## Saturday, November 17, 2012

### Coercive competition

A useful way to think of organised crime is as the application of coercion for profit in social spaces where the power of the state does not effectively reach.

It is common to think of organised crime gangs as having "territories".

Such as this map of the territories of Mexican drug cartels.

Obviously, the drug cartels are not the only coercive power in such territory -- the Mexican state still operates. Nevertheless, it make sense to talk of territories and turf wars -- which can be vicious and deadly. So deadly, that law and order can break down if the struggle gets sufficiently intense. Ex-military personnel can be prime recruits for such gangs because they are trained in applying violence.

Researchers have found that American street gang territories in Los Angeles can be modelled by predator-prey equations, with violence concentrated on the boundaries of territories. (Abstract of article here.) Organised crime being a form of competition over scarce resources -- income from crime; in the above cases, primarily from sale of illegal drugs. Though human trafficking is apparently rising in importance as an income source.

Essentially, organised crime gets its "in" because the state fails to maintain a sufficient monopoly of organised coercion. This can be because the state just does not bother (as in various shanty-towns and slums in Latin America or the Philippines). Or because its mediation and enforcement services are sufficiently incompetent, as happened in Bangalore in India, where organised crime provided land ownership enforcement and mediation services more effectively than the slow, complex and corrupt official land ownership registration, mediation and enforcement system. Or because the state bans a range of transactions, thereby withdrawing its mediation and enforcement services from them -- given that said ban fails to eliminate such transactions.

Practitioners captured with tools of the trade
Which is why command economies tend to become, over time, spectacularly pervaded by corruption. So many transactions people wish to engage in are illegal, that huge "black" markets form. Which then creates a demand for mediation and enforcement services that the state refuses to provide for such transactions; demand that is open (and likely) to be fulfilled by organised crime. Since command economies tend to have ruthless enforcement services that -- by a thoroughly Darwinian process of selection -- tends to breed ruthlessly effective organised crime (as they are the only ones that survive). A legacy that can persist (or even be exported) after the command economy has collapsed. Hence the notorious problems with Russian organised crime gangs.

The market for official discretion
Corruption is the market for official discretion, so the more pervaded by regulation based on official approvals the economic life of an economy is, the greater the level of corruption tends to be. In Australia, land markets have long been the major markets most pervaded by official discretions, so have a long history of corruption scandals. Since the Spanish and Portuguese exported highly economically controlling systems of government with elaborate licensing and other forms of official discretion, their former colonies tend to have notoriously high levels of corruption. Up until the mid C18th, English-cum-British politics were also notoriously corrupt. There was then a century or so of repeal of official monopolies, licenses and other regulatory interventions which massively shrank the scope of official discretions. By the mid C19th, British politics had a very high reputation for probity. Shrinking the realm of official discretions naturally shrinks the likelihood of corruption, just as expanding it tends to have the opposite effect.

Note that official discretions and regulation are not the same thing. One can regulate by some general rule or by requiring official approval; the latter is a form of official discretion, the former is not. The German Federal Constitution, for example, essentially blocks official discretions from interfering with (pdf) property rights. That effective ban does not stop Germany from having land and environmental regulation, it just forces it to be via open rules. The complication is that any regulation generates some form of official discretion in its enforcement; nevertheless, systems of explicit official discretion are much more vulnerable to corruption than rule-based systems.

While organised crime (in the sense of competing mediation and enforcement services to those provided by the state) and corruption are connected, they are not the same thing. In China, for example, the Communist Party elite dominates both the official state and the market for official corruption, greatly reducing the scope for any competing source of coercive services. Though whether this is a stable arrangement is another question, as continuing sale of official discretion is likely to undermine the social coherence, the asabiyya, needed to make such continuing exclusion of alternatives work. The Gu and Bo Xilai scandal may be the Party leadership drawing "lines in the sand" that organised violence will remain a Party-state monopoly.

Competing mediation and enforcement
Gambling, prostitution and drugs are notorious realms for organised crime precisely because they are banned transactions that the state has thereby withdrawn its mediation and enforcement services from which nevertheless continue to occur. As demand for such transactions are not eliminated by the ban nor such withdrawal, income sources are opened up able to support alternative mediation and enforcement services as neither party in such transactions wishes to attract the attention of the state.

Prohibition was notoriously a hey-day for organised crime precisely because so many people still wished to consume alcohol. This connection between the wish to control other people's transactions and willingness to supply banned services can lead to an effective alliance between the controlling moralists -- the wowsers -- and gangsters; the so-called "Baptists and Bootleggers" phenomenon. The notion that officially banning, or failing to recognise, something will make the thing go away is very attractive. Even if it is not fully believed, it can be a great way to express righteous malice towards others.  A central appeal of political action is, after all, precisely that one can impose costs on others which one avoids oneself. (There is some depressing economic experimental evidence on the power of human malice.)

They will accept us as their new protectors after we smash them
Protection rackets are the most direct form of competing mediation and enforcement services. (Anarchists of various stripes would argue, of course, that the state is just a protection racket that has managed to clothe itself in an aura of legitimacy.) The existence of protection rackets relies on people being either isolated from, or otherwise lacking confidence in, official state protection.

The failure of a state to enforce an effective monopoly of organised violence can have very unpleasant consequences. For example, there was a major drop in homicide rates in Western Europe after the medieval period (pdf) as the nascent modern state became the monopoly provider of organised coercion, rather than relying on that local franchising of protective services which we call "feudalism". Coverage of protective services became less contested, so increasing in clarity and effectiveness. The state acquiring the income and administrative resources to be the monopoly provider being what led to the transition from "franchising" protective services to direct central provision. This led to a serious of inter-related "knock on" effects. As the nobility became less bellicose, its behaviour became more "courtly", generating different social expectations. The expansion of centralised provision of protection led to less reliance on personal honour -- a form of "privatised" protection -- and less tolerance of its effects by state officers and judges.

Neighbourhood self-help group
Conversely, competition in the effective provision of mediation and enforcement, in organised violence, is competition in the ability to apply violence. An obvious way to demonstrate effectiveness is to eliminate the opposition, thereby reaping the benefits of local control. The recurring need to "prove" effectiveness, the dynamics of challenge and response, of displaying "honour" and protecting "standing" as per a system of privatised violence, and the problems of competing ambition both between and within gangs, can lead to high levels of violence.

Whenever territory is the primary source of income subject to coercive capture, border violence is likely to be high. A major reason for the decline of warfare between states in modern times is that land is no longer such a central source of income. Conversely, conflict within states has been plausibly connected to high salience of natural resource income open to territorial capture (pdf).

Intentions and consequences
If one wants to reduce corruption, reduce official discretions and the extent of banned transactions. If one wants to reduce organised crime, ensure that the enforcement and mediation services of the state are effective and reliable -- including well plugged into the local communities -- and minimise banned transactions. Of course, the enforcement and mediation services of the state are more likely to be effective and reliable the less reliance there is on official discretions and the less banning of income-generating transactions.

But the desire to control the transactions of others -- due to malice, righteousness, to generate or protect privilege, to provide income, to some combination of these -- can be strong. And the consequences of high levels of official discretions or of banned transactions can be remarkably easily ignored or denied.

Nor should we underestimate the willingness to inflict costs and misery on others for no other reason than preserve our own cognitive comfort. Particularly when all sorts of fears about what might happen if we don't require official approvals, or ban said transactions, can so easily be conjured up and contrasted with the "manifestly" good intentions of such controls. Especially when we can associate ourselves with said good intentions and deny or ignore the consequences for others. A central appeal of political action being that one can impose costs on others which one avoids oneself.

Coercion is control over others without their consent. That reality is at the heart of organised crime but also of the policy and social failures that give rise to it.

[Cross-posted at Skepticlawyer and at Critical Thinking Applied.]

## Wednesday, November 14, 2012

### The dynamics of division

A recent post by Stratfor intelligently discusses the dynamics of US presidential elections -- why they tend to be so even, why low voter turnout does not seem a good indicator of voter alienation, that big [60%+] wins (Harding 1920, FDR 1936,  LBJ 1964, Nixon 1972) have not generally led to historically well-regarded presidencies.

But it misses out on why two-Party system tends to be so even in voter supporter--such that a 55-45 result is a "landslide". It is a result of the dynamics of coalition building.

For, in any political system dominated by two Parties, even a unitary "Major Party" is, in reality, a coalition. Not only a coalition of various shades of political ideology among its activists (who may or may not form as overt factions) but a coalition of voters. The level and strength of support within the various elements of said coalition for a specific Major Party will vary and will be subject to different "triggers" of support or opposition. The weaker that support, the more "floating" considerations -- such as apparent competence -- will become dominant.

As long as enough of the electorate is open to persuasion, trying to build a majority coalition will be somewhat like herding cats. Just as you apparently have one in place, another will wander off. What appeals to one group may be a matter of indifference, or even hostility, to another. And your bids for support are subject to continual competition from your opponents.

Being in office is an advantage, in that one can "deliver", but also something of a disadvantage, in that you are responsible for policy outcomes, so your chances of alienating people tend to accumulate over time. Hence a tendency for the electoral support of Governments to decline over time; for being in office to be a wasting political asset.

So, given a certain political competence and openness, there will be a constant tendency for support for each "side" of politics to converge on about 50% of the vote. This is related to the median voter theorem, but one should be wary of seeing the politics as being captured along a single dimension or axes.

Moreover, such convergence is what one wants. If politics is divided into a permanent majority and minority (as Ulster politics is, for example), the level of alienation among the permanently excluded is likely to be dangerously high. One wants as large a section of the electorate as practical feel that "their side" (someone they voted for) will be in office at least some of the time. That concerns of folk like them get a say.

Which is one of the advantages of the Australian system, in that the proportional representation Senate gives even supporters of Parties not up for gaining a House of Representative majority a vehicle for having some influence without causing political instability.

If one sees the Major Parties as competitors seeking to build a voter-majority across disparate social groups who nevertheless all feel that they are in the same political "game", then the tendency of electoral politics in Two-Party systems to result in remarkably persistent even divisions of total votes is neither mysterious nor problematic.

[Cross-posted at Skepticlawyer and a later version at Critical Thinking Applied.]

## Monday, November 12, 2012

### Modernism in religion

One of the most enjoyable polemics I have read in recent years is Christopher Beckwith's denunciation of modernism.  Not modernity, but modernism -- the belief that the new is always better than the old. A monstrously destructive delusion that consigns centuries, even millennia, of human experience, striving and achievement to the tediously passe, beneath the concern of the so-much-more-enlightened present.

One of the great ironies of the modern age is that those forms of religion which most proclaim their devotion to the origins of their faith are most in thrall to this delusion. All the experience and wrestling with faith and life that has happened between those origins and now is consigned to the dustbin of history as corrupting pollution of the pristine original faith. That original faith as currently imagined, of course.

This modernism in religion manifests in modernism in architecture. The Wahhabism the al-Saud are allied to is just such a rejection of the history of Islam to return to its alleged roots. A return which includes obliterating historical buildings in Mecca -- even those intimately connected to Muhammad's family and companions -- to build modernist monstrosities, such as the tallest clock tower on top of the building with the biggest floor space overlooking the mosque which holds the Kaaba, the focus of the hajj and the lodestone for the direction of the prayers of believers.

No connection to that history is safe. This obliteration of the past includes:
the house of the prophet's wife, Khadijah, was razed to make way for public lavatories; the house of his companion, Abu Bakr, is now the site of a Hilton hotel; and his grandson's house was flattened by the King's palace.
But more is to come. Much of the Kaaba mosque itself, along with the core of the Old City of Mecca, is to be obliterated to construct 400,000 sq metres of prayer halls notionally able to peer at the Kaaba and to allow 130,000 pilgrims an hour to be funnelled through the holy centre. Stark modernist functionality literally built on the obliteration of the history of Mecca.

There is a profound arrogance involved in this rejection of human experience, achievement and striving in favour of present obsessions. An arrogance which is profoundly destructive. In this case, quite literally and physically so.

## Sunday, November 11, 2012

### Time enough for success

Skepticlawyer's excellent post on the GFC examines the financial crisis. The post below is concerned with the time period for monetary policy. While, as I note below, the collapse in total spending clearly worsened the GFC, this post is more about how to avoid or minimise recessions and, particularly, events such as the Great Recession.

The remarkable success of the Australian economy in avoiding a recession (defined as two consecutive quarters of negative economic growth) for 21 years and counting has been remarkably ignored by economists and policy-makers across developed countries.

It is true that the robust growth of the Chinese economy has been good for Australian commodity exports (the usual reason for dismissing Australia's recent economic success). However, it is also true that the high $A has been less happy for other sectors of the Australian economy -- such as tourism, education and manufacturing exports. Moreover, commodity prices dropped dramatically during the height of the Great Recession -- Australia had a higher (proportional) drop in exports than did the US. The Australian success in avoiding recessions also predates the recent surge in its terms of trade. (Graphs in this post taken from here.) Like other market monetarists, I attribute the Australian success in avoiding those transaction crashes we call "recessions" to the Reserve Bank of Australia's (RBA) monetary policy. This is not to deny that decades of reform have made the Australian economy much more flexible, and so responsive to changes in economic conditions. Or that the concern of fiscal authorities to make life easier for the RBA has not been helpful (at the very least, in keeping down debt liabilities of taxpayers). Furthermore, as Jim Belshaw points out, the ability of the$A exchange rate to respond rapidly to an economic shock was very beneficial to the Oz economy during the GFC -- but that was also true during previous economic shocks, such as the 1997 Asian crisis.

All these things have made it easier for the RBA to run monetary policy smoothly. But it is that policy itself which is at the core of the avoiding of transaction crashes.

The business cycle itself has not been abolished -- this is particularly obvious if one looks at per capita GDP data.  It has, however, been greatly, and beneficially, ameliorated.

At the core of market monetarism is the view that monetary policy is not a mechanical manipulation of monetary aggregates or base interest rates but an exercise in managing expectations through policy signaling. (A useful, quick, lay-friendly summary is here; I would also add in debt as the ultimate "sticky price".)

Within the boundaries set by the level of credibility of the central bank -- credibility that may require commitment to action to maintain --  the same policy instruments may have quite different signaling, and so expectation management, effects depending on the policy framing in which they are embedded.

Balanced credibility
As I have argued elsewhere, the advantage the RBA has is that, unlike central banks who only have credibility on inflation targeting, the RBA also has credibility on total spending (and so income) in the economy. Its credibility is balanced (inflation and spending) not unbalanced (inflation only). Which means that its interest rate shifts positively manage both inflation and spending expectations.

Confidence that spending (and so income) will remain relatively stable means that Australia has not experienced the transaction crashes we call "recessions".

How does the RBA achieve this balanced credibility? It is explicitly an inflation targeting central bank and it uses base interest rate as its policy instrument; its policy signaling device. In this, it is like other central banks.

The key difference is the time period of said inflation target -- it is an average over the business cycle. In the words of the RBA website:
The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over the cycle. This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community. Seeking to achieve this rate, on average, provides discipline for monetary policy decision-making, and serves as an anchor for private-sector inflation expectations.
As I have also argued before, this means that its policy time-horizon is based on economic conditions, not on some time period imposed over the top of economic conditions. To put it another way, there is no time period constraint operating on the RBA (and its policy signaling) independent of economic conditions.

Since the policy time-horizon is directly connected to economic conditions, this greatly helps signaling (and so expectations management). There is no concern that some arbitrary (time) constraint unconnected to economic conditions will affect RBA policy. A time-horizon based on economic conditions does not impose an arbitrary -- and so potentially dysfunctional -- constraint on policy.

Moreover, because it specifically invokes the business cycle, the RBA's monetary target actively assists maintaining balanced credibility. If the inflation target is an average over the business cycle (as it has to be to be responsive to economic conditions), that clearly implies more strongly than a simple inflation target that monetary policy will be easier if economic activity weakens and tighter if economic activity strengthens; not merely to "keep" the inflation target but in order to "lean against" the direction of economic activity so as to stabilise spending. For, being an average, it clearly implies the inflation target constraint will be (temporarily) traded-off to keep economic activity (or, more accurately, since central banks only directly control matters nominal -- that is in money terms -- spending) up if economic conditions worsen, thereby creating both inflation and spending (and so income) credibility, i.e. balanced credibility, for the RBA. So its interest rates shifts provide credible and positive signals for both inflation and spending.

Supply shocks, money demand and looking forward
This also makes the RBA somewhat more broadly forward-looking than other central banks. Since the target is a band over the business cycle, how inflation has been is considered in terms of expected economic conditions, particularly if economic conditions are weakening. Scott Sumner nicely highlights an example of this.

To put the difference between simple inflation targeting and (implicit or explicit) spending targeting another way, as Scott Sumner points out in his recent (very clear) paper on NGDP targeting (pdf: nominal GDP = GDP in money terms = total spending on/income from output of goods and services), simple inflation targeting responds quite differently to supply shocks than NGDP targeting or some implicit spending targeting. Inflation targeting would lead to tightening monetary policy in response to a negative supply shock, such as a surge in the price of oil (a perverse response to expected conditions making a transaction crash much more likely), while NGDP targeting would lead to easing monetary policy (the correct response if a serious transaction crash is to be avoided).

Supply shocks show up how the RBA monetary policy time-horizon makes inflation-targeting operate like NGDP targeting, for the average-over-the-business-cycle-goal does not sacrifice the overall level of spending to the inflation target if economic conditions weaken due to a supply shock. A similar point operates when there is an increase in demand to hold money (driven, say, by a financial crisis). An inflation-targeting central bank is likely to be limited in its monetary response, as any effect on inflation from an increase in the demand to hold money is likely to be downward. A NGDP-targeting central bank would ease, since money being held is not being spent and so would have a serious downward effect on spending.

Given the US$is the premier global reserve currency, this makes it more important, not less, that the US Federal Reserve target NGDP (or else, like the RBA, has an explicit average-over-the-business-cycle target) since monetary-demand-shocks (for the premier global reserve currency) are more likely and the consequences of a US transaction crash are more serious. The "passive tightening" of the US Federal Reserve during the surge in demand for$US helped make the GFC such a financial crisis (as spending, therefore income, expectations weakened dramatically, worsening fears over debt and leading to a flight to cash) and, through the consequent transactions crash, the Great Recession "Great".
Regarding the time-horizon for policy, there is also an issue with what is known as level-targeting, whether of the price level or of NGDP.

Level targeting anchors longer-term expectations by forcing central bank to, if it follows the target, to adjust to past outcomes or be increasingly exposed as failing to meet its target. It does generate a possible short-run problem if reaction to past outcomes is held to create perverse responses to expected conditions. This is much more a problem for price-level targeting than NGDP-level targeting because the former lacks spending (and so income) credibility and the latter does not.

Repeatable success
So, the central bank having a policy time-horizon which is based on economic conditions allows much better policy signaling and expectations management. Having policy targets whose time periods impose arbitrary constraints unconnected to economic conditions on monetary policy is unfortunate. Having credibility on inflation but not spending makes serious transaction crashes not merely likely but as inevitable as anything can be in economic policy.

The success of a monetary policy target whose time-horizon is based on economic conditions and which has credibility for both inflation and spending is not some happy accident. It is a repeatable success open to any central bank which can bear to learn from antipodean achievement.

POSTSCRIPT: It is sometimes suggested that the RBA has been lucky in that it has not had to confront the problem of the "zero bound" (when base interest rates are 0%pa and so cannot be cut any further: the various quantitative easings [QEs] are attempts to get around that constraint). Australia has persistently run slightly higher inflation than, for example, the US.  Given the long history of Australian labour market rigidity (i.e. strongly "sticky" wages), this seems to be fairly clearly deliberate policy, fortuitously or deliberately making it much less likely Australia would confront the problem of the "zero bound".

## Monday, November 5, 2012

### The ever-sharpening crisis of capitalism

I like graphs.  A good graph can be very revealing. Such as this graph on US per capita income from the 2012 US Federal Budget (via).

The impact of the Great Depression is very obvious.  But so is the remarkable stability of economic growth in the US over the last 120 years.