Saturday, July 31, 2010

What is evolution a theory of?

Real quick for the biologists in the house.  I want to pare this question down to the minimum so that maybe someone shows me where I'm going wrong.

People claim to believe in something they call the theory of natural selection by differential reproduction.  What does this theory purport to explain?

Does it explain the origin of life?  No, it takes reproduction as one of its premises, so it can't be expected to explain that.

Does it explain species we find on earth today?  Well, yes, insofar as it contends that current species are produced by modifications of old species.  However, it really only explains the selection of new species, and not their production, per se.  It says that species that are more adapted to their environment will reproduce better, and so selection will assure us that these are the ones we find later on.  But then it measures how adapted an animal is by how well it reproduces, which leaves you with a tautology, not a theory.  I guess there is some amount of content to claiming that the things we see are around because they are good at making copies of themselves.  You could imagine a world populated primarily by things that lasted a really long time individually, and not by things that reproduce at all.  But do we really take evolution to be a theory that primarily says that it's really hard to keep existing without making a copy of yourself?

Does it explain how new species arise or explain the diversity of life?  Not at all.  It says that there will be lots of copies of things that reproduce more.  When you ask why something started reproducing more, they tell you that it's because of better adaptation.  When you leave aside the tautological question above and just ask, well, how did it get better adapted, you are told that it was a chance mutation.  Sometimes you get a slightly ore sophisticated answer about a chance mutation that improved its adaptability or ability to learn, but in the end, the answer to the question of why is the biological world so diverse seem to boil down to "chance".  But chance is explicitly outside of the theory.  The theory talks about how you end up with more or less of what already exists.  No matter how slow you imagine change to happen, you still have to invoke some change to get anywhere at all, and it still inherently falls outside of the theory which deals only in similarity.  You will recall how Zeno proved movement was impossible.  

So if evolution is not a theory of any of these things, then what exactly is it a theory of, pray tell?  

It seems we need a theory of chance.  A theory of difference instead of reproduction.


For no particular reason, I thought I would take another stab at explaining the title of the blog.  The quote at the top actually comes from A Thousand Plateaus, a seminal bit of post-structuralism penned back in 1980 by French philosopher Gilles Deleuze and Italian psychoanalyst Felix Guattarri.  In an effort to dramatically boil this down, I would claim the thesis of their book is that the world is created by the intersection of forces of stasis and forces of change.  See, I told you I could simplify it; it's just like Star Wars.  They even give these forces names, almost like you would mythological characters (kinda like Freud and the Oedipal complex, now that I think about it) -- the force of stasis is called the State Apparatus, and the force of change is called the War Machine.  In general, these forces work at odds to one another, but they can also interbreed and combine in strange ways, and the Capitalist Axiomatic is the half-breed offspring of the two. 

It's hard to write something like this in any sane amount of space without falling into what feels like intellectual parody, but I will nevertheless forge ahead.

The State Apparatus is an apparatus of capture.  The State is basically a parasite in this theory.  In and of itself it doesn't produce anything.  It is not creative.  It takes existing mechanisms (of production, of language, of culture -- the idea is not mainly economic) each with its own codes and conditions and coordinates and over-codes them.  In other words the state apparatus is a force of unification, organization, systematization, and homogenization.  It marks off a territory, puts a fence up, and starts collecting taxes. 

In the book, they base part of this theory around the way the earliest states, like Sumer and Ur, actually functioned, but you don't need to buy the anthropology to get the idea.  Every system that's going to stick around has to come up with some sort of mechanism of stabilization that serves as its foundation and lingua franca.  The important thing to realize is that this foundation is not generative, not creative.  The state apparatus doesn't build it.  It's not the seed or the root of anything.  All the production is already occurring.  It just comes along later and brands the whole works and appropriates a slice.  The State Apparatus sets out limits, closes things off, and divides up the results.  Middle management in short.

This is a very different view of the state (and of organization more generally) than some are used to.  We're often brainwashed into thinking that organization is somehow more central than the forces it organizes.  As if the state itself created the organization, instead of merely coordinating already existing forces.  This is perhaps why we think that leaders have such an exaggerated importance, rather than understanding that they are more fundamentally an effect than a cause.  This is not to say that the state doesn't have a real existence and real effects.  The state is perfectly real, it's just a reactive and derived reality that has to do with maintaining a form and an equilibrium that came from somewhere else.

What's really creative is the War Machine.  The basic principle of the war machine is that it accepts no limits.  It is a force of change and mutation that will attempt to overrun every fence you put up.  The war machine has no purpose other than indefinite expansion.  It's not looking to conquer territory, which is only of concern to the state.  It doesn't have any sense of self-preservation or equilibrium.  It simply refuses to be contained; it is that element of chaos in any system that falls outside of control, and hence is the fountain of all novelty and change. 

In the book they link this to the relation of nomadic tribes to the early states.  Again, the point isn't crucial, except insofar as it helps to understand that the real object of the war machine isn't war in our modern sense.  The real object is simply to preserve the openness of a system and to avoid being captured and forced into settling down.  Instead of first marking off a territory and then filling it up, the war machine goes out and populates the little desert oases as it finds them, following the lay of the land without imposing an external order on it.  The war machine represents the system destroying barbarians at the gate.

This may be starting to sound sort of obvious -- sure, things break down, people and species and systems die off --  so I just want to pause for a moment to emphasize how odd it actually is.  Something fundamental happens when you try to think about the necessity of what, from the point of view of the stable forms trying to maintain themselves, are accidents.  Necessary accidents; failures and innovations that somehow have to be part of your theory instead of relegated to special exceptions.  Through this you bring chance into the world as a real active force, rather than just something that comes from beyond and fucks your shit up.  You give possibility a deep reality.  I can't think of a more profound philosophical stance, and this is what draws me to Deleuze in general (a lot of his more academic work is devoted to sorting out what kind of reality we could attribute to possibility, following the line of suggestions made by those few philosophers who share this tendency -- Spinoza, Hume, Nietzsche, Whitehead).  It may sound like a simple inversion, but to look at the world and see the flow between the forms as more active, more creative, and maybe even more real is to see a whole new world.  Chance reigns supreme and the rest is just bureaucracy.


Given the opposition of the state apparatus and the war machine, you would think that these forces were forever irreconcilable.  But part of the beauty of Deleuze's thinking is the way that he very clearly lays out oppositions to make a conceptual point, and then goes on to show how they inevitably combine to in very complicated ways to make the real world.  In this case we pass from the pure cases of Sumer and the Huns respectively, to a much more mixed modern situation.  The idea is that somewhere along the way, the State came up with the bright idea to capture the War Machine.  Capture is the defining action of the state after all, and the war machine was a constant threat. 

So in our little mythico-historical drama here, the modern European states represent the partial success of the State Apparatus in capturing the War Machine and incorporating it into its system.  Hence the wars fought over territory in the 17th through 19th century, which differ dramatically from than the sacking that brought down Rome and even the Crusades (a form of religious war machine).  Napoleon and his idea that the entire state should be mobilized for absolute territorial war is the pinnacle of this movement.  The war machine becomes the preferred tool with which the state captures.  And you can tell it's the state behind these wars if you ask "what do you do after you capture"?  The answer is basically nothing -- you don't change anything, you mostly let them go on like they were, and impose enough control to tax them.  The parasite is only looking to expand the host.  Or as Clausewitz put it, war is just politics by other means.

The story doesn't end there though, because its not that easy to keep the war machine penned up (which is really impossible, by definition), so capturing it is fraught with peril.  From the Napoleonic state employing a pet war machine, it's only a short jump to Hitler's war machine getting the upper hand and using the state for the purposes of pure destruction.  Hitler was no parasite.  He wasn't interested in the tax base.  He wasn't interested in capture.  He was just going to wipe everyone out.  One of the truly remarkable things I've discovered in the little reading I've done about the psychology of Nazi Germany is how all that precise organization was consciously directed at destruction as its unique goal (Goebbels said some profoundly fucked up shit to those who were listening, though this may take the cake: "In the world of absolute fatality in which Hitler moves, nothing has meaning any longer, neither good nor bad, time nor space, and what other people call success cannot be used as a criterion ... Hitler will probably end in catastrophe").

What does all this have to do with capitalism?

Stay tuned for next week's exciting conclusion!

Friday, July 30, 2010

I am not a liquidationist

Okay.  So you're doing a hundred miles an hour in an SUV that only turns left.  You've been making donuts like this for a while when a squid darts into the road in front of your left bumper.  You smash into the thing and end up sitting in the middle of the road a smoking heap, calling for help.  The mechanics show up fast and get the car running again, but aren't able to fix the steering before some dude with 12 arms zooms up behind you in his new Nano.  You're about to get rear-ended.  Panicked, you start to step on the gas when you remember that you still can't steer, unless by some magic the crash happened to change that. 


Let's just floor it and hope for the best?

Monday, July 26, 2010

Another Tidbit from Wolf

One of the curious things I've often wondered about is the vitriol that the current Republican party shows toward Keynes.  I find it odd because it seems clear to me that the Republican supply-side theory of growing the economy by cutting taxes and running deficits, is at base a deeply Keynesian theory.  The distinction between demand-side Keynesianism and a supply-side version seems like a second order one when you consider that both rely on the idea that the government should stimulate an economy that for whatever reason is not operating at fully efficient equilibrium.

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: "supply-side economics". Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.

The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?

How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives - for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the "starve the beast" theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.

In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage. It also made the Republicans de facto Keynesians in a de facto Keynesian nation. Whatever the rhetoric, I have long considered the US the advanced world's most Keynesian nation – the one in which government (including the Federal Reserve) is most expected to generate healthy demand at all times, largely because jobs are, in the US, the only safety net for those of working age.

The post goes on to make clear that the real honest-to-god fiscal conservatives like Mankiw and Friedman don't believe this logic.  They want a smaller government, with the tax cuts balanced by spending cuts, just because they hate the fucking Eagles.

Friday, July 23, 2010

Diversification as Monoculture

Recently I've been reading about the mechanics of American corporate governance.  In theory of course, corporate governance is entirely straightforward and democratic -- one share, one vote.  Of course, there are some special cases where founders or their heirs maintain control over a company by setting up a special class of shares that get a disproportionate representation.  While this is more common than one might imagine, it's still an exception (forgive my lack of statistics, it's Saturday) and for the most part the economic owners are in nominal control of a company.

The reality is pretty different though.  The owners are officially in control, but they naturally have to appoint a board of directors to represent them and hire a manager to run the business and make day to day decisions.  The CEO is inherently going to end up much much closer to the business than the board, who in turn is much closer to it than the shareholders.   Multilayer representative democracy is not exactly a ... ahem ... flawless system, so stuff gets lost in translation.  If you want to read about just how complicated this process of translation is, read the SEC concept release, which goes over the mechanism from top to bottom.  The consequences of making sausage with this mechanism are as obvious as they are widespread -- wildly overpaid management that has little of its own money at risk, incentivized to either placidly chew the cud and milk their control, or to go for broke at someone else's expense.

At first it seemed to me that the problem was about the dispersion of ownership.  I rant endlessly about how America is just too damn big and how they wrote the constitution to serve 4 million and not 300 million people; I thought the problem in corporate governance was similar, large corporations simply have too many shareholders to be governable.  The centralization of control opens the door to corruption.

The more I've thought about this though, the more I've decided that it's not the number of owners per se that is the overwhelming problem.  After all, even in a large company with many owners that is not controlled by its founder, say GE for example, a solid portion of the ownership lies in the hands of the largest asset management firms.  In the case of GE, the top 10 institutions own 17.4% of the stock.  They shouldn't have that much difficulty getting their way, especially when you consider that a lot of the little holders don't bother to vote at all or let their broker vote for them.  And I submit that they wouldn't (have trouble) if they had any clue what their way was.  Unfortunately, these big owners own, quite literally, everything.  The biggest owners are almost always one flavor or another of index fund or its modern equivalent , the ETF.  They just track "the market" and are professionally agnostic about the individual companies in it.  They don't have an opinion about how a company should be run, and there's no way they could have an informed one about all 500 plus that they own.  Rather than acting as a powerful concentration of ownership, they are just another middleman muddling the mechanism.

How did we get to this state then?  How did the real beneficial owners end up so far from the thing they own?  A big part of it was the encouragement people have gotten over the last 50 years that there was something out there in the wild called "the market".  This idea grew out of the work of the Chicago School and the capital assets pricing model.  They designed a toy model of a perfectly functioning market, which is an inherently equilibrium tending machine, from whence they went on to prove that in this toy model return was proportional to risk (defined as volatility).  From there, if you presume that the individual assets are uncorrelated, it's a short step to touting the wonders of diversification in providing you the highest return for a given level of risk.  You just buy your share of "the market" which is defined as "all of the assets" and you let it work it's invisibly handed magic.

This model explains the market okay if you squint just right and throw out the major data points of the century, like, say, the Great Depression, so naturally it was taken as gospel.  It also created a whole wonderful new industry for Wall Street because now they could own the same thing as everyone and charge a fee for doing so without getting blamed if things went bad.  But I'm being facetious and cynical.  The theory really isn't that stupid, even if you can hardly call it empirical science.  It does more or less explain long stretches of data in a parsimonious fashion.  And in the end, I can't say I have a better suggestion than this extreme diversification for the amateur investor.  Like so many things in economics though, it's clear that the George Soros principle of reflexivity applies here as well -- once everyone does what the theory says they should, it ceases to be valid.  In this case, everyone diversified into the same stuff, and the correlations increased dramatically, which invalidates the premise.

Now it's pretty obvious where I'm heading with this.  It seems to me that the problem was that we grew a monoculture of diversity.  Once this monoculture was established, the combination of finance and politics swept through it like a virus.  We unhooked the basic premises of capitalism, namely that owners with varying preferences care what happens to their property.  If it's only ever 1% of your property it can't really be worth worrying about, right?  In that case why would you bother with governing the investments you make?  None of them is individually important and you can't know about everything.  On top of that, they've already proven to you that you can't beat the market, and proven too that when you just buy a bit of everything, it will all magically work itself out, even if it's immediately obvious that if most people are following this advice it can't possibly work.  So there's no point in even trying to govern the corporations you own for your benefit.  Sit back, drink your coffee and enjoy your divine right to a little slice of America.

In the end, this monoculture reminds me of socialism.  Instead of centralizing economic decisions in one 'party brain' that wisely and benevolently  decides how we should allocate resources, we have centralized decisions in one theory that wisely and benevolently declines to make those decisions.  It's kinda like a lobotomized socialism.  And of course, once you take away the patient's higher brain functions, they end up running on the old autonomic reptile brain power.  Just how ancient is the Vampire Squid?

These are not the droids you are looking for

Felix Salmon pretends he has heard something that escaped most of us:

Matt Cameron picks up on an interesting tidbit from the most recent Goldman Sachs earnings call:

As a result of meeting franchise client and broader market needs, we had a short equity volatility position going into the quarter. Given the spikes in volatility that occurred during the quarter, equity derivatives posted poor quarterly results,” Goldman’s chief financial officer, David Viniar, told analysts on a quarterly earnings conference call on July 20 …

In fact, Goldman managed to put the bold clause in every single article I've seen regarding their earnings -- they veritably shouted from the mountain that whatever their business as usual is, it won't qualify as prop trading.  Volcker and Congress must have been thinking of someone else ...

Tuesday, July 20, 2010

Mafia State

It seems to me that Martin Feldman has a largely good idea ... that will never ever happen.

When it comes to spending cuts, Congress is looking in the wrong place. Most federal nondefense spending, other than Social Security and Medicare, is now done through special tax rules rather than by direct cash outlays. The rules are used to subsidize a wide range of spending including education, child care, health insurance, and a myriad of other congressional favorites.

These tax rules—because they result in the loss of revenue that would otherwise be collected by the government—are equivalent to direct government expenditures. That's why tax and budget experts refer to them as "tax expenditures." This year tax expenditures will raise the federal deficit by about $1 trillion, according to estimates by the congressional Joint Committee on Taxation. If Congress is serious about cutting government spending, it has to go after many of them.

For example, the Joint Tax Committee identified more than a dozen tax-based programs that subsidize education and training. These include small ones like the Coverdell education saving accounts (with a 2010 tax expenditure cost of $100 million) and much larger ones like the various tax credits for tuition (costing $11.7 billion). The hundreds of other tax expenditures include a $500 million annual subsidy for the rehabilitation of historic structures and a $4 billion annual subsidy of employer-paid transportation benefits.

Ignore for a moment the blatantly partisan nature of the the examples (gee, I wonder if businesses ever benefit from these type of tax expenditures?  Nope, looks like it's only education and transportation and liberal bullshit like that).  Ignore also that some of these benefits exist to make the tax code more progressive (nominally at any rate, I for one still think there's an proportional relationship between how progressive they make the tax code on the one hand, and how much they let large businesses take it out of poor people's pockets by reducing competition on the other). 

Neither of these objections matter really because it would be simple suicide for congress to relinquish its power to micromanage the tax system.  If they don't first condemn you, and then grant you a stay of execution, they lose all their power to collect protection money in the form of campaign contributions.  Congress doesn't regulate in order to improve an industry, it regulates, first and foremost, to extract its paycheck.  And the way it "regulated" finance in the last decade should remind us that congress is in the unique position of getting paid for doing stuff, and for not doing stuff as well.

Wednesday, July 14, 2010

Don't disappoint me

So I'm interested in finding out whether hydraulic fracturing (aka fracking) for the purposes of extracting natural gas from shale formations is safe and efficient.  I begin with no opinion.  For the most part, in my experience, people are wrong.  So I'll just have to sort through it on my own.

In trying to find out, I read a lot of folks from the industries involves saying that it's perfectly safe, we've been doing this for years, for god's sake it's happening way below the water table, how can it be a problem, etc ...  This is marginally convincing, because it does turn out to be mostly true.  Fracking has been around long time, no one has really ever noticed a problem with it, and it does almost universally happen below the water table.  But then again, the N isn't huge here, as the process hasn't really been used in lots of geographies and at large scale.  Plus, you can't exactly trust the people most likely to benefit financially.

So I go and read some of the other side.  Vanity Fair wrote this article.  Basically it says that fracking will make your hair fallout and your teeth turn green.  Sounds grim, but how likely is that claim to be true on a wide scale.  Vanity Fair just exists to sell magazines after all, and this smells a little sensationalistic.  If you read through the article though, you do see a few claims that need addressing.  The process requires what sounds like a lot of water.  The water has to get trucked into some god forsaken PA town where they haven't even managed to put out the coal fire they started in the 60's.  That burns up a lot of oil, and of course uses the water.  And then to get the gas out you have to shoot the water down into the rock at high pressure with a bunch of chemicals and sand that fracture it.  These are not the nicest chemicals, and not all of them seem to stay way down in the well on all occasions.  In other words the article points out that we should probably think about whether this is safe and efficient or not.  Which was the question of course.  Which we still haven't answered of course, because the article has no fucking numbers in it.  Because, you know, numbers aren't as scary as green teeth.

But okay then, that's Vanity Fair.  If that was my go to source for information, I'd be even poorer than I am.  So I check out this engineering professor Anthony Ingraffea's lecture.  He's been around the science of this for a while, he's consulted for the industry -- certainly he will have something useful to say?  The lecture's got some numbers and some data and some more stuff to think about, but it is in fact a colossally awful and biased piece of work.  Go ahead and watch it and decide for yourself.  It does also brings up some good points.  You have to make lots of small wells for this process to work, so you have to end up with a landscape full of wells.  It takes a while to drill lots of wells, so there will be lots of noisy dirty activity in your backyard, if you happen to be sitting on the right to lease your privileged piece of geology.  And then you've got to truck waste in and pipe gas out, and deal with the potential toxic fluid leakages, and waste, and etc ...  Important stuff to think about undoubtedly.  But this guy's entire presentation is designed to scare, and not to inform.  Not to balance and calculate and weigh pros and cons.  Certainly not to suggest solutions that would alleviate whatever the problems are. 

I mean, how about a calculation of the carbon footprint of the trucks that carry the water compared to the emissions savings of producing more electricity with gas.  What if you used the gas to power the trucks, would that make carbon sense?  And how about the water issue.  I don't want a comparison between the amount of water fracking requires and the amount that goes over Schuchyll Falls in the time it takes me to quaff another Yuengling.  I want it compared to how much my neighbor dumps on his lawn and car every Sunday afternoon while I vomit.  And don't tell me that the fluid is really really really scary and has fangs.  Tell me how I can deal with that by changing it or storing it better or whatever.  It's so disappointing because this guy has the knowledge (if not the speaking ability) to be able to put together a good, fact filled presentation that says on the one hand this, and on the other hand that.  But everybody today is just like Truman, they all want a one-handed economist.  Truman would have loved environmentalists though -- I've never met one with two hands.  This guy just wants to scare you so that you keep the hell away from his trout stream.  So disappointing.  And yes, I know there are a million caveats to my annoyance here involving the difficulty of mobilizing and educating people, or dealing with government, or beating corporations with serious lobbying budgets, etc ... that would make you look less harshly on Herr Doktor -- but I also want some facts and context occasionally.  Why are the two so impossible to combine?

Back the drawing board I guess.  I still have no real sense if fracking at scale is honestly dangerous, or whether it's the equivalent of those complaints you heard circa 2002 about how ugly those cell-phone towers are, and ... are you there? ... hello ... reception is terrible around here. 

¿Vos también estás luchando para la gentuza?

Only 600 over the curve.  Ain't socialism grand?
Argentina's transport secretary, said the pact calls for China to invest in 10 separate rail projects in Argentina over the next two to five years, including construction of rail lines and equipment. Among these is a $2.5 billion rail-renovation project in the capital, Buenos Aires, Mr. Schiavi said.  Mrs. Kirchner, who made the announcement during a visit to Beijing, said Argentina will get the funds in 19-year loans carrying an interest rate of Libor plus 600 basis points, or hundredths of a percentage point. Further details of the financing detail are scarce.

The real question is whether the deal is denominated in pesos, renminbi, or beans.

Monday, July 12, 2010

Would you like some bananas with your politics?

Interfluidity today passes along what has become one of my favorite Keynes quotes: I love the way this forces you to twist your perspective on the Roaring Twenties, the ensuing Depression, and, by implication, the massive stimulus project the Nazis undertook.

It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924–29] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.

I do not take this view. I find the explanantion of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity…

He goes on to point out that the same cannot be said of the idiotic investments we made in our last boom period -- a 3,000 sq.ft. house with two SUVs in the garage is about the least productive investment I can think of.  If we extend our definition of the "boom" in the most recent cycle to include the internet bubble, the case is less clear, but at any rate his point is well taken.  We've malunderinvested in a lot of useless crap, as Bush might have put it.

Was this because of some grand failure of the free market though?  It seems to me that this was principally a failure of our political system.  He addresses this question, though only tangentially:

In theory, we have two overlapping systems, a financial system and a political system, whose shared purpose is to make information-dense decisions about how best to use or conserve our resources. It's not clear how we should make these decisions when both systems seem badly broken.

So, yes, let's be clear.  Both systems are broken.  But I think you miss something fundamental if you don't see how the problems are connected.  Finance is broke in large part because politics was already broken.  I mean this in two ways. 

First, on a practical level, the government simply reneged on its duty to regulate the market.  In the end anyone with a deep belief in the market as tool (as opposed to a fundamentalist faith in the market as a dogma) still can see that it's the job of politics to set up the rules of the game so that when the financiers and entrepreneurs compete for the spoils, they actually provide a benefit to other folks as well.  Politics designs, and finance executes. 

Second, if politics disdains design, finance will execute us right into oblivion.  The market, as machine, runs on its own logic of profit maximization.  If politics is broken enough to allow for its own purchase as a viable business strategy, it will, inevitably, be bought.  I'm sure loyal readers who hear me say "feedback loop" one more time will reach for their revolvers, so I will shift gears a bit ... 

Does this observation mean that economics or politics is more fundamental?  It seems clear that the answer should be politics.  An equilibrium tending free economic market governed by an invisible hand is actually a very special type of political game.  Economics is a sub-discipline of politics.  Not to be outdone, Interfluidity knows this as well.

Shlieffer and Vishny's famous coinage, "the limits of arbitrage" is not strong enough, because it suggests that efficient arbitrage is the norm subject to some exceptions and limitations. It is more accurate to view efficient arbitrage as the unusual special case, in bond markets as well as in equity markets.

I would extend this logic further, however, and say not only that the actual market works according to theory only on occasion and almost by accident, but that it's almost accidental that we even occasionally have a market to begin with.  We take democracy and markets for granted because we have seen a few rare examples of them, and because the idea is so pretty and easy to theorize about.  Unfortunately, the real world -- whether political or economic -- only teases us with an intermittent tractability.  This is actually true of every science we attempt, though it's obviously much worse if you're trying to invent a science of economics or politics.  In fact, I feel like this logic applies to whole bunch of problems, from the definitions of life and consciousness all the way to our efficient market theory and maybe even our basic philosophical assumption that stability is somehow more fundamental than change.  We pattern seeking monkeys are experts at making a general rule out of a tiny special case.

Kinda reminds me of the old math joke: "Classification of mathematical problems as linear and nonlinear is like classification of the Universe as bananas and non-bananas".

Thursday, July 8, 2010

Allow me to eviscerate

Art Laffler, yes, the Laffler of famed Curve, has an op-ed in today's WSJ.  He pretends to look at some evidence, and concludes that we're only having a recession because the lazy bums don't want to work.

The most obvious argument against extending or raising unemployment benefits is that it will make being unemployed either more attractive or less unattractive, and thereby lead to higher unemployment. Empirical research supports this view.
He goes on to tell a lovely and plausible story about what would happen if unemployment benefits were $150,000 per year.  This of course, makes his point undeniable.  So I have to agree that we should keep unemployment benefits below this level.  Given that the average check amounts to around $15,000 per year (if you could claim it for an entire year) it looks like there's about a factor of 10 between Dr. Laffler and the truth.  This doesn't stop him from producing "evidence" in the form of the following chart:

This again is quite undeniable. The chart incontrovertibly shows that the government pays more in unemployment if there are more unemployed people.  Science motherfucker!  Put that in your pipe and smoke it you liberal cur!

Honestly though, the whole thing is either so stupid or so evil or so dishonest that I'm already bored with making fun of the guy.  Just listen to some of this stuff:

There isn't a "tooth fairy," or as my former colleague Milton Friedman repeated time and again, "there ain't no such thing as a free lunch." The government doesn't create resources. It redistributes them. For everyone who is given something there is someone who has that something taken away.
While the unemployed may spend more as a result of higher unemployment benefits, those people from whom the resources are taken will spend less. In an economy, the income effects from a transfer payment always sum to zero. Quite simply, there is no stimulus from higher unemployment benefits.
To see this, imagine an economy that produces 100 apples.

Um, have you ever heard of this Keynes guy?  Krugman and DeLong and Thoma are right; it's honestly like living in the dark ages.  I guess Laffler has been working on modeling the 100 apple economy.  Actually, maybe that's still too complicated.

To see these effects clearly, imagine a two person economy in which one of the two people is paid for being unemployed. From whom do you think the unemployment benefits are taken? The other person obviously. While the one person who is unemployed may "buy" more as a result of unemployment benefits, the other person from whom the unemployment sums are taken will "buy" less. There is no stimulus for the economy.

Now that we have a nice realistic model of the economy as two frictionless billiard balls rolling around in Art Laffler's head, we can clearly conclude that the best thing would be to cut taxes.  What?  You don't see the connection?  Come on man.  Learn the refrain.  They've been teaching it to you like it was Sesame Street.  The punchline is ALWAYS cut taxes.
My suggestion would have been to take all $3.6 trillion and declare a federal tax holiday for 18 months. No income tax, no corporate profits tax, no capital gains tax, no estate tax, no payroll tax (FICA) either employee or employer, no Medicare or Medicaid taxes, no federal excise taxes, no tariffs, no federal taxes at all, which would have reduced federal revenues by $2.4 trillion annually. Can you imagine where employment would be today? How does a 2.5% unemployment rate sound?

With that out of the way, Dr. Laffler, PhD, can now get down to the serious business of writing tomorrow's op-ed, which of course exposes the scientific inevitability of US budget deficits causing the invisible bond vigilantes to flee US Treasuries and drive interest rates to the moon.  Science is never more fun than when you just get to make it up as you go!

Grotesque.  Irresponsible.  And just plain flat out fucking wrong. 

Wednesday, July 7, 2010

Credit is just trust with a number

The ever-enlightening M. Pettis churned out another of his trademark monster missives (well, monster by typical blog post metrics).  This one touches an issue dear to my heart, namely the fact that we are all already bankrupt. 

For the next several years, as Keynes reminded us in the 1930s, savings is not going to be a virtue for the world economy.  It is more likely to be a vice.  In order to regain growth the world desperately needs less savings and more private consumption, but I think it is not going to get nearly enough to generate growth.  Why?  Because in all the major economies the banking systems are largely insolvent, or about to become so, and desperately need to rebuild capital.  For reasons I discuss below, this will have a large adverse impact on private consumption.

The only question left is how we deal with it.  In the end, the response is more of a political question than anything economic -- modern politics specializes in sweeping problems under the rug long enough for them to become someone else's ... ad infinitum.  Pettis goes on to point out that the most likely version of events is something akin to Japan.  They have had banking problems for 20 years now, and all the while they have forced their consumers to continue bailing and bailing via passing this debt onto the state's books (sound familiar?) and then holding interest rates for short term depositors artificially low (sound really familiar?) while letting the banks rake in a fat spread.

... in Japan, during the past twenty years the Japanese government and the beleaguered Japanese household have been tasked with keeping the banking system alive.  I don't know whether or not the banking system has finally been cleaned up, but for the purpose of my calculations it doesn't really matter.  The Japanese government has been saddled with a huge nominal debt burden, which is only bearable because interest rates are kept artificially low.  Forcing down the interest that depositors and bondholders receive means that borrowers are getting (albeit not visibly) substantial amounts of hidden debt forgiveness funded by household depositors.

So while he outlines a variety of logical possibilities for dealing with the aftermath of our recent giddy surfeit of trust, they all basically boil down to household consumers footing the bill one way or another as in Japan.  Somebody that thought they weren't going to have to work so hard or live so well is now going to have to get off their keister.  Politics is there to help us decide who. 

One thing that he doesn't really go into in this post is the possibility of distributional differences.  From a macro perspective this question is meaningless.  Households will pay.  It doesn't matter to a first order approximation whether these are rich or poor households.  It seems clear to me though that there is a political dimension to the division of this burden.  Perhaps one of the reasons that Japan's Great Recession has been so smooth (honestly, I know it sounds crazy, but Japan might be a success story, at least when compared with the Great Depression) is that they have a relatively egalitarian society.  Here in the third world, we might expect a few more bumps in the road. 

The end of his post also contains a very interesting suggestion that I haven't thought through yet completely.

Until the banking messes are cleaned up, I think we shouldn't count on household consumption to save us.  The only solution I can think of for this problem is if governments — especially China, Germany and Japan — use their resources of wealth to clean up the banking mess without forcing households to do it.  How?  they need to privatize their vast holdings of assets and use the proceeds either to clean up the banks or to prop up household wealth.  This will require a major political reform, especially in countries like China, but I have no doubt that eventually we will get there.

Privatization is sort of a bad word today, especially in places like China, but I bet it will become eminently respectable again in a few years.  But until then, and as long as the banks are in such bad shape, do not expect consumers to ride to the rescue.

If the basic issue is getting people to trust one another and their government enough to get back to fucking work, then letting them feel some access to the wealth they have collectively built up in the form of State ownership might be a good solution.  Unfortunately, the biggest problem we have everywhere is that the mechanisms that hold these collectives together are malfunctioning.  We are at the point of completely dropping any pretense that any political party can act "for the people".  It was always a bit mystical, this "people", but perhaps there was some amount of mechanism there for their "will" to get transmitted.  Now, it's like we've got one guy working the brake and another handling the wheel, and the two can't even talk to one another.  So it's hard to count on these guys to come up with the most equitable and efficient division of labor.

Monday, July 5, 2010

What is a number?

I've been obsessed with this question for quite a while now.  I think it dates back to reading Wolfram's A New Kind of Science, especially the part where he goes into what sort of computational system mathematical proof might be, and in particular the picture on page 153 that shows how the classical iterative map from chaos theory is actually just a digit shift when you look at it in binary notation.  So is chaos very simple, or terribly complicated?  Well, it depends on how you write down the numbers involved.  The idea that the notation you use to represent a number matters in a deep way really got under my skin.

Unfortunately, it turns out to surprisingly hard to find other people who are also obsessed with this question.  Shocking, I know.  But, today only, for your blog perusing pleasure, I present Brain Rotman, mathematician, philosopher, and author of Ad Infinitum ... The Ghost in Turing's Machine: Taking God Out of Mathematics and Putting the Body Back In.  An Essay in Corporeal Semiotics.  This is a very interesting little book (though with a title so long that you have to wonder whether it's a cheeky joke) that takes issue with every known philosophical interpretation of mathematics, and tries to open up a new and more realistic way of thinking about just what this particular animal behavior pattern is all about. 

First, Rotman dispenses with the age-old absurdity of the Platonist viewpoint -- mathematics as a language for describing pre-existing truths about eternal objects.  As loopy as that sounds, I think most mathematicians still look at it this way.  They're not inventing stuff, they think they're discovering it.  To me, this account of the activity is so obviously theological that it's not even worth exploring.  I mean, once you start asking how the apes get in touch with the essences the whole thing sinks faster than the Hindenberg.

Next, he goes on to dispense with Hilbert's reinterpretation of mathematics as a purely formal and computational enterprise devoid of all meaning.  As if Godel hadn't already managed that.  His critique here is not the same as Godel's of course.  He's not concerned with the fact that the computers will never make it to the "end" of mathematics, he's just wondering why on earth anyone would be interested in math if it merely consisted in taking a set of axioms and some rules of inference and grinding out tautological proofs. 

Finally, while he has the most sympathy for it, he has a fundamental objection to the constructivist-intuitionist branch that Brouwer and Kronecker advanced under the flag of the latter's infamous, "God made the integers.  All the rest is the work of man".  He likes their idea that mathematics has to be founded on procedures that could actually be carried out by mathematicians (and hence shares their problems with Cantor's transfinites), but he's not so thrilled with the idea that the acceptable "construction" is judged by some slightly mystical pre-verbal intuition rather than anything as concrete as a symbol processing system.  And he's especially not thrilled with that notion because it enables them to sweep under the rug the very thing their intuition most takes for granted: namely, the integers.

Ultimately then, that's what the book is about -- the constructivists should have been constructivist about the integers.  Are the natural numbers really so natural, or is that the baggage left behind by some theological dogma?  This is the question Rotman is interested in, and after a long introduction dealing with the philosophical impediments that have prevented us from even asking the question, and outlining his own stance -- short version: mammals do math with machines -- he gets down to work on a new theory of arithmetic.

So how do we make the integers then?  This is pretty straightforward; we count.  And then we add, which is just shorthand for counting and counting again, and then we multiply, which is adding and adding again, and exponentiate, and hyperexponentiate, and ... you get the idea.  So we actually count twice.  Once at the level of the integers directly, and once at this meta-level that keeps track of our counting operations.  In both cases we just repeat the last step again. 

And we presume that it doesn't change anything.  We presume that the context of the repetition doesn't have any effect on the outcome.  In other words, we assume that going from 5 to 6 is the same as going from 10^10^5 to 10^10^10^6.  It's just adding zeroes, so to speak.  We could continue on like this indefinitely.  Or could we?  I mean, if we start with a general philosophical acknowledgement that it's monkey doing this mathematics (maybe with computers now) we immediately have to wonder both how far the monkeys and their machines can really count, as well as how far they can really meaningfully conceptualize.  I mean, I get a stack overflow just trying to parse hyperexponentiation, and while my mac may get a little further, I'm pretty sure I can blow it's stack as well.  So it seems all repetitions are not created equal after all.

So if we start from a mathematics situated in this universe and not mysteriously floating free of it, we have to ask ourselves what we actually mean when we say we count and we put more zeros or levels down ad infinitum ...  There has to be some, certainly very large, physical limit to any actual counting.  That "..." is just a figure of speech.  In real life, counting, like every other physical process, is going to be dissipative.  It's going to burn up energy and produce entropy/information.  You can't have it endlessly for free.  The counting to infinity that mathematicians use in nearly every proof is really a sort of waking dream.  No actual agent could ever carry on like that, but everyone knows what you mean when you imagine this ghost in the machine.

And this of course is Rotman's point.  He's not trying to "disprove" regular arithmetic.  He starts from a general idea that mathematics is a language, and a language is fundamentally a way to generate an interesting inter-subjective game and not, primarily, to describe an objective world. From that perspective it is only necessary to point out that the rules we assume counting plays by are not the only ones.  Regular arithmetic imagines some disembodied agent that could never exist in our physical world, and that counts forever and never loses track of whether they are hyperexponentiating or hyperhyper ... or ... is it a weekday?  We know what you mean by that even if it is imaginary.  But we could also imagine something else.

The situation is exactly analogous to the axiom of parallels in Euclidean geometry.  For 2 millennia no one could imagine two parallel lines crossing.  It was taken as both a logical axiom and a true description of real geometry.  It took until Riemann for people to realize that you could put together a coherent curved geometry that violated Euclid's axiom.  And it turns out it was not just a logical possibility, but a better and more general description of reality (even if you wouldn't want to use it to build a bookshelf).

Rotman proposes a model for a non-Euclidean arithmetic, where counting is "locally flat", but, because of dissipation occurring in the real universe, starts to "curve" at very large numbers.  I will spare you the definition he tries to present of the terms in quotes.  Suffice it to say that counting and numbers take on a very different appearance afterwards, though much like an M.C. Escher drawing, things look pretty normal in the middle.  It's really interesting to see what happens when you break the stranglehold that simply counting forever has on our imagination.  You see that a whole new system is not only logically possible, but you even start to wonder whether perhaps this model would be a better description of the reality of time.  If Riemann's geometry was a more complete description of the structure of space, perhaps non-Euclidean arithmetic would help us investigate the structure of time.  After all, what is counting but our image of the passing of time.

Anyhow, interesting stuff.  The writing is slightly clause-heavy and academic -- I will chop of his finger the next time he reaches for the comma key -- but it's quite lucid and easy to follow.  He also wrote a book about the history of zero which might be interesting.  I can predict the punchline of that one already though -- zero merged writing numbers and calculating with numbers.

Friday, July 2, 2010

This is not my fault

Our at least I don't remember anything about it.

A former oil broker was fined and banned from the industry for five years after the UK regulator said he made unauthorised trades from home and triggered a spike in oil prices after a weekend of heavy drinking.

Did I ever mention how I think the market is a machine for producing randomness?