Collective Inaction

Sorry I haven't posted.

I recently read Mancur Olson's totally brilliant Power and Prosperity.  

Olson is one of the few economists I have come across who has a broad enough conception of his discipline to realize that the strictly economic is always embedded in a political and social environment which it shapes it at the same time as it is shaped by it.  While that may seem obvious enough, it is remarkably overlooked in our age of specialization, and it would be valuable enough if that were the only insight in the book.  

But Olson goes much further than this and convincingly starts to apply the most basic tool of economics -- the realization that individuals respond to incentives -- to the analysis of political machines.  With some simple reasoning he is able to generate very parsimonious explanations for a whole bunch of things that are at first quite puzzling.  For example, he explains why a subjugated people might defend a warlord or mafia don.  He explains why the Soviet Union appeared for so long to be a serious economic rival to the United States despite suffering the supposed drawbacks of a command and control organization, as well as why it so suddenly collapsed.  He explains why some societies have been able to transition from authoritarian to democratic structures with remarkable success (post-imperial Japan, post-fascist Germany) while others seem unable to make this transition.  I won't bore you with a longer synopsis.  Suffice it to say that he basically explain just about everything, so go read the book.

Because my point here was something much simpler than expounding Olson's theory.  My point was the train of thought that the first sentence of the book set off.

These days, virtually all economists (and I think also most people in other fields) would agree that societies are most likely to prosper when there are clear incentives to produce and to reap the gains from social cooperation through specialization and trade.

This seems like an innocuous enough phrase, no?  "Most" of us would apparently agree with it, which may make you suspect that it is your standard neo-liberal drivel.  Adam Smith, Invisible hand, blah blah blah.

If you look carefully at the statement though, you find something else going on.  You'll notice first that it doesn't say anything at all about free markets or limited government regulations or light taxes.  In fact, the mention of "trade" only comes right at the end, and, along with its correlate "specialization", is merely a means to an end.  The avowed end is to have incentives to produce and to cooperate in that production.  Just to confirm this reading, let me copy out the rest of the first page of the book.

If a society is to achieve its highest possible income, the incentives must not only be clear but must induce firms and individuals in the economy to interact in a socially efficient way.  That is, they must be similar to the incentives in perfectly competitive industries; those where the market, in addition to having other virtues, is so large  -- or the firms in it are so small -- that no single firm has a monopoly power or a perceptible impact on price.

 

When we shift 'from what is best for prosperity to what is worst, the consensus would probably be that when there is a stronger incentive to take than to make -- more gain from predation than from productive and mutually advantageous activities -- societies fall to the bottom.  In a Hobbesian anarchy, where there is no restraint on individuals' incentives to take things from one another, or in a kleptocracy, where those in power seize most of the assets for themselves, there is not much production or many gains from social cooperation through specialization and trade.

For me, that first sentence crystallized a shift in perspective that is very simple but very powerful.  Markets are not an end in themselves, they are a means to an end.  The fundamental role of markets is to promote cooperation, not to allow for competition.  Markets are (one way) of solving a collective action problem.  They need to be designed to solve this problem.  The logic for their existence does not fundamentally begin with the individual and a defense of the individual's right to try and make a profit, and then proceed, by way of the invisible hand, to just happen to coincide with a happy, cooperative greater societal good.  The logic runs in reverse.  We are searching for a mechanism to promote cooperation.  To give people an incentive to cooperate we need to solve the basic problem inherent with any form of collective action -- how will the gains be distributed and how will we prevent free riders from overwhelming the system. Competition is just there to solve this secondary, though fundamental, problem, it is just one way to reap the gains from social cooperation.  Competition is a safeguard that is there just to keep the game honest and to try to convince as many people as possible to play.  The invisible hand isn't blind providence, it is intelligent design.

I think it's very powerful to realize that the deep goal of markets is to facilitate cooperation and create a mechanism that solves a problem of collective action.  Most simply, it allows you to do away with the absurd left-right fissure that has engulfed our politics which imagines the market and the state as sworn enemies.  This division is the great ideological red herring of our age.  And more abstractly, it also allows you to see markets as a stage in the evolution of a supra-human organism.  

I could go on and enumerate the many virtues of this new gestalt, but let me just mention something that David Graeber pointed out in Debt: The First 5000 Years -- I am hardly the first to come up with this idea.  In fact, it appears that the first serious free marketeers arose during the medieval Islamic age, andNasir al-Din al-Tusi had no illusion that the market was first and foremost about cooperation, even as far back as 1242:

Let us suppose that each individual were required to busy himself with providing his own sustenance, clothing, dwelling-place and weapons, first acquiring the tools of  carpentry and the smith's trade, then readying thereby tools and implements for sowing and reaping, grinding and kneading, spinning and weaving ... Clearly he would not be capable of doing justice to any one of them.  But when men render aid to each other, each one performing one of these important tasks that are beyond the measure of his own capacity, and observing the law of justice in transactions by giving greatly and receiving in exchange the labor of others, then the means of livelihood are realized and the succession of the individual and the survival of the species are assured. 

I want to invest in lobbying

The Big Picture has a nice infographic today that lets you calculate the compound annual growth rate of lobbying expenditure for various industries.  The top spenders have grown at around 10% per annum for the last decade.  That's a pretty booming industry.

If you step back for a second and just look at government lobbying as any other industry, you can see that the basic laws of competitive advantage make this sort of growth inevitable.  Congress consists of only 535 members, which makes it a limited resource; the returns are high; and you can turn a first mover advantage into a durable competitive advantage by making a politician who may be around for many years beholden to you from the start.  In such circumstances, capital will find a way.  That is the magic of the market.  In fact, if I weren't deeply opposed to the very existence of this market, I would be looking to invest.  

If you want to read a well-crafted and very detailed tale about the rise of lobbying as an industry, I can wholeheartedly recommend Robert Kaiser's So Damn Much Money.  Reading about the history of post-war Washington is very illuminating and helps to understand why the system we have now is subtly different from the basic corruption that bedevils government everywhere and always; these days, we have learned to mass produce corruption.

And by the way, all hail a hedge fund manager brave enough to call for public financing of elections.

QB or not QB

I've been reading these guys' letters for almost 3 years now, ever since they came through our office trying to raise money for their fund.  Eventually, the Big Picture and a few of the other widely followed contrarians picked them up (dare I say syndicated them?).  I think they have many good points, and they have definitely helped me to develop my own thinking about the practical realties of monetary policy and monetary regimes.  Also, they give good (if long) letter.

Unfortunately, to borrow a phrase from somewhere I cannot remember, they manage their persona better than their portfolio; if they're so smart, why aren't they rich?  Last time I checked, these boys weren't even keeping up with the S&P500, let alone the price of gold, despite how much they yammer on about the bankruptcy of the modern monetary system and praise that barbaric yellow relic, and even despite the incredible run it has had over the last 2 years. 

I see two reasons why these guys are better off writing incendiary columns than managing money:

1. They have religion about their thesis.  Confident contrarianism is one thing, and probably a necessary thing for producing excellent returns.  Courage of your convictions is another thing, and is usually the kiss of fucking death.
2. They are wrong.  They simply haven't thought through this problem all the way, despite discussion of "war-gaming" their central thesis.  So, credit them for getting to second base when the vast majority of the world is still on first, but don't get too convinced that they have seen how the whole game develops.  It's long and complicated and contingent and they have stopped in the middle -- they outline one possible monetary future and call it inevitable.  It reminds me of Nozick's pithy phrase regarding a priori truths in philosophy, "Lack of invention is the mother of necessity".

Exasperation aside, let me address point 2 in a more substantive way.

US dollar are debt, technically (Federal Reserve Notes) and in practice.  Their ongoing value is supported by a system of government oversight that ultimately relies upon convincing private counterparties to use them in transactions.  As all modern global currencies are directly or indirectly benchmarked to the US dollar, they too are unreserved debt, literally and functionally owed by sponsoring sovereign governments and backed by the full faith and credit of their taxpayers.

The fundamental question all global commercial counterparties must answer upon each transaction is, "will my currency maintain its purchasing power until the next time I need it?"  If a quorum of economic counterparties begins to answer negatively, the currency in question will soon lose sponsorship and fail.

This may sound insightful to small children taking their first steps into the wide world of political economy.  Wow!  Money, like reality, is nothing but a collective hunch!  Let's throw off our clothes and run free through the fields of hard asset backed currency and pick daisies!  There's nothing to fear but everyone else fearing fear itself!  Revolution!  Mister T pities the fool who doesn't buy gold.

Good try, but this is NOT all there is to money, any more than all there is to the government in general is our collective decision to obey it.  Yes, sure, if we all woke up tomorrow and decided that cigarettes or leaves are money, then they would be.  And if we decided to have a revolution and throw off government oppression worldwide, we could.  While an valuable thought experiment, this is a lot easier said than done of course.

In the case of money, what is difficult is the fact that we cannot collectively decide what constitutes money independent from collective deciding what constitutes acceptable government.  You cannot ignore that money was invented by governments, for governments, in order to collect government taxes.  You cannot talk about money without talking about taxes and politics.  The bedrock reason we all primarily use government backed currency is because that is the only thing they accept as tax payments, and if you don't pay your taxes, guys with guns come and put you in a very unpleasant little cement floored cage opposite a shackled man in an orange jumpsuit.  This fact is not incidental to money.  It is the fucking DEFINITION of money.  It is the crystal out of which the money network condenses, as it were.  To write about what money supposedly is without mentioning taxes is not an oversight.  It is a fundamental error.  They are not just early.  They are wrong.

In short, money is inherently political, like everything else.  The change of monetary regimes is therefore also inherently political.  Economics and politics intersect, no doubt, but one does not determine the other.  If you want to predict the trajectory of either, you have to understand both. But if you really want to focus on something, I still think that politics precedes even being.

Am I paranoid?

Or is this the sort of chart that Google will one day employ to demonstrate that late model humans should be phased out in favor of more efficient forms of working memory that do not depend on clumsy mechano-magnetic mechanisms?

One of my favorite ideas in Accelerando was that the solution to the Fermi Paradox (if there's lots of other intelligent life in the universe, why haven't we seen it yet) could simply be lack of decent effective bandwidth.

To sketch out the concept a little ... 

1. Any brain is a distributed system.
2. No matter how big your brain gets, it still has to be instantiated in some physical form.
3. A big brain is going to have lots of individual parts, aka matter.
4. The individual parts have to communicate with one another and be tightly integrated to form an intelligence.

ERGO:

Even if you have the brain the size of a planet, it still has to be relatively dense or the speed of light constraint will introduce too much latency in the information transfer between the parts to do any really serious thinking.  Bandwidth is important to thinking.  Well, effective bandwidth.  The question is actually latency, but if you have to send lots of packets of information back and forth, the two are less different than you might think.

COROLLARY:

You cannot spread a brain out over cosmic distances (unless you are willing to have it think very slowly).

FURTHER:

Since most of the universe is not energy/matter dense, a very large brain will not want to leave the house because the effective bandwidth is going to suck.  It's a long way between planets.  Which means that a big brain is either going to bring the matter to itself, or accept shipping a much smaller version of itself around the cosmos if it wants to get away from home.  Big brains cannot travel light.

QED.

Bricolage

My views on net-neutrality, I can see from the various draft posts I've got sitting around, have grown by accretion, and are far from finished.  While I'm certain that the lack of timely Anarcho-theist scripture has prevented most of you from meanwhile making effective use of the intertubes, it does not appear that this situation will be quickly remedied.  However, in lieu of a positive, final, stone tablet type set of open internet principles and prescriptions, I can, at minimum, identify those areas where I believe we are falling from grace.

Witness this bullshit:

Regulation is to the rescue. ISPs will not be allowed to block access to (legal) websites, or unreasonably discriminate in the way traffic flows. Customers choose. ISPs are open. The network is neutral. What's not to like?

On January 10 2011, we found out. MetroPCS, hit with its first formal complaint, is an upstart wireless network offering low prices and short-term contracts. As part of their $40 a month "all you can eat" voice, text and data plan, they slipped in a bonus: free, unlimited YouTube videos, customised to run fast and clear.

Activist groups, led by Free Press, went ballistic. Their petition to the FCC declared that the mobile provider was favouring YouTube over other video sites, creating just the sort of "walled garden" that would destroy the internet. "The new service plans offered by MetroPCS give a preview of the future in a world without adequate protections for mobile broadband users," they wrote.

The complaint performs a great public service, revealing just how net neutrality would "adequately protect mobile broadband users". In fact, MetroPCS advances the interests of consumers by supporting enhanced access to the applications most popular with users. Such arrangements do not sabotage internet development, but drive it.

MetroPCS possesses no market power. With 8m customers, it is the country's fifth largest mobile operator, less than one-tenth the size of Verizon. Under no theory could it force customers to patronise certain websites. It couldn't extract monopoly cash if it tried to.

This is precisely what you don't want to happen with net-neutrality regulation.  So precisely, in fact, that I wouldn't put it past AT&T to have lodged this complaint as part of a lobbying strategy meant to discredit the new FCC guidelines (remember, these boys are playing chess, not checkers).  

Saying that you can't discriminate against certain sites cannot mean that you cannot promote others.  While I realize that the competitive advantage tied to how fast a site loads is measured relative to others, this systemic effect of these two rules would be entirely different.  In the first case you are sticking cats in everyone else's tubes in order to make yours appear relatively faster, which results in the overall efficiency decreasing.  In the second case, someone is building a new, and admittedly private, tube.  This improves the system overall, though the benefits clearly accrue disproportionately to those doing the building.  To use an analogy, someone built a toll road alongside the crowded highway, though in this case, it appears that everyone is free to drive on the new road in exchange for watching a few more Youtube billboards sail past.

I do think that we need to have a serious debate about the long term effects of more internet traffic going over toll roads.  If investment were drawn exclusively to building these roads, it's hardly far-fetched to imagine the public arteries eventually reduced to pot-holed rubble.  In addition, having a decent public infrastructure could be important for maintaining competition over the long term -- if you need tons of cash and expertise to ship stuff around on the internet, this may favor those who already dominate the traffic in bits.  All things considered, I think it's very likely that we want to maintain some sort of quasi-public information highway, or at least to impose some sort of wholesale level regulation on this infrastructure if we decide to leave it private owned (and remember, leaving it privately owned has gotten us pretty far already -- it ain't public right now).

Unfortunately, however, our mechanism for building public infrastructure of any kind here in the US is entirely dysfunctional. While fixing this is a noble goal (PUBLIC FINANCING OF ELECTIONS! PUBLIC FINANCING OF ELECTIONS!) we can't let that hold us hostage and prevent us from achieving some of the same ends by other means.  We simply cannot afford to discourage investment in the internet while we wait for a perfect government.  

PS.  There are a million other issues that come up here, not the least being the relationship between my last statement and my view that the AT&T - T-Mobile merger is a disaster and should be prevented.  After all, AT&T has promised to invest in significantly more 4G buildout if the merger is approved.  And to use the Jimi Hendrix version of the national anthem as their hold music.  Do we really want to discourage that?

On the bus

I think we have another winner here:

Two collegiate-looking dudes are arguing intensely in German: The translation stream in his glasses tells him they're arguing over whether the Turing Test is a Jim Crow law that violates European corpus juris standards on human rights.

BINGO!

Peter Orszag, formerly of the Office of Mangement and Budget, and now of Citigroup, has come up with a brand new system for encouraging savings in America: a savings lottery. 

In the quest to raise saving rates, this allure of lotteries may be quite helpful. To be sure, most of any increase in national savings will come from a reduction in budget deficits. But a secondary priority is higher household savings, especially among lower- and middle-income groups.

 

This is where prizes can help. A recent paper for the National Bureau of Economic Research laid out the case for a savings vehicle coupled to the opportunity of winning a large prize. One way to think of these "prize-linked" accounts is that they can offer an expected market return, but in an innovative way. They pay a guaranteed return below market interest rates, but also provide a lottery ticket whose value makes up the difference.

 

To be specific, a lottery-lined savings account could offer a lower rate of interest, but also say a one-in-a-million chance of winning $1m for each $100 deposited. Mathematically, the expected return is the same, but the chance to win $1m makes the account much more attractive.

What he fails to mention is exactly who is supposed to be running the lottery.  He does acknowledge that lots of states have lotteries now, and that the expected return is well below one (on average you "win" 50 cents by buying a one dollar lottery ticket).  And he mentions that if the state is running the lottery, this amounts to a form of regressive taxation because more poor people play, and lose, than do rich folks.  But then he sort of slips a gear and proposes his altruistic scheme where the expected return is equal to exactly one -- 1 million people put up $100 each, you take the resulting $100m and invest it a 2% return, and at the end of the year, you give everyone $101 back except for one lucky soul who receives $1m.  Very tidy.

But who is running this show I wonder.  The same state that already fleeces the guy in the food stamp line every week with the current lottery?  Or some more altruistic state that runs the whole thing like a small town raffle and skims nothing off the top? 

Assume NC starts a program like this and is giving you back, on average, $100 plus 2% interest, for every $100 you save.  It proves wildly popular and NY decides to copy it.  Only they realize that they might attract more people if the prize is $2m.  Naturally, in this case, after the prize, there's no money left over to pay everyone else their interest, but they still get back the $100 they saved.  Would people be more interested in this lottery?  The expected return is lower, but the prize is bigger.  How about NJ, who decides to offer $10m in prize money, and reasons that even with this princely sum, they will still be giving $92  back to the losers for every dollar.  That's not the end of the world, is it?  And the expected return is still exactly one.  And if these lotteries prove popular why wouldn't NM perk up to a chance to change things ever so slightly and give everyone $90 back, give away $10m, and just keep $2m for the guvna?  Wouldn't people play this lottery too?  They already play ones that are much less rewarding.  

So then what prevents a state from skimming a little?  And then the next from skimming a little more?  Until we reach the point where the odds are so bad that the it limits itself, which would represent something like the market price for the gambling instinct.  I mean, if the odds were worse, fewer people would play so they would raise less revenue but pay out less, and if the odds were better more people would play but they'd have to pay out more.  Don't states already set the odds on their lotteries to raise maximum revenue?  

I was joking, but now I'm kinda curious.

Anyhow, my point was just that we already have a household savings system linked to a lottery ticket, and we call it the stock market. The odds are most definitely rigged, but people still LOVE to play.  And the house, just like the state lottery, keeps a big chunk of the kitty.  Perhaps this accounts for Mr. Orszag proposing this scheme now that he has moved over to Citigroup.  It makes me feel terribly modern to know that the government could outsource corruption.