Pondering Panacea: "Who Farted?!!"

A perennial puzzle for advocates of work time reduction is the angry rejoinder that one is promoting a "panacea". The knee-jerk indictment flies off the pigeonhole shelf so fast and furious one has to duck to avoid being clobbered by ricocheting chunks of boilerplate. Elinor Ostrom et al. offer an explanation. "In the governance of human-environment interactions, a panacea refers to recommendations that a single governance-system blueprint (e.g., government ownership, privatization, community property) should be applied to all environmental problems...."

Advocates of panaceas make two false assumptions: (i) all problems, whether they are different challenges within a single resource system or across a diverse set of resources, are similar enough to be represented by a small class of formal models; and (ii) the set of preferences, the possible roles of information, and individual perceptions and reactions are assumed to be the same as those in developed Western market economies.

"As proponents of collaborative approaches to resource management," Conley and Moote were, "unnerved by the ways in which these processes have been portrayed as a cure-all." Now, who is most likely to portray collaborative approaches as a cure-all? The culprits are those who insist the loudest that the only solution is privatization... government regulation... or government ownership or spending.

Look again at those two false assumptions of the panacea peddlers: small class of formal models; preferences and reactions typified by market economy. The clue here is that the purveyors of the most stereotyped blueprint solutions have adopted the cry of "panacea!" as their first defence against any threatening non-orthodoxy. The model for that behavior is that of the flatulent school-boy who preemptively demands "who farted?!" as a strategy for asserting his innocence by alleging someone else's guilt. The corresponding conclusion can only be "he who smelled it, dealt it."

Temperatures rising - this time it's the H1N1 Pandemic

"....The interviewee asserted that doctors have provided professional assistance to patients, including those provided them with all the necessary drugs, which, however, did not lead to recovery. "It's an infection, which, when it enters the body can not handle: three days and people die," - she said. According to doctors, among the dead - three young people aged 26-27 years, one 11-year-old child and 40-year-old man. The employee also said the city polyclinic UNIAN that the most likely cause of death is some unknown virus. She noticed that, as a rule, for the entire period of the season increased risk of influenza in the region died of 1-2 persons. "Nobody knows anything" - she described the situation with the patients. She also expressed the view that the virus has an effect similar to AIDS, which weakens the immune system. "Something is killing immunity", - said the doctor.The employee called the local hospital and the inadequate diagnosis of the causes of deaths - "poslegrippovye complications", stressing that they may occur after a person was sick for some time. "Influenza can give a complication in the kidney, for example, but it later - after the disease" - she said...."[1]

A new strain of H1N1 influenza virus (swine flu) began in March this year. “Localized outbreaks of influenza-like illness (ILI) were detected in three areas initially in Mexico and soon after in the United States. Following the discovery of the new strain in the United States, its presence was quickly confirmed in multiple nations across several continents.”[2] In April 1,600 suspected cases were reported.


In early October an epidemic of a more lethal strain of H1N1 began in the western part of Ukraine. “The epidemic began in Ternopil, Ivano-Frankivsk and Lviv … The services of the Ministry of Health delayed reaction to the obvious trends and threats have failed to take necessary preventive measures to reduce threats to life and health. Real assessment of the situation was given only 27-28 October, but the appropriate response measures were not adopted.” [3]

By early November the alarm in the Ukraine had been well and truly raised. In his address to the nation Victor Yushchenko stated: “ People are dying. The epidemic is killing doctors. This is absolutely unprecedented and inconceivable in the XXI century.” He asserted that there were three types of influenza currently spreading throughout the country, two kinds of seasonal flu and the H1N1 strain. This “may lead to the emergence of an even more aggressive new virus”, Yushchenko said [4]. Actual, although not declared martial law is instituted. The Ukrainian Health Minister Wasilij Kniazevicz is reported to have asked the country’s top prosecutor to open criminal proceedings against those who are opposed to the implementation of the mass flu vaccination campaign. President Victor Yushchenko announced the National Security and Defense Council [NSDC - a government body consisting of the president himself, the chairman of parliament, the prime minister Yulia Tymoshenko the head of the Security Service of Ukraine and other high ranking ministers] will become the supreme ruling authority. The NSDC was immediately instructed “to begin preventive and promotional work in areas where there is no epidemic”. Anyone that fails to comply with the NSDC will “result in application to the law enforcement authorities.” [5]

By the 10th November more than a million people in Ukraine had become infected. [6] The pandemic appears to have quickly spread to other parts of Europe. See map.

The mortality and morbidity statistics for this flu pandemic in the Ukraine appear to be significantly understated. Despite a very dramatic rise in the incidence of the disease, the death stats present a picture of a remarkably low and stable death rate. Further, mortality stats for this swine flu epidemic are notably lower in the Ukraine than they are in the US. Why? The Ukraine health facilities are very poor in comparison.

The H1NI virus is reported to be at a tipping point for lethality. Minor changes, such as a single change in one gene segment, can have major effects [7].

There's been no media coverage on this pandemic at all in the Australian media as far as I am aware.

[1] Post subject: Re: situation on Ukraine
PostPosted: Fri Oct 30, 2009 8:45 am
http://fluboard.rhizalabs.com/forum/viewtopic.php?f=5&t=2474&start=20


[2] Swine flu outbreak threatens pandemic
27th April 2009.
http://www.scientistlive.com/European-Science-News/Medical/Swine_flu_outbreak_threatens_pandemic/22204/

[3] Read more: http://trancy.net/2009/11/01/november-1-ukraine-ua-situation-update/#ixzz0Y3fmmlNA
From: November 1. Ukraine UA Situation Update
http://trancy.net/2009/11/01/november-1-ukraine-ua-situation-update/

[4] President's address to the Ukrainian people on the occasion of flu epidemic in Ukraine
Press office of President Victor Yushchenko. 04.11.2009 19:00
http://www.president.gov.ua/en/news/15609.html

[5] Actual, although not Declared MARTIAL LAW In Ukraine
* Posted by Jaro on November 8, 2009 at 3:39am in The Townhall
http://www.tcunation.com/forum/topics/actual-although-not-declared

[6] A million infected in Ukraine flu epidemic: minister
(AFP) – Nov 10, 2009
http://www.google.com/hostednews/afp/article/ALeqM5igljlXmqY49TbADWAZteRNljNEnQ

[7] niman
Post subject: Re: situation on Ukraine
PostPosted: Sun Nov 01, 2009 9:49 pm
pw123 wrote:
So you are bascally implying that this is evidence that H1N1 and it's eight genomes has mutated into a more severe form. Increased virulence / lethality can involve one change on one gene segment. H1N1 is at a tipping point, and minor changes can have major effects.
www.twitter.com/hniman
See: http://fluboard.rhizalabs.com/forum/viewtopic.php?f=5&t=2474&start=260

Elite Ignorance on Health Care?

Jonathan Gruber is a health economist from MIT -- an expert, no doubt. David Leonhardt quotes his favorable comment on the Senate health care bill: "I can’t think of a thing to try that they didn’t try."

Leonhardt, apparently, never bothered to ask him about single payer.

Obama and the Continuing Disintegration of the Center-Left

I was going to post something about Obama’s apparent decision to endorse a “compromise” semi-surge in Afghanistan, but then it occurred to me that there is nothing new to talk about; it is the same old, same old. He is continuing his own pattern of leading-by-following, and in this he is representative of the global center-left, which has been slowly putting itself to sleep since the 1980s. This is worth a few words, perhaps.

In a sense, it all goes back to the return of the hard right as a potent political force in the 1980s. This was more pronounced in the English-speaking world than elsewhere, but a parallel pattern can be seen in societies that had stronger social-democratic traditions. For various reasons, the leading parties—the Democrats in the US, Labor in England, the Social Democrats in Germany, the Socialists in France, the party-of-the-month in Italy (currently the Democrats)—came to redefine themselves as the non-right. Vote for us, they said, and prevent the right from undoing our former hard-won victories.

In part, this transformation reflected a misreading of the new political climate. The problem was defined as “appealing to the voters” and assembling a governing majority, but this was the symptom, not the cause. As a mass of polling data largely confirms, there has been no seismic shift in public opinion; this is not why the roll-back right has gained the initiative.

In a capitalist society, where prosperity depends on business investment and politicking itself is a capital-intensive enterprise, governing majorities are always assembled from the top. First there must be a sufficiently large segment of business and financial interests willing to mobilize behind a political project, and then this project must be sold to the electorate. The rise of the right is based in large part on the coalescing of such a mosaic of elites behind their program. Sometimes they win and sometimes they lose in their pursuit of an electoral majority, but they are always a force, and each win further institutionalizes their objectives.

The core problem of the center-left is that they do not have a base in the business/financial upper tier, except as a brake on the ambitions of the right. In other words, they do not have a program that can attract the support of enough of these interests, which they can then take to the voters. But without a program they become progressively less effective as political mobilizers, and they achieve little to nothing in their terms in office.

In Europe the crisis of the center-left has reached its Wiley Coyote moment. In most of these countries the political system is organized to permit a number of minority parties, and voters who still believe that parties should have programs have abandoned the center-left dinosaurs for these alternatives. In no country, however, is there any prospect that one of the newcomers, or even a coalition of them, will succeed in governing. The triumph of the right, in the context of one of capitalism’s worst traumas, is mainly a matter of filling a vacuum.

In the US the Democrats stumble on as the party of the non-neocons. The Bush legacy elected Obama, just as Clinton survived thanks to the willingness of Newt Gingrich to periodically scare the bejesus out of everyone with a modicum of reality contact. But there has been and is no program. Obama’s “program” in health care is to get a bill passed, whatever its content. His “program” on climate change is to get a bill passed, eventually, of some sort. His “program” on finance is to prevent a collapse and hope that the system will reform itself. His “program” on Afghanistan is to identify the minimum number of additional troops that will protect Democrats from the accusation that they are soft and unpatriotic. In short, he is likely to further hollow out the Democratic Party as a political enterprise and leave little legacy of social progress. The only reason the Democrats will not implode as their European counterparts have is that our system effectively excludes minority parties, and the Republicans are scarier than ever.

We need a dramatically different direction in politics.

Hackers, Hockey Sticks, and Hot Air

By now most have heard about the hacking of emails at the East Anglia Climate Research Unit, with revelations of questionable conduct by Michael Mann, Phil Jones, and others, including apparent efforts to cover up embarrassing facts and manipulate refereeing processes at journals. There have been piles of posts all over, and many people spouting off about this, with global warming skeptics pronouncing this to be the definitive proof that they are right (or at least not as unprofessional as some of those arguing for anthropogenic global warming). I note the response of those at the CRU. I also note that they should indeed be embarrassed at some of which has been uncovered.

It is indeed unfortunate that the scientific discussion has degenerated into such a slime pit of personalistic attacks and exaggerations. The skeptics are on the attack now, but the other crowd has attacked as well, and much of this is truly internecine. Thus, two of the major contenders and players in the emails are Michael Mann and Patrick Michaels. They were both in the same department at the University of Virginia for some time and were both there when the great controversy over the "hockey stick" erupted (neither are there now). This was a diagram first cooked up by Mann that showed rapid recent warming compared to earlier periods, which received lots of publicity, including in one IPCC report. It turned out the original study was flawed in terms of both data and statistical methodology. Some of the more pathetic floundering in the emails surrounds this. However, it must be noted that more recent data and better statistical methodology has largely confirmed the hockey stick result. We have been in a period of amazingly exceptionally rapid warming recently.

I will also note that this hack job may well be revenge for an attack from the other side on Michaels that was overdone. This was triggered by a Paul Krugman column on May 27, 2006, in which he attacked Michaels for testimony he gave a Senate committee about other testimony by James Hanson. While I agreed that Michaels could be criticized for some of what he said (just as I think Mann and crew can be criticized for some of what they have said), I thought at the time and said so in various places that the attack on him was overdone. One can read Brad DeLong's account of Krugman's argument, Michaels' own defense of himself, and Hansen's take on it. This stuff has been going on for some time.

Michael Perelman Needs Help ASAP

The school invited me to give the annual lecture on December 8. I'm trying to copyedit The Invisible Handcuffs, finish two articles before a December 1 deadline, and grade papers before school starts next week.

My idea is to show how ideas evolve with my books, paralleled with both the course of the economy and the course of higher education, particularly in California. I don't have much data on education yet.

I have roughed out the first draft of the talk, which I'm sure will have a lot of problems. If anyone has any these suggestions for improvement, I would be more than grateful.

http://michaelperelman.wordpress.com/files/2009/11/lecture.pdf

Judith Miller on the Economics Beat

I will leave it to Dean Baker and Paul Krugman, who get paid to do this, to tear into the errors and absurdities of this latest bit of agitprop from the New York Times on the phantom menace of fiscal deficits. What I would like to raise is the issue of institutional responsibility. You would think that the Times might have learned from its earlier foray into phantom WMD’s that playing the lead public role in a campaign of deception can have devastating consequences, particularly if the end product is a policy that implodes on its own mythology. This is what happened in Iraq: blatant falsehoods published as fact in the news outlet that feeds stories to the rest of the media (now that they have downsized their own news-gathering forces) came back to haunt them when, instead of WMD’s, soldiers were met with IED’s.

Let’s hope this campaign to reproduce 1937 is the inspiration of a rump group in the financial elite with little influence on actual policy. If deficit-cutting becomes the new imperative in Washington, however, and the economy duly melts, we will have to suffer through more public contrition on the part of the Times’ editorial brass.

Jamie Galbraith's Call to Arms

Jamie Galbraith rallies the faithful: "Sorry to be defeatist - it’s the way I feel. Prove me wrong."

Seventy-six years ago a Senator from Alabama — yes, Jamie, Alabama — proposed a solution to an earlier unemployment crisis. And you know what? The Senate approved it 53-30. But the Big Boys objected and we got the NRA instead. "It will be remembered," wrote brain truster Rexford Tugwell, "that one of the reasons why NRA was sponsored by Roosevelt, and why the act was passed in the special session of spring, was the threat of a thirty-hour law being pushed by Senator Hugo Black." Tugwell was wrong. It has not been remembered. It is forgotten that Roosevelt only acted in the face of a more radical mobilization.

The problem with the solutions you propose, Jamie, is that they are the kind of moderate, respectable responses that might be forthcoming from an Obama administration if (and only if) there was momentum building for a more radical response to the jobs crisis.

There is a 240-year arc to this crisis, a 60-year arc and a 30-year arc. The 240-year arc is "capitalism". The 60-year arc is "the cold war" and the 30-year arc is "neo-liberalism". Until enough people understand how those three arcs relate to each other, there’s not going to be any resolution of this crisis. Moving beyond the neo-liberalism of the last 30 years cannot mean restoring some solution from a more distant past. What is most frightening about the present crisis is that its resolution has the potential for a previously inconceivable degree of emancipation. It is precisely the THREAT of freedom that is evoking such great resistance.

"Civilization has to defend itself against the specter of a world which could be free. If society cannot use its growing productivity for reducing repression (because such usage would upset the hierarchy of the status quo), productivity must be turned against the individuals; it becomes itself an instrument of universal control."

The world that made us and the world we made

In June this year an Australian by the name of Paul Gilding made an interesting statement about the cause of the global financial crisis. Gilding gives public talks around the world highlighting the alarming issue of global climate change. In his talk he said that in July 2008 the world entered ‘the crash’ that resulted from a planetary economic and environmental system pushed to its limits.

“….We entered the crash then because oil prices were going through the roof, because of supply issues. Food prices were going through the roof because climate change was crashing the Australian wheat crop and rice crop, and therefore we had food spikes around the world for that and other reasons. We had floods since then in the US destroying the corn crop. This is climate change. This is what we forecast would happen, that you would get distributed impacts, hard to pinpoint a specific cause …. nevertheless would have impact on the economy. That's what we were seeing. We saw oil prices going up because consumption in China was going ahead of forecast, right? So that's what happens when you push a system against its limits, right? It bounces and it has the responses, and those responses are resource prices going up, ecological systems breaking down, the biggest-ever melting of the North Pole sea ice, right?…” [1]

‘Distributed impacts’, an interesting concept for economics. We could imagine that the global economy collapsed last year because of a giant financial ponzi scheme reaching its logical conclusion. However, the existence of diverse (and much more widespread) currents of collapse in the environment and society could explain why this apparently mindless financial engineering game existed in the first instance.

For instance, over the 20th Century it is possible to see the games of Empire being played by out in a way that increasingly impoverished what we now call the ‘third world’. Barnet and Muller, in their 1974 book entitled ‘Global Reach’ point out that in 1900 people in poor nations had ½ the per capita income of rich nations. By 1970 their income had dropped to 1/20th, as measured in 1900 dollars [2]

During that same century the ‘advanced societies’ began to experience “a doubling of the total output of goods and services…every fifteen years.” And the doubling times were shrinking. [3]

Ironically, but not surprisingly, economists by 1976 were talking about a global recession. Jim Cairns, a left-winger heterodox economists from down-under pondered whether the stagflation that existed at the time was one of the implications of the development of ‘bigness in capitalism’. He said things were not so different in Australia compared to the rest of the ‘advanced’ world where “some 2 percent of the companies control about 50 percent of 'gross national product' in some way or another.” [4]

It seemed logical to many writers and thinkers that the increasingly warped wealth distribution in the world would lead to ongoing economic crisis. A very disturbing consequence of this imbalance was that the political power had also concentrated. The corporate elite constituted “a hierarchy developed and run from the economic top down.”

“The chief executives are now at the head of the corporate world…In them is vested the economic initiative, and they know it and they feel it to be their prerogative. As chiefs of the industrial manorialism, they have looked reluctantly to the federal government’s social responsibility for the welfare of the underlying population. They view workers and distributors and suppliers of their corporate systems as subordinate members of their world, and they view themselves as individuals of the American individualistic sort who have reached the top.” [5]

The markets that this new power elite created were not politically neutral. The ideological power of the forces of globalisation

“have a strong preference for measures that reduce inflation at the expense of higher unemployment, for measures that reduce public spending in ways that diminish welfare provision, and for precedence to be given to ‘development’ over environmental protection… Globalisation is thus not just the spread of corporate and financial activity: it is the spread of political ideas backed by economic power.” [6]

A war ensued. It was waged on the planet’s atmosphere, on the land, sea and other conditions of life. The number of malnourished people in the world has increased by about 20% in the last decade, from 800 million to near a billion people… global warming is already making itself felt in the drying out of grain producing areas in Australia, China, Africa, and arguably the American west…. we are already consuming more resources than the Earth can sustain by any reasonable measure.” [7]

The truth is that the Ponzi scheme began a hundred or more years ago. We’ve been drawing heavily from our capital and presenting this as ‘wealth creation’. Capitalism was ‘sped up’. Space was substituted for time and that meant, according to Theresa Brennan “that neither the environment nor the people who live in it are given the opportunity to regnerate.” [8]

Regulation of the global financial system won’t cut the cake. There needs to be a move away from streamlined thought produced by the machinery of propaganda. Can we no longer differentiate between the world that made us and the world we made? If we could, would we see that corporations are more often not the creators of wealth - their efficiency often merely lies in how quickly they can usurp natural and human capital. Militarism and empire strategies make the concept of ‘comparative advantage’ in trade null and void. ‘Freedom’ is not the right to impose our will on our environment in violation of natural laws. ‘My country’ is the world. ‘The crisis’ is not a deficiency of demand but one of supply. The earth does not belong to man – man belongs to the earth.

[1] The great disruption. Paul Gilding. 14th June 2009
http://www.abc.net.au/rn/backgroundbriefing/stories/2009/2592909.htm#transcript

[2] Richard J Barnet & Ronald E Muller. ‘Global Reach – The Power of the Multinational Corporations’. Touchstone publishers. 1974. Page 190.

[3] Alvin Toffler ‘Future Shock’. Pan Books. 1970 Pages 31 and 32

[4] [1] Jim Cairns 'Oil in Troubled Waters' Widescope International Publishers Pty Ltd, Camberwell Victoria. 1976. pp 133-134. As quoted in:
Bigness in Capitalism. Brenda Rosser. October 2009
http://econospeak.blogspot.com/2009/10/bigness-in-capitalism.html

[5] C Wright Mills, ‘The Power Elite’ Oxford University Press. 1956. Page 165.

[6] Clive Hamilton ‘Growth Fetish’. Allen and Unwin, 2003. Page 118

[7] Silent Armageddon?
by Alexis Zeigler for Culture Change
http://greenertimes.wordpress.com/2009/03/01/gt-for-march-2-8/

[8] Theresa Brennan ‘Globalisation and its Terrors’ Routledge 2003.

Prosperity without Lumps

Ed Crooks reviews Prosperity Without Growth in the Financial Times:

Jackson, a professor of sustainable development at Surrey university, has thought hard about the subject. His prose is lucid and lively, and many of his policy prescriptions are sensible....

Yet for all these strengths, his argument is flawed...

His only idea that could put the brake on growth would be cutting working hours. Here he takes the economist’s famous “lump of labour” fallacy – the idea that there is only a fixed amount of work to do that has to be shared round – and suggests it should be a goal of policy. Yet in anything other than a perfect utopia, the idea that there is no more work that needs doing is ludicrous.

Indeed, the idea that "there is no more work to be done" would be ludicrous. But that's not the same idea as the idea that we need to make up wasteful things to do just to keep people in jobs.

Galbraith Replies to Keyserling

Said Galbraith: "Mr. Keyserling has been reading my books and watching my actions for the last 10 years and finding evidence of wickedness which even I would not have thought possible. Feeling as he does, he was certainly right to alert the public."

Washington Post, February 15, 1968:

John Kenneth Galbraith, national chairman of the Americans for Democratic Action, took formal notice yesterday of charges that he has long been engaged in a devious campaign to defeat President Johnnson.

The accusations were leveled Tuesday by fellow economist Leon H. Keyserling in a protest against ADA's weekend endorsement of Sen. Eugene J. McCarthy for President.

Said Galbraith: "Mr. Keyserling has been reading my books and watching my actions for the last 10 years and finding evidence of wickedness which even I would not have thought possible. Feeling as he does, he was certainly right to alert the public."

California Collapsing: What Would Reagan Do?

When he was in office, Ronald Reagan looked bad. Now, by today's standards, he looks like a progressive.

Reagan, Ronald. 1973. "On Spending and the Nature of Government." National Review (7 December).

"When I took office in 1967, we discovered that the promise of "no tax increases" could not be carried out. California was virtually insolvent, the precious administration having changed that state's system of budgetary bookkeeping in a way that allowed the spending of 15 months' revenue in twelve months' time, thus avoiding a major tax increase in election year 1966. The state government was spending $1 million a day more than it was collecting."

"California, unlike the Federal Government, cannot print more money or pile up deficits. The governor is required to submit a balanced budget, and if any additional taxes are needed to balance revenues with spending, the constitution requires the governor to propose higher taxes."

"So our first major lesson in government was painful: for the taxpayers and for us. We had to increase taxes by some $800 million to balance the unbalanced budget we inherited."

Barmy and Clyde

Clyde E. Dankert was a "widely respected" labor economist who in 1965 edited an Industrial Relations Research Association volume on Hours of Work. His textbook, Contemporary Unionism in the United States, was published in 1948 by Prentice-Hall. I have read some bizarre attempts to explain the inexplicable "lump of labor fallacy" but this one is delirious. In it, Dankert claims that those who believe a given reduction in the hours of work will result in a permanent reduction in unemployment subscribe to the lump of labor fallacy. What do you call it when an argument doesn't even have enough solid straw in it to qualify as a straw man?

For a permanent reduction in hours, the fact must be recognized that the volume of unemployment, both technological and non-technological, can be as large with industry operating at a low hour-level as at a high one. The forces which produce unemployment can operate just as effectively, and just as disastrously, when the length of the working-week is thirty hours as when it is forty or fifty hours. It is still true, however, that a permanent and a more or less general reduction in hours will cut down the amount of technological unemployment. Here we must distinguish between the movement to the lower hour-plateau and the arrival at it. The transition will without any doubt lessen the amount of unemployment for the time being. But when once the new level is reached and the necessary adjustments in industry have been made, there is no reason for believing that the volume of unemployment will continue to be less than it had been. To argue to the contrary is to subscribe to the lump-of-labor (or fixed work-fund) fallacy. [No, to argue to the contrary would constitute a level of incomprehension that couldn't be encompassed by the term "fallacy". But no advocate of shorter working time ever "argues to the contrary" that a given reduction in hours will result in a permanent solution to unemployment so just what is the point of this red herring?]

If, as the productivity of industry increases, the length of the working-week is gradually reduced, the amount of technological unemployment can to some extent be kept down. But the hours should not be reduced commensurately with the increase in productivity. If that is done, the living standards of the workers will be frozen at their existing levels. [Here, however, is a fallacy. The living standards of the workers will not be "frozen" because with fewer hours of work they will have more free time.] From the standpoint of human well-being it would be a gross mistake to take all the gains that are made in productivity in the form of increased leisure. Some of the gains should be taken in the form of more production and higher material living standards.[From the standpoint of writing a college textbook it would be a gross mistake to issue personal value judgments as absolute principles without giving reasons for that opinion.]

Reducing Financial Complexity: A Different Take on Transaction Taxes

I’m working on a project that involves, among other things, looking at taxes on financial transactions, and I’ve thought myself into an idea that I’d like to float to our skeptical readership. The short version: Tobin taxes, Keynes taxes, and other financial transaction taxes have been sold on the grounds they would reduce price volatility. There is some controversy about this, and the case is not at all clear. I think, however, that increasing transaction costs could have the effect of reducing the complexity of trading strategies, and that might be a very positive thing.

The original proponent of a transaction tax was Keynes, who wanted to apply it to the stock market. He thought that it would have the effect of penalizing speculative strategies with high turnover, while rewarding buy-to-hold strategies. His views on financial markets as casinos are well known, and the tax proposal fits like a glove. Tobin, writing after the collapse of Bretton Woods and its fixed exchange rates, zeroed in on foreign exchange transactions. He worried about excess volatility in currency markets and applied Keynes’ logic to that sphere.

The argument about “real” versus “speculative” motives for transactions is plausible but much too simple. In particular, it makes assumptions about hedging strategies that are unfounded. The simplest version of such a strategy is that you take a position in the forex markets that is the reverse of the one you take in your real (goods and services) transactions. This means that you would double the volume of real trade to get the real-plus-hedged component of forex transactions, and as we know the latter is a vast multiple of the former.

But hedges can be quite a bit more complicated. One can try to hedge a variety of risk factors, not only exchange rates but also interest rates, commodity prices, etc., and these risks may interact in nonobvious ways. Moreover, one can shade or fine-tune a hedge, or generate a package of hedges that have properties that a simple reverse-position transaction cannot emulate. Without knowing the deep microstructure of these markets, it is impossible to know a priori how much of the transaction volume is risk averting (hedging) rather than risk-seeking (speculation).

Empirically, there have been studies that claim that transaction costs (which a transaction tax would augment) have been positively associated with volatility in foreign exchange markets. These, to my knowledge, have not been refuted.

As I see it, the intellectual and political winds have therefore shifted on transaction taxes. Keynes and Tobin wanted a tax big enough to change behavior, because they thought markets needed to be checked. Contemporary proposals, which are gaining momentum, have much lower tax rates precisely to avoid altering the behavior of market players. We are now hearing about a tax of a basis point or less on the value of transactions, not enough to change the way markets work, positively or negatively.

But I think the fixation on the terms of contracts (short term vs long) misses the point. A transaction tax penalizes a trading strategy according to the volume of transactions it entails. Consider again the hedge. A reverse position is the simplest hedge, and it consists of just one transaction. Granted, it may be too simple to meet the needs of sophisticated players, but this is not an argument for unlimited complexity.

Complexity renders market positions opaque and creates potential for systemic faults that are invisible even to the well-trained eye. Note that transaction costs fall as one moves from simple/actual transactions (like spots and outright forwards) to more complex ones (derivatives). Apparently such costs were not sufficient to prevent the emergence of fantastically complex strategies that entailed taking conditional positions in a plethora of markets simultaneously—a complexification that culminated in collapse. The conclusion appears to be that these costs need to be raised.

In other words, it is not the term of the trade that should attract a tax, but the sheer number of such trades to support a single position-taking.

I have argued previously that there was a dialectical relationship between the complexity of trading strategies and the extent of leverage. More leverage justified putting resources into increasingly complex strategies that offered minuscule margins. The perception that such mini-margins could be attained as a sure thing (all risk offloaded) justified leveraging that would otherwise have been viewed as outré.

Hence there may well be a case for a large enough transaction tax to alter behavior, but with a different purpose. The issue is not how much volatility it discourages, but how much complexity and inducement to excess leverage..

How Digital "Piracy" Creates Value.

EBay just sold a large portion of Skype after a long legal dispute with Skype's founders. What interested me was the Skype's code evolved from the founders' earlier venture, the file-sharing system, Kazaa. In effect, the experience with the "illegal" Kazaa allowed the founders to develop technology that had a great value, especially for people communicating internationally.

The founders, Niklas Zennstrom and Janus Friis, blocked the sale for a long time on the grounds that EBay violated an agreement not to tamper with the code without their approval. In effect, Ebay acted like a pirate, while the pirates became anti-pirates.

Perhaps someday someone will catalog all the other benefits that that the pirates developed.

Here is some background information:


Dealbook. 2009. "EBay Settles Suit Over Skype Sale." New York Times (6 November).
http://dealbook.blogs.nytimes.com/2009/11/06/ebay-settles-suit-over-skype-sale/?scp=2&sq=ebay%20skype%20sale&st=cse

"Skype brought in $185 million for eBay in the last quarter and was the fastest-growing part of its business."

Stone, Brad. 2009. "Founders Win a Piece of Skype From eBay." New York Times (6 November): p. B 3.
http://www.nytimes.com/2009/11/07/technology/companies/07skype.html

"eBay has formally settled the litigation around its sale of the Skype online calling service. The founders of Skype, Niklas Zennstrom and Janus Friis, will drop their lawsuits against the company and a consortium of buyers whose bid to purchase 65 percent of Skype was announced last month, according to an announcement released by eBay before the opening of the stock markets on Friday. As part of the complex agreement, the founders will own a 14 percent stake in the new Skype and receive two seats on the board."

"The founders will also transfer the disputed intellectual property owned by their company Joltid, which was at the heart of the legal battle, over to Skype."

Joe Nocera, Joe. 2009. "The Cloud Hanging Over Skype." New York Times (5 September): p. B 1.
http://www.nytimes.com/2009/09/05/technology/companies/05nocera.html?ref=business&pagewanted=all

"In 2005, when eBay bought Skype from its founders, Janus Friis and Niklas Zennstrom, it paid $3.1 billion. But the company had performed so poorly that by the fall of 2007, eBay had been forced to take a $1.1 billion write-down."

"Not long after Mr. Friis and Mr. Zennstrom left the company, they became embroiled in a dispute with eBay that has turned into a very nasty lawsuit. It turns out that in selling Skype to eBay, Mr. Friis and Mr. Zennstrom retained control of a key part of the Skype technology, which they licensed to eBay. Although the details are under seal in a London court, the Skype founders' essential complaint is that eBay tampered with their software, and in doing so, violated the terms of the licensing agreement. They were demanding that Skype be forced to stop using the technology, which, for all intents and purposes, would mean shutting down Skype itself. The case is set for trial in 2010."

"In a court hearing in London last June, eBay's lawyer told the court that if Mr. Friis and Mr. Zennstrom won the case, the result would be "devastating"."

"Skype was not Mr. Friis's and Mr. Zennstrom's first company. No, that was the infamous Kazaa, a peer-to-peer company that the two men founded in 1999, not long after Napster showed the world exactly how easy it was to steal copyrighted music using peer-to-peer computing. By 2001, the recording industry, having routed Napster, turned its sights on Kazaa."

" In 2003, when they started Skype, that same technology that had powered Kazaa became an important part of the Skype code; it was the means by which computer users connected to each other and created a larger network. (VoIP -- voice over Internet protocol -- was the means by which they spoke to each other online.) But Skype never owned the technology; JoltID did. Why eBay was willing to go along with such an arrangement when it bought Skype two years later will forever be a puzzle. But so long as the two men remained part of the eBay "family," it didn't matter much. Any changes to the peer-to-peer code were ones they approved"."

"When the deal went sour, however, and the founders left eBay, that all changed. And when eBay continued to tinker with the code -- something eBay contends it has a right to do under the license -- they entered into negotiations that went nowhere. Finally, by March of 2009, the two sides had sued each other."