July 7, 2014

  • Of taxes and capital, of billionaires and poverty

    A review of Capital in the Twenty-First Century by Thomas Piketty

    JDN 2456946 EDT 13:15.

    I finished the book several days ago, but I wanted to give it a really thorough review because it is such an important book—and so closely linked to the kind of thing I do research on. I will abbreviate its name as Capital henceforth, which is also a nod to Marx’s Das Kapital. Many have accused Piketty of being Marxist, but actually most of what he says would draw agreement from Adam Smith. Competitive markets, transparent regulations, progressive taxes. The economic system Piketty wants is not the 1930s Soviet Union; it is the 1950s United States.

    Indeed, one of his central points is that the period from about 1945 to 1965 was the time of lowest inequality, most progressive taxes, and highest economic growth in any developed nation in history. Growth in Europe was especially rapid due to the catch-up after WW2, but even in the US growth was substantially higher then than it is now. It was the Golden Age of Capitalism, and we could go back there with just a few simple changes.

    And this is important to keep in mind as you read Capital and its many reviews and responses; Republicans and the likes of Forbes would have you believe that Piketty is some kind of far-left totalitarian Communist, but the truth is quite the opposite: Piketty is a moderate center-left economist, and the only reason he seems so far from mainstream is that our “mainstream” has veered astonishingly far to the right.

    We live in a nation that has privatized prisons and soldiers. If there are any functions of government more basic than these, I can’t think of them; the whole point of having a government is that it handles your law enforcement and military defense—it monopolizes violence to reduce violence. In fact, when we say we’ve “privatized” them, that doesn’t even make sense; a privatized service is one in which revenue is earned from customers subject to market forces. If you’re paying with tax revenue, you can’t privatize it, no matter how far you remove it from accountability or how many rich old White men you put in charge of it. In real economic terms, the US Postal Service—which makes all its revenue from customers, not taxes—is privatized; and no prison or military could ever be. All you can do by “privatizing” it is make it less efficient, less accountable, more corrupt. Again, I remind you: this is something that Adam Smith and Milton Friedman would agree with; there is nothing socialist about government control of military and law enforcement (or if there is, then there is nothing wrong with socialism).

    Privatization does make sense in some cases; and indeed when I wrote a development paper on Venezuela, one of the core themes was that Venezuela urgently needs to privatize most of its industries. When you are making a physical product that is bought by customers, privatization is only sensible; that’s the situation for which free-market capitalism was expressly designed, and it is the situation in which it shines. Obvious on the other side are forms of violence, like law enforcement and military; those must necessarily remain under government control. The only debate we should be having is about the intermediate cases, the service industries: banking, insurance, healthcare, software development. Since there is no physical product to be bought and sold, the standard rules of capitalism don’t quite work; this is especially obvious in the case of software development, in which a single “product” is actually a piece of information—really, a gigantic integer—that can be copied, modified, and redistributed indefinitely. I tend to favor more nationalization of these intermediate cases, as does Piketty; that is what makes us center-left. Favoring more privatization is a reasonable view to be argued, and that would be center-right.

    Indeed, there are features of Piketty’s Capital that may annoy some on the far-left, the most extreme Occupy Wall Street folk who demand a total dismantling of capitalism. Piketty is not anti-free-market; on the contrary, many of his complaints are about ways in which our free market is distorted by a taxation and regulatory system that favors the rich and powerful. One of the most worrisome is the way that the return on capital in our system actually increases with the amount of capital you have, which is inherently unstable. It’s supposed to be constant or decreasing; under this sort of increasing returns, once someone is richer they will continue to get richer by an ever-growing fraction until they own the whole economy or (more realistically) the system falls apart.

    This is why the central equation of the book (which has been made into a t-shirt) is r > g, the return on capital is greater than the growth rate of the economy. As long as this is true, capitalism will not be stable; the owners of capital will capture an ever-growing portion of the economy.

    Actually even this wouldn’t necessarily be bad, if capital endowments were evenly and fairly distributed. A prolonged period of r > g could in fact be a world in which manual labor is made obsolete by automation—and to some extent this is actually true. The problem is that our endowments of labor are relatively equal (some are smarter or stronger than others, but never by a factor larger than 10), while our endowments of capital are wildly unequal (some people literally own 1,000,000 times as much as other people!). As Piketty discusses in detail, much of this inequality is perpetuated through inheritance, in a system Piketty calls “patrimonial capitalism”. Personally I think this term is too soft; a system in which the rich and powerful today are the heirs of the rich and powerful yesterday isn’t capitalism at all, it’s feudalism. We speak as if the left is “socialism” and the right is “capitalism”, but in fact we’ve gone so far right that it’s more like the left is capitalism and the right is feudalism.

    If these capital endowments could be somehow equalized, the fact that r > g would be no cause for concern; and Piketty has a recommendation for how we might do this. He recommends a high progressive tax on capital directly; not on returns to capital, which are easily disguised by clever accounting, but on capital itself. And lest you fear he’ll raise your property taxes, actually he intends to lower them; he wants the tax to be on net capital, so if you have a house worth $200,000 with a mortgage balance of $150,000, he would tax the $50k you have, not the $200k you’d have if the house were paid off. If you were underwater, your property tax would drop to zero under Piketty’s system. Moreover, the very high rates he envisions would only apply to very large incomes; I think his example is about 5% above $1 million and 10% above $10 million. That’s quite high for a property tax; keep in mind that return on capital is usually in the realm of 7%, so if you are taxed 5% on capital stock that would be 71% of your capital income. Taxed at 10%, you may actually pay out more than you take in; but this is exactly the point, because Piketty does not think anyone deserves to maintain stocks of capital in the hundreds of millions or billions.

    And I must say… I’m inclined to agree. The only people I can think of whose contributions to the world were large enough that I would say they might deserve $1 billion were not billionaires; and contrapositively all the billionaires I know of are not people who made anywhere near that kind of contribution. Perhaps if our billionaires were Jonas Salk and Alan Turing instead of Bill Gates and Steve Jobs I would find the distribution more justified. Don’t get me wrong, Bill Gates and Steve Jobs contributed a great deal, and I think it is entirely fair that they be millionaires; but billionaires is something else entirely.

    This failure to distinguish millionaires—the merely rich—from billionaires—the mind-bogglingly wealthy plutocrats—is something that grates me, a symptom of our national innumeracy that goes all the way to the top. Obama will say things like “millionaires and billionaires should pay their fair share”; if you don’t see what’s wrong with that, that’s part of the problem. It would be like saying, “starving people and millionaires should pay their fair share”; while I suppose this is true, the fair share starving people should pay is probably zero if not negative. Don’t believe me? Well, the UN extreme poverty level is an annual income of $450 per year; anybody below that, it’s fair to say, is starving. A millionaire making 7% would have an annual income of $70,000 per year. Meanwhile, a billionaire making 7% has an annual income of $70,000,000 per year. The ratio between the starving child in Africa and the millionaire is 156:1. The ratio between the billionaire and the millionaire is 1000:1. To be fair, we still call someone like Mitt Romney a “millionaire” (or the awkward term “multi-millionaire”) if their net wealth is say $200 million, which is closer to the billionaire range. I think we should probably try to speak in terms of logarithms: A starving child lives on three figures (10^2), a sweatshop worker makes four figures (10^3), a middle-class American makes five figures (10^4), a doctor makes six figures (10^5), the inventor of Photoshop makes seven figures (10^6), Mitt Romney takes in eight figures (10^7), anyone in the Forbes 500 receives nine figures (10^8), and Bill Gates receives ten figures (10^9). So far, nobody takes in eleven figures, but the very richest billionaires are getting close.

    Piketty of course would never make such an error; indeed he meticulously distinguishes different levels and sources of wealth, and catalogues them all for over two centuries of history across the US and Europe. The book is absolutely a tour de force, and it is remarkable that a 700-page tome full of numbers and graphs has nonetheless managed to achieve bestseller status. At the very least, Piketty struck a nerve; and I think more than that, he finally gave people the rigorous economic analysis to prove what they had suspected all along.

    One of the choices Piketty makes that I found oddest is his tendency to focus on the ratio of capital stock to income. I think he did this because it’s easy to get good data on it—which is vital for the sort of large-scale long-term historical analysis he wanted to do. This always felt to me like not quite getting at the issue we really wanted to get at, sort of like how real GDP doesn’t capture the true prosperity of a society because it leaves out things like volunteer work, leisure time, psychological stress, and environmental impact. If the capital to income ratio is say 8 years, what does that mean exactly? Well, it means that it would take 8 years of the whole economy’s income to equal the amount of capital. If all income went to capital (no labor income at all, thankfully not a situation we’ve ever been in), this would necessarily mean that the return on capital is 1/8, i.e. 12.5%. That’s pretty high; if we assume instead the 7% ballpark I mentioned earlier, this would mean that 56% of the economy’s income is going to capital, which would still be horrible (this is about the state of the antebellum South if you count slaves as “capital” because their income goes to their owners).

    In the US today, about a third of our income is due to capital, which at 7% means our capital to income ratio is about 5 years. (And indeed it is; Piketty has some very nice graphs of this over time. The extremes: the US ratio has gotten as low as 3 years in 1940, while the Europe ratio was as high as 7 years in 1880.) I’ve heard many an economist declare that the 2/3 labor and 1/3 capital mix is some sort of fundamental law of capitalism, but Piketty demolishes that notion completely; the proportion of income that has gone to capital has varied from as low as 20% to as high as 50%. This “law” is in fact the contingent result of 20th century geopolitical events and government policies. Those same economists often try to make excuses for why the proportion of the economy going to wages has been falling since about 1970 (it’s always Reagan, curse his name); usually their excuse involves “labor costs” that include all sorts of benefits, but think about that for a minute: Where do benefit payments go? Not to the worker, that’s for sure; they go to hospitals or insurance companies. And if you think that workers get that value back in the form of healthcare, think again: The US spends twice as much on healthcare as France and our life expectancy is shorter.

    So as you can see, the capital to income ratio does tell you something about the distribution of income in society, but in a very indirect way. Theoretically one could have a very high capital to income ratio and still have most income go to labor, so long as the return on capital were low enough; in practice the capital to income ratio varies much more than the return on capital does.

    Piketty wants to tax all this capital away, and that’s the part that makes the right wing red with rage. He has no qualms about saying that the taxes are confiscatory; he explicitly wants to redistribute wealth from the rich to the poor. It’s rather refreshing, really; where so many liberals dance around the issue, Piketty just comes out and says that he thinks our distribution of wealth is unfair and needs to be changed.

    I actually think the tax rates he recommends may be too high; taking above about 70% of income (which a 5% capital tax might, and a 10% capital tax definitely does) actually puts you on the wrong side of the Laffer Curve and reduces your government revenue. The right wing tries to pull out the Laffer Effect when talking about hikes from 20% to 30%, which is absolutely ludicrous; but when it comes to hikes from 30% to 80% it’s actually a very reasonable concern. That’s the thing about economics; it’s quantitative. Everything is a matter of degree.

    Then again, these very high rates would directly reduce the inequality of wealth, and in particular pull some of the wealth from the very top of the distribution where a handful of billionaires own as much as entire nations. There definitely is something wrong with that state of affairs, and the Laffer argument also doesn’t seem all that compelling either.

    For those who think that say a 90% tax on all income above $10 million would damage the economy, I offer a challenge: Name me a profession that satisfies all three of the following constraints. 1. The work produces some real benefit to the world. This doesn’t have to be a physical product, or even anything particularly important; it just needs to be some real good or service that is beneficial to someone. Feel free to include art, music, research, software development, even insurance. 2. The income received by an individual worker can be in excess of $10 million per year. 3. If their income were significantly reduced, the worker would substantially reduce the amount of work they do.

    I can think of jobs that satisfy any two, but never all three; and all three is what you’d need to justify the Laffer argument. Software developers satisfy 1 and 2, but free software proves they don’t satisfy 3; likewise for professional athletes, actors, and musicians, because the vast majority of people in sports, acting and music make very little money at it, and just do it because they love doing it. Most jobs—take your pick, from coal miners to physicists—satisfy 1 and 3, but get nowhere near 2. And there are jobs like hedge fund managers and derivatives traders that satisfy 2 and 3, but I think you’d be hard-pressed to say they satisfy 1.

    If I am indeed right that there are no such jobs, or only a handful of them that aren’t particularly important, then here is what mathematically must happen under such a tax: Money that previously went to these rich workers now goes somewhere else (either the government or the rest of the economy, depending on how exactly things shake out), and the total amount of real goods and services in the economy does not change. The pie remains the same size, and they get a smaller piece of it; therefore the rest of us get a bigger piece. The Laffer Effect only happens if the pie gets smaller, and with a cutoff of $10 million I just don’t see that happening. Make the cutoff $100,000 and it would; call that 2B: An individual worker can receive more than $100,000 per year. Now there are jobs that satisfy all three of 1, 2B, and 3; for instance, neurosurgeons, university professors, engineers. But at $10 million? I just don’t see it.

    How much money would such a tax put back into the economy? It’s estimated that the super-rich take about 20% of our nation’s income, so that 90% tax would be like an 18% increase in GDP, or about $2.7 trillion. Yes, trillion with a T, yes, 10^12 USD, yes, enough to cover basically the entire federal budget on its own. We could eliminate taxes entirely for 99.9% of the population and still have a smaller deficit than we do now. That is how insanely unequal our income distribution has become.

    Hm… maybe this Piketty fellow is onto something after all?

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.

May 5, 2014

  • Plenty of snark, not enough substance

    JDN 2456783 PDT 11:34.





    A review of Extreme Money by Satyajit Das





    I had high hopes for this book; I’ve read quite a few books about the Second Depression now, but this one promised to tie it all together into a coherent narrative about what is wrong with modern capitalism.


    But the narrative it delivers is an unconvincing one, filled with cynicism and pessimism about how this is just the way things are and we will have to accept our fate. Das has a weird dissonance in his understanding of the relation between the real and financial economies; one moment he’ll say that the financial economy is all made up and means nothing, and the next he’ll say that because the financial economy failed we must all accept slower growth and reduced standard of living in the real economy. He says several times that we must "live within our means", apparently not grasping that we have the power to create money out of thin air if we so desire it. A lack of money should never be a problem. A lack of oil, or a lack of steel, or a lack of trees, or a lack of laborers, or a lack of physicists—those could be problems. But a lack of money is something the government can change with the strike of a pen. If they fail to do so it is not because there is some irredeemable flaw in capitalism; it is because our legislators are ignorant.


    I guess it’s not entirely his fault; hardly anyone actually understands the true relationship between the real and financial economies—but if you’d like to be someone who does, I strongly suggest reading up on Modern Monetary Theory, starting here:
    http://neweconomicperspectives.org/2013/04/modern-monetary-theory-overview-part-1.html


    Das loves being snarky, and he’s quite good at it. Some of his lines are hilarious, like "self-regulation, which bears the same relation to regulation as self-importance does to importance" and his comparison of the SEC and DOJ to the Robin Williams sketch about "Stop! Or… I’ll should stop again!". But he lets the snark get the better of him, unwilling to take just about anything seriously, preferring to make fun of all possible views equally so that he can avoid ever being caught agreeing with someone who might be wrong. He makes fun of Keynesians and Austrians alike. He even mocks Nassim Nicholas Taleb, whose views as far as I can tell are indistinguishable from his own—both seem to think that the world is hopeless and completely unpredictable and we should all give up and die. (The fact that financial markets are fat-tailed isn’t a reason to give up on modeling financial markets; it’s a reason to model them with fat-tailed distributions, for goodness’ sake! "Not all animals are elephants, so we may as well give up on biology
    altogether.")


    Das makes odd literary and film references, some relevant but most not. He even references Transformers to say something about our creations rising up to destroy us, even though that’s not at all what Transformers was about and he’d have had a much better and more literary example with, ahem, Frankenstein.


    Some of his explanations of how derivatives work are not bad, though his diagrams are not as helpful as he thinks they are and there are better places to look if you want to understand derivatives.


    Even worse, he makes some really weird and embarrassing errors. His explanation of systemic versus diversifiable risk is utterly wrong, and coming from a man who spent years working in financial markets it suddenly becomes apparent why our financial system might not be working. He buys into the whole Monetarist (or should I borrow from Krugman and say "sado-monetarist"?) notion that printing money is inherently inflationary, regardless of what’s going on in demand; he actually speaks of "debasing the currency" as though that were a real problem for modern fiat systems.


    Worst of all, he offers us no solutions. The entire book is an interminable rant about how horrible things are, and then at the end he gives us no policy suggestions and hardly even any hope that any of this could be repaired. He takes the view that Krugman warned us about, the notion that "we are all to blame" and the system is fundamentally broken and everything is hopeless. No, we are not all to blame. In fact, the blame can be set squarely on a surprisingly small number of shoulders (or did I need to remind you that HSBC laundered money for terrorists?). The system is not fundamentally broken, it is suffering from what Keynes called "magneto trouble" (today we’d say "alternator"): It won’t start, it won’t run, everything is clearly wrong! Oh, wait, replace that one part and everything is fine. That one part is our banking system. We need to fundamentally reform our banking system. But the rest of the real economy? Actually that’s all fine. The computers still run, the laborers still work, the physicists still think, the bridges still stand. The United States is in real terms the richest country in the history of the world; it’s high time our monetary system reflected that.

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”.