The Wall Street Journal, always on the lookout for good humor, outdid itself today with an essay by Chester E. Finn Jr., advocating keeping schools open on Saturday. The author acknowledges that strapped districts are shortening the school week to four days. Others are considering eliminating the 12th grade.
Presumably, the idea would be for teachers to increase their days of work in return for reductions in salary. Sadly, the problem is a teachers’ union, which is also responsible for the bad weather during the winter.
In the words of the author, “This issue brings out the teacher unions, too, demanding more pay for extra hours, hence fatter school-system budgets in a lean fiscal time. Little wonder that taxpayers are legitimately wary.”
And who says that the Wall Street Journal does not have a good sense of humor?
Finn, Chester E. Jr. 2010. “The Case for Saturday School.” Wall Street Journal (20 March): p. W 1.
Saturday, March 20, 2010
Friday, March 19, 2010
Economics as a Moral Science?
I am quickly dashing off the text for lecture for the Campus Peace Institute. What I have is a bit rough, but I would appreciate any feedback.
Thanks.
Click here:
http://michaelperelman.files.wordpress.com/2010/03/peace.pdf
Thanks.
Click here:
http://michaelperelman.files.wordpress.com/2010/03/peace.pdf
Ten Influential Books I Have Read
Tyler Cowen over at Marginal Revolution has started a game of people listing the ten most influential books that they have read, which has since been picked up by a large number of folks. At first I thought this was kind of silly, but I have decided to join in and provide a list. This is in rough chronological order of when I either read or initially encountered them, although unlike some others, I am not going to provide any accompanying explanatory verbiage. Let them just be.
So, now, some days later, have decided to add some commentary.
1. The Lord of the Rings, J.R.R. Tolkien
Read first when I was 12 in hardbook when nobody knew about it. Blew me away and still does. My all time fave.
2. 1984, George Orwell
I was at the peak of my libertarian phase when I read this (age 14), but I am still deeply struck by its vision of tyranny based on double speak and all that.
3. The Worldly Philosophers, Robert Heilbroner
Not the greatest book on economics, but I read it at the time that I switched into economics, and it played a role. Later I would read many of the classics, but I would say that for all the simplifications, Heilbroner's takes generally held up pretty well on the earlier economists.
4. Collected Poems, Wallace Stevens
I write poetry, and I could list some others, but Stevens has a certain perfection and profundity. I just heard earlier this evening that Hemingway beat him up out of jealousy because he knew Stevens was a genuine genius.
5. Joseph and His Brothers, Thomas Mann
Buddenbrooks and The Magic Mountain get read more and get more attention, but this longest book of Mann's is more profound in my view. It was where I really became aware of how the western monotheisms took so deeply of the preceding paganism, and it also deeply altered my view of the role of Jews in history.
6. Some Cambridge Controversies in the Theory of Capital, Geoffrey C. Harcourt
This was the book that first threw me into realizing that orthodox economic theory had serious problems. Some of my earliest publications were inspired by it.
7. Gravity's Rainbow, Thomas Pynchon
Deeply altered my view of what happened in the first part of the 20th century and and the interconnections between technology and various intellectual disciplines. I remain a big fan of Pynchon.
8. Remembrance of Things Past, Marcel Proust
Tyler Cowen praised this one for its "interiority." It has that, but its depiction of the subjective aspect of time as well as of the many layerings of social hypocrisy and obsession is also outstanding, as well as the sheer quality of the writing itself.
9. Structural Stability and Morphogenesis: An Outline of a Theory of Models, Rene Thom
This is the book that first laid out catastrophe theory, which has long since interested me. However, this is also a multidisciplinary book of philosophy and not merely of mathematics, obscure in many ways and disturbing.
10. Chaos: Making a New Science, James Gleick
This is a pop-schlop book ultimately, but it did put together the pieces of what was going on in chaos theory quite well. I had been aware, but this helped me focus on what was going on in this topic, yet another of my ongoing obsessions.
So, now, some days later, have decided to add some commentary.
1. The Lord of the Rings, J.R.R. Tolkien
Read first when I was 12 in hardbook when nobody knew about it. Blew me away and still does. My all time fave.
2. 1984, George Orwell
I was at the peak of my libertarian phase when I read this (age 14), but I am still deeply struck by its vision of tyranny based on double speak and all that.
3. The Worldly Philosophers, Robert Heilbroner
Not the greatest book on economics, but I read it at the time that I switched into economics, and it played a role. Later I would read many of the classics, but I would say that for all the simplifications, Heilbroner's takes generally held up pretty well on the earlier economists.
4. Collected Poems, Wallace Stevens
I write poetry, and I could list some others, but Stevens has a certain perfection and profundity. I just heard earlier this evening that Hemingway beat him up out of jealousy because he knew Stevens was a genuine genius.
5. Joseph and His Brothers, Thomas Mann
Buddenbrooks and The Magic Mountain get read more and get more attention, but this longest book of Mann's is more profound in my view. It was where I really became aware of how the western monotheisms took so deeply of the preceding paganism, and it also deeply altered my view of the role of Jews in history.
6. Some Cambridge Controversies in the Theory of Capital, Geoffrey C. Harcourt
This was the book that first threw me into realizing that orthodox economic theory had serious problems. Some of my earliest publications were inspired by it.
7. Gravity's Rainbow, Thomas Pynchon
Deeply altered my view of what happened in the first part of the 20th century and and the interconnections between technology and various intellectual disciplines. I remain a big fan of Pynchon.
8. Remembrance of Things Past, Marcel Proust
Tyler Cowen praised this one for its "interiority." It has that, but its depiction of the subjective aspect of time as well as of the many layerings of social hypocrisy and obsession is also outstanding, as well as the sheer quality of the writing itself.
9. Structural Stability and Morphogenesis: An Outline of a Theory of Models, Rene Thom
This is the book that first laid out catastrophe theory, which has long since interested me. However, this is also a multidisciplinary book of philosophy and not merely of mathematics, obscure in many ways and disturbing.
10. Chaos: Making a New Science, James Gleick
This is a pop-schlop book ultimately, but it did put together the pieces of what was going on in chaos theory quite well. I had been aware, but this helped me focus on what was going on in this topic, yet another of my ongoing obsessions.
Wednesday, March 17, 2010
China's Economic Nationalism?
Today's Wall Street Journal expresses shock that China is resorting to economic nationalism, which is supposed to be the exclusive right of the U.S. After all, China's economy seems to be performing better than the U.S. -- at least until a possible real estate bubble bursts. In addition, China does seem to be reining in its expansionary monetary policy, something the U.S. did not do as its bubble grew. Anyway, here are my extracts from the relevant articles:
Browne, Andrew and Jason Dean. 2010. "Business Sours on China: Foreign Executives Say Beijing Creates Fresh Barriers; Broadsides, Patent Rules." Wall Street Journal (17 March): p. A 1.
Canaves, Sky. 2010. "China Slams Luxury Goods' Quality." Wall Street Journal (17 March): p. B. 2.
Browne, Andrew and Jason Dean. 2010. "Business Sours on China: Foreign Executives Say Beijing Creates Fresh Barriers; Broadsides, Patent Rules." Wall Street Journal (17 March): p. A 1.
Foreign businesses say their relationship with China is starting to sour, as tougher government policies and intensifying domestic competition combine to make one of the world's most important markets less friendly to multinationals.
Interviews with executives, lawyers, and consultants with long experience in China point to developments they say are making it much harder for many foreign companies to succeed. They say the changes suggest Beijing is reassessing China's long-standing emphasis on opening its economy to foreign business -- epitomized by the changes it made to join the World Trade Organization in 2001 -- and tilting toward promoting dominant state companies.
In the latest broadside against foreigners, authorities in a wealthy province near Shanghai Tuesday assailed the quality of luxury clothing brands from the West, including Hermès, Tommy Hilfiger and Versace.
Technology executives say they are highly concerned about government procurement rules issued late last year that would favor local suppliers who have "indigenous innovation." The rules, if implemented, could limit foreign access to tens of billions of dollars in contracts for computers, telecommunications gear, office equipment and other goods.
Patent rules imposed Feb. 1 threaten to increase costs in China for foreign innovators in industries such as pharmaceuticals, and let authorities force foreign drug companies to license production to local companies at state-set prices.
Executives in several industries say the liberalization spurred by China's WTO entry is stalling. Foreign makers of wind turbines and solar panels say they are being shut out of big renewable-energy projects. Regulatory barriers effectively cap participation in insurance: Foreign companies had just 4.7% of China's life-insurance market as of June, and 1% of its property and casualty market, according to PricewaterhouseCoopers.
Canaves, Sky. 2010. "China Slams Luxury Goods' Quality." Wall Street Journal (17 March): p. B. 2.
In a statement posted on its Web site, the Zhejiang Administration of Industry and Commerce said that "International designer clothes, blindly worshipped by Chinese consumers and enjoying 'super national treatment' in the country, have once again proven unsuitable for China".
According to the Zhejiang notice, 48 out of 85 samples of imported clothing from 30 international brands failed to meet Chinese product quality standards. The brands also included Versace, Dolce & Gabbana and Zara. The authorities say that they have impounded all of the clothes with the same model numbers as the samples that failed to meet the standards, but the rest of the companies' products aren't affected. It was unclear if any fines would be levied. The harsh tone of the attack appeared to be out of proportion to the actual infractions: half of the complaints were over usage labels, including laundry instructions that failed to meet Chinese requirements. Nevertheless, the statement was carried widely by China's official media. While the immediate financial impact of the sanctions against the luxury brands is likely to be limited, the negative publicity could be damaging. Foreign brands sell at a huge premium to local brands, justified in part by the perception of quality.
Will Dodd's Proposed Reforms Reduce The Power Of the Regional Feds?
So, in the office I post on Obama's picks for the Fed and comment on the district/regional bank presidents, only to come home and find a front page story in WaPo on Senator Dodd's proposal to reduce the power of the regional banks and their presidents. Apparently he wants to take away their power to regulate banks in their districts, although the power of the New York Fed and a body to be set up at the Board of Governors, although not under its control, would take over this supervisory role. Also, the New York Fed president would become a presidential appointee. I saw nothing altering the role of the regional bank presidents on the FOMC, where all of them report on conditions in their regions during the meetings, and five of them vote on policy.
Actually I am not impressed by this proposal. The argument of their defenders that they will have better knowledge of their regions if they supervise their local banks makes sense to me. Also, they are the ones that actually operate the discount windows that lend to the banks in their regions. Again, they will know better about this lending if they know what is going on with those banks. This proposal looks just plain silly to me, frankly.
Actually I am not impressed by this proposal. The argument of their defenders that they will have better knowledge of their regions if they supervise their local banks makes sense to me. Also, they are the ones that actually operate the discount windows that lend to the banks in their regions. Again, they will know better about this lending if they know what is going on with those banks. This proposal looks just plain silly to me, frankly.
Will Obama's Fed Picks Change The Fed?
The retirement of Vice Chairman Donald Kohn and Obama's decision to replace him with Janet Yellen, as well as to appoint Sarah Bloom Raskin and Peter Diamond to vacancies on the Board of Governors raises the question of whether this means a shift in attitudes or decisionmaking at the Fed. The answer is probably not too much, mostly because Yellen is already involved in FOMC meetings as San Francisco Fed president, while the othet two appointees lack experience with monetary economics, although Raskin, a lawyer by training, is currently Commissioner of Financial Regulation in Maryland, and Peter Diamond is a distinguished MIT economist, although an expert on social security and fiscal policy rather than monetary theory or policy. Yellen is viewed by most as "dove" in terms of favoring fighting unemployment more than inflation, although Mark Thoma has linked to Lawrence Meyer claiming that at least on one occasion in the mid-1990s when she was on the Board, Yellen was hawkish.
Some observers have argued that the Board needs beefing up by "real economists" to offset the supposedly hawkish set of district bank presidents, many of them distinguished Ph.D. monetary economists with strong views and large egos, who may be dominating the FOMC. In contrast with the Board of Governors who are appointed by presidents with approval by the Senate for 14 year terms (which none ever finish anymore), district bank presidents are appointed by Boards of Directors of the district banks, with the approval of the Board of Governors, and often represent local economic interests as well as the sometimes peculiar views of the specific district banks, with some known for particular views. Thus, the St. Louis and Richmond Feds have long been viewed as bastion of old-fashioned monetarism, while the Minneapolis Fed (with its connections to the University of Minnesota) is viewed as a fountainhead of new classical economics.
I shall list all the current governors and district bank presidents below with some information about each, while noting that indeed Kohn was senior to all, with a University of Michigan Ph.D. and starting at the Kansas City Fed in 1970 before going to Washington where he became Greenspan's right hand man in many high level staff positions before joining the Board of Governors and becoming Vice Chairman. Yellen served on the staff in Washington in 1977-78, as well as the Board of Governors in 1994-97, before becoming SF Fed president in 2004, a definite insider with a distinguished academic record (and Nobel Prize winning husband), if not as much of one as Kohn. BTW, it should be noted that she may not accept the appointment as it would involve a pay cut of about $200,000 per year.
Board of Governors (continuing):
Ben Bernanke, Chairman, econ PhD MIT 1979, distinguished publication record,
Bd of Govs, 2002-05, Chairman, 2006-
Kevin Warsh, J.D. Harvard, 1995, Bd of Govs, 2006-
Elizabeth Duke, MBA, Old Dominion (year?), Bd of Govs, 2008-
came up through Virginia banking system, Chair Bd of Directors, ABA, 2004-06
Daniel Tarullo, J.D. University of Michigan, 1977, Bd of Govs, 2009-
District Bank Presidents (continuing, not listing Yellen at San Francisco Fed):
Boston: Eric Rosengren, econ PhD, U. of Wisconsin, 1986, at Boston Fed since 1985, president since 2007
New York: William Dudley, (first among equals and permanently on FOMC, which includes five district bank presidents at any time), econ PhD, UC-Berkeley, 1982, at NY Fed since 2007, president since 2009, formerly at Goldman Sachs
Philadelphia: Charles Plosser, econ Phd, U. of Chicago, 1976, strong new classical orientation and distinguished publication record, formerly associated with strongly monetarist Shadow Open Market Committee, president since 2006
Cleveland: Sandra Pianalto, econ MA George Washington U., (year?), at Cleveland since 1983, president since 2003
Richmond: Jeffrey Lacker, econ PhD, U. of Wisconsin, 1984, at Richmond since 1989, president since 2004. Despite having strongly Keynesian major prof, Donald Hester, Lacker seems to have gone native at the Richmond Fed with a strongly hawkish reputation.
Atlanta: Dennis Lockhart, econ and foreign policy MA, Johns Hopkins, 1971. At Citibank/Citigroup, 1971-88. At Atlanta since becoming president, 2007.
Chicago: Charles Evans, econ PhD, Carnegie-Mellon (year?), distinguished publication record, at Chicago since 1991, president since 2007.
St. Louis: James Bullard, econ PhD, Indiana, 1990. distinguished publication record and interested in agent based modeling and complex dynamics, currently serving as adjunct prof at Washington U., and as coeditor of the Journal of Economic Dynamics and Control. At St. Louis since 1990, president since 2008.
Minneapolis: Narayana Kotchelakota, econ PhD U. of Chicago, 1987, formerly at U. of Minnesota and strong new classical with distinguished publication record. At Minneapolis since becoming president, 2009.
Kansas City: Thomas Hoenig, econ PhD Iowa State (year?), at KC Fed since 1973, making him senior person of this group in Fed, president since 1991, also senior at that level.
Dallas: Richard Fisher, highest degree unlisted. Background in private banking starting in 1975 at Brown, Harrisman, later a diplomat, trade rep for NAFTA negotiations and also at Kissinger Associates. At Dallas as president since 2005.
Some observers have argued that the Board needs beefing up by "real economists" to offset the supposedly hawkish set of district bank presidents, many of them distinguished Ph.D. monetary economists with strong views and large egos, who may be dominating the FOMC. In contrast with the Board of Governors who are appointed by presidents with approval by the Senate for 14 year terms (which none ever finish anymore), district bank presidents are appointed by Boards of Directors of the district banks, with the approval of the Board of Governors, and often represent local economic interests as well as the sometimes peculiar views of the specific district banks, with some known for particular views. Thus, the St. Louis and Richmond Feds have long been viewed as bastion of old-fashioned monetarism, while the Minneapolis Fed (with its connections to the University of Minnesota) is viewed as a fountainhead of new classical economics.
I shall list all the current governors and district bank presidents below with some information about each, while noting that indeed Kohn was senior to all, with a University of Michigan Ph.D. and starting at the Kansas City Fed in 1970 before going to Washington where he became Greenspan's right hand man in many high level staff positions before joining the Board of Governors and becoming Vice Chairman. Yellen served on the staff in Washington in 1977-78, as well as the Board of Governors in 1994-97, before becoming SF Fed president in 2004, a definite insider with a distinguished academic record (and Nobel Prize winning husband), if not as much of one as Kohn. BTW, it should be noted that she may not accept the appointment as it would involve a pay cut of about $200,000 per year.
Board of Governors (continuing):
Ben Bernanke, Chairman, econ PhD MIT 1979, distinguished publication record,
Bd of Govs, 2002-05, Chairman, 2006-
Kevin Warsh, J.D. Harvard, 1995, Bd of Govs, 2006-
Elizabeth Duke, MBA, Old Dominion (year?), Bd of Govs, 2008-
came up through Virginia banking system, Chair Bd of Directors, ABA, 2004-06
Daniel Tarullo, J.D. University of Michigan, 1977, Bd of Govs, 2009-
District Bank Presidents (continuing, not listing Yellen at San Francisco Fed):
Boston: Eric Rosengren, econ PhD, U. of Wisconsin, 1986, at Boston Fed since 1985, president since 2007
New York: William Dudley, (first among equals and permanently on FOMC, which includes five district bank presidents at any time), econ PhD, UC-Berkeley, 1982, at NY Fed since 2007, president since 2009, formerly at Goldman Sachs
Philadelphia: Charles Plosser, econ Phd, U. of Chicago, 1976, strong new classical orientation and distinguished publication record, formerly associated with strongly monetarist Shadow Open Market Committee, president since 2006
Cleveland: Sandra Pianalto, econ MA George Washington U., (year?), at Cleveland since 1983, president since 2003
Richmond: Jeffrey Lacker, econ PhD, U. of Wisconsin, 1984, at Richmond since 1989, president since 2004. Despite having strongly Keynesian major prof, Donald Hester, Lacker seems to have gone native at the Richmond Fed with a strongly hawkish reputation.
Atlanta: Dennis Lockhart, econ and foreign policy MA, Johns Hopkins, 1971. At Citibank/Citigroup, 1971-88. At Atlanta since becoming president, 2007.
Chicago: Charles Evans, econ PhD, Carnegie-Mellon (year?), distinguished publication record, at Chicago since 1991, president since 2007.
St. Louis: James Bullard, econ PhD, Indiana, 1990. distinguished publication record and interested in agent based modeling and complex dynamics, currently serving as adjunct prof at Washington U., and as coeditor of the Journal of Economic Dynamics and Control. At St. Louis since 1990, president since 2008.
Minneapolis: Narayana Kotchelakota, econ PhD U. of Chicago, 1987, formerly at U. of Minnesota and strong new classical with distinguished publication record. At Minneapolis since becoming president, 2009.
Kansas City: Thomas Hoenig, econ PhD Iowa State (year?), at KC Fed since 1973, making him senior person of this group in Fed, president since 1991, also senior at that level.
Dallas: Richard Fisher, highest degree unlisted. Background in private banking starting in 1975 at Brown, Harrisman, later a diplomat, trade rep for NAFTA negotiations and also at Kissinger Associates. At Dallas as president since 2005.
The smile of collusion
A quote from Jean Baudrillard under one of my early paintings. How eloquently he puts my thoughts into words.
"This false distance is present everywhere: in spy films, in Godard, in modern advertising, which uses it continually as a cultural allusion. It is not really clear in the end whether this 'cool' smile is the smile of humour or that of commercial complicity. This is also the case with pop, and its smile ultimately encapsulates all its ambiguity: it is not the smile of critical distance, but the smile of collusion"— Jean Baudrillard (The Consumer Society: Myths and Structures)
Tuesday, March 16, 2010
Manufacturing Discontent
I was asked to write something up about my book, Manufacturing Discontent. I thought that I would share it with you. Any comments would be be appreciated. It begins as:
Of all my books, Manufacturing Discontent may seem to have the least links with Marxism. After I published The Invention of Capitalism: Classical Political Economy and the Secret History of Primitive Accumulation, some people argued that the subject was purely historical and had no contemporary relevance. Of course, the seizure of property continues throughout the world, even in the United States, where government can take property through the law of eminent domain and then turn it over to private interests.
Read the entire commentary at:
http://michaelperelman.files.wordpress.com/2010/03/manufacturing.pdf
Of all my books, Manufacturing Discontent may seem to have the least links with Marxism. After I published The Invention of Capitalism: Classical Political Economy and the Secret History of Primitive Accumulation, some people argued that the subject was purely historical and had no contemporary relevance. Of course, the seizure of property continues throughout the world, even in the United States, where government can take property through the law of eminent domain and then turn it over to private interests.
Read the entire commentary at:
http://michaelperelman.files.wordpress.com/2010/03/manufacturing.pdf
Monday, March 15, 2010
More Nonsense About Social Security Going Broke
If Stephen Ohlemacher doesn’t know any better than this, maybe he should refrain on writing on this topic:
Let’s do some simple arithmetic. If the Social Security Trust Fund has $2.5 trillion in government bonds – at the current interest rate of 4.5% it receives around $112 billion in interest income. So if benefits exceed payroll contributions by only $29 billion, wouldn’t the Trust Fund assets grow by $83 billion? Of course, Mr. Ohlemacher seems to be of the belief that these Trust Fund assets are supposed to cover those General Fund deficits. Ahem!
The retirement nest egg of an entire generation is stashed away in this small town along the Ohio River: $2.5 trillion in IOUs from the federal government, payable to the Social Security Administration. It's time to start cashing them in. For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year. Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more. Sounds like a good time to start tapping the nest egg. Too bad the federal government already spent that money over the years on other programs, preferring to borrow from Social Security rather than foreign creditors.
Let’s do some simple arithmetic. If the Social Security Trust Fund has $2.5 trillion in government bonds – at the current interest rate of 4.5% it receives around $112 billion in interest income. So if benefits exceed payroll contributions by only $29 billion, wouldn’t the Trust Fund assets grow by $83 billion? Of course, Mr. Ohlemacher seems to be of the belief that these Trust Fund assets are supposed to cover those General Fund deficits. Ahem!
Sunday, March 14, 2010
The Art of Political Lying
In 1712, John Arbuthnot, chiefly known as a satirist, considered second only to Jonathan Swift, was also the Queen Anne's doctor and a Fellow of the Royal Society, proposed the publication of a book with two volumes, titled, The Art of Political Lying. Sadly, the book never appeared although it would be more relevant than ever today. Arbuthnot praised, "the noble and useful art of political lying, which in this last age having been enriched with several new discoveries" (p. 8) Obviously, he did not have the Internet in mind, but perhaps something similar had recently happened in England.
The loosening of government restrictions opened the country up to a flood of pamphlets. A recent critic noted that "greater freedom to print is more deviously related to the prevalence of accusations of lying" (Condren 1997, p. 125). Arbuthnot, himself, pointed to the role of "the great fondness of the malicious and miraculous: the tendency of the soul towards the malicious, springs from self-love, or a pleasure to find mankind more wicked, base, or unfortunate than ourselves."
Arbuthnot also promised to explore whether political lying should be the exclusive right of the government.
Not being erudite enough to follow through with Dr. Arbuthnot's project, I appeal to you to complete his work.
Arbuthnot, John. 1712. Proposals for Printing a Very Curious Discourse, In Two Volumes in Quarto, Intitled, Psuedologia Politike, or, A Treatise of the Art of Political Lying: With an Abstract of the First Volume of the Said Treatise (London: Printed for John Morphew, near Stationers-Hall).
Also see the proposal at
http://books.google.com/books?id=z2K2ljV5PI8C&pg=PA291&dq=Arbuthnot+%22Art+of+Political+Lying%22&client=firefox-a&cd=3#v=onepage&q=Arbuthnot%20%22Art%20of%20Political%20Lying%22&f=false
The loosening of government restrictions opened the country up to a flood of pamphlets. A recent critic noted that "greater freedom to print is more deviously related to the prevalence of accusations of lying" (Condren 1997, p. 125). Arbuthnot, himself, pointed to the role of "the great fondness of the malicious and miraculous: the tendency of the soul towards the malicious, springs from self-love, or a pleasure to find mankind more wicked, base, or unfortunate than ourselves."
Arbuthnot also promised to explore whether political lying should be the exclusive right of the government.
Not being erudite enough to follow through with Dr. Arbuthnot's project, I appeal to you to complete his work.
Arbuthnot, John. 1712. Proposals for Printing a Very Curious Discourse, In Two Volumes in Quarto, Intitled, Psuedologia Politike, or, A Treatise of the Art of Political Lying: With an Abstract of the First Volume of the Said Treatise (London: Printed for John Morphew, near Stationers-Hall).
Also see the proposal at
http://books.google.com/books?id=z2K2ljV5PI8C&pg=PA291&dq=Arbuthnot+%22Art+of+Political+Lying%22&client=firefox-a&cd=3#v=onepage&q=Arbuthnot%20%22Art%20of%20Political%20Lying%22&f=false
Two Conceits, Planning and Finance
It’s time to step back and think about the larger implications of the economic meltdown—what it says about our times and the ideas that have ruled them. I want to draw a parallel between 2008 and 1989, the failure of finance and the failure of planning.
The starting point should be the insight of Hayek and his Austrian colleagues that most economically valuable knowledge is local and tacit. Only those directly involved in the production and consumption of goods and services can really know about quality, difficulty, uncertainty and other not-fully-quantifiable or codifiable dimensions of economic life. This is why organization and control has to be decentralized.
The Austrian prediction of the downfall of central planning was finally validated in 1989—even sooner, for those who were following the internal debates about prices and planning taking place in the Communist world. By the fall of the Berlin wall there were no defenders left for the notion, or “conceit”, that a single, all-powerful bureau could intelligently manage a complex modern economy.
In very general terms, planning failed on two counts, both related to the ubiquity of local and tacit knowledge. First, because crucial economic information could not be codified, relations between the center and the enterprises had to be based on trust. One way the planners could convince themselves that their underlings were reporting correctly was, to put it bluntly, terror: the threat that misreporting or failure to follow orders would be punished as an “economic crime”, with horrible personal consequences. We still see the reflection of this approach in China. Yet sufficient trust could not be established even in the most autocratic regimes, and as political systems liberalized, the scope for these principal-agent conflicts grew ever larger. One universal post-1989 discovery is that the official statistics were rubbish, and there were dark practices in every corner.
The second problem is simply the complexity of modern economic life and its resistance to being encapsulated into the statistics that planners depend on. Plans were “wrong”, not just for errors in judgment or poorly chosen models, but because they were inherently unable to supply the answers to the questions that were most pressing on the ground. They could not make use of the non-quantifiable information that producers and users of goods possessed, nor could they interact constructively with the decision-making that is unavoidable at a local level. The great dream of computerization, for instance, that advocates thought would revolutionize central planning, never panned out. This was the purest, most direct vindication for the Austrian critique of centralized socialism.
The fundamental contradiction of Austrian thought, however, is between its awareness of the person-, activity-, and placed-based nature of knowledge and its assumption, never really defended, that markets can succeed in assembling this knowledge and guiding local decision-making. In saying this, I am not claiming that markets should have no role or cannot accomplish any informational or allocative function—only that they do not solve the problem posed by the centrality of local and tacit knowledge. But don’t take my word for it; see how this conceit collapsed in the financial meltdown of the past two years.
The “financialization” revolution of the post-1980 period was based on the assumption that market valuation of assets was rational and correct, and that owners of these assets would, in the process of maximizing their wealth, provide the best possible guidance for the dispersed producers whose work created the revenue flows which the assets capitalized. Control of enterprises would be transferred to the financial markets, which would decide which producers would be supported or shut down, and which would choose managers and evaluate their performance.
Alas, the same two faults we witnessed with central planning were reproduced in “central markets”, dishonesty and decision failure. In modern economies, for instance, intangible factors play perhaps the largest role in wealth creation, and this defeats any attempt to base valuation solely on accounting algorithms. Unscrupulous actors, interested only in their own personal gain, used this opportunity to deceive regulators and counterparties, to the extent that trillions of dollars were transferred to insiders while the rest of us were stuck with claims on fictitious assets. Whole companies were brought down, for instance, by equity funds that quietly stripped them of their financial value, leaving them too indebted to survive, and leaving gullible buyers of this debt with shredded balance sheets. No doubt a large part of this fraud could have been avoided had the insiders not gamed the political system and eviscerated regulation, but it would be a mistake to simply assume that regulation alone would be enough. The problem of the regulator is not so different from that of the central planner: how do you know whether an instrument or deal is value-destroying if you cannot independently ascertain what the actual value is?
Similarly, even well-motivated “abstract investors”, owners of funds who shuffle claims on a wide variety of enterprises and rely only on accounting data, and not the local and tacit knowledge of those on the scene, cannot really know what actions will make production more efficient at using resources and meeting social needs. The problem is the inability of accounting data to encompass the dispersed and non-codifiable information that workers, buyers, and managers generate and rely on. The “market for corporate control”, for instance, simply assumes that the information available to financial markets is sufficient to determine which managers are doing their jobs well and which need to be sacked. There are some success stories, in which entrenched managers, demonstrably failing in their obligations, were flushed out by external investors, but also many horror stories in which hard-earned craft and wisdom were expunged, and viable enterprises were destroyed. The inability of financial markets to assume the role of global economic management should not be laid at the feet of any particular individuals; it is intrinsic and is due to the same factors that caused central planners to fail.
Perhaps the main difference between 1989 and 2008 is that we had a ready narrative for the collapse of state-managed economies: for decades the failure of Communism had been predicted and explained for us, and the message was transmitted through the mass media for all to hear. The message regarding the shortcomings of financial markets is not as well-developed, however, nor is it being disseminated with the same ideological fervor. Yet experiences do not teach lessons all by themselves; they need to be narrated and understood. If we are to benefit from the upheaval we are still going through and find our way to a more stable and socially rational system of economic organization, we will need to clarify the story and find words to tell it.
The starting point should be the insight of Hayek and his Austrian colleagues that most economically valuable knowledge is local and tacit. Only those directly involved in the production and consumption of goods and services can really know about quality, difficulty, uncertainty and other not-fully-quantifiable or codifiable dimensions of economic life. This is why organization and control has to be decentralized.
The Austrian prediction of the downfall of central planning was finally validated in 1989—even sooner, for those who were following the internal debates about prices and planning taking place in the Communist world. By the fall of the Berlin wall there were no defenders left for the notion, or “conceit”, that a single, all-powerful bureau could intelligently manage a complex modern economy.
In very general terms, planning failed on two counts, both related to the ubiquity of local and tacit knowledge. First, because crucial economic information could not be codified, relations between the center and the enterprises had to be based on trust. One way the planners could convince themselves that their underlings were reporting correctly was, to put it bluntly, terror: the threat that misreporting or failure to follow orders would be punished as an “economic crime”, with horrible personal consequences. We still see the reflection of this approach in China. Yet sufficient trust could not be established even in the most autocratic regimes, and as political systems liberalized, the scope for these principal-agent conflicts grew ever larger. One universal post-1989 discovery is that the official statistics were rubbish, and there were dark practices in every corner.
The second problem is simply the complexity of modern economic life and its resistance to being encapsulated into the statistics that planners depend on. Plans were “wrong”, not just for errors in judgment or poorly chosen models, but because they were inherently unable to supply the answers to the questions that were most pressing on the ground. They could not make use of the non-quantifiable information that producers and users of goods possessed, nor could they interact constructively with the decision-making that is unavoidable at a local level. The great dream of computerization, for instance, that advocates thought would revolutionize central planning, never panned out. This was the purest, most direct vindication for the Austrian critique of centralized socialism.
The fundamental contradiction of Austrian thought, however, is between its awareness of the person-, activity-, and placed-based nature of knowledge and its assumption, never really defended, that markets can succeed in assembling this knowledge and guiding local decision-making. In saying this, I am not claiming that markets should have no role or cannot accomplish any informational or allocative function—only that they do not solve the problem posed by the centrality of local and tacit knowledge. But don’t take my word for it; see how this conceit collapsed in the financial meltdown of the past two years.
The “financialization” revolution of the post-1980 period was based on the assumption that market valuation of assets was rational and correct, and that owners of these assets would, in the process of maximizing their wealth, provide the best possible guidance for the dispersed producers whose work created the revenue flows which the assets capitalized. Control of enterprises would be transferred to the financial markets, which would decide which producers would be supported or shut down, and which would choose managers and evaluate their performance.
Alas, the same two faults we witnessed with central planning were reproduced in “central markets”, dishonesty and decision failure. In modern economies, for instance, intangible factors play perhaps the largest role in wealth creation, and this defeats any attempt to base valuation solely on accounting algorithms. Unscrupulous actors, interested only in their own personal gain, used this opportunity to deceive regulators and counterparties, to the extent that trillions of dollars were transferred to insiders while the rest of us were stuck with claims on fictitious assets. Whole companies were brought down, for instance, by equity funds that quietly stripped them of their financial value, leaving them too indebted to survive, and leaving gullible buyers of this debt with shredded balance sheets. No doubt a large part of this fraud could have been avoided had the insiders not gamed the political system and eviscerated regulation, but it would be a mistake to simply assume that regulation alone would be enough. The problem of the regulator is not so different from that of the central planner: how do you know whether an instrument or deal is value-destroying if you cannot independently ascertain what the actual value is?
Similarly, even well-motivated “abstract investors”, owners of funds who shuffle claims on a wide variety of enterprises and rely only on accounting data, and not the local and tacit knowledge of those on the scene, cannot really know what actions will make production more efficient at using resources and meeting social needs. The problem is the inability of accounting data to encompass the dispersed and non-codifiable information that workers, buyers, and managers generate and rely on. The “market for corporate control”, for instance, simply assumes that the information available to financial markets is sufficient to determine which managers are doing their jobs well and which need to be sacked. There are some success stories, in which entrenched managers, demonstrably failing in their obligations, were flushed out by external investors, but also many horror stories in which hard-earned craft and wisdom were expunged, and viable enterprises were destroyed. The inability of financial markets to assume the role of global economic management should not be laid at the feet of any particular individuals; it is intrinsic and is due to the same factors that caused central planners to fail.
Perhaps the main difference between 1989 and 2008 is that we had a ready narrative for the collapse of state-managed economies: for decades the failure of Communism had been predicted and explained for us, and the message was transmitted through the mass media for all to hear. The message regarding the shortcomings of financial markets is not as well-developed, however, nor is it being disseminated with the same ideological fervor. Yet experiences do not teach lessons all by themselves; they need to be narrated and understood. If we are to benefit from the upheaval we are still going through and find our way to a more stable and socially rational system of economic organization, we will need to clarify the story and find words to tell it.
Saturday, March 13, 2010
Friday, March 12, 2010
The Peripatetic Peter Chang Goes Soft And Cools It Down
For something a bit different for this blog, I am going to comment on the recent frenzy over award-winning and mysteriously peripatetic Szechuan Chinese chef, Peter Chang, who has had articles about him by Calvin Trillin in the New Yorker, (abstract free, but full version gated, title "Where's Chang?") and by Todd Kliman Oxford American, ungated, (title, "Todd Kliman chases the perfect chef"). After cooking at the Chinese embassy in Washington, Chang began cooking at China Star in Fairfax, now a favorite hangout of Tyler Cowen of George Mason who is the author of the useful Washington Ethnic Dining Guide, along with many of his colleagues. Chang moved on to two other restaurants in Northern Virginia, then one in Marietta, Georgia, then one in Knoxville, Tennessee, and now is at Taste of China in Charlottesville, VA. I have eaten at China Star, where the current chef preserves some of Chang's recipes, and last night ate at Taste of China. Chang's food is tastier, but he has gone soft and cooled it down. Where Todd Kliman praises the "numbing" quality of his food, last night it did not numb, in contrast to what one finds now at his original venue, China Star in Fairfax. [more below the fold, hopefully]
I began going to China Star a few years ago after learning of it through Cowen's dining guide and after my daughter, Sasha, enrolled at George Mason University. China Star has become her favorite restaurant in the area, so we have now eaten there numerous times and know many of their dishes well. So, it was not surprising that with these articles out and Sasha home for spring break, we would be tempted to try Taste of China only an hour's drive away from Harrisonburg in Charlottesville. We got there about 5:30 and had to wait about 45 minutes for a seat (no reservations; the frenzy is intense). We ordered some dishes that are also served at China Star, such as spicy beef and tripe and also Szechwan chili chicken on the bone ("Qung Qing chili chicken" at Taste of China). Chang's current stuff is more subtle that the versions at China Star, and indeed astoundingly tasty. But it lacks a certain bite, certainly compared to China Star.
I suspect that what has happened is that Chang's long sojourn in places like Knoxville has Americanized him a bit, and perhaps he has accepted his celebrity as well. So, there is no separate menu for the hard core stuff, although the menu is separated into Chinese and "Chinese American" (conventional Chinese) sections. He seems to have toned down a bit, now that he is in effect appealing to masses waiting in long lines, not that I begrudge him his success (he was long rumored to keep moving because he "feared success"). In any case, his food is still extremely good.
I do recognize that we ate there only once, so it is possible that it was unuusally mild. It is also probably the case that one could ask for it to be spicier and he would deliver. I am a bit put off by the mob scene there, but if I do eat there again, I shall ask for them to give me the real punch and not the wimpy style.
I began going to China Star a few years ago after learning of it through Cowen's dining guide and after my daughter, Sasha, enrolled at George Mason University. China Star has become her favorite restaurant in the area, so we have now eaten there numerous times and know many of their dishes well. So, it was not surprising that with these articles out and Sasha home for spring break, we would be tempted to try Taste of China only an hour's drive away from Harrisonburg in Charlottesville. We got there about 5:30 and had to wait about 45 minutes for a seat (no reservations; the frenzy is intense). We ordered some dishes that are also served at China Star, such as spicy beef and tripe and also Szechwan chili chicken on the bone ("Qung Qing chili chicken" at Taste of China). Chang's current stuff is more subtle that the versions at China Star, and indeed astoundingly tasty. But it lacks a certain bite, certainly compared to China Star.
I suspect that what has happened is that Chang's long sojourn in places like Knoxville has Americanized him a bit, and perhaps he has accepted his celebrity as well. So, there is no separate menu for the hard core stuff, although the menu is separated into Chinese and "Chinese American" (conventional Chinese) sections. He seems to have toned down a bit, now that he is in effect appealing to masses waiting in long lines, not that I begrudge him his success (he was long rumored to keep moving because he "feared success"). In any case, his food is still extremely good.
I do recognize that we ate there only once, so it is possible that it was unuusally mild. It is also probably the case that one could ask for it to be spicier and he would deliver. I am a bit put off by the mob scene there, but if I do eat there again, I shall ask for them to give me the real punch and not the wimpy style.
Thursday, March 11, 2010
Why a National Institute of Finance Will Fall Short
It seems like a good idea. Create a separate federal agency to monitor systemic risk exposure in financial markets. Require the major players to report trading data to this agency that they withhold from the public, so that a better picture can be drawn. Require this agency, the National Institute of Finance, to issue periodic reports, alerting the rest of us to developments that pose a risk of widespread disruption.
Certainly it’s better than nothing, which happens to be the status quo. (In theory the Fed should be doing this already, but in practice they have no interest.) If we had had such an Institute five years ago, perhaps they would have added their voice to those in the economics and finance professions who said leverage was careening out of control.
Perhaps.
But the approach embodied in the bill currently gestating in the Senate Banking Committee is built on a compromise that puts sound risk management, well, at risk. It goes like this:
As we have come to realize, a large part of the instability of global finance resulted from the pyramiding of increasingly complex financial instruments. There was an arms race between quants to develop evermore devious contracts, whose terms would be triggered by intricate combinations of market outcomes. Firms invested heavily in these strategies, and algorithms and instruments were jealously guarded as intellectual property. Trades were conducted in private, with no central registry, much less a public reporting of their terms. The terrible truth we learned in 2008 is that no one could possibly know how the system as a whole would respond to the seismic shocks of bubble-bursting, illiquidity and default. We waited breathlessly, week after week, to see how the unraveling would take place: real-time, real-life enactment was the only way the structural properties would be revealed.
Would an Institute of Finance be able to figure out the stability and dynamics of the system before it collapses? It depends on the information they are able to get. If they have access only to the data that are already publicly available, they’ll be in the same boat that independent analysts are in already. And true enough, many of us were able to see aspects of this crisis in advance, and we sounded the alarms. It is also true, however, that no one saw the entire process (we saw chunks of it), and our voices were drowned out by those who thought our fears were overblown. If the Finance Institute becomes one more such voice in the wilderness, will it make a difference?
But the discussions under way have broached the possibility that Institute staff would receive more reporting data than is currently made public, under a guarantee of confidentiality. This could make their pronouncements more credible and influential. Yet there are two shortcomings. First, it can be assumed that the Institute will not get all the trading details, only some. There will be negotiations with the banks, equity funds and other players, and deals will be cut. Even so, you can be sure that the details of some trades, perhaps the most essential for those who want to analyze the health of the system, will be withheld precisely because they are both profitable and risky, and participants want to milk them to the end. Second, it is the unfathomable complexity of interacting algorithms that is at issue. The players can’t figure it out, and, even with piles of trading data, it is likely that civil servants will be stumped too.
There is a much simpler, more effective solution. Require all contracts to be traded on exchanges, and all their terms to be reported publicly. (Perhaps the identity of the parties could be confidential; this is all.) There would be no intellectual property in financial instruments, and no incentive to devise ultra-complex variations. Algorithms used internally by investors to decide what positions to take would still be proprietary, of course, but these pose few systemic challenges. Contracts would standardize in convenient ways, and the public as a whole would be in a position to assess where the system is heading. You could be your own Institute of Finance.
What is the downside? Less profit opportunity in finance, a more routine, predictable, boring role for the financial sector, and fewer job openings for math jocks on Wall St. That’s probably enough to kill the idea politically, but from a public point of view, this down is all up, up, up.
Certainly it’s better than nothing, which happens to be the status quo. (In theory the Fed should be doing this already, but in practice they have no interest.) If we had had such an Institute five years ago, perhaps they would have added their voice to those in the economics and finance professions who said leverage was careening out of control.
Perhaps.
But the approach embodied in the bill currently gestating in the Senate Banking Committee is built on a compromise that puts sound risk management, well, at risk. It goes like this:
As we have come to realize, a large part of the instability of global finance resulted from the pyramiding of increasingly complex financial instruments. There was an arms race between quants to develop evermore devious contracts, whose terms would be triggered by intricate combinations of market outcomes. Firms invested heavily in these strategies, and algorithms and instruments were jealously guarded as intellectual property. Trades were conducted in private, with no central registry, much less a public reporting of their terms. The terrible truth we learned in 2008 is that no one could possibly know how the system as a whole would respond to the seismic shocks of bubble-bursting, illiquidity and default. We waited breathlessly, week after week, to see how the unraveling would take place: real-time, real-life enactment was the only way the structural properties would be revealed.
Would an Institute of Finance be able to figure out the stability and dynamics of the system before it collapses? It depends on the information they are able to get. If they have access only to the data that are already publicly available, they’ll be in the same boat that independent analysts are in already. And true enough, many of us were able to see aspects of this crisis in advance, and we sounded the alarms. It is also true, however, that no one saw the entire process (we saw chunks of it), and our voices were drowned out by those who thought our fears were overblown. If the Finance Institute becomes one more such voice in the wilderness, will it make a difference?
But the discussions under way have broached the possibility that Institute staff would receive more reporting data than is currently made public, under a guarantee of confidentiality. This could make their pronouncements more credible and influential. Yet there are two shortcomings. First, it can be assumed that the Institute will not get all the trading details, only some. There will be negotiations with the banks, equity funds and other players, and deals will be cut. Even so, you can be sure that the details of some trades, perhaps the most essential for those who want to analyze the health of the system, will be withheld precisely because they are both profitable and risky, and participants want to milk them to the end. Second, it is the unfathomable complexity of interacting algorithms that is at issue. The players can’t figure it out, and, even with piles of trading data, it is likely that civil servants will be stumped too.
There is a much simpler, more effective solution. Require all contracts to be traded on exchanges, and all their terms to be reported publicly. (Perhaps the identity of the parties could be confidential; this is all.) There would be no intellectual property in financial instruments, and no incentive to devise ultra-complex variations. Algorithms used internally by investors to decide what positions to take would still be proprietary, of course, but these pose few systemic challenges. Contracts would standardize in convenient ways, and the public as a whole would be in a position to assess where the system is heading. You could be your own Institute of Finance.
What is the downside? Less profit opportunity in finance, a more routine, predictable, boring role for the financial sector, and fewer job openings for math jocks on Wall St. That’s probably enough to kill the idea politically, but from a public point of view, this down is all up, up, up.
VA Governor McDonnell Sees The Light (Sort Of)
"Discrimination against any class of people without a rational basis is forbidden" under the Equal Protection Clause of the U.S. Constitution says an Executive Directive issued yesterday by Virgnia Governor Robert McDonnell. The directive goes on to mention specifically "sexual orientation and parental status" as categories for which there is no such rational basis for discriminating in employment. I welcome this directive, although it must be noted that it is merely a "directive" rather than an "order," the status of his earlier statement that excluded GLBT (plus) people from protection against employment discrimination in the state government of Virginia, with orders having the force of law whereas a directive is merely an advisory opinion.
This has been issued openly due to a massive political backlash against the advisory letter to state colleges and universities from Attorney General Kenneth Cuccinelli telling them that they could not forbid discrimination against gays in employment. Even campus Republican groups have objected, with fully universal condemnation coming out of campuses at all levels, as well as from business elites in Northern Virginia worried about the impact on the reputation of the Virginia system of higher education, and also gay activist groups descending en masse on Richmond to protest. Unsurprisingly Cuccinelli still has his defenders, including the wacko Delegate Robert Marshall who recently blamed disabled children on abortion and is now claiming that Cuccinelli's critics are motivated by "anti-Catholic" bias. Gag.
This has been issued openly due to a massive political backlash against the advisory letter to state colleges and universities from Attorney General Kenneth Cuccinelli telling them that they could not forbid discrimination against gays in employment. Even campus Republican groups have objected, with fully universal condemnation coming out of campuses at all levels, as well as from business elites in Northern Virginia worried about the impact on the reputation of the Virginia system of higher education, and also gay activist groups descending en masse on Richmond to protest. Unsurprisingly Cuccinelli still has his defenders, including the wacko Delegate Robert Marshall who recently blamed disabled children on abortion and is now claiming that Cuccinelli's critics are motivated by "anti-Catholic" bias. Gag.
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