts the dire outcomes of the Treaty of Versailles and the disasters it will lead to in the 20th century, you would think you were reading a history of the 20th century—except he is writing this history before it happened. I made a list of the events he clearly and specifically predicted:

    1. Weimar hyperinflation: “A system of compelling the exchange of commodities at what is not their real relative value not only relaxes production, but leads finally to the waste and inefficiency of barter. If, however, a government refrains from regulation and allows matters to take their course, essential commodities soon attain a price level out of the reach of all but the rich, the worthlessness of money becomes apparent, and the fraud upon the public can be concealed no longer.” “It is impossible at the present time to say what the mark will be work in terms of foreign currency three or six months or a year hence, and the exchange market can quote no reliable figure.”
    2. Balkanization: “Economic frontiers were tolerable so long as an immense territory was included in a few great Empires; but they will not be tolerable when the Empires of Germany, Austria-Hungary, Russia, and Turkey have been partitioned between some twenty different independent authorities.”
    3. Change of the League of Nations into a new body: “[...]that is no reason for any of us to decry the League, which the wisdom of the world may yet transform into a powerful instrument of peace, and which in Articles XI-XVII has already accomplished a great and beneficent achievement.”
    4. Obstruction due to international veto power: “Does not this provision reduce the League […] into a body merely for wasting time? If all the parties to the Treaty are unanimously of opinion [...] it does not need a League and a Covenant to put the business through.”
    5. The European Union: “A Free Trade Union, comprising the whole of Central, Easter, and South-Eastern Europe, Siberia, Turkey, and (I should hope) the United Kingdom, Egypt, and India, might do as much for the peace and prosperity of the world as the League of Nations itself.”
    6. World War 2: “If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can they delay for very long that final civil war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing, and which will destroy, whoever is victor, the civilisation and the progress of our generation.”

    He didn’t actually get everything right.
    1. He overestimated the League of Nations: “These Articles, which provide safeguards against the outbreak of war between members of the League and also between members and non-members, are the solid achievement of the Covenant. These Articles make substantially less probable a war between organized Great Powers such as that of 1914. This alone should commend the League to all men.”
    2. He also failed to predict the rise of Stalinism: “As I write, the flames of Russian Bolshevism seem, for the moment at least, to have burnt themselves out, […]” “I see few signs of sudden or dramatic developments anywhere.” But even then, he allows the possibility: “A victory for Spartacism [i.e., fascism] in Germany might well be the prelude to Revolution everywhere: it would renew the forces of Bolshevism in Russia, and precipitate the dreaded union of Germany and Russia;”
    3. He predicted the collapse of the European food supply: “The danger confronting us, therefore, is the rapid depression of the standard of life of the European populations to a point which will mean actual starvation for some (a point already reached in Russia and approximately reached in Austria).” This absolutely would have happened if not for the invention of the Haber-Bosch process and the industrialization of food production. Indeed, he even allows for that result, but is too cautious to predict it: “I assume that there is no revolutionary change in the yield of Nature and material to man’s labor. It is not impossible that the progress of science should bring within our reach methods and devices by which the whole standard of life would be raised immeasurably, and a given volume of products would represent but a portion of the human effort which it represents now.” In a later work, Economic Possibilities for our Grandchildren, he actually expands upon this concept into a (highly, uncannily accurate) prediction of the 21st century economy.
    4. He errs most when disagreeing with himself, saying: “Thus the extraordinary occurrences of the past two years in Russia, that vast upheaval of Society, which has overturned what seemed most stable—religion, the basis of property, the ownership of land, as well as forms of government and the hierarchy of classes—may owe more to the deep influences of expanding numbers than to Lenin or to Nicholas; and the disruptive powers of excessive national fecundity may have played a greater part in bursting the bonds of convention than either the power of ideas or the errors of autocracy.” I am far more inclined to agree with a statement he made later in the General Theory: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. ”

    He has an extremely high view of America, at a level that I would find almost unseemly among an American citizen: “After the United States came into the war her financial assistance was lavish and unstinted, and without this assistance the Allies could never have won the war, quite apart from the decisive influence of the arrival of the American troops.” “The ungrateful Governments of Europe owe much more to the statesmanship and insight of Mr. Hoover and his band of American workers than they have yet appreciated or will ever acknowledge.” “If I had influence at the United States Treasury, I would not lend a penny to a single one of the present Governments of Europe. They re not to be trusted with resources which they would devote to the furtherance of policies in repugnance to which, in spite of the President’s failure to assert either the might or the ideals of the people of the United States, the Republican and the Democratic parties are probably united. But if, as we must pray they will, the souls of the European peoples turn away this winter from the false idols […] and substitute in their hearts for the hatred and the nationalism […] thoughts and hopes of the happiness and solidarity of the European family,—then should natural piety and filial love impel the American people to put on one side all the smaller objections of private advantage and to complete the work, that they began in saving Europe from the tyranny of organised force, by saving her from herself.”
    Then again, this is… a basically accurate prediction. The Marshall Plan absolutely was a concerted effort by the United States to save Europe from itself, and it worked spectacularly well. Is America really that great? I think in practice we fail to live up to our ideals; but then, what other nation is founded upon such ideals at all? We are the first nation on Earth to actually be founded, not for the advantage of a king, not in the name of a race or a religion—but in the name of an ideal, a principle of democracy and liberty based directly on Enlightenment philosophy. Perhaps we really are so great, or could be, did we not so often stumble in our own hypocrisy.
    In his most distasteful moments, he comes across as intensely elitist; he speaks often of the foolishness of peasants and the great achievements of entrepreneurs “These ‘profiteers’ are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot be get rich quick whether they wish it or desire it or not. If prices are continually rising, every trade who has purchased for stock or owns property and plant inevitably makes profits.”
    He does have great compassion for the people of Germany, however: “The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable—abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilised life of Europe.”
    He understands enlightened self-interest in a way that even modern game theorists don’t: “If there is any force in this mode of thought, expediency and generosity agree together, and the policy which will bet promote immediate friendship between nations will not conflict with the permanent interests of the benefactor.” “The more successful we are in snapping economic relations between Germany and Russia, the more we shall depress the level of our own economic standards and increase the gravity of our own domestic problems.”

    On the whole, Keynes is unmistakably brilliant, and his long-term predictions have a level of accuracy that is especially shocking in an age when modern neoclassicists could not see 2008 coming even in 2006. If nothing else, that alone should make us Keynesian.
    Just skip Chapters IV-VI.